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Premature Land Development

Well-located land — that is, land which is served by existing infrastructure such as highways, sewers, water systems, airports, railroads, subways — should be used intensely, put to its highest and best use. If our incentive permit it to remain underused, the result will be urban sprawl, long commutes for our youngest workers and family members, the premature development of agricultural and wilderness land into tract housing, which will require highways, sewers, water systems, etc., often paid for by people other than the developers (who get to walk away with a huge land profit).

We can preserve wilderness and agricultural land from premature development, protecting ecosystems and the water supply, if we re-arrange our incentives to encourage the full development of our best land.

How do we do that? Place our taxes on the land values. Poorly located land has little value, until the taxpayers invest in infrastructure (see also: pork) that makes it usable and accessible. Agricultural land on the fringes is not particularly valuable as agricultural land (say, $1,000 to $10,000 per acre, depending on the crops and climate involved and the water supply), and so would not bear a particularly high tax. (Most farmers have a lot more value in their buildings and equipment than in their land; Georgists would remove the taxation from capital.) But urban land values in the central business district are much higher: sometimes as much as $250,000,000 per acre — 100,000 times what a typical agricultural acre is. Use that prime land fully. And even in a small city, an acre downtown, properly developed, can save 10 acres on the fringe.

 

Nic Tideman:   The Case for Taxing Land

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. ...

In theory, land speculation can either improve or worsen economic efficiency.  The way that land speculation can improve efficiency is by preventing the premature development of land at suboptimal intensity.  If land in a particular region is destined to rise in value at a rapid rate and few people realize this, then in the absence of speculation in land, people would tend to build structures that would turn out not to have been worth building once the higher value of land became known.  In retrospect it would be seen to have been more efficient to leave land undeveloped until its value rose, and then develop it at a higher intensity.  The possibility of profitable speculation in land would induce those who could foresee the future higher value of land to buy land and hold it unused until its high value became generally known.  In the process, the inefficient premature development of land at a sub-optimal intensity would be prevented. ...

There is little evidence of inefficiency from premature land development.  If there were such evidence, it would take the form of recently constructed buildings being demolished for more extensive development, or possibly, in less extreme and less obvious cases, new development surrounded by recent, substantially less extensive development that could have been just as extensive as the new development if only the developers had waited a little longer.  Examples of the first type of evidence are quite rare.  Examples of the second type would be easy to miss, but still there seems to be no reason to suppose that they represent a problem of efficiency as widespread as the problem of indefinitely deferred development induced by the winner’s curse.

The second reason for believing that deferred development induced by the winner’s curse is more of a problem than premature development induced by a lack of foresight is that the latter problem can more easily be resolved by new markets.  If land should come to be taxed so heavily that people stopped speculating in land, and if it then transpired that people often lost money on their investments in developing land because they underestimated the rate at which land values would rise, then there would be a potential private market for good predictions of the rates at which land values would rise.  A person who could foresee future rises in land values (a good speculator in today’s markets) would have a comparative advantage in selling insurance against a rise in land values, and hence in land taxes, that would make current development unprofitable.  Thus, in making land speculation unprofitable, land taxation would redirect the energies of those who believed they could predict rises in land values, away from buying and holding land that they believed would rise in value, and toward selling insurance against rises in land values where they believed that there would be none.  People would be discouraged from building where land values were foreseen to rise rapidly, by the unavailability of reasonably priced insurance against rises in land taxes.  Thus the potential development of a market for insurance against rises in land values makes it unnecessary to maintain land speculation as a mechanism to secure efficient deferral of development.  The benefits of eliminating the inefficient deferral of development that is caused by the winner’s curse can be secured without foregoing the benefits of redirecting development, based on private knowledge of where land values will rise rapidly. Read the whole article

 

Nic Tideman: Land Taxation and Efficient Land Speculation

Of course, land will not be transferred by those who have the right to use it unless some payment is made. The possibility of payments for transferring the right to use land raises the specter of land speculators receiving large undeserved profits while holding economic development hostage. Is land speculation an unavoidable concomitant of a market economy?

It is important to understand first that withholding land from development can be a productive activity. Land that is developed prematurely will not be improved to the extent that is efficient when the land is ripe for development, because that later development would require the sacrifice of the earlier, inefficient improvements. To insure that resources are not wasted on premature development of land, it must be possible for those who make development decisions to profit from making them well. This perspective on land speculation was developed by Richard T. Ely (1920). ... read the whole article

 

 

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