FT columnist (and our nominee for Sanest Man of the Year award, if one exists) Martin Wolf penned a fascinating column last week in which he argued for a land tax. This is a rather obscure topic, even in economic discourse, and in some people's eyes, is sure to undermine our claim that Wolf has been a lone voice of sanity in recent months. He wrote:
...appropriation of the rise in the value of land is not just unfair: what [has a landowner done] done to deserve this increase in [their] wealth? It has obviously dire consequences. First, it makes it necessary for the state to fund itself by taxing effort, ingenuity and foresight. Taxation of labour and capital must lower their supply...
Second, this system creates calamitous political incentives. In a world in which people have borrowed heavily to own a location, they are desperate to enjoy land price rises and, still more, to prevent price falls. Thus we see a bizarre spectacle: newspapers hail upward moves in the price of a place to live – the most basic of all amenities. The beneficiaries are more than land speculators. They are also enthusiastic supporters of efforts to rig the market...they welcome the creation of artificial scarcity of land, via a ludicrously restrictive regime of planning controls. This is the most important way in which wealth is transferred from the unpropertied young to the propertied old...
Third and most important, the opportunity for speculation in land both fuels – and is fuelled by – the credit cycle, which has, yet again destabilised the economy. In a superb new jeremiad [The Inquest, published by Discovered Authors; the U.S. edition is titled Boom Bust: House Prices, Banking, and the Depression of 2010], the journalist Fred Harrison argues that this cycle – with a duration of 18 years – was predictable and, by him at least, predicted. In essence, he notes, buyers rent property from bankers, in return for a gamble on the upside. A host of agents gains fees from arranging, packaging and distributing the fruits of such highly speculative transactions. In the long upswing...they all become rich together, as credit and debt explode upwards. Then, when the collapse comes, recent borrowers, the financial institutions and taxpayers suffer huge losses. This is no more than a giant pyramid selling scheme and one whose dire consequences we have seen again and again...
Do we want to start yet another credit-fuelled property cycle as soon as the debris of the present one is cleared away, some years of misery hence?
...It is bad enough that the result has been expensive houses and inefficient taxes. But it is surely far worse that such insane speculative fevers have ended up destabilising the entire global economy. Even if few know it, it is time for a change.
In arguing for a land tax, Wolf is raising the ghost of Victorian progressive economist and Philadelphia native Henry George, as articulated in his 1879 treatise Progress and Poverty (this and another book of George's are also available free of charge at the Mises Institute's site). In a recent edition of the book, Cliff Cobb of The Schalkenbach Foundation wrote that "for George, wise tax policy was merely a vehicle to break the stranglehold of speculative ownership that effectively limits the opportunity to earn an [sic] decent living and participate in public life."
George became immensely popular in the late 1800s, and inspired tax reform movements in several parts of the world based on taxing the "unearned rents" accruing to land owners. Hong Kong's tax system still relies heavily on land taxes, and one of George's followers reportedly invented the precursor to the board game Monopoly. Apparently "winning" was supposed to be instructive rather than a cause for gloating; hopefully my older sister is reading this!
To be fair, the idea of taxing "land rents", and the controversies and arguments (pdf) it engenders, predate George. Adam Smith, David Ricardo, and many other classicals debated it. Thomas Paine wrote a treatise on it called "Agrarian Justice" (though Cobb points out that George's 'land tax' might be better called a 'location tax', as he was just as interested in urban land rents as rural). And despite its modern obscurity, land taxation is a fascinating and, as Wolf points out, still highly relevant subject. Economist Michael Hudson, with a bit of conspiratorial flair -- perhaps justified (pdf) -- recently wrote (pdf):
Land remains the largest asset even in today’s industrial and hight echnology economies. Most “capital” gains are still land-price gains, which substantially exceed corporate profits. Yet land no longer stands at the center of economic thought. Postclassical economics has provided an ideological umbrella to reverse the classical view of land’s rental value as constituting an “unearned increment.” Mainstream thought now merges land, monopolies and high finance amorphously into capital-in-general, lumping economic rent and interest indiscriminately with the earnings of all other property. The upshot is that despite its economic importance, the land and its rental value—along with monopoly rent—have become nearly invisible in today’s national statistics and theorizing. Britain has not published land assessments since 1872, and today’s official U.S. statistics produce nonsensical undervaluations of land.
