David R. Henderson  

Problems with Henry George's Single Tax

A Search-Theoretic Critique of... Krugman, Human Weakness, and D...

Bryan Caplan makes a good point with his and Zac Gochenour's search-theoretic critique of Henry George's tax on the value of unimproved land. It's similar to a point that Charles Hooper made in his bio of Henry George in The Concise Encyclopedia of Economics. Hooper writes:

George was right that other taxes may have stronger disincentives, but economists now recognize that the single land tax is not innocent, either. Site values are created, not intrinsic. Why else would land in Tokyo be worth so much more than land in Mississippi? A tax on the value of a site is really a tax on productive potential, which is a result of improvements to land in the area. Henry George's proposed tax on one piece of land is, in effect, based on the improvements made to the neighboring land.

And what if you are your "neighbor"? What if you buy a large expanse of land and raise the value of one portion of it by improving the surrounding land. Then you are taxed based on your improvements. This is not far-fetched. It is precisely what the Disney Corporation did in Florida. Disney bought up large amounts of land around the area where it planned to build Disney World, and then made this surrounding land more valuable by building Disney World. Had George's single tax on land been in existence, Disney might never have made the investment. So, contrary to George's reasoning, even a tax on unimproved land reduces incentives.

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COMMENTS (17 to date)
david writes:

True, but observe that the model implies some rather unsettling results regarding equilibrium values of land in general, even in an untaxed market. Network effects, spatial concentration...

Like the socialist calculation debate, the apparently statist result falls naturally out of the rigid perfect-market analysis - a market so perfect it can tolerate a lot of statism! Regrettably moving away from this analysis also weakens the case for market allocation, and it can be unclear which side weakens faster.

Devil's Advocate writes:

Possibly the second greatest book on economics ever published..."The Concise Encyclopedia of Economics." Second, only to Mr. Adams' tome.

David R. Henderson writes:

@Devil’s Advocate,
Thanks. Who is Mr. Adams?

Isegoria writes:

The problem goes away if Disney is allowed to govern its own land and collect its own (local) taxes.

Lorenzo from Oz writes:

Add in zoning and the problems magnify. Jurisdictions which get a significant amount of revenue from land tax have an incentive to restrict supply so as to drive up price.

Daniel Klein writes:

Fred Foldvary's piece in EJW contains a fairly clear presentation of a "geo-rent" tax proposal (pp. 108-112).

On that scheme, Charlie's points miss the mark. By consolidating ownership of surrounding land, the whole unified property would be assessed as though pristine -- at least, that is how I understand Foldvary's proposal.

In fact, one of the chief ways to game the system under Foldvary's regime would be for Bob and his neighbor Jim, each of whom have nicely developed his property, to merge ownership (or for one to take over the other), so that Jim's "neighboring" improvements no longer count in the assessment of pristine value of the land that prior to the consolidation was owned by Bob, and vice versa. I am not sure how serious a problem this is for Foldvary's proposal.

As for the point that Bryan makes in his post (and his coauthored paper, which I've not consulted): That sounds like a real issue but only a very small one, as these things go.

My attitude is that, in a hypothetical in which the government is going to coercively extract $X from the economy, the geo-rent tax is probably the best way to do it (provided that $X is not too large), and probably far better than the second-best approach. Adam Smith and Milton Friedman agreed.

One can point up problems and imperfections of the geo-rent tax. But remember the opera-singing contest. Let us talk about the problems of any other way you think better to coercively extract $X.

But the main reason not to bang the drum for the geo-rent tax is that, if we talk up the relative merits of a geo-rent tax and it catches interest and affects policy, the likely result is that such a new tax won't replace existing taxes but rather will just get piled onto them.

Ryan P writes:

Dr. Klein,

I'm afraid I'm a bit skeptical about the last paragraph. You seem to imply that if we can only hold the line on keeping tax revenues down in the short run, long run spending will decrease and we won't need long run tax increases either. That strikes me as likely backwards: lower taxes encourages more spending and thus more long run taxation.

I will of course admit that if we pass some new, more efficient taxes, we won't undo existing taxes and we will end up with higher tax revenue. But that's an unfair comparison -- given unsustainable deficits, there will be (more) taxes.

Rod Engelsman writes:

Site value is a synergistic phenomenon. The value of a particular site is going to be the summation of the effects of all the improvements and economic activity in the area. So it's true that the improvements on a particular site will contribute to that summation. But normally the contribution from any particular nearby relevant improvement will be negligible, including the improvement of that particular site.

I'm not entirely sure what Prof. Foldvary means by the word "pristine", but to my mind the proper way to appraise a site would be to assume that only that site is vacant and all else is held constant.

