Wednesday, 14 May 2014

Libertarians Should Support a Land Value Tax

Libertarians support low taxation as a core principle because it frees people and thus the economy from the burden of the State. All but the most rabid Anarcho Capitalists though concede that the State needs some revenues with which to perform the very few necessary functions of government (I think this is probably just Courts (as any lawyer would, ahem) but I am in a minority of crazy extremists apparently).

If you do concede that the State has a role to play and that the State is going to need money to do it then, according to the thinking of the likes of Adam Smith[i], Thomas Paine[ii] and Milton Friedman[iii], land taxation is not just a necessary evil, it is a positive good in that it tackles monopolies and should ensure efficient use of land.

First, to clear things up, a definition, a land value tax (or site valuation tax) is a levy on the unimproved value of land only. It is an ad valorem tax on land that disregards the value of buildings, personal property and other improvements. A land value tax (LVT) is different from other property taxes, which are taxes on the whole value of real estate: the combination of land, buildings, and improvements to the site.

It would appear clear that a common social resource, i.e. the land, a resource that naturally exists, is not the product of investment or the application of human skill and is generally not something that more can be produced of, has become monopolised by a few. This does not change the fact that land ownership can only ultimately be vested in society as a whole and that that land has to be the source of revenue for the upkeep of society.

We can broaden this out to other common resources. In addition to the land, there are minerals, forest resources, fishery resources, and even the electromagnetic spectrum, all of which are valuable economic resources, but all of which are grounded in an original gift of nature. There is nothing unusual about the fact that mineral extraction rights and rights to the use of the electromagnetic spectrum are controlled by licences from the state that aim to create revenue as ownership of these rights creates an advantage for the holder, when in fact none of these things was created by human agency in the first place.

It is right therefore that the state attempt to extract as large a proportion as possible of the economic rent derived from possession of land, minerals, forestry and fishery resources, and the electromagnetic spectrum, and land taxation should be seen in this light. Given the fact that land is a common social resource, it is doubtful whether the word “taxation” is correctly applied to a land levy. What we are talking about here is not taxation of income or profits or the restriction of economic activity, but a levy that is based on the fact that no original ownership of the common resources ever existed.

Benefits of a land tax
Libertarians have always supported land assessments rather than other forms of taxation for a number of other reasons. The most important of these is that other forms of taxation impose deadweight economic losses. Income taxes and profit taxes deter economic activity and can lead to the flight of labour and capital overseas to less greedy jurisdictions. If there were no income taxes or corporation tax, then it is undoubtedly the case that the economy would be much larger.
A key advantage of the land value tax is its encouragement of efficient use of land and its discouragement of speculation in land. Applying an annual charge to all land holdings, based on the unimproved value of the land, would impose higher levies on prime land sites, for example, those in central London, thus encouraging development elsewhere where land values are cheaper, with positive results in terms of regional development. Property developers would be incentivised not to hold onto large land banks without building on them, and land, as a scarce social resource, could not be hoarded or put to inefficient use without incurring regular annual levies.

Furthermore, exponential increases in land values would attract higher annual levies, helping to restrain soaraway property bubbles in the same way that higher interest rates bear down on inflation; in the case of inflation, the imposition of higher interest rates depends on good central banking practice, whereas an annual land value levy based on a percentage of land values would be a market mechanism to ward off bubbles and speculation.
Land values would be discounted owing to the prospect of paying annual levies. In the initial period, this ought to lead to a fall in property values, although it needs to be emphasised that in the long run land values could also be enhanced, as in Hong Kong, by low income and profit taxes, creating a virtuous scenario where economic activity was not deterred by deadweight losses, and rapid economic growth still allowed freeholders to benefit from rising demand for their land. This would help to keep revenues from land value taxes high, continuing to support the few government services that are needed.
It is important to emphasise that the land value tax cannot be shifted to tenants in a way that would add to business costs. Classical economists argue that rent is not a real cost of production, but merely a price determined by demand for the land, as shown by the fact that commercial rents fall in a recession. Rent does not independently affect the cost of products produced by industry, but rather amounts to the capturing of part of the value of the output created by the outlay of capital and labour by the landowners.

