Wednesday, 15 January 2014

On Land Value Tax (LVT), Part 1.

The longstanding tax proposal for LVT was reasonably popular in the late 1800s and still has some advocates today. I will explain the LVT, explain its advantages and disadvantages. In the following blog I will provide a further argument against it, referring to a couple of my previous blogs, to show that LVT is in fact a very limited and partial form of wealth tax.

The idea behind the LVT is fairly simple; tax the rental value of the land that people own. There are many variants of the proposal, but the most sensible approach is to focus on the value that the land would have if it were sold without any development on it, and then the owner would be charged a proportion of this value each year. This requires the land to be valued regularly.

LVT-type proposals were generally advocated by classical economists such as Adam Smith, David Ricardo and JS Mill, who saw land as a separate category. Popular political thinkers such as Thomas Paine and Henry George argued for the proposal, but obviously ran up against landed interests. These thinkers perhaps realised that landowners got money for their land without having to do anything, and realised that taxing the land would not produce any economic disincentives—landowners would need to use the land productively but now to pay the tax instead of to enrich themselves.

Classical economists saw land as a separate economic category with its own economic nature. However, the marginal revolution in economic thinking did away with this categorisation. According to post-classical (including of course neo-classical) economists economic decisions are (or perhaps should be?) based on the marginal benefits of one economic use when compared to others. The upshot was that land was treated just the same as any other economic resource (or input, or “factor of production”).

The case for treating land any differently disappears if we point out that there is nothing particularly special about land as an economic factor. Economic theories that can fully explain economic decisions about land without creating an additional category are going to be more attractive than those which depend on extra categories. One defence of LVT is to insist that classical economics is uniquely correct, and this is the recourse of the commentator on this blog “Physiocrat” who has commented on several of my previous posts. It is an interesting project to consider what has been lost in the shift from classical to marginal economics, but I do not think that the treatment of land as a special economic category is one of the losses.

I have said repeatedly that taxation is a normative issue and this is where the real action lies. I have argued that taxes should be judged on their incidence with regard to the economically fortunate/unfortunate and their likely economic effects, and LVT does fairly well on this count. However, it taxes only those fortunate people who have a prior investment in land, as I will explain further in the following post. Taxing people who have good economic fortune in a more systematic manner through the imposition of a tax on comprehensive income, particularly on windfall income, would be much more appropriate. LVT fails to tax the recipients of gifts, inheritances, and returns to scarce talents. Fortunate people who have investments in government or corporate bonds will be relatively unaffected by the switch to LVT.

However, there is a political philosophy which supports the imposition of LVT on normative grounds; Left libertarianism. This view has been defended by political philosophers such as Hilel Steiner (see An Essay on Rights) and Mike Otsuka (Libertarianism without Inequality). The idea is that people own themselves, and therefore the products of their labour (so far so libertarian). However, people cannot come to own land, since this is for the benefit of the whole community. Therefore, when people take ownership of land they owe the community rent from taking temporary ownership of this communal resource.

This position is a perfectly philosophically valid, but I’m not convinced that such strong self-ownership rights exist, nor that it is that important to enforce them in such a stringent way. The division between the treatment of the self and the treatment of land seems arbitrary to me in this instance. Of course, we have reasons to limit what can be done to persons in ways that do not apply to land, but taxing people on the returns to their labour does not trouble me that people are being violated in any way. Slightly less strong rights of ownership seem to provide all the personal freedom that people need.

I’m not convinced by the economic arguments or philosophical ones for LVT, and I will add a further important point about the introduction of an LVT in my next post.


Physiocrat said...

The "marginal revolution" in economics merely obfuscated a fundamental and incontrovertible truth. Land is different from the other factors of production. It is a gift of nature, its supply is fixed and the possession of a parcel of land confers a monopoly advantage on the possessor. Thus the case of treating land differently cannot be made to disappear by academic sleight of hand. Taxing the fruits of the workers' labourer ought to concern everyone, as it is a fundamental injustice, which also gives rise to a raft of intractable problems of a practical nature and damages the economy to boot.

LVT, which incidentally is not a wealth tax, does not tax inheritances such as pictures on the wall and jewellery in the deceased's bedside table, and does not purport to. Why should anyone want to? Where is the principle? What is the aim? "Scarce talent" is worthless without application and hard work, and why should such individuals be singled out?

dougbamford said...

Was expecting more than just assertion, Henry.
So you've got your moral points and the economic theory ones.

All very well being sceptical of the "marginal revolution" but then you have to provide some reason to prefer another approach.