And while George was never completely forgotten, especially in unorthodox corners of the economics profession, he does seem to be enjoying a popular renaissance -- the 'geolibertarian' movement is a good example. If you see a bumper sticker that says "Tax Land Not Labor," you'll now have some idea what it's referring to.
Like most things in economics however, defining land rents, much less taxing them, is messy, controversial, and laden with tradeoffs (though Georgist economist Mason Gaffney might scold us for saying so - see page 3 of this pdf). For example:
- As one letter writer to the FT pointed out, purely nominal gains in land value due to inflation are not economic rents and should not be taxed. This is clearly true, and land taxes, especially capital gains on land holdings, should be indexed to inflation. And of course a well designed land tax would credit the private owner for maintenance and improvement expenditures.
- Conceptually, the distinction between earned and unearned rents is a simple one, but the distinction becomes much messier in theory, and especially complicated in practice. Furthermore, as most land tax proponents will admit, economic rents can appear almost anywhere in human endeavors -- they do not solely arise from land ownership. It may be true that as human activities become increasingly specialized, rents become harder to identify and correct.
- Though most land tax proponents do not promise utopia, some "geoists" fall prey to cultural adulation, notably (but not restricted) to Native American cultures. However, this overlooks their diversity and oversimplifies their economic and social systems. Certain cultural features such as alliances, trading, intermarriage, conflict, raiding, etc., which are nearly universal, imply tension over scarce resources, even in cultures with a strong sense of universal endowment and/or little concept of private property.
- Administration of a land tax is not costless or riskless. For example, managing the available supply of land for private purchase in Hong Kong and calculating levies requires fairly intensive public sector work, which entails not just costs, but also agency risk and risk of human error. And insofar as there are land cycles in Hong Kong, there can still be dramatic revenue cycles (to the extent that those land cycles are driven by Hong Kong's tie to the USD, this would be less of a concern for the U.S. economy).
- Path dependence dictates that there would be significant costs in terms time, effort, money, and other resources in transitioning from a tax system based largely on income to one based on land rents. That is not a sufficient argument against such a transition (note some politicians' current desire to implement a VAT or national sales tax), but it's a critical element of any cost-benefit analysis. The likely costs become more apparent when you consider that land taxes have long been administered and collected at the state and local levels, while the federal government has far less experience and expertise (other than resource concessions and public land leases).
- At some point, most private owners of land have risked financial capital. To the extent that they employed excessive leverage, that can and should be managed thru better financial regulation. And diversity of and fair access to ownership, along with healthy turnover, would seem to argue against a persistent family or "class" of "rentiers" (though turnover, at least of residential real estate, is hardly healthy at the moment).
- The planning controls that Wolf bemoans probably do not have "enrichment of the old at the expense of the young" as their primary purpose. That would seem to be more of an unintended consequence. Planning and development matter -- development has social value, positive or negative -- and thus communities ought to have some measure of control over the actions of individuals.
- In the U.S., a concerted move towards land taxes would probably undermine the federal government's efforts to support the housing and financial sectors. While some may view that as desirable or even necessary, the short term effects on bank balance sheets could be rather chaotic (some may view that as downright enjoyable, but as we like to point out, no one should want to put our payments system at risk).
At bottom, the debate over land rents and taxes is just one more facet of the timeless human debate over endowments, production, and distribution. That problem has been central to all human cultures and societies, past and present, and it has been managed in many different ways, more than one of which can be said to have worked. By viewing land as a critically distinct type of asset, proponents of land taxes, including Martin Wolf and Henry George, raise important questions, not just for economists, but for all modern societies.
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