Saturday, 13 October 2012

Georgist experiment

Emailed in by Ben W, from Fox News:

Small government and free-market capitalism are about to get put to the test in Honduras, where the government has agreed to let an investment group build an experimental city with no taxes on income, capital gains or sales.

Proponents say the tiny, as-yet unnamed town will become a Central American beacon of job creation and investment, by combining secure property rights with minimal government interference.

“Once we provide a sound legal system within which to do business, the whole job creation machine – the miracle of capitalism – will get going,” Michael Strong, CEO of the MKG Group, which will build the city and set its laws, told

Strong said that the agreement with the Honduran government states that the only tax will be on property.

The Hondurans are (probably) missing a right old trick here. In theory, if they reserve the right to charge rent on the land*, the rent they will collect will be approx. as much as the taxes on income tax, capital gains etc. which they would have collected anyway, or more to the point, as much as those firms would have paid at an equally good location. And unlike taxes on income and capital gains, charging rent has no deadweight costs.

We observe this in real life quite easily. If France puts up its top rate of tax to 75%, then in relative terms, the UK with a top rate of 45% looks more attractive, so rents in Paris go down and rents in London go up, in extremes, by as much as 30% of people's income.

* At its simplest, the government would just build buildings to order, and then rent them out. Or they can sell off the land subject to LVT.


Derek said...

This could be great or it could be a disaster. All depends on what the MKG group do with the money that they collect as property tax. If they put 95% or more of the revenue back into local circulation via local citizens dividend or infrastructure spending, this is a Georgist experiment and should work great. If they send it to the US shareholders or the Honduran government they are just another monopoly landlord but with a whole city of tenants.

It's an interesting idea but I'd like to see more details before deciding whether it's likely to be successful.

Bayard said...

"they are just another monopoly landlord but with a whole city of tenants."

It depends on who is responsible for what. If the company is responsible for the police, the justice system, the prisons, the roads, all the "high-multiplier" spending, then they are not "just another monopoly landlord". If the Honduran government is responsible for these things, yes they are. Citizens' income doesn't come into it really. It is up to the company to provide an environment that will sell best to potential inhabitants, however they do that - CI, low taxation or whatever. This isn't a country: you don't have to live in it.

Kj said...

Every experiment like this is a good thing. I really hope it doesn't turn out the way I suspect; an corporatist export processing zone where someone intends to make out from the land in the end.

Investors who think the city will do well will also be able to buy land there.

“There will be a free market in land,” Strong said.

Has a certain faux-libertarian ring to it, interepreted from a strict Georgist perspective ofcourse.

Derek said...

I'm fine with all that, Bayard. My point is just that we don't have enough details to know who's paying for what. And we don't know even whether the property tax mentioned is a ground rent or a land and buildings rent.

According to the Independent...
Honduras has unveiled a radical free-market plan to establish three "charter cities" in the violence-racked Central American nation.

The government this week signed an agreement with US developers MKG group to begin building the cities – complete with their own governments, laws, courts, police forces and tax systems – from scratch early next year.

... which sounds good. I've been trying to Google for a bit more info on these charter cities or on the MKG Group but haven't had a lot of success so far.

Kj said...

Derek: search for Michael Strong Flow Idealism. He's part of some network of "conscious capitalists" of some sort, and as far as I remember, I think I've come across something he has written, which includes LVT, so maybe this will be right up our alley.

Derek said...

Thanks, Kj. I'll do that.

Kj said...

He also featured in some TED-talks available on Youtube.

Kj said...

In-depth article:

Mark Wadsworth said...

D, I'm not sure it matters what MKG do with their income. The point is that we will able to see the total rents they collect, which in theory is the base line for what the Honduran state could have collected in rent/LVT if they got rid of all other taxes.

B, agreed.

Kj, ta for link.

Robin Smith said...

Each time they tried this, very nobly, the exemptions and compensations dished out have destroyed any hope. Then, the rent seekers come along and say "Look, we told you it was a rubbish idea. Proof is right there. The old way is the only way."

Unless the people understand the fundamental nature of it, and its effects, from the root, and only once they have done that, agree it is good and really want it, it will fail.

Its no use just getting the theory and adopting it. People have to mean to do it from a deep personal level. Else it will easilly be corrupted from every corner.

Its not a pracyical or political problem. Its a moral one at the root.

This is the call out from Real Reform. We have to really mean it. It has to be real.

An LVT fan who only believes in its technical merit is no more an advocate than a fake socialist or libertarian.

James Higham said...

If France puts up its top rate of tax to 75%, then in relative terms, the UK with a top rate of 45% looks more attractive, so rents in Paris go down and rents in London go up

Assuming they'll move of course. Cuisine and the lure of the female are legit economic-concerns.

Mark Wadsworth said...

RS, sure, but a bit more infinite evidence never goes amiss.

JH, exactly, the shock horror headline was "Hundreds of Paris homes up for sale". I'm sure Hollande is taking comfort from that, that means there are several million Paris homes not up for sale.

Robin Smith said...

MW yes exactly KUTGW, Do Everything. It all counts. YPP is taking it further. As is Real Reform.

The Robin Smith Institute - Real Reform. Swapping out rent seeking for wealth creation: Land Value Taxation. Do you really mean it?

Bayard said...

It occurred to me that in this new Georgist Utopia, all the citizens will be skilled or "management class". All the unskilled jobs will be done by Hondurans who commute in every day.

Mark Wadsworth said...

RS, B, for sure, these enclaves will be run as private, for-profit exercises to benefit the shareholders, but it is still an interesting experiment, as we will probably observe that the total rents which can be charged are much, much higher than in the rest of Honduras (or surrounding countries).

So these mini private states will show what the government could do, only instead of that government paying out the rents as dividends, it would (hopefully) continue to plough it back into the economy or failing that dish it out as a Citizen's Dividend (which is like everybody being an equal shareholder as of right and by large, it nets off with the profit element of the rent they have to pay).

Derek said...

Looks like this won't be happening after all. The Honduran Supreme Court has put the kibosh on it. Pity. It would have been interesting to see how it turned out.

Derek said...

And in the latest exciting development, four of the Honduran Supreme Court judges have been sacked by the Honduran Congress for making the "wrong" decision. Not so Supreme after all then.

So it looks like the project is back on again.

Mark Wadsworth said...

D, thanks. Kj just posted something even more interesting about Detroit Belle Isle but the comment disappeared in the system.

Kj said...

I'll try again:

Developer pitches $1B commonwealth for Belle Isle ..
..Under the plan, it would become an economic and social laboratory where government is limited in scope and taxation is far different than the current U.S. system. There is no personal or corporate income tax. Much of the tax base would be provided by a different property tax — one based on the value of the land and not the value of the property.

Derek said...

Once again it's a "go". See the Marginal Revolution post.