The Disney World example is an outlier, though. It's a problem but I wouldn't let it be a defeater of the concept. Given that in ideal Georgist theory the LVT would the ONLY tax that Disney would face I don't see how it's any worse than the current situation. I'd hate to see this start to get corrupted with corporate carve-outs. So the enterprise is successful and their taxes go up. Well... too bad. Life's rough sometimes. (But I'm not a libertarian, either.)

Rahul Jain writes:

The land nearby only went up in value because the government spent tons of money building or coordinating the building of infrastructure (sewers, electric lines, phone lines, roads, etc) to make that land habitable to the standards that Americans expect. If government simply built the infrastructure and sold the land, then the gains from the sale of the land would typically pay for the cost of building the infrastructure.

However, such central planning is prone to failure... except that what Disney did is coerce the government into following IT as a central planner rather than using its own plans, and then reaped the value of the implementation of that plan without paying for it!

With an LVT, they would be discouraged from building so far away from existing man-made or natural (rivers, oceans) infrastructure, allowing the infrastructure costs borne by government to be more incremental and allowing more land to remain unharmed by human activity as a reserve of genetic diversity, recycler of waste, and buffer in case of natural disaster, in some cases.

Jim Glass writes:

The Disney World example is an outlier, though...

Not at all. Buying land, improving portions, selling off adjacent plots at appreciated value, repeat, is a standard and common development practice. It's "internalizing the externalities".

A notable example was the NYC subway system. The private owners/developers bought land along the subway routes to be, sold it off at appreciated value, and obtained the funds they used to finance their capital investment in the subway's equipment.

Of course, Georgism was still a major political force in NYC at that time and the subway developers faced outraged populist howls of anger about how they had exploited the land price appreciation for their own gain. Though this gain let the subway's creation be financed privately, with the cash coming voluntarily from those who bought property that benefitted in value from the subways, as it should -- instead of from *taxes* on everybody in the city, at a time when the city government and its finances were notoriously corrupt (say "Tammany", the reason the reformers of the day insisted that the subways be privately owned and operated.)

As a practical matter, the only US juridiction to try to impose a real land tax as per Henry (going through the difficult exercise of subtracting the value of improvements to determine land value, instead of using the faux "split rate" method that simply applies a percentage of total property value to land) was Pittsburgh circa 2000.

Land, being fixed in amount, is of course very volatile in price (no supply response to mitigate price movements), and appraisal-based taxes of all sorts are by far the most difficult and costly to administer and vastly the most litigated. (See appraised-property gift tax, estate tax, regular property tax, etc.) They are also the most prone to corruption, for obvious reasons. When the new Pittsburgh land tax system was adopted it was immediately hit with a tsunami of appraisal protests, appeals and litigation, collapsed and was abandoned.

The first requirement for a "good tax" (or "least bad" one) is that it be easy to administer efficiently and equitably. When a tax like this one comes *nowhere near* meeting even the most minimum practical requirement in that regard, there is little reason to spend a lot of time parsing the theory of it. Except for the academic fun of theory parsing.

Niels writes:

Henderson clearly does not understand the concept of land rent. Per definition it is separate from the incentive needed for providing labour and capital. It is perfectly possible that Disney land's activities raises land rent, however, any returns they get from the land rents are a surplus received *on top* of the returns necessary for the incentive to provide the goods and services they provide on the market. Which means if it were to be taxed, they would still have enough reason to do it. What might be true, is that this tax shift could shift incentives given to giant monopolistic corporations towards smaller and more competitive business. That might imply we get other kinds of goods and services, but definitely more employment. Is that a bad thing?

James Oswald writes:

Compared to what alternatives? A Georgist tax might not have exactly 0 deadweight loss, but to show it should not be imposed, you have to show it has a higher deadweight loss than taxes currently in effect. Surely the deadweight loss is lower than a capital tax.

Fred Foldvary writes:

A properly implemented land value tax only taps the economic rent of land. By definition, economic rent is the surplus not needed to put land into its most productive use. In principle, if Florida had LVT, Walt Disney World not be taxed on the extra site value generated by its theme park, because that would be due to its own capital goods and enterprise. The proposition that Disney would not have made the investment if it could not keep the higher site value implies that this higher value would not be an economic rent of land.

Fred Foldvary writes:

> Jim Glass: Land ... is ... very volatile in price

A land value tax rate of 90 percent would make the price of land plunge to 10 percent of its non-taxed value, hence the volatility would be unimportant. Indeed, LVT would reduce excessive speculation and reduce volatility.

> appraisal-based taxes of all sorts are by far the most difficult and costly to administer

Then why do all states and localities have real property taxes? Is a property tax more costly to levy than income taxation?

> vastly the most litigated.

