Month: November 2013

Reviving Georgism: What is Land Value Tax

Firstly, I recommend watching either or both of the following clips before or after reading through this post (whichever you prefer):

There are some much longer documentaries on this topic, but the above two give a basic rundown and hopefully get you curious!

Land Value Tax (LVT) is a tax (or levy) on the unimproved value of land. LVT aims to reduce the value of land to make housing affordable by discouraging land speculation (unproductive behaviour) and to encourage entrepreneurship in business through abolishing taxes on productive behaviour. LVT is not intended as an additional tax, rather as a replacement of all other taxes.

Some prefer to call LVT a groundrent and not a tax because it reflects the rent paid for the use of property rights in land which is distinguishable from the ownership-use rights in buildings and other capital improvements.

[Note: I will discuss how LVT could be implemented in a later post and will address the differing views on what to call the LVT, as I’ve noticed some friendly contention among Georgists on terminology]

Henry George recognised that land obtains it value through its location and  demand. He noted that a vacant lot can increase in value without the landowner having made any improvements. He called the increase in the unimproved land value ‘unearned income’ (i.e. there is no cost in producing land because land is itself not produced by labour – although as pointed out in The New Statesman recently, some landowners have in fact produced land, e.g. the Palm Jumeirah).

Similarly, Professor Michael Hudson writes that:

Classical economists developed the labour theory of value to isolate economic rent, which they defined as the excess of market price and income over the socially necessary cost of production (value ultimately reducible to the cost of labour). A free market was one free of such “unearned” income – a market in which prices reflected actual necessary costs of production or, in the case of public services and basic infrastructure, would be subsidized in order to make economies more competitive. Most reformers accordingly urged – and expected – land, monopolies and banking privileges to be nationalized, or at least to have their free-lunch income taxed away.

[emphasis added]

George argued that unearned income from land should be taxed because:

If land were taxed more heavily, the quantity available would not decline, as with other goods; nor would demand decline because of land’s productive uses. By taxing the whole of the value of unimproved land, the government would drive the price of land to zero 

[emphasis added]

So why drive the price of land to zero?

In a nutshell: there is no cost in producing land since (predominantly) no-one produced or created it. Land is a natural resource (like air, water etc) that we rely on for survival. However, because our current system does not take into account the community efforts that give land its value, it is treated as a commodity allowing land speculators, homeowners and those employed in the FIRE (Finance, Insurance and Real Estate) sector to profit from the efforts of others simply by holding and selling land and obtaining the ‘free lunch’ or unearned income.

Reducing the land value to zero would mean that future homeowners would only need to borrow money for the improved value of the land and not the unimproved value and could mean that some future homeowners would not have to borrow at all from a lending institution, thereby making home buying much more affordable.  It also encourages those sitting on vacant lots (i.e. land speculators and property developers) to develop the site or sell it to someone who will develop it (i.e. putting it to productive use), because the land owner would still be required to pay the LVT whether or not any improvements were made. This would also address concerns about foreign ownership of land in NZ, because foreign owners would also be required to pay  LVT.

LVT is preferable to productive income taxes, because there is a fixed amount of land, so any rent could easily be collected. This means we could simplify the tax system and address avoidance issues, as people cannot shift land offshore to a tax haven. In addition, it means that workers and businesses can retain their full productive earnings thereby encouraging productivity (entrepreneurship, research and development etc) which will improve economic outcomes and assist in bringing about equality.

Matt Nolan (TVHE and Infometrics) states that:

If you tax land, the price of land will fall, but the amount of land being used will not change.  In contrast, a tax on labour income will lead to some people working less, and a tax on capital will lead to lower levels of investment in New Zealand.  This attribute of a land tax means that it is more “efficient” than other taxes, implying that for any given amount of revenue the government wants to raise this tax will do it for a lower cost to the rest of us.

Nolan also notes that while the introduction of a land tax would have ‘adverse implications for those who own a significant amount of land or those who own land but have a variable income year to year, that changes in wealth as a result of the imposition of a land tax will only happen once, so it would be possible for the government to compensate the immediate losers of the changes through lump-sum payments if it deems the adjustment to the new tax unfair’.

