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I. Taxing Land as Ethics and Efficiency
II. What is Land?
III. The simple efficiency argument for taxing land
IV. Taxing Land is Better Than Neutral
V. Measuring the Economic Gains from Shifting Taxes to Land
VI. The Ethical Case for Taxing Land
VII. Answer to Arguments against Taxing Land
There is a case for taxing land based on ethical principles and a case for taxing land based on efficiency principles. As a matter of logic, these two cases are separate. Ethical conclusions follow from ethical premises and efficiency conclusions from efficiency principles. However, it is natural for human minds to conflate the two cases. It is easier to believe that something is good if one knows that it is efficient, and it is easier to see that something is efficient if one believes that it is good. Therefore it is important for a discussion of land taxation to address both question of efficiency and questions of ethics.
This monograph will first address the efficiency case for taxing land, because that is the less controversial case. The efficiency case for taxing land has two main parts. ...
To estimate the magnitudes of the impacts that additional taxes on land would have on an economy, one must have a model of the economy. I report on estimates of the magnitudes of impacts on the U.S. economy of shifting taxes to land, based on a mathematical model that is outlined in the Appendix.
The ethical case for taxing land is based on two ethical premises: ...
The ethical case for taxing land ends with a discussion of the reasons why recognition of the equal rights of all to land may be essential for world peace.
After developing the efficiency argument and the ethical argument for taxing land, I consider a variety of counter-arguments that have been offered against taxing land. For a given level of other taxes, a rise in the rate at which land is taxed causes a fall in the selling price of land. It is sometimes argued that only modest taxes on land are therefore feasible, because as the rate of taxation on land increases and the selling price of land falls, market transactions become increasingly less reliable as indicators of the value of land. ...
Another basis on which it is argued that greatly increased taxes on land are infeasible is that if land values were to fall precipitously, the financial system would collapse. ...
Apart from questions of feasibility, it is sometimes argued that erosion of land values from taxing land would harm economic efficiency, because it would reduce opportunities for entrepreneurs to use land as collateral for loans to finance their ideas. ...
Another ethical argument that is made against taxing land is that the return to unusual ability is “rent” just as the return to land is rent. ...
But before developing any of these arguments, I must discuss what land is.
What is Land?
David Ricardo defined land, memorably, as ‘the original and indestructible powers of the soil.’ This definition is overly narrow. It would exclude from land such valuable and destructible things as minerals and topsoil. Ricardo’s definition even suggests that the value of land arising from urban locations might not be included in ‘land,’ since it would not necessarily qualify as a ‘power of the soil.’
The definition of land that is most useful in economic theory is that land is all scarce factors of production other than people and the products of human effort. Land is the gifts of nature. Thus land includes both rural and urban territory, mineral resources, water, fish in oceans and rivers, virgin forests, geosynchronous orbits and the frequency spectrum.
While there is some tendency to think of measuring land in ‘stock’ terms (‘What is the value of that piece of land?’), the flow of services from land is more fundamental. While capital goods have selling prices related to their costs of production, such a calculation does not apply to land since, by definition, land is not produced. The selling price of land is conceived in economic theory as the present value of the net return after taxes to the future flow of land services, when the land is used in the way that maximizes that present value. Following David Ricardo, the value of the flow of services from land is sometimes described as the residual after paying other factors their opportunity costs, when land is used efficiently. But in equilibrium, a similar statement can be made about any other factor.
With some components of land, such as river water flowing into an ocean, the extent to which the land is used in one period has no influence on the extent to which it can be used in other periods. In other cases, such as mineral deposits, use in one period comes at the expense of use in other periods. Agricultural land has a capacity to be ‘mined’ of the nutrients that make it productive, making it somewhat similar to mineral deposits.
With urban land there is a different type of interdependency between use at one time and the potential flow of services at another. To be used most productively, urban land must be combined with durable, immobile capital. Therefore an increase in the intensity of urban land use often requires the destruction of previous capital investments. This intertemporal dependence means that, in principle, a forecast of all future economic conditions is needed to know what use of land is best today. Since people make different forecasts, they reach different conclusions about what use of land is best today. Only with the passage of time, if at all, is it possible to know what use of land would have been best.
The fact that structures are durable and immobile also means that care must be taken in defining the value of the flow of land services. There is a tendency to think of “the rent of land” as the amount of money that land yields to those who have exclusive use of it. However, this formulation is not always useful for defining the rent of land over a particular interval of time. If an investor spends a year and £20 million erecting a building that is expected to last for 30 years, what was the rent of the land under the building during the year of construction? It is not sensible to say that, if the best possible use of the land produces a negative cash flow over a given interval of time, then land has no rental value over that interval. If markets were perfect and the decision to construct the structure was optimal, the finished building would have a value that was greater than its cost of construction by the rent of the land it occupied and the accumulated interest on construction costs and land rent. But if a non-optimal construction decision is made, that does not reduce the rent of land.
