Felix Sargent

Re: Shentrup’s Land Value Tax Critique

May 4, 2017

This article is a response to Clay Shentrup’s https://medium.com/@ClayShentrup/land-value-tax-1ce8c743a248

The Purpose of Tax

Clay lists:

There are precisely two reasons for any tax or subsidy. They are:
1. To directly affect the welfare of the recipient.
2. To address an externality (Pigovian taxes/subsidies).

This is the foundation of the flaws in his argument against the Land Value Tax. Taxes do not exist to address externalities or affect the welfare of the recipient — they exist to raise money for the government. The government will then re-allocate that money as it sees fit to “form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity”

Land Value Taxes are not good by themselves. If the services that government provides could be free, we should not have a Land Value Tax. Unfortunately, that’s not the case.

Land Value Taxes are the least worst arbitrary taxes

Pigovian taxes and subsidies are ideal, because they cause a societally positive change to behavior. Don’t like pollution? Tax it, and it’ll cost money to pollute. Not a fan of people drinking alcohol, or doing drugs? Tax that, increase the price, and fewer people will trade their time effort and money for booze (or they’ll go to the black market).

For the sake of argument, let’s implement all reasonable pigovian taxes. We end pollution, nobody smokes or drinks (it’s a boring world). How can we pay for schools, infrastructure, hospitals and defense? The US relies on income, sales, and corporate taxes, with a small margin of property taxes. I’m sure Clay would agree with me that those are inefficient taxes. Income taxes increase costs for firms and lower salaries for workers, as do sales for consumers, and corporate taxes for shareholders. There needs to be a source of government revenue that cannot be avoided by better behavior, but doesn’t distort markets; an arbitrary (meaning not bundled) tax for revenue purposes alone.

The question is “If taxation is necessary, what is the best way to tax?”

An Ideal Tax:

1. Does not affect the supply and demand of the commodity.
2. Should be easily determined and collected.
3. Should be consistent and reliable, as to not cause wild swings in government income.

A direct refutation of Clay’s arguments

The Specialness of Land

Clay ends his article with by addressing the core tenant of the Land Value Tax, by saying that there’s “nothing special about ‘unimproved value of land.’” Land ownership, unlike other commodities, is always a monopoly grant. There are no identical pieces of land, as you cannot have two plots of land in the same place at the same time. The value of an unimproved lot in downtown Manhattan carries far more value than an equivalent lot in North Eastern Iowa. A plot of land’s location and proximity to other items is what gives it value. The elasticity of land supply is fixed — meaning that if more people desire land in an area, then the price of that land must increase. Land can be developed, which will allow it to be better utilized, but the price for the land will remain the same, or increase because of the improvement.

The Transaction Example

Imagine that Bob agrees to sell a parcel of land to Alice for 3M$. But just before they can conduct the transaction, the government imposes a land value tax (LVT) on it.

The two agree that the LVT has a net present value of 1M$. Thus by taking the land off Bob’s hands, Alice is effectively paying Bob 1M$ in cash. Thus she’ll only pay another 2M$ directly to Bob, for an effective total purchase price of 3M$.

Alice is the one who gets screwed here, if she buys the land for 3M. A Land Value Tax is assessed like a property tax (except it’s not a tax on improvements). The tax occurs yearly. It’s not a transaction tax. If Alice agreed to purchase a place for $3M, and a tax is placed on the property, she will have to pay that tax over time. As the value of the property increases or decreases, so will her taxes. This drastically changes the expected future value of the property. She should renegotiate, or not buy, or change her expectation of the worth of property ownership.

If this example were realistic, Alice would not sign the deal, and Bob would have to lower his price to find a buyer. Clay says that this makes the tax “arbitrary” — but the goal of the tax is for the government to efficiently raise revenues. It’s arbitrary nature is not a problem. It is fair to acknowledge Bob does get screwed by this. The rules of the game have been fundamentally changed, and not in his favor. Now Bob will have to either sell it for less, or develop the property to provide a benefit — such as building a large housing complex on it, and renting it out. Bob now needs to work for his wealth.

Landowners already have an incentive to put their land to the most productive use, or to sell it to someone who can (who will thus be willing to pay more for it than it’s worth to the owner). There is no negative externality here to account for.

Landowners can generate two forms of revenue from their land.
One is to rent it, earning revenue from derived from businesses on the property.
The other is to hold it like an asset and wait for it to appreciate. An empty, fenced plot of land appreciates as much value as the skyscraper next door. It may even be more valuable for the reason that it is an open lot and occupied with existing construction. To do this is immoral. It is a blight upon the community to not develop your land to the extent possible. When land owners wait for others to improve around them, the increase in value of their land is a transfer of wealth from those who pay for developments, to the private land owner.
Land owners who do not develop their land are free riders upon the good nature of others who build and develop a community with vision.

Land owners have some incentive for their land to be productive. But it is easier and less risky for them to sit and wait for it to appreciate. Many land owners do this unintentionally. Their optimal use may differ from the desires of the community, such as a single family home in a neighborhood of skyscrapers. Land owners have the prerogative to do what they want. It’s up to the community to align their incentives towards development.

Henry George puts it another (extreme) way. In his view, there is no reason for a land owner to receive any appreciation in value of the land. They can and should build, own and sell the improvements on the land, but the land itself should not appreciate. In lieu of socializing the land, George proposes a proportional tax.

It’s important for us to recognize that we didn’t make the land. We can build improvements upon it but land itself is not built. Our Government is by the people for the people, representing a geographic area. An area built on land. All products, services, materials, and food are ultimately derived from the bounty of the land. A tax upon the root element of our economy is the best method by which we can fund the collective (rather than individual) needs of our society.