Wednesday, 28 December 2016

Causation Is Not Creation

One of the most pernicious arguments against Land Value Tax is  “Landowners create land values” aka the Disney World KLN.

Imagine I build a whole city, including all the infrastructure as well as all the buildings. Because I build it so well and  many people want to move there,  I have made a worthless location, desirable. My work, effort and enterprise has created value, from which my ability to charge rent/higher selling price  is a just reward.

Which all sounds very plausible, and so not hard to see how most people believe an LVT is a damaging tax on “positive externalities”, “spillovers”, “wealth creation” etc, etc.  

Indeed, many pro-LVTers make the same mistake by saying the tax merely reclaims values created by State spending, community effort etc.

However, all that is really going on is that by creating one factor ie buildings/infrastructure, it has caused demand to be shifted for another. It just so happens that with immovable property, the owners of land and capital are usually one and the same. Hence the confusion.

If we separate the two, the confusion disappears. For example, once crude oil was a pollutant which if it appeared on the surface made land worthless. The invention of the internal combustion engine changed this, shifting demand to oil products, making it a valuable commodity and its owners very rich. 

Did the manufacturers of engines also need to own the oil for them to be incentivised to make engines? Clearly not.

And as the provision of every good and service shifts demand, subtly or otherwise, for other goods and services causing their value to change, then property rights cannot be claimed on this basis. 

So imagine I still built the above city, only this time I rent the land from a big landowner instead of buying it outright.

If I get an income from renting out the capital, while the landowner gets that from his land, then why should my incentives to produce capital be different from anyone else's? 

Indeed, if the prospect of having to pay the landowner rent meant I didn’t build the city at all, then by definition it was an inefficient allocation of my resources, that would be better invested elsewhere.

That is to say, that if freeholders do not pay rent, as tax, for their right to exclude others from scarce resources, supplied for free by nature/god, then that is an implicit State subsidy. Which not only causes misallocation and over consumption of immovable property, but is then capitalised into incomes and selling prices. The cause of excessive inequality. (It’s odd that economists are against rent controls because as an implicit subsidy to tenants they distort markets, yet they fail to apply the same logic to freeholders).

As per my post below, the only way a property right can be claimed is the creation of a good or service and its provenance. While demand for natural resources can be shifted, causing their value to rise, these values are not the sole property of titleholder to Land because they are not “created”. 


Mark Wadsworth said...

Ah, the two equal and opposite KLNs,

Land owners create land values; land owners have no influence over land values.

Even if we concede that landowners create location values, surely it is far better to tax them on that small part of their efforts which goes into higher location values instead of taxing them on all their efforts (income tax, VAT and so on),

The madness is that tenants contribute to location values just as much or as little as their neighbours who happen to be owner-occupiers, but they pay a privately collected tax (rent) for the location value. So LVT just levels the playing field while leaving most efforts untaxed.

Mark Wadsworth said...

"So imagine I still built the above city, only this time I rent the land from a big landowner instead of buying it outright."

That's an unlikely scenario, but quite realistic to assume that you buy the land with a mortgage which for the next few decades is the same as paying rent for the land while you own the 'capital' (the buildings).

As a sensible developer will still be able to make money in such a situation, turning the privately collected LVT (mortgage interest) into publicly collected LVT would make no difference to his incentives.