If the relevant economic or moral issue is that people have a monopoly over a particular patch of land (as they don't have a monopoly over land in general) then surely people also have monopolies of a morally similar sort over their skills/talents, and also over the artworks and jewellery they own. Furthermore, the money that they earn on these things are also related to the rest of the community, since the community creates the demand and hence the price for these things.

There aren't massive practical problems asking people to pay capital gains tax on their art sales or on their labour contracts.

Your point about work being necessary to earn anything on talent is even less applicable to my hourly averaging proposal, which takes account of the time spent working. So that is an interesting point that I'll have to remember to follow up on.

dougbamford said...

Oh yes,
"LVT, which incidentally is not a wealth tax, does not tax inheritances such as pictures on the wall and jewellery in the deceased's bedside table, and does not purport to. Why should anyone want to? Where is the principle? What is the aim?"
I explained why it acts as a wealth tax when introduced in the second blog. The lack of principle is apparent here in that LVT would not tax people who receive their inheritance in jewellery while it would tax those who received land shortly before the introduction of the tax - the land would immediately lose value while the jewellery would not.
In neither case did the people do any work for their inheritance so it can't relate to that. Once upon a time someone made the jewellery while no one made the land (except in some parts where land has been actively reclaimed from the sea but we'll ignore those cases), but why does this matter now? Who cares?
What matters is the incidence of the taxation, and all people should be taxed in accordance with their economic good fortune, as I set out in a previous blog from a couple of months ago (on which I believe you commented).

Physiocrat said...

The proponents of the marginal revolution just brushed away the inconvenient facts, leaving behind an analysis that is simply incoherent. But until you have yourself got to grips with the theory it brushed aside, you will not realise what is wrong with it and there is no way I or anyone else can explain what the problem is. Suffice it to say that it arose as an attempt to discredit George's work. Mason Gaffney has gone into the matter in detail and found the smoking gun.

Under the dispensation that you appear to be supporting, anyone working in Central London has to pay what amounts to a private tax to one of the six aristocratic families who own most of it.

As for skills, these are not so unusual. What is unusual is for the possessors of those skills to apply themselves diligently. Or would you propose some kind of aptitude test to establish whether individuals have latent skills and tax them on those latent skills?

benj said...

The above link is to "the marginalists who confronted land".

Land, by definition, is all that is not supplied by human effort, and is thus unreproducible.

While this may not make it "special" in what we do with it, it does make is special in how it's value is distributed.

How we distribute the value produced by human effort, and the value derived from natural resources is a moral and therefore an economic question. A fair distribution of resources is one which produces the most amount of wealth/economic welfare. In order for that to happen, we need an ethical basis of property rights, from which we align incentives.

Unethical property rights distort incentives, and lowers output.

Only a tax, that is a coercive deduction as a % of a factor supplied by human effort can produce a deadweight loss. This is how we know income/capital/transaction taxes are unfair and immoral.

However, land rents as public revenue, by which we are all equal share landlords of the value derived from natural resources, do not have any deadweight losses. By definition, a "land tax" cannot reduced factors supplied by human effort. Indeed, where markets are imperfect (monopoly deadweight loss), because owner occupiers impute their rent, a land tax allows the market to allocate that resource at optimal efficiency. So, a LVT grows the economy. This is how we know it fair, and shared land rents are morally correct property rights.

While we can deduce the above from only a supply/demand curve, knowing that Land is a distinct factor makes life easier.

I do wonder about the sanity of economists who deny Land exists, and everything is Capital. It implies that Man didn't only create the World from his own efforts, but the Universe that contains it too.

It's also worth noting that shared Land rent isn't a "tax". As above, only a coercive deduction of value created by human effort can be a "tax".

A LVT, is the same category of payment as any other good or service. It is market based compensation for the right to exclude others from a scarce(valuable) natural resource. It is therefore a user fee, or rent. Not a tax.

Even in an Anarchy, with no public services, an LVT would be a prerequisite for peace and prosperity. That we pool our rents to pay for public services is a separate issue.

That we do not equally share the rental value of Land, produces inequality, and as a consequence re-distributive State spending in order to partially mitigate this (still £250bn pa short) , unfairly financed by taxes on output.

This gives us the double whammy of entrenching inequality and poverty, stunting economic growth and giving us a large and overweening State apparatus.

That fact that because on its own a LVT produces a fair distribution, thus drastically reducing the size and scope of the State is why control freak Socialists marginalise or reject it.

As for most "libertarians" who also hate LVT, the unequal distribution of an irreproducible factor, Land, is the economic enslavement of your fellow man. Freedom without an us all being equal share landlords is not possible.

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