Because it is difficult to litigate income and sales taxes. Property tax litigation is good; it prevents excessive assessment. Anyway, the first step is not litigation but appeals. There are much more property tax appeals than litigations.

> They are also the most prone to corruption

Land value assessments are a public record, available to anyone, and subject to appeal if your tax is higher than your similar neighbor. Why would that be more corrupt than income taxation?

Anonymous writes:

Michael Barone looked into the failure of central planning in determining DC Metro layout.

I wonder how Rahul Jain's point would have affected the decision to build away from metro lines stations in DC. Seems the building away from Metro lines is now "pulling" infrastructure to the developments. I don't think the LVT tax would be able to take into account "all" future infrastructure improvement based on limited knowledge. Seems the land went up in value because of the development and not "just" because of the improvements to infrastructure. Thinking the Chinese "ghost cities" with infrastructure/no demand.

[broken link fixed--Econlib Ed.]

Michael writes:

>And what if you are your "neighbor"? What if you buy a large expanse of land and raise the value of one portion of it by improving the surrounding land.

I'm not sure why this is a problem. Let's step back from the issue, and look at Pigou. He proposed a tax on negative externalities, however his proposal also allowed for the existence of positive externalities, which could be subsidized (a Pigovian subsidy).

Likewise, a land tax could also allow for a land subsidy on improvements that raise the value of surrounding property. A wise sovereign (or state) would want to maximize that value, after all -- a landlord that owns a house with a vacant lot next door might very well lower the rent to a tenant who kept the house in good condition and raised the value of the vacant lot. Conversely, he might raise the rent on those who hold loud parties and dump trash in the yard.

So a state could very well give a tax break to a person whose effort raised the value of a community, with the subsidy paid for by the increased taxes collected from the surrounding property. Theoretically, if the improvement was valuable enough -- a beautiful park open to the public, for example -- the legal occupant might pay nothing in taxes, but instead get paid by the state.

Jim Glass writes:

> They are also the most prone to corruption

"Land value assessments are a public record, available to anyone ... Why would that be more corrupt than income taxation?"

Because land plots are unique in value, as the Georgists are fond of emphasizing ... that value for tax purposes is set in each case by an assessor ... and a money or favor changing hands changes that value. Can you do that with your income tax?

This is hard reality, right now. Not theory. See the billion-dollar ring of crooked property tax assessors exposed in Manhattan a few years ago. Have you ever heard of a billion-dollar payroll tax scandal, or billion-dollar ring of crooked income tax auditors?

> appraisal-based taxes of all sorts are by far the most difficult and costly to administer

"Then why do all states and localities have real property taxes? Is a property tax more costly to levy than income taxation?"

Of course it is. If property taxes are so easy to collect, where is the federal property tax? Why do other taxes collect so much more than property tax -- by 90% to 10%?

Localities have property taxes because the Village of Briarcliff Manor, NY, pop 8,000, can't impose an income tax, estate tax, payroll tax or its own sales tax. It can tax the real estate within its boundaries. What other tax do you propose it use?

Property tax is the most costly tax administratively, by far, because it is the most subjective, thus the most disputable.

Take Massachusetts, a high-tax state with income tax, sales tax, estate tax, corporate tax, etc. With all those kinds of taxes, ninety percent of all tax appeals and litigation are property tax.

So yes, property tax is a lot more costly to administer and difficult to apply equitably.

BTW, in the income tax too appraisal issues account for the bulk of litigation: what is the proper appraised value of those shares in a private business? Patents? Stock options? Depreciable properties? Non-compete terms? etc. etc. etc. Estate tax appeals and litigation are near totally dominated by appraisal issues.

Payroll tax OTOH has near zero cost of litigation for revenue collected, there's nothing to appraise.

Appraisal-based taxation is the most subjective, costly to administer, inequitable as to like being treated as like, and prone both to corruption and the reverse of the taxman strong-arming the taxpayer. That's 101 in tax practice. The way it dominates tax litigation is proof of the fact.

"Property tax litigation is good..."

Sure, for me -- I'm a tax lawyer!

The next time you find yourself in litigation with the government, tell us how good it is for you.

> Land ... is ... very volatile in price

"A land value tax rate of 90 percent would make the price of land plunge to 10 percent of its non-taxed value, hence the volatility would be unimportant. "

Let me understand this: The small land value tax imposed in Pittsburgh collapsed immediately under a tsunami of appeals and litigation. The fix for this is supposed to be to massively increase the tax to confiscatory rates. Then people won't care how much they pay through the tax, so they won't appeal their tax assessments any more. Hmmm....

Also, on the other side of things, having tied collection of the bulk of all national revenue to a single tax with a highly volatile tax base will prove to be an "unimportant" issue (if an issue at all).

Seems a lot more Utopian than realistic to me.

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