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 FoxNews.com.

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.