Firstly, I recommend watching either or both of the following clips before or after reading through this post (whichever you prefer):
- How to end poverty (8:15)
- Introducing the Land Value Tax: Unearned Income explained (3:03) (NB: This video is made and released by Liberal Democrat Action on Land Tax and Economic Reform)
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.
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
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.
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.
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.