LVT

#Herecomesthesun: The Greens Solar Home project

Firstly, there is some magic in using a Beatles song as a hashtag to promote your policy on solar energy. On one hand, it will resonate with the diehard Green voter given that its a criticism of corporate life. On the other hand, one can’t help but smile when listening along given its folky beat. And its The Beatles, well, more correctly George Harrison. Maybe its just me, I don’t know. But I think that its use is some political psychology gold.

Secondly, the Greens Solar Home project is the kind of radical policy that the Greens need to reinvigorate their voting constituency. Its a bold move amid their neolibral-lite policies, to encourage consumers to ‘take the power back’. Another pun from a band also likely to resonate with the diehard Green voter and anti-state renegades. But pertinent since it implies that the consumer has the power both in terms of their energy source (no more bills to Mr Deep-pockets) and their choice on how best to manage their energy needs (self-determination).

BUT there is a ‘but’ when considering the specifics of this policy and I’m hoping my critique doesn’t minimise the clout of the overall message.

The thing about political parties is that they seem to abhor revision. In the face of criticism, parties often dig in their heels – even if that means advocating bad policy. I hope the Greens can internalise the feedback from Green voters and even non-Green voters and use it to show that they are open to revision where necessary, which is in itself conducive to participatory democracy, and in line with the underlying message of solar project – self-determination.

For ease of reference the Greens policy document can be located here.

In it you will see, that the Greens offer low interest loans to homeowners to install solar panels. The repayments are made through the homeowners council rates. That is, the loan is to be repaid at $900 per year on top of their rates. The interest on the loans is said to be about 4.1% p.a, although this interest figure is subject to change.

The Greens envision a savings of $100 per year for homeowners. Given interest must also be paid on that loan per year, its unclear if the Greens will require the interest on top of the $900 repayment, in which case, the savings figure of $100 is false. Or if the interest is included in the $900 per year, which means the term of the loan is longer.

Some argue that at least the repayments aren’t going to a foreign-owned company. But the loans are made through a foreign bank and provided to the consumer via the government. So in effect, the repayments go to the worst of them all. The Bankers.

What about the effect on homeowners? Its true that some homeowners will benefit from solar power, particularly those who live in the homes they own. Depending on social preferences, house prices may rise if solar is viewed as an improvement to the property. Which is fine for those who tenant their won properties.

What about the renters? landlords may decide to install solar to improve the value of their properties. The effect, is likely to see the rent increase for two reasons: the market rate for solar homes will increase if there is demand for solar powered homes, and the landlord will need to repay the loan for the installation of the solar panels. So for low income renters, this may be a negative, since renting can already place a large burden on those individuals or families. If landlords are prevented from passing on the costs of the loan to install solar, then fewer rental properties will have solar, which affects a large proportion of the lower socio-economic demographic who are the people who need access to soalr the most. Also, it diminishes the purpose of the Greens policy.

Also, the idea that excess power generated could provide a return to the homeowner is a bit disingenuous. If the uptake is significant then power prices will fall. This means that the price at which you can sell your excess power is probably negligible. In addition, the Greens NZ Power policy, intends to drive down the price of power!

This article by  George Monbiot  (h/t to @gtiso) suggests that solar panel installation ‘is the ideal modern status symbol, which signifies both wealth and moral superiority’ [in the middle class], ‘even if it’s perfectly useless’. The suggestion is that the policy either intentionally or inadvertently operates as a wealth transfer to the middle class. Similar could be said of the Greens policy.

What about disposal? It was pointed out that solar panels are difficult to dispose of because they contain toxic materials. Solar panels are estimated to have a life span of about 25 years. The policy is unclear on how the Greens intend to dispose of the panels at the end of their life spans. If they will create landfills in NZ, then there are additional costs involved in setting up a land fill for this purpose, not to mention issues with dumping toxic materials into NZ soils. The alternative is to export the waste material and have some other community deal with the effects of solar panel pollution. Admittedly, I’m not very clued up on how to dispose of toxic materials or the extent of the toxicity in solar panels, so this worry of mine could be completely unfounded.

