This disincentive to search for new ways to use land is intrinsic to the land value tax: since a landowner does not actually create the oil on their land, but merely discovers it, the oil would be part of the land’s “unimproved value”, which is inherently subject to taxation under the LVT.
In the comments to Bryan Caplan’s post, Mark Wadsworth replies:
This is feeblest argument of all. I don’t even need logic to defeat this one, I can do this with hard facts. And as a matter of hard fact, most governments operate a fairly Georgist system with oil exploration and extraction, or just about any mining activities, i.e. they auction off licences to explore and extract.
The winning bid for the licence must, by definition, be approx. equal to the rental value of the site (or the rights to do certain things at the site). And the winning bid, if calculated correctly, will leave the company with a good profit on its operations in future, and as a matter of fact, most mining companies and most oil companies make profits, end of discussion, there is no disincentive for exploration at all.
Or do you think that when Western oil companies rock up in Saudi Arabia, that the Saudis don’t make them pay every cent for the value of the land/natural resources? The Western oil companies just get to keep the additional profits made by extracting, refining, shipping the stuff.
Second:
For instance, if a developer owns multiple adjacent parcels and decides to build housing or infrastructure on one of them, the value of the undeveloped parcels will rise due to their proximity to the improvements. As a result, the developer faces higher taxes on the remaining undeveloped land, making development less financially appealing in the first place.
Why do we want to make it easy for developers to hold onto unimproved land as it gets more valuable? Isn’t it in society’s interest that someone else gets that land and builds improvements on it?
Third:
Unlike professional developers or large corporations, individual landowners with sentimental ties to their property are not necessarily looking to maximize profit. Therefore, taxing the unimproved value of their land through an LVT would not necessarily compel them to sell or develop it. Instead, it might simply place an additional financial burden on individuals who already have strong personal reasons for holding onto their land, doing little to incentivize the creation of additional housing developments.
If society doesn’t get to use that land, at least it’ll get more tax money for it. And on the margin some land will be freed up.
All of that said, I think the real blocker to LVT is that the landowner lobby will never allow it, and will fight tooth and nail to repeal it if passed. The only way it could stick is if a sufficiently “red” government got power for a long time, but that’s a big ask. Making construction easier is a smaller and more realistic ask, it would give people a lot of the benefits at a fraction of the cost.
Here you aren’t just making an argument against LVT. You’re making a more general argument for keeping housing prices high, and maybe even rising (because people might count on that). But high and rising housing prices make lots of people homeless, and the threat of homelessness plays a big role in propping up these prices. So in effect, many people’s retirement plans depend on keeping many other people homeless, and fixing that (by LVT or otherwise) is deemed too disruptive. This does have a certain logic to it, but also it sounds like a bad equilibrium.
I agree this argument could be generalized in the way you suggest, but I want to distinguish between,
Keeping housing prices artificially high by maintaining zoning regulations that act as a barrier to economic growth, in particular by restricting the development of new housing that would drive down the price of existing housing if it were allowed to be constructed.
Keeping the value of property held in land high by not confiscating the ~full rental value of land from people.
While I agree the first policy “does have a certain logic to it”, it also seems more straightforwardly bad than the second approach since it more directly makes society poorer in order to maintain existing people’s wealth. Moreover, abandoning the first policy does not appear to involve reneging on prior commitments much, unless you interpret local governments as “committing” to keep restrictive zoning regulations for an entire community indefinitely. Even if people indeed interpret governments as making such commitments, I assume most people more strongly interpret the government as making more explicit commitments not to suddenly confiscate people’s property.
I want to emphasize this distinction because a key element of my argument is that I am not relying on a “fairness” objection to LVT in that part of the post. My point is not about whether imposing an LVT would be unfair to people who expected it to never happen, and purchased land under that assumption. If fairness were my only argument, I agree that your response would weaken my position. However, my argument in that section focuses instead on the inefficiency that comes from forcing people to adapt to new economic circumstances unnecessarily.
Here’s why the distinction matters: if we were to abandon restrictive zoning policies and allow more housing to be built, it’s similarly true that many people would face costs as they adapt to the resulting changes. However, this disruption seems like it would likely be offset—more than adequately—by the significant economic growth and welfare gains that would follow from increasing the housing supply. In contrast, adopting a land value tax would force a sudden and large disruption, but without many apparent corresponding benefits to justify these costs. This point becomes clearer if we accept the argument that LVT operates essentially as a zero-sum wealth transfer. In that case, it’s highly questionable whether the benefits of implementing such a tax would outweigh the harm caused by the forced adaptation.
And as a matter of hard fact, most governments operate a fairly Georgist system with oil exploration and extraction, or just about any mining activities, i.e. they auction off licences to explore and extract.
The winning bid for the licence must, by definition, be approx. equal to the rental value of the site (or the rights to do certain things at the site). And the winning bid, if calculated correctly, will leave the company with a good profit on its operations in future, and as a matter of fact, most mining companies and most oil companies make profits, end of discussion, there is no disincentive for exploration at all.
Or do you think that when Western oil companies rock up in Saudi Arabia, that the Saudis don’t make them pay every cent for the value of the land/natural resources? The Western oil companies just get to keep the additional profits made by extracting, refining, shipping the stuff.
I may be misunderstanding their argument, but it seems to be overstated and overlooks some obvious counterpoints. For one, the fact that new oil discoveries continue to occur in the modern world does not strongly support the claim that existing policies have no disincentive effect. Taxes and certain poorly-designed property rights structures typically reduce economic activity rather than eliminating it entirely.
In other words, disincentives usually result in diminished productivity, not a complete halt to it. Applying this reasoning here, I would frame my argument as implying that under a land value tax, oil and other valuable resources, such as minerals, would still be discovered. However, the frequency of these discoveries would likely be lower compared to the counterfactual because the incentive to invest effort and resources into the discovery process would be weakened as a result of the tax.