The fairness argument is a significant component of Georgism and its unsurprising that land owners including Mum and Dad homeowners and the FIRE sector resist the introduction or dismiss the idea of a LVT system given the intent to reduce land values. But Georgists and many other renowned economists argue that LVT is fair and in fact is the fairest tax system because it penalises unproductive behaviour rather than productive behaviour. The Land Value Taxation Campaign set the fairness argument out as follows:

Land (unlike goods and services) has no cost of production. If an ample supply of land of equal desirability were available everywhere, there would be nothing to pay for its use. In reality land acquires a scarcity value owing to the competing needs of the community for living, working and leisure space. Thus land value owes nothing to individual effort and everything to the community at large. It belongs justly and uniquely to the community. Conversely, the reward for individual effort can belong only to the one who earns it, to spend, save or give away as he or she may see fit.

Because of differences in positional advantages, fertility or natural resources, some locations are more desirable than others. Demand for access to these features gives land its rental value. Land Value Taxation, being assessed on these values, is fair in its incidence.

Georgism is not immune from criticism, but  Nate Blair argues that:

The problem with Georgism is not the idea, which is basically flawless.  The problem with this idea is that it seems both radical and inherently moderate to anyone understanding it.  The revolutionary aspect of Georgism threatens the predators of caricature “capitalism” and angers the conservatives. The justice and honesty threatens communist revolutionaries and angers armchair progressives, who are fine with paying a bit more but not with giving up their privilege.

[emphasis added]

My current view (which may change as I come to understand Georgism and LVT a bit more) is that LVT as a single tax is insufficient for capturing other forms of unearned income, and given George was writing in a time when technology and global networks were not nearly as sophisticated as they are today, perhaps he may have considered a tax system that captured all unearned income. However, some Georgist’s suggest that LVT would capture most unearned income, since it derives from land holding in some way.

In concluding, it is important to note that LVT is not an end in itself but it is the most equitable way for bringing about progress and eliminating economic inequality. And who knows what will follow, but in my view we should at least be trying to set the right foundations.

 

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On Conservatism

Conservatism invokes many negative stereotypes. And probably for good reason given the kinds of policy that modern conservatives have both implemented and supported. However, conservatism is not necessarily bad, rather its the way in which modern conservatives have either covertly or inadvertently retaliated against original conservatism.

Its an ideal time to revisit what conservatism is because as Patrick Gower points out, Colin Craig’s Conservative Party (CP) is on the rise.

Additionally, Christine Rankin  told Colin Espiner that its wrong to talk about the CP in terms of left or right, instead she prefers the conservatism vs liberalism spectrum.

I think she makes a valid point because according to the CP principles and various other CP resources they’re not strictly capitalist. For instance, the CP advocate for all New Zealander’s to have reasonable access to quality health care and education regardless of their ability to pay, unlike other party’s with conservative values that promote a user pays model only.

I came across a blog on Conservatism vs Liberalism (an obviously biased piece in favour of conservatism), that was somewhat useful for gauging how a conservative sees the differences between conservatism and liberalism. It led me to reflect on how we use the terms conservative and liberal and the obvious tensions that result.

For instance, consider how strict or controlling parents are characterised as conservative while parents who are more open to their children having new or non-traditional experiences are considered liberal. Its worth noting that both conservatives and liberals value  individual freedom and I feel like we’ve come to use conservatism pejoratively probably because of the conservatism we’ve been exposed to.

Noam Chomsky explains that:

Political terminology isn’t a model of clarity at best…almost every word is used in a sense which is almost its opposite. This is true of words like conservative. The political policies that are called conservative these days would appall any genuine conservative, if there were one around to be appalled.

In the interview, Chomsky refers to the Reagan Administration as an example of how conservatism was disingenuously used to implement largely authoritarian policy such as the building up of a powerful central state and a commitment to protecting it from the public which he argues created immunity from public inspection, despite conservatism requiring state transparency and accountability.