So I have outlined my gripes, so let me just reiterate that I wholeheartedly support initiatives to address climate change and moves towards decentralisation and clean energy. So  one way I see for improving the policy is implementing the combination of LVT and UBI (see my post on the benefits of UBI here).

LVT as mentioned multiple times in previous posts, brings land (broadly defined to include all natural phenomena not produced through human exertion) into common ownership – distinct from collective or private ownership. The economic rent collected is pooled and can be redistributed via a UBI. Income taxes are abolished (or significantly reduced during the transition) giving workers and non-workers (due to UBI) the ability to invest in their choice of clean energy (if that’s what they desire).  It might even be that communities decide to reduce the UBI for each person and use the remaining amount to invest in infrastructure and clean energy. Who knows. But that is self-determination. It extends this policy and makes it fair for all.

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Reviving Georgism: George was a root hacker not a branch wriggler

Universal Basic Income vs Minimum/Living Wage

Bryce Edwards compiled a round-up of the inequality debates regarding NZ’s 2014 Election. I suppose, whether the motivation to focus on inequality is well-intentioned or a vote grabbing exercise is yet to be determined.

My issue with the inequality debate is that it is most often framed in terms of whether we should (a) increase the minimum wage, (b) legislate for a living wage, or (c) target assistance through wages subsidies like Working for Families. Not really root hacking stuff.

The presumption from those advocating increasing the minimum wage or having a living wage is that it will improve outcomes for the working poor.

Minimum or Living wage (MLW)[1] proponents also tend to argue that it is unfair that government subsidises businesses through the various welfare packages made available to low-income earners absolving businesses of the responsibility to pay fair wages to its workers.

In fact, I have made this argument myself and while I have revised my views on MLW strategies, I do think it has some merit. But whether MLW strategies address the issue of economic inequality is a different story.  In my view, part of the remedy to overcoming economic inequality is to implement a Universal Basic Income (UBI).[2]

I have posted this particular piece in my Reviving Georgism series because like many Georgists,[3] I think UBI and Land Value Tax (or land rent, land fees etc) are complementary policies for tackling inequality.

I do not necessarily oppose a MLW, in fact, a living wage is precisely what I advocate. I’m just not convinced that state regulating private enterprise to pay a particular minimum amount will necessarily have the effects intended. I think that UBI is a better goal because it benefits all society, not just one group, i.e. low skilled, low-income ‘workers’.

I also think we overlook that a MLW is a legal privilege that favours business and is therefore out of step with the objectives of the Unions and campaigns who typically lobby for MLW. I set out my argument below.

MLW as legal privilege

A MLW is a legal privilege weighted in favour of business because it removes the negotiating power of the worker to obtain a higher wage. It does this by legally entitling businesses to pay workers less (the minimum) than they might otherwise be willing to pay. Moreover, businesses are likely to choose to pay the legal minimum required simply because the law says they can.

Robert J Murphy adds another dimension where he argues that:

“Raising the minimum wage might represent a drastic harm to the most vulnerable and desperate workers…What could happen is that the higher wage would attract new workers into the labor pool, allowing firms to become pickier and, thus, to overlook the least-productive workers, who would remain unemployed or lose their jobs to more-highly-skilled workers”

I agree that MLW increases could represent a harm to low-income earners and I think that Murphy’s point reinforces my argument about privileging business. Additionally, MLW strategies might attract those who are unemployed but looking for work, to take on low skilled jobs in the interim, thereby potentially increasing unemployment for low skilled workers – an unintended consequence.

I’m not ignoring the fact that in non-minimum wage societies businesses can (and do) exploit workers.  My criticism is not that MLW strategies are inherently bad for all workers, indeed they probably do have some positive short-term effects for some but as Fred Foldvary points out [Henry] George would argue that minimum wage simply treats the effects [of poverty] not the symptoms, and that it distracts and appeases to avoid confronting the remedy.