Secondly, and more importantly, countries like Saudi Arabia (and other Gulf states) presumably have strong incentives to uncover natural oil reserves for essentially the same reason that a private landowner would: discovering oil makes them wealthier. The key difference between our current system (as described in the comment) and a hypothetical system under a naive land value tax (as described in the post) lies in how these incentives and abilities would function.
Under the current system, governments are free to invest resources in surveying and discovering oil reserves on government-owned property. In contrast, under a naive LVT system, the government would lack the legal ability to survey for oil on privately owned land without the landowner’s permission, even though they’d receive the rental income from this private property via the tax. At the same time, such an LVT would also undermine the incentives for private landowners themselves to search for oil, as the economic payoff for their efforts would be diminished. This means that the very economic actors that could give the government permission to survey the land would have no incentive to let the government do so.
This creates a scenario where neither the government nor private landowners are properly incentivized to discover oil, which seems clearly worse than the present system—assuming my interpretation of the current situation is correct.
Of course, the government could in theory compensate private landowners for discovery efforts, mitigating this flaw in the LVT, but then this just seems like the “patch” to the naive LVT that I talked about in the post.
I think I have counterarguments to some of this.
First:
In the comments to Bryan Caplan’s post, Mark Wadsworth replies:
Second:
Why do we want to make it easy for developers to hold onto unimproved land as it gets more valuable? Isn’t it in society’s interest that someone else gets that land and builds improvements on it?
Third:
If society doesn’t get to use that land, at least it’ll get more tax money for it. And on the margin some land will be freed up.
All of that said, I think the real blocker to LVT is that the landowner lobby will never allow it, and will fight tooth and nail to repeal it if passed. The only way it could stick is if a sufficiently “red” government got power for a long time, but that’s a big ask. Making construction easier is a smaller and more realistic ask, it would give people a lot of the benefits at a fraction of the cost.
I agree this argument could be generalized in the way you suggest, but I want to distinguish between,
Keeping housing prices artificially high by maintaining zoning regulations that act as a barrier to economic growth, in particular by restricting the development of new housing that would drive down the price of existing housing if it were allowed to be constructed.
Keeping the value of property held in land high by not confiscating the ~full rental value of land from people.
While I agree the first policy “does have a certain logic to it”, it also seems more straightforwardly bad than the second approach since it more directly makes society poorer in order to maintain existing people’s wealth. Moreover, abandoning the first policy does not appear to involve reneging on prior commitments much, unless you interpret local governments as “committing” to keep restrictive zoning regulations for an entire community indefinitely. Even if people indeed interpret governments as making such commitments, I assume most people more strongly interpret the government as making more explicit commitments not to suddenly confiscate people’s property.
I want to emphasize this distinction because a key element of my argument is that I am not relying on a “fairness” objection to LVT in that part of the post. My point is not about whether imposing an LVT would be unfair to people who expected it to never happen, and purchased land under that assumption. If fairness were my only argument, I agree that your response would weaken my position. However, my argument in that section focuses instead on the inefficiency that comes from forcing people to adapt to new economic circumstances unnecessarily.
Here’s why the distinction matters: if we were to abandon restrictive zoning policies and allow more housing to be built, it’s similarly true that many people would face costs as they adapt to the resulting changes. However, this disruption seems like it would likely be offset—more than adequately—by the significant economic growth and welfare gains that would follow from increasing the housing supply. In contrast, adopting a land value tax would force a sudden and large disruption, but without many apparent corresponding benefits to justify these costs. This point becomes clearer if we accept the argument that LVT operates essentially as a zero-sum wealth transfer. In that case, it’s highly questionable whether the benefits of implementing such a tax would outweigh the harm caused by the forced adaptation.
Sorry—I realized after commenting that I overstated this bit, and deleted it. But anyway yeah.
In regards to this argument,
I may be misunderstanding their argument, but it seems to be overstated and overlooks some obvious counterpoints. For one, the fact that new oil discoveries continue to occur in the modern world does not strongly support the claim that existing policies have no disincentive effect. Taxes and certain poorly-designed property rights structures typically reduce economic activity rather than eliminating it entirely.
In other words, disincentives usually result in diminished productivity, not a complete halt to it. Applying this reasoning here, I would frame my argument as implying that under a land value tax, oil and other valuable resources, such as minerals, would still be discovered. However, the frequency of these discoveries would likely be lower compared to the counterfactual because the incentive to invest effort and resources into the discovery process would be weakened as a result of the tax.
Secondly, and more importantly, countries like Saudi Arabia (and other Gulf states) presumably have strong incentives to uncover natural oil reserves for essentially the same reason that a private landowner would: discovering oil makes them wealthier. The key difference between our current system (as described in the comment) and a hypothetical system under a naive land value tax (as described in the post) lies in how these incentives and abilities would function.
Under the current system, governments are free to invest resources in surveying and discovering oil reserves on government-owned property. In contrast, under a naive LVT system, the government would lack the legal ability to survey for oil on privately owned land without the landowner’s permission, even though they’d receive the rental income from this private property via the tax. At the same time, such an LVT would also undermine the incentives for private landowners themselves to search for oil, as the economic payoff for their efforts would be diminished. This means that the very economic actors that could give the government permission to survey the land would have no incentive to let the government do so.
This creates a scenario where neither the government nor private landowners are properly incentivized to discover oil, which seems clearly worse than the present system—assuming my interpretation of the current situation is correct.
Of course, the government could in theory compensate private landowners for discovery efforts, mitigating this flaw in the LVT, but then this just seems like the “patch” to the naive LVT that I talked about in the post.