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.