Wages increase when rent decreases

George argues that ‘the line of rent is the necessary measure of the line of wages’.[4] He thinks that under free conditions, no-one would work for someone else if they could make the same amount working for themselves.[5] He argues its only when land is monopolised that individuals are forced to compete for work.[6]

George’s theory argues that wages are determined by what is left after rent is taken out.[7] Rent being that which is paid for using land.[8] He further argues that:[9]

“No matter how much they might actually produce, they receive only what they could get on land available without rent—on the least productive land in use. Landowners take everything else. Hence, no matter how much productive power increases, neither wages nor interest can rise if the increase in rent keeps pace with it”

He also proposes that:[10]

“Where land is subject to ownership and rent arises, wages will be fixed by what labor could secure from the highest natural opportunities open to it without paying rent (i.e., the margin of production). Where all natural opportunities are monopolized, wages may be forced by competition among laborers to the minimum at which they will consent to reproduce. Clearly, the margin cannot fall below the point of survival”

At first glance, this quote seems to support having a MLW, but in context George would say MLW is not conducive to solving inequality – it simply ‘appeases’ the workers to avoid dealing with the free lunch income enjoyed by land owners at the expense of workers who are forced to compete for a minimum wage. Noting, a minimum wage could never be lower than the margin or landowners would risk an uprising that could threaten their privilege. So even without a MLW setting, landowners will always have a minimum at which they can charge rent, and businesses would have a minimum at which workers would consent to work or they risk workplace strikes.

On this basis, I think a MLW plays right into the hands of the landowners and businesses to the detriment of the most vulnerable members of our society because it provides a sense of certainty around rents i.e. a MLW provides a legally specified minimum wage that must be paid to workers (by businesses)  on which land owners can base their rents.

Importantly, as Nate Blair points out minimum wages in the long-run can only shift economic rent to different locations or decrease aggregate wages. And while a minimum wage can benefit labour in the short-run, including labourers who also happen to be landlords,  the long term impact on real wages is negligible.

Arguably, UBI is no different than MLW because it too provides everyone with a specified minimum amount of income. However, this is why I think in order for UBI to be effective it must be accompanied by a LVT and because it focuses on long term outcomes.

Another benefit of UBI is that it provides a mechanism for recognising and rewarding our currently economically invisible members i.e. those who carry out valuable but unpaid work such as stay at home parents, or volunteers.

The UBI and LVT combination also provides a foundation for setting up a participatory democracy framework which would enable individuals to voluntarily take part in public decision-making forums (e.g. multi-body sortition etc) without the stress of having no income. But that is a discussion for another post.

To conclude, if the politicians aren’t going to address the root of inequality by looking at tax evolution and a UBI, then we deserve an answer as to why. This is what I believe we ought to challenge our politicians on this year to determine if their policies are simply vote grabbing or genuine. How we decide the amount, or the age, or the frequency at which individuals receive a UBI (or the rate or measure for determining LVT) is beyond the scope of this particular post but I think what we should be focusing on (as the title of this post suggests), is hacking at the roots instead of simply wriggling the branches of the failed system we have inherited.

UPDATE:

Its been brought to my attention that I have probably been a bit presumptuous in assuming that readers would take into account the current wage subsidies and welfare packages already available in NZ.

Its important because this is the context within which I base my argument. Here are a few sites to help get your head around NZ minimum wage and the government transfers available:

In NZ there are two predominant broad views about how to improve poverty. The first broadly subscribes to the Scandinavian model – progressive taxation and increasing the top marginal rate to increase revenue to provide free core public services. Critics of the welfare system and of those advocating for a Scandinavian model in NZ argue that welfare creates dependency and this dependency causes the poverty and wage gaps we see in our country.  The critics are the second group who typically subscribe to the neoliberal model – lower taxes, privatisation, user pays services, the free market. Scandinavian model advocates usually argue that if the wealthy paid more taxes on their productive incomes that we could afford to provide core public services to those most in need.

There is a strong tension between these two groups. As a relatively recent subscriber to Georgism, I think that both models are flawed because unlike Georgism, they ignore the role that speculative behaviour plays in creating inequalities.

In this post, I tried to clarify that I didn’t think a MLW was inherently bad, just that UBI with LVT was better overall.

The reason most often cited for pursuing a MW is ‘fair pay for a fair days work’ and I agree with the sentiment. However, I don’t think ‘fair pay’ and ‘minimum wage’ are the same, but this is how MW proponents often frame their arguments.

In fact, MW’s often aren’t ‘fair’ for the work carried out. If they were then government transfers i.e wage subsidies wouldn’t be necessary. No matter how little a worker is paid by their employer, the wage subsidies supplement those incomes enough so that supplemented income makes working more attractive than just receiving jobseeker support (a welfare payment).

