Debate Magazine

Killer Arguments Against LVT, Not (466)

Posted on the 27 July 2019 by Markwadsworth @Mark_Wadsworth

My self-appointed tormentor emailed me a link to this.
His KLNs kick off with this:
There are precisely three reasons for any tax or subsidy. They are:
1. To directly affect the welfare of the recipient. (Money has a decreasing marginal utility, so you generally want an extremely progressive wealth tax, with redistribution to poorer citizens.)
2. To address an externality (Pigovian taxes/subsidies).
3. Because the income was unearned, thus taxing it away won’t distort incomes. (Incredibly minor in significance compared to the first two.)

Nope, those are actually reasons #2, #3 and #4.
#1, the only one which really matters, is that the rental value of any plot of land is a good approximation of the value of the services provided by society in general (or the burdens placed on them) and the value of government spending which benefits that particular plot.
Therefore it seems fair and reasonable to fund public services out of an annual charge on the rental value of each plot of land ("user pays"), with a corresponding reduction in taxes on "everybody else", i.e. reductions in sales taxes and payroll taxes (and ultimately, reductions in income tax or corporation tax in the narrow sense, but that is not quite so urgent).
Rather neatly, LVT also ticks boxes #2, #3 and #4. These are welcome bonuses, but not really central to the debate.
Once you have understood this, all his KLNs melt away:
Even if we ignore the differential marginal utility of wealth, and buy the argument that we want to tax “unearned” wealth, an LVT effectively becomes a random tax on a name picked out of the phone book.
For instance, suppose Alice buys land at a value of X. It appreciates to X+Y. Then she sells it to Bob for X+Y. Then the LVT goes into effect. Bob suddenly loses the assessed net present value of all future LVT payments, i.e. Y. If he sells it to Eve, she pays X, not X+Y.
So in effect, 100% of the LVT is paid by Bob. So an LVT is effectively just a one-time tax on the poor sap who happens to own the land when it goes into effect. You might as well throw darts at a map and tax the targeted household by some arbitrary amount of money.

It's not a one-time tax on Bob and not arbitrary in the slightest. It is an annual user charge payable by all current and future owners of any plot of land. The selling price of land is the value of all the future tax-free benefits which the purchaser expected to receive by owning it, i.e. the value of all the future taxes which "everybody else" will pay (and the future burden placed on "everybody else").
"Everybody else" was not party to the contract by which Bob bought from Alice and is under no moral or legal obligation to pay for Bob's (or Eve's) future benefits. "Everybody else" could stop paying tax completely by simply moving abroad, and what would Bob or Eve do then?
So Bob made a gamble - expecting that the government would force "everybody else" to pay for his benefits in perpetuity - and Bob lost. The buck has to stop somewhere. Chances are that Bob will end up paying less tax overall, assuming he's still working or running a business.
And if it were a one-off tax, which it isn't, then that's an argument in favour of LVT - it means that in future, we will all be living tax-free, including Bob.
... when addressing an externality, we only want to tax or subsidize the affected party in order to optimize behavior. In this case, we want to subsidize people in order to incentivize those behaviors which added value to the property, e.g. the building of a new road. That does not imply that we should fund the subsidy by a tax on the individual who received the benefit.
Just look at that last sentence. Who the hell does he expect to pay for the new road? Some will benefit from it (their plots now have better access) and some will be burdened by it (their plots now suffer from noise, pollution or congestion). The former group pay a higher user charge and the latter group get a reduction in their user charge, because the rental value of their plots will go up or down.
This is neither a tax nor a subsidy and not to be judged as such. Behaviour is optimised later on - people who don't need better access will sell up to those who do; people who don't mind traffic noise will buy the negatively affected land, and so on.
The second flaw in the quoted argument is this. Suppose the unimproved value of the land is X, and the publicly added value is Y. The correct Pigovian subsidy would be to credit the exact amount of Y back to those individuals who added that value (e.g. the taxpayers who funded that “new road nearby”), as precisely as feasible as possible.
All land value is publicly added (including whatever was provided by nature), there is no need to split it into X and Y. By taxing land values instead of wages and output, this would meet his test of "the correct Pigovian subsidy". "Everybody else" gets their credit by simply paying less tax. So I fail to see how that is a KLN, even on his terms.
Lastly there’s nothing special about “unimproved value of land”... Perhaps the most bizarre thing about the LVT is its core focus on land as opposed to any other arbitrary asset.
Whether there is or isn't anything "special" about land rental values is by the by.
There are other state-granted or natural monopolies which are equally worthy of being subjected to user charges analogous to LVT. This is not an arbitrary list. Most Georgists agree that the LVT logic also applies to other privileges, such as patent rights, exclusive use of radio spectrum, mining rights, take-off and landing slots, driving a car generally (fuel duty, congestion and parking charges), taxi driver permits, and so on and so forth.
We also note that nowhere in his entire screed does he explain why it is noble and just to tax wages and output in order to subsidise land owners. If we substitute "income tax" into all his arguments, you see just how feeble they are, and would in fact be good arguments against income tax.
What if Bob just started his first job and has a life time expected income of $1 million and then the government introduces income tax. His lifetime earnings have now fallen by the amount of the tax. Is that a one-off tax on Bob? Going by his logic it is Eve, who starts her first job next year pays a one-off tax. Everybody who starts work will be imposed to a one-off tax of several hundred thousand dollars. for ever. Wouldn't it be better to impose a large one-off tax today and then let everybody live tax-free in perpetuity?

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