He also points to increased censorship and other forms of control that are touted as conservatism but are in fact the very opposite of conservatism (insofar as conservatism was originally intended).

Chomsky suggests that in defining conservatism:

Whatever the term means, it involves a concern for Enlightenment values of individual rights and freedoms against powerful external authorities such as the state, a dominant Church, and so on. That kind of conservatism no-one even remembers anymore

Regarding the CP, it will be fascinating to see how conservative they are in the original sense. I mean, critics are already alluding to a dubious relationship between the CP and the Church. Although, Rankin insists that there are various religious affiliates within the party membership, including herself. Besides conservatives aren’t Marxists, so individuals voluntarily affiliating to whatever religion they please is not ideologically problematic for conservatism in the same way that it is for Marxists. Interestingly, there is some common ground between Marx’s criticism of religion as ‘the opiate of the people’ and conservatism’s (original) scepticism of dominant religious institutions as inhibitors of individual freedom.

I’m not convinced that the CP is or will be a conservative party in the original sense. Mostly because we have two dominant parties and the CP will have to make compromises if it wants to form a government with one of them. In either instance, the penchant for authoritarianism exhibited by National and Labour will always conflict with conservatism.  I suppose  we’ll need to wait and see how the CP manage their conservatism (if elected) with an openly authoritarian coalition partner as it could make for some very interesting politics on the right, as I doubt a Labour led government would work that closely with the CP.

Reviving Georgism: Introduction

HGeorge

“This association of poverty with progress is the great enigma of our times…so long as all the increased wealth which modern progress brings goes to build up great fortunes, to increase luxury and make sharper the contrast between the House of Have and the House of Want, progress is not real and cannot be permanent” – Henry George

Henry George is most well known for his ‘single tax on land’ proposal, or what is most commonly referred to as Land Value Tax or LVT (although, he was not the first to popularise this idea). George’s theory is summed up on Econ Lib as follows:

Most taxes, noted George, stifle productive behaviour. A tax on income reduces people’s incentive to earn income; a tax on wheat would reduce wheat production, and so on. But a tax on the unimproved value of land is different. The value of land comes from two components, its natural value and the value that is created by improving it (by building on it, for example). The value of a vacant lot in its natural state comes not from any sacrifice or opportunity cost borne by the owners of the land, but rather from demand for a fixed amount of land. Therefore, argued George, because the value of the unimproved land is unearned, neither the land’s value nor a tax on the land’s value can affect productive behaviour. If land were taxed more heavily, the quantity available would not decline, as with other goods; nor would demand decline because of land’s productive uses. By taxing the whole of the value of unimproved land, the government would drive the price of land to zero.

I have briefly alluded to LVT before here and here .

A social advantage of the LVT is that it obtains support from across the political and economic spectrum, that is, its not strictly left, right or centre. For example, David Farrar (right wing blogger/National Member) recently commented that he supports a land tax and Stuart Nash (left wing blogger/Labour Member) did the same earlier this year on the Daily Blog .

My understanding so far is that George wanted to bring an end to privilege. He thought that the dependency relationship between land owner and non-landowner enabled the conditions for poverty to flourish and he considered that a land value tax to replace income taxes would reduce the resultant economic inequality by placing the tax burden on the unproductive gains of the land owner rather than the productive gains of the worker.

This presumably has the effect of encouraging the least well off members of society to obtain their full wage, thereby incentivising productivity and reducing the incentive of land owners to hold vacant land which drives up property prices.

As a non-economist, there are definitions I am still trying to get my head around, so any economists reading this feel free to correct any errors in the comments below. I’m still reading ‘Progress and Poverty’ (among multiple other texts) and I’ve decided that I will address Georgism in a series of posts over the next few months, with the holiday season nearing, I may be somewhat distracted. I will try to write according to the titles listed below and I will update with hyperlinks as I post:

  1. What is land tax
  2. Who does land tax apply to
  3. Why we should favour land tax
  4. How will land tax reduce economic inequality
  5. How we can implement land tax fairly in Aotearoa New Zealand