So if we had no MW (in NZ), and some workers were to receive less from an employer than they might currently get those low-income earners would have their incomes supplemented by wage subsidies.

Additionally, no business could pay below the maximum someone could get on welfare because most workers would choose not to work for less than what they could get for not working. This would apply in any country who has a welfare system. In effect, even if there was no legally specified MW there is actually already a minimum in place i.e. more than a worker could receive as their maximum on welfare. Admittedly, in NZ this rate would probably change depending on the region a person lives, because the accommodation supplement is location based.

Aside from the arguments set out in this post, MW also has the effect of forcing workers to compete for jobs, which gives business the upper hand to choose the person willing to accept the least amount in wages i.e. the minimum legal amount.

I reiterate, I don’t disagree that MW’s can have short term benefits. However, I think that focusing on MLW prolongs getting to the real remedy because it appeases workers, which means the more vulnerable members of our society – those who are unable to work for whatever reason, only receive welfare payments, which are necessarily less than those who earn any productive wage with additional government transfers (wage subsidies). A UBI and LVT combo would iron out this inequality and ensure even those who were unable to work had access to a living wage, not a bare minimum.


[1] For ease of reference, I use MLW to include those who advocate:

  1. a minimum wage; and or
  2. increasing the minimum wage; and or
  3. a living wage.

[2] Others refer to this is Guaranteed Minimum Income or Guaranteed Basic Income.

[3] I have resolved to use the term ‘Georgism’ (as the title of each post suggests) to reinvigorate interest in Henry George’s economic theory. However, in doing so I think I may have inadvertently neglected the preferences of some who prefer ‘Geoism’ and others who reject describing themselves under an ‘-ism’, such as Martin Adam’s who writes at Land, A Humaniteer Project. Adam’s proposes that while Henry George’s economic theory is traditionally understood as Georgism, a more accurate term is ‘Geoism’ because it ‘contains the prefix Geo, from the Greek word γαια, meaning ground or earth’ and because George’s philosophy advocates the sharing of nature. Please note that I use the term ‘Georgism’ broadly to include any persons who share in advocating the fundamentals of George’s economic theory.

[4] Henry George and B. Drake (ed.) Progress and Poverty (2006, Robert Schalkenbach Foundation, New York) available online: http://www.henrygeorge.org/pdfs/PandP_Drake.pdf  at 117.

[5] Ibid at 116.

[6] Ibid.

[7] Ibid at 93.

[8] Ibid at 89.

[9] Ibid at 93.

[10] Ibid at 116.

Credit for the title of this post belongs to Adam John Monroe

Thanks to all those in the LVT Facebook group that helped me get my head around this and directed me to relevant chapters!

Reviving Georgism: How the Greens could improve their taxation policy

Previously, I wrote that I would vote according tax reform policy because I consider tax reform as fundamental in resolving economic equality in NZ and abroad. It’s also no secret that my voting preferences are best understood in a left-wing framework, but this does not presuppose I would vote for a NZ Left party if their tax policy had worse outcomes.  Anyhow, I was reading the Greens taxation policy and decided this was a good time to write the third installment of Reviving Georgism and discuss how the Greens could improve their taxation policy to address the unrelenting economic inequality smothering NZ.

(Obviously, I am critiquing from a non-economist perspective but in light of Henry George’s economic theory)

Summary of Greens Taxation policy

The Greens state that they envision a tax system that ‘supports communities and the environment, encouraging sustainable behaviour while providing sufficient revenue for the effective operation of Government’.

They insist that a tax system should be broad based to avoid excessive reliance on personal and business income taxes, and that the tax base should include: Personal & Business Income Taxes, Consumption & Expenditure Taxes, Targeted Environmental Taxes, and Taxes that acknowledge the value of common property (Resource Rents).

The Greens also advocate Ecological Taxes (ET), a Capital Gains Tax (CGT), and a Christchurch Earthquake Levy (CEL) as part of their policy proposal. In addition, they recommend setting up an ecological tax commission, increasing the top marginal personal income tax rate, altering the progressive tax scale, and introducing a universal tax free threshold for the first $10,000 of income.