Attempts by landowners to capture a larger part of their commercial tenants’ revenues by requiring tenants to cover all taxes and charges incurred by the landowner would, over the long run, not push up business costs, but reduce the profitability of using the land, causing tenants to go elsewhere where site valuations were lower.
This reflects the fact that landowners cannot go elsewhere, the locations of their land sites are fixed, whereas their tenants can move their businesses out of prime location sites. Excessive demand for prime land would fall, and less favoured locations, in the North of England and elsewhere, would attract more investment, with positive social repercussions.
The confusion between passive gains and gains that are the result of initiative and investment is found all the way through our current taxation system. Income tax and corporation tax are assessed on all income and profits, without attempting to break out the proportion of the earnings that relate to the three factors of production: land, labour and capital. Some income is passively gained, and some profits are passively made on the back of misguided central banking policy to promote property bubbles. By contrast, a great deal of income and profits is the result of hard work and initiative, and by obscuring the difference between the gains from land, labour and capital, three categories kept quite distinct in the analysis of the classical economists, we are unable to promote investment and hard work and deter speculation in property.
Land value taxation allows for a reduction in income and profit taxes, which currently restrict economic activity. It also allows for the abolition of stamp duty, capital gains taxes and inheritance taxes. This promotes the productive use of the land by not impeding property transactions. The key to this is to establish an annual land value tax on the unimproved value of land sites. This would hold property values down over the long term, allowing the young to buy properties, allowing banks to extend mortgages without a constant cycle of property boom and bust, and this would also allow more of people’s incomes to be devoted to consumption, instead of spending the majority of their incomes on taxes and mortgages to finance an economic model based on public debt and property bubbles. Genuine hard work would not be penalised as it is at present; passive profiteering would become more difficult, although some increase in land values based on strong demand in a low-tax economy could still take place
As long as taxation is geared towards repression of incomes and profits, economic activity in this country will be held back. Financial services, property and the public sector are keeping our economy sluggish. Libertarians who support low taxation, and in particular, forms of taxation with low or zero deadweight effects, should support land taxation as a way of moving to a more sustainable model of economic growth.
Crafted from a number of pieces by D.J. Webb, Ryan Hinds, Wikipedia on Georgism.

[i] Smith, Adam (1776). The Wealth of Nations, Book V, Chapter 2, Article I: Taxes upon the Rent of Houses. "Ground-rents are a still more proper subject of taxation than the rent of houses. A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground."

[ii] Thomas Paine contended in his Agrarian Justice pamphlet that all citizens should be paid 15 pounds at age 21 "as a compensation in part for the loss of his or her natural inheritance by the introduction of the system of landed property." "Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."

[iii] Milton Friedman stated: "There's a sense in which all taxes are antagonistic to free enterprise – and yet we need taxes. ...So the question is, which are the least bad taxes? In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago."


ThomasBHall said...

Almost all political leanings should advocate LVT- but surprisingly, they don't...
I think nearly all political movements start off with it- UKIP had it on at one time if I remember rightly (Mark?), and the Greens still do.
The problem is, that whenever a group/party looks like it might actually get somewhere, it is bribed off and the policy gets watered down (maybe including buildings on assessment), then before long it is so different the clean arguments no longer stand, and it is quietly forgotten.

Sobers said...

I wish you LVT people would agree on exactly what sort of LVT you want, before trying to convince us all of its merits. Is it an annual % tax on the sale/purchase value, an annual % tax on the cash rental value, or an annual % tax on the site only rental value, ignoring all improvements?

Because the last one (as advocated in your piece) would raise vastly less tax revenue than the other two, given the main reason someone either buys or rents a house is to live in it. If you disregard the house the rental value is going to be considerably less, which even if taxed at 100%, is never going to raise anywhere near the amount of tax revenue that we do today with taxes on income and profits.

It would be nice to have some fixed idea of what you're all proposing rather than jumping around all over the place with quite different concepts.

Ben Jamin' said...


Er, well that would all depend on % rate you set for 1&2 wouldn't it?

LVT relates to the site rental value only. So it's 100% for 3.

As it happens, as Mr Wadsworth has calculated(see KAALVTN blogspot) this approximates to 3.5% of current selling prices in the UK.

"Current" being the important proviso.

Mark Wadsworth said...

Sobers, boring, I have added a footnote. Why do you keep coming back to the same old fake objections to something which nobody proposed anyway?

BJ. thanks. The Homeys pretend that it is unworkable to set a tax based on "current" selling prices and then instead of doing revaluations, just indexing up the tax amount each year, regardless of changes in selling prices up or down.

Ahem, what about Council Tax?

Not that I'm advocating this approach, but it is do-able, rental values across the country move fairly in line year by year, it's only after five or ten years that relative values will have changed significantly.

Ben Jamin' said...

Libertarians and Anarchists should support LVT whether there is a "government" or not.

This is not about funding State spending per se, but paying compensation for your right to exclude, granted and respected by those you wish to exclude, ie everyone.

It just so happens that in our society, this is best achieved by the government collecting this on our behalf, and spending it on services we share.

Furthermore, the rental value of Land is the measurement of the surplus we collectively create, after wages and interest has been paid to producers.

As such, if it were the only permissible source of State revenue, it would provide a natural ring-fence around the size of government spending. ie we can only spend on services we share together no more than the surplus we create together.

Which you'd have thought Libertarians would support wholeheartedly. Funnily enough they don't.

