The concern about new uses of land is real, but very limited compared to the inefficiencies of most other taxes. It is of course true that if the government essentially owns the land to rent it out, the government should pay for the exploration for untapped oil reserves! The government would hire the oil companies to explore. It is also true that the government would do so less efficiently than the private market. But this is small potatoes compared to the inefficiency of nearly every other tax.
It is true that a developer owning multiple parcels of land would have lower incentives to improve any one of them, but this sounds like a very small effect to me, because most developers own a very (very) small part of the city’s land! In any case, the natural remedy here is for the government to subsidize all improvements on land, since improvements have positive externalities. Note that this is the opposite of the current property tax regime in most places (where improving the land makes you pay tax). In fact, replacing property taxes with land value taxes would almost surely incentivize developers to develop, even if they own multiple parcels of land. In other words, your objection already applies to the current world (with property taxes) and arguably applies less to the hypothetical world with land value taxes.
Estimates for the land value proportion of US GDP run significantly higher than the World Bank estimate, from what I understand. Land is a really big deal in the US economy.
“The government has incentives to inflate their estimates of the value of unimproved land” sure, the government always has incentives towards some inefficiencies; this objection applies to all government action. We have to try it and see how bad this is in practice.
The disruption and confidence-in-property-rights effects are potentially real, but mostly apply to sudden, high LVT. Most people’s investments already account for some amount of “regulatory risk”, the risk that the government changes the rules (e.g. with regards to capital gains taxes or property taxes). A move like “replace all property taxes with LVT” would be well within the expected risk. I agree that a sudden near-100% LVT would be too confidence-shaking; but even then, the question is whether people would view this as “government changes rules arbitrarily” or “government is run by competent economists now and changes rules suddenly but in accordance with economic theory”. A bipartisan shift towards economic literacy would lead people towards the latter conclusion, which means less panic about confiscated investments and more preemptive panic about (e.g.) expected Pigouvian taxes (this is a good thing). But a partisan change enacted when one party has majority and undone by the other party would lead people towards the former conclusion (with terrible consequences). Anyway, I am a big supporter of incrementalism and avoiding sudden change.
“The purported effect of an LVT on unproductive land speculation seems exaggerated” yes, I agree, and this always bothered me about LVT proponents.
The disruption and confidence-in-property-rights effects are potentially real, but mostly apply to sudden, high LVT.
Well, no. It applies to sudden SIGNALING OF INTENT to a high LVT. Any move in this direction, even if nominally gradual, will immediately devalue the ownership of land. Nobody is going to believe in a long-term plan—near-future governments want the money now, and will accelerate it.
In a lot of human public-choice affairs, the slippery slope is real, and everyone knows it.
More accurately, it applies to a signalling of intent of confiscating other investments; we don’t actually care if people panic about land being confiscated because buying land (rather than improving it) isn’t productive in any way. (We may also want to partially redistribute resources towards the losers of the land confiscation to compensate for the lost investment—that is, we may want to the government to buy the land rather than confiscate it, though it would be bought at lower than market prices.)
It is weird to claim that the perceived consequence of planned incrementalism is “near-future governments want the money now, and will accelerate it”. The actual problem is almost certainly the opposite: near-future governments will want to cut taxes, since cutting taxes is incredibly popular, and will therefore stop or reverse the planned incremental LVT.
we don’t actually care if people panic about land being confiscated because buying land (rather than improving it) isn’t productive in any way.
Maybe I misunderstand. I haven’t seen the proposal that only applies to buying undeveloped land—all I’ve seen talks about the land value of highly-developed areas. You can’t currently buy (or build) a building without also buying the land under it. As soon as the land becomes valueless (because the government is taking all the land’s value), the prospect of buying/building/owning/running structures on that land gets infinitely less appealing.
Thanks for this post. A few comments:
The concern about new uses of land is real, but very limited compared to the inefficiencies of most other taxes. It is of course true that if the government essentially owns the land to rent it out, the government should pay for the exploration for untapped oil reserves! The government would hire the oil companies to explore. It is also true that the government would do so less efficiently than the private market. But this is small potatoes compared to the inefficiency of nearly every other tax.
It is true that a developer owning multiple parcels of land would have lower incentives to improve any one of them, but this sounds like a very small effect to me, because most developers own a very (very) small part of the city’s land! In any case, the natural remedy here is for the government to subsidize all improvements on land, since improvements have positive externalities. Note that this is the opposite of the current property tax regime in most places (where improving the land makes you pay tax). In fact, replacing property taxes with land value taxes would almost surely incentivize developers to develop, even if they own multiple parcels of land. In other words, your objection already applies to the current world (with property taxes) and arguably applies less to the hypothetical world with land value taxes.
Estimates for the land value proportion of US GDP run significantly higher than the World Bank estimate, from what I understand. Land is a really big deal in the US economy.
“The government has incentives to inflate their estimates of the value of unimproved land” sure, the government always has incentives towards some inefficiencies; this objection applies to all government action. We have to try it and see how bad this is in practice.
The disruption and confidence-in-property-rights effects are potentially real, but mostly apply to sudden, high LVT. Most people’s investments already account for some amount of “regulatory risk”, the risk that the government changes the rules (e.g. with regards to capital gains taxes or property taxes). A move like “replace all property taxes with LVT” would be well within the expected risk. I agree that a sudden near-100% LVT would be too confidence-shaking; but even then, the question is whether people would view this as “government changes rules arbitrarily” or “government is run by competent economists now and changes rules suddenly but in accordance with economic theory”. A bipartisan shift towards economic literacy would lead people towards the latter conclusion, which means less panic about confiscated investments and more preemptive panic about (e.g.) expected Pigouvian taxes (this is a good thing). But a partisan change enacted when one party has majority and undone by the other party would lead people towards the former conclusion (with terrible consequences). Anyway, I am a big supporter of incrementalism and avoiding sudden change.
“The purported effect of an LVT on unproductive land speculation seems exaggerated” yes, I agree, and this always bothered me about LVT proponents.
Well, no. It applies to sudden SIGNALING OF INTENT to a high LVT. Any move in this direction, even if nominally gradual, will immediately devalue the ownership of land. Nobody is going to believe in a long-term plan—near-future governments want the money now, and will accelerate it.
In a lot of human public-choice affairs, the slippery slope is real, and everyone knows it.
More accurately, it applies to a signalling of intent of confiscating other investments; we don’t actually care if people panic about land being confiscated because buying land (rather than improving it) isn’t productive in any way. (We may also want to partially redistribute resources towards the losers of the land confiscation to compensate for the lost investment—that is, we may want to the government to buy the land rather than confiscate it, though it would be bought at lower than market prices.)
It is weird to claim that the perceived consequence of planned incrementalism is “near-future governments want the money now, and will accelerate it”. The actual problem is almost certainly the opposite: near-future governments will want to cut taxes, since cutting taxes is incredibly popular, and will therefore stop or reverse the planned incremental LVT.
Maybe I misunderstand. I haven’t seen the proposal that only applies to buying undeveloped land—all I’ve seen talks about the land value of highly-developed areas. You can’t currently buy (or build) a building without also buying the land under it. As soon as the land becomes valueless (because the government is taking all the land’s value), the prospect of buying/building/owning/running structures on that land gets infinitely less appealing.