The Greens support exempting the family home from CGT, restricting foreign purchases of local assets, and treating investment income equally for tax purposes.

This taxation policy is intended to ‘shift taxes off work and enterprise, and onto waste, pollution and scarce resources’. The Greens insist under their taxation policy ‘clean business pays less and everyone pays less income tax’.

Note, I will not be discussing The Greens monetary policy included in the taxation scheme, in this post, except to point out that if productive income tax is abolished, individuals would receive their full wage and this is likely to be spent back into the economy, increasing the money supply in circulation without having to artificially create more money or print more money.

Why tax at all?

Most of us probably agree that under current economic conditions we need to fund public services for the most vulnerable members in our communities and for other community needs. And generally, tax is considered acceptable for this purpose. The question for now then is not whether we should tax, but rather what should we tax.

Of course, hard leaning right libertarians will probably dispute the use of taxation altogether, but for the purposes of this post, I will not explore that particular argument.

As pointed out in my previous posts on Reviving Georgism here and here, I explain how Henry George proposed targeting what we take not what we make and he saw this is as fundamental to eradicating poverty and instrumental in advancing progress.  I think that the Greens vision could be highly compatible with Georgism if more radical changes were made to their taxation policy  and if they simplified rather than complicated the tax system because their vision is not too dissimilar from George.

Analysing the Greens under a Georgist lens

Currently, the Greens taxation policy is not the fairest way to draw revenue for public services because it places a large tax burden on the productive earnings of individuals and businesses and burdens them with further costs attributable to an array of other taxes (existing and new).  But it does at least feature land and resource rents, which are not only relevant to Georgism but probably the most important component of an efficient and effective tax system.

I find the Greens phrase  ‘funding the effective operation of Government’ problematic, because it’s so general in nature it ignores that the tax system must be simple or efficient if we want effective government. As pointed out in the Taxing Question of Land ‘complex tax systems allow for avoidance, evasion and expensive administration costs to both the public and private purse’. So it is really a matter of fiscal responsibility to implement a simple tax system. The Greens seem to presume that the introduction of CGT counters the avoidance issues, but they ignore the cost it takes to administer further taxes and to enforce payment, and the fact that individuals and businesses may still be able to hide that revenue in offshore tax havens.   Unfortunately, the Greens policy does not simplify the monstrosity of a tax system we currently endure, it introduces a raft of new taxes without abolishing any existing taxes, and effectively feeds the monster.

The Greens also insist that a broad base tax system is necessary to reduce the burden on income earners, but seem to equate ‘broad base’ with many taxes. Broad base just means not restricting to narrow sources, and as the Land Value Tax Campaign argue land itself is the broadest base of all from which to draw public revenue since it’s the hub of basically all economic activity. The Greens seem to overlook the practical role of land and natural resources in this sense.

The Greens insist that their taxation policy lowers income taxes but it doesn’t. It raises the top PAYE rate to 39% for those that earn over $80,001.00. The Greens retain a tax-free threshold which is intended to offset the land and resource rents that form part of their ecological taxes. In addition, there is no reward for clean business, there is simply an exemption from paying the maximum rate.

In order to understand the alleged benefits of the Greens income taxation, I carried out a comparison between the current PAYE scheme and the Greens PAYE scheme. The table below shows the current thresholds and tax rates against the Greens taxation proposals. It also provides two examples illustrating that the Greens are wrong to say that ‘everyone pays less income tax’.

Current PAYE 
Tax rate
 
Greens PAYE
Tax rate
Up to 14,000
14,001 to 48000
48,001 to 70,000
70,001+
10.5%
17.5%
30%
33%
Up to 10,000
10,001 to 42,500
42,501 to 80,000
80,001+
0%
19%
33%
39%
(Note: all comparisons exclude all other levy's/taxes)
Example A: XX earns $90,000 per annum
AA under PAYE
$90,000
AA under Greens PAYE
$90,000
$14,000  - 10.5%
$34,000  - 17.5%
$22,000  - 30%
$20,000  - 33%
$1,470
$5,950
$6,600
$6,600
$10,000  - 0%
$32,500  - 19%
$37,500  - 33%
$10,000  - 39%
0
$6,175
$12,375
$3,900
TOTAL
$20,620
TOTAL
$22,450

Example A shows that someone who earns $90,000 p.a pays an extra $1,380 p.a under the Greens taxation scheme.