To give a meaning to ‘the rent of land’ that does not depend on when construction happens to occur, it is useful to define ‘the rent of land’ as the opportunity cost of leaving vacant land vacant. Thus in the case of the year of construction discussed above, one would ask, ‘Suppose that the construction had been postponed for a year. Perhaps by that time it would be appropriate to invest in a £21 million building rather than a £20 million building. If one developed the most profitable possible plan for the land, subject to the constraint that the land be left vacant for the first year, how much lower would the present value of net returns be?’ The answer to this question, the loss of the present value of net returns from postponing use of land for a year, would be the rent of the land for the year. This is the amount of money that one would need to get in net returns from some pre-existing use to justify postponing redevelopment for a year. Thus the rent of land for any developed site, for any year, is defined to be the answer to the question, ‘If this site were undeveloped, what would be the cost of leaving undeveloped and unused for a year?’
Land also differs from labor and capital in the origin of claims to own it.
Ownership of land is thus a form of privilege. The word ‘privilege’ comes from the Latin prive + legis, meaning ‘private law’. A private law is a law that has someone’s name it, that is, a law that authorizes one person to do what others are not permitted to do. In a just world, there would be no privilege. (Thus no one is underprivileged.) In a just world, land would not be ‘owned’, but rather ‘held’ or ‘possessed’, subject to a payment that reflected the value given up by others in allowing one person to have exclusive use of a site. ... Read the whole article
Mason Gaffney: Red-Light Taxes and Green-Light Taxes
II. What is waste, and what should we do about it?
We are all against wasting resources: wonderful - but what is waste? In answering, I will deal with two cognate questions.
A. What is waste?
The question has been faced before. Gifford Pinchot was a leader with a magic name in the U.S.A. during the early conservation era. He answered well for his times and, I submit, for ours too.
"... natural resources must be developed and preserved for the benefit of the many and not merely for the profit of a few. ... the people shall get their fair share of the benefit which comes from the development of the country which belongs to us all."
He did not say just "preserved;" he said "developed and preserved." Today I suspect he would say "REdevelop," to get away from the negative baggage carried by "develop;" I certainly will.
Pinchot went on:
"The first principle of conservation is development, the use of the natural resources now existing ... for the benefit of the people who live here now. There may be just as much waste in neglecting the development and use of certain natural resources as there is in their destruction by waste. ... Conservation, then, stands emphatically for the use of substitutes (he mentions water for power and transportation) for all the exhaustible natural resources, ... The development of our natural resources and the fullest use of them for the present generation is the first duty of this generation. ...
So Pinchot was against waste, like
everyone, but he gives it a new
turn (or, rather, an old turn that many have forgotten). To him,
WASTE MEANS FAILING TO USE RENEWABLE RESOURCES. Urban land makes
good example. Urban land, economically speaking, is a lot like
falling water, strange as it seems. Economists
(who are not all bad)
classify urban land as a "flow resource." They liken it to
water because its services perish with time, whether used or not -
and we are trapped in the one-way flow of time. It is an even better
example of a "flow resource" than water itself, because unused water
may have other uses downstream. Even in wasting out through
California's Golden Gate, fresh water repels salinity. The unreaped
harvests of idle land, however, flow down the river and out the
Golden Gate of time like lost loves, and magic moments that passed us
by. The waste of NOT using flow resources is just as real as the
waste of misusing exhaustible resources. Indeed, when we tote up the
transportation costs of disintegrated urban settlement patterns, it
is clear that failure to use good urban land is a major cause of
wasting energy. ... read the whole article
Pinchot on "Development"
Gifford Pinchot, the father of Conservation, was not against developing land. In his own words:
So Pinchot was against waste, so what? Who isn't? This could be just a banality, but he gives it a new turn. To him, waste means failing to use renewable resources. His example was hydropower, which he would substitute for coal and oil. That is not such a good example today, when we cherish our few remaining wild rivers, but today urban land makes an even better example.
"Urban land?", you may ask. "What has urban land in common with falling water?" Economists (who are not all bad) classify urban land as a "flow resource." They liken it to flowing water because its services perish with time, whether used or not, and we are trapped in the one-way flow of time. Likewise, urban land is not depleted by use. It is an even better example of a "flow resource" than flowing water itself, because, as we are so conscious today, "unharnessed" flowing water may have other downstream uses. Even in wasting out through the Golden Gate, it may repel salinity. The unreaped harvests of idle land, however, flow down the river and out the gates of time like lost loves dimming, and golden moments we let slip away beyond recall.
What is this "service" of urban land, that we should be mindful of it?
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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper