Why We Can’t Tax Land Values Down to Zero

by Polly Cleveland

Georgists often claim that we can and should tax land values down to zero, or almost zero. However, this claim depends on ignoring how taxes are spent. As Mason Gaffney has shown, All Taxes Come Out of Rent (ATCOR) — including bad taxes like sales taxes. Moreover, all deadweight loss or “Excess Burden Comes Out of Rent” or EBCOR. Less obviously, all subsidies and spillovers from public investments go into rent, call this ASGIR. Let’s take three examples to follow the implications.

1. Suppose a small jurisdiction, like a town, switches all its taxes to land, while collecting the same amount of taxes and spending them the same way. The switch means that the owners of relatively underdeveloped property will pay more taxes, while the owners of fully developed property will pay less. In the town as a whole, the total rent generated will rise due to the lifting of excess burden. Consequently, total land values will rise too. However, land values will rise more in the best, central locations from the removal of the tax penalty on buildings. Land values may fall in the fringe areas as new development in the center makes sprawl less rewarding.

2. Now take the same town and imagine the city council decides to raise the land tax and spend new revenues on productive public investments, like improved utilities and better schools. When the Council runs out of such investments, it starts paying a basic income grant to every resident. What will happen? You guessed it. New residents, new investments, and new commuters to new jobs will pour into town. Land values will rise even further, especially in the best locations but perhaps throughout the town. Whoa! That’s not the promise of Progress and Poverty, is it?

3. The first two cases assumed a small jurisdiction. But a small jurisdiction like a town cannot seriously affect the price of labor, and cannot affect the price of capital at all. Now assume a large jurisdiction, such as a big state like New York or California. Workers cannot instantly move or commute into such a jurisdiction from neighboring states. A shift of taxes to land, by opening up new investment opportunities, will create a labor shortage, driving up wages. If this big land tax state raises rates to increase public benefits, and especially if it pays a basic income grant, some workers will choose to drop out of the paid labor force. These would include mothers with small children, students, sick and elderly people, and creative folks like artists and novelists who could now afford to pursue their dreams. Only now will George’s prediction hold true. Rising wages will cut into rent. Land that was previously supra-marginal for different activities — office buildings to forestry — becomes sub-marginal. Total land values may actually decrease, though they will still surely increase in prime locations. If an entire nation were to switch to land value taxation, the effect would be even more dramatic, as it’s even harder for labor to cross international barriers, and capital movement may also be restricted.

In summary, the greatest beneficiaries of a switch to land value taxation in a small jurisdiction will be: local landholders! Which raises an obvious question: why don’t small jurisdictions just up and switch? As LVT warriors know, it ain’t so easy. There’s ignorance, there’s conservatism, and there are anachronistic anti-LVT state constitutional provisions. There are the influential holders of large underdeveloped downtown parcels, who might actually win from LVT, but can’t see past an immediate tax increase. And finally, there are the holders, large and small, of underdeveloped fringe land. These folks will lose, big time, and they know it.

The greatest beneficiaries of a switch to land value taxation in a large jurisdiction will be, as George claimed, workers and small local capitalists. While some central landowners may gain, peripheral landowners will lose, and can be expected to fight. Only with high rates, and broad benefits including a basic income grant to all residents can everyone gain.

Advocates of LVT at the local level need to avoid claiming it will lower land values. That claim may alienate potential middle-class allies, notably homeowners. In most cases, they will gain from a simple shift to LVT because their properties are highly improved. Don’t scare them unnecessarily with a threat to the precious land values they’re counting on to pay for retirement!

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