Example B: XY earns $48,000 per annum
XY under PAYE
$48,000
XY under Greens PAYE
$48,000
$14,000 - 10.5%
$34,000 - 17.5%
$1,470
$5,950
$10,000  - 0%
$32,500  - 19%
$5,500   - 33%
$0
$6175
$1,815
TOTAL
$7,420
TOTAL
$7,990

Example B shows that someone who earns $48,000 p.a pays an extra $570 p.a under the Greens taxation scheme.

So despite the Greens universal subsidy for the first $10,000 earned, no real benefit accrues to the income earner. The use of progressive taxation nullifies the intended effect of a tax-free threshold. It’s probably why Labour dropped it and why National have argued against it.

LVT avoids issues inherent in progressive taxation

Supporters for progressive taxation schemes typically argue that the most well off members in society should pay more than the least well off members. I agree to an extent, except I don’t think ‘well-off’ should have any bearing on actual income earned – such income goes to the income earner in exchange for their labour. I’d argue that well-off is those with the privilege of holding land, that is, those whose increases in wealth occur through the State sanctioned legal privilege of land holding (*NB, I do understand that there are persons who are asset rich and cash poor which needs special attention when implementing a tax reform such as LVT).

Other issues that concern me with progressive taxation are:

  1. self-employed earners may opt to work for cash jobs to avoid paying the higher tax rate, thereby reducing the amount of revenue collected for public services/effective operation of Government
  2. it could discourage individuals and businesses from acting charitably because of the increase in tax from their productive earnings, thereby reducing the funds that might otherwise be invested or directed toward charitable causes
  3. by having the income tax rate so high and introduction of resource taxes on top along with a raft of other taxes without removing any pre-existing taxes, may in fact drive down wages or employers may choose to employ fewer people to maximize their profits

Avoiding xenophobia allegations

I do worry about the restrictions on asset purchases targeted at foreign purchasers. Restricting foreign purchases of local assets suggests xenophobic attitudes, whether intended or not. However, if land rents are implemented, there is no need for the restrictions because the landowner becomes liable to pay the land tax. The rents accumulated are then redistributed back to the community whose efforts created the unimproved value of the land. This unimproved value is also why I think the Greens are wrong to exclude the family home as a source of tax revenue. Homeowners can simply hold their properties without making any improvements yet the land value increases through the efforts of others but the benefit of that unearned increment goes straight to the land title holder.

Greens compatibility with Georgism

In reference to my earlier posts on Georgism, I do think The Greens are right to argue that ‘work and enterprise should be encouraged and speculative investment in non-productive assets discouraged’, and I also agree that ‘the taxation burden should be reallocated away from income and towards resource use, waste, and pollution’, which is why I think the Greens policies could be highly compatible with Georgist economic theory.

If the Greens explored the fundamentals of Georgism, I think they could create a sound tax system that fits their vision while simultaneously addressing the economic inequality smothering NZ.

I think the best way to improve the outcomes of our most disadvantaged members is by abolishing income tax altogether.  This does not mean abandoning social security. The LVT is an effective precursor to introducing a UBI, and subsequently the dismantling of an overreaching State by reducing the need for many of the services the State provides. It is simple and  efficient.

In my opinion, The Greens are in a favourable position. Without the support of the Greens, Labour probably wont be able to govern. This means that instead of the Greens having to resort to incrementalism (after all, Labour have that covered) they can use their influence as part of a coalition to push more radical policy that is less State centred while trying fresh ideas to revitalise the Left and broaden their appeal across the political spectrum.

In summary, The Greens could improve their taxation policy by abolishing taxes on productive earnings and focusing on taxing land and resources. This would simplify the tax system, work toward reducing the size of government and act as a precursor to implementing a UBI.

 

FYI – Over the next week or so, I will be updating my blogshelf to include a page designated to Land Value Taxation. Please email me: ellipsister.blog@gmail.com  if you have a blog or website and want to make sure I include it! Thanks. 

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.