Bayard said...

"The problem is, that whenever a group/party looks like it might actually get somewhere, it is bribed off and the policy gets watered down (maybe including buildings on assessment), then before long it is so different the clean arguments no longer stand, and it is quietly forgotten"

Not so much bribed off, but subject to a realisation that a policy that discourages land speculation is going to go down like a lead balloon in a country of land-speculators, which is what the UK has become.

Sobers said...

"Mr Wadsworth has calculated(see KAALVTN blogspot) this approximates to 3.5% of current selling prices in the UK"

Only it doesn't though, does it? Take a very nice house in the country. Out on its own, no neighbours, big grounds, miles from a town. Currently worth a fortune. Take away the improvements (the fancy house, the stables, the manicured gardens, the gravelled drive) and what is the site only rental value? Not much different to the farmland next door really. So the LVT on such a property would not be roughly equal to 3.5% of the selling price. Its only that if you smear all the site only rental values of the entire UK over all the UK property values, with no regard for how any particular site should be valued.

Mark Wadsworth said...

S, this is getting tiresome, BJ pointed out that it would be approximately 3.5%.

We are all perfectly aware that the site-only rental value as a % of current selling prices of UK homes forms a curve.

The % is low for low value homes (as little as 0%), it rises to 4% or even 5% for upper-middle homes (£400k to £600k) and then falls again to 2% or even less for status homes (£2 million-plus).

Please go and read the full article, read it properly and understand it for once, and let's leave it at that.

Mark Wadsworth said...

B, for sure, a majority of voters (60%?) is Home-Owner-Ist.

But there are four or five large parties fighting for the Homey vote.

That leaves 40% of potential votes to be snaffled by a Geo-Libertarian party.

So with the 60% Homey vote split four or five ways and up to 40% going to the other party, who's going to win the election?

Sobers said...

Explain to me why the site only rental value of a stately home set in 50 acres of grounds, in open countryside, worth say £10m on the open market, is 2% of that value. Without all the improvements you've got 50 acres of farmland, in the middle of no-where, rental value c. £5k, £10k tops. Land no-one in their right mind would rent for £200k.

Mark Wadsworth said...

S, you're being silly now.

We both know perfectly well that 49 out of those 50 acres have little value in themselves. If they were rented to a neighbouring farmer, they are worth £5k - £10k.

It is the rental value of the DEVELOPED LAND which matters.

Having read the linked article, you now know that perfectly well already. Your day job is getting planning permission on your farmland, you knew it anyway.

And that developed land with the stately home has a rental value and has some maintenance costs. Subtract the latter from the former and that's your site-only value.

If people in their right mind would pay £10 million to buy that house, then it is fair to assume that the site-only rental value is something like £200,000.

Who cares, anybody who can afford to rent or buy a house like that will be saving £200,000 in income tax every year anyway, affording it is not a problem.

Mark Wadsworth said...

Just in case anybody thinks I am making this up, I went on Rightmove.

Here's a 7 bed farmhouse in Oxfordshire with large gardens which you can rent for £4,250 a week (for holidays).

Sobers said...

"It is the rental value of the DEVELOPED LAND which matters."

Well its not site only value you are taxing then is it? The location value of just the plot of a stately home in the middle of nowhere is the same as an adjoining piece of farmland, because that is its location, in farmland. The entire value of the property is in the improvements - the grand house, the formal gardens, the outbuildings, the avenue of trees up the drive. The value of the property is entirely in the quality of the improvements. 50 acres with a prefab post war bungalow in the middle of them is worth considerably less than the same acres, in the same location with a stately home on it. Ergo the location value is just that of the surrounding land not what is on it.

DBC Reed said...

Since only about 60% of the electorate vote, that 60% Homeownerist cannon fodder is going to comprise most of the electorate that actually turns out to vote.

Geo Libertarians need to recognise that they are operating in ,to all intents and purposes, a functioning neo fascist state where successive false flag governments stay in power by mass bribery of those who vote with State Money.

In that cases political start-ups naively telling the truth (and they will now have to take on board the recent BoE admission that banks create money as well) are not going to cause the big crooks to lose much sleep.

neil craig said...

This may be the definitive article (ie Mark another 300 debunking false arguments against may be overdoing it).

On the other hand I would like to raise Heinlein's variant - that the land valuation be set by the owner but that there be a legal right for anybody else to buy it off them at a set multiple of that valuation - the incentive to value correctly.

Mark Wadsworth said...

NC, it was Sumo King's article, and not everybody is a "libertarian".

I no longer describe myself as such as the name as been hijacked by people who want the government to protect their right to collect rents; rather than the government protecting people against those who want to collect rents.

As to Heinlein, the problem is that is discourages improvements.

The owner of a building in crap condition would end up paying less tax than the bloke next door whose house is kept in really good condition.