Monday, June 29, 2009

LVT is not a good tax

There are a good number of people wandering about this here blogosphere who advocate a Land Value Tax (LVT): often citing Adam Smith, they claim that it is the "least worst" tax.

Over at Samizdata, Johnathan Pearce delivers a pretty comprehensive smack-down of LVT—inspired by regular commenter (here and there) Ian B.
However, I wanted to post this by the regular commentator, IanB, as it was too good to leave at the bottom of a very long thread about the flawed idea that land, qua land, is special, and must be singled out for tax because of its supposed uniqueness, as distinct from say, income or consumption:
"Liberty is based on a different presumption which has the virtue of making sense, which is that people should own property and do with it as they wish, because it is their property. And, honestly, if I save up and buy some land and plant a big garden on it for my retirement, I don't care whether you think it would be better used for a glue factory because that would return you some externality that you can double charge for via your tax."

"This is why liberty and georgism are incompatible; you keep making claims on behalf of the community. Screw this "community" of yours. It has no rights or claims on me beyond the right to freely interact with me. The LVT is a crude social engineering plan. It attempts to maximise productivity of land. Liberty is not about maximising any statistical value- it is simply the principle that the person may do with themself and what is theirs what they wish. So long as they produce enough by whatever means to survive, there are no other demands upon their economic activity."

Exactly. Suffice to say, I doubt the LVT enthusiasts will give up (they are persistent, a bit like cockroaches that can apparently survive a nuclear blast). Question: why does this issue come up a lot on this site? Are we masochists? Well, libertarians obviously are against taxation, period, but there are grounds for debate on the least-worst form of tax; for what it is worth, some form of consumption tax is probably best in my view, not least because they tend to be fairly easy to collect, although there are still issues here.

Indeed, it is consumption taxes (preferably on luxuries) that I favour since they are as close to a voluntary tax as you can get—you don't have to buy things and thus you don't have to pay the tax.

And, of course, if the levels of tax are set, and the tax collected, locally, e.g. a Local Sales Tax, you can keep the levels of tax low through competition between different areas.

Further, consumption taxes, quite obviously, do take account of ability to pay: if you cannot afford to buy lots of nice shiny things, then you do not pay tax. If you are a multi-millionaire and you love nice shiny things, then you pay lots of tax. Very progressive, you see, but it doesn't disproportionately penalise people for the amount of money they earn.

Anyway, Johnathan continues to explain why LVT doesn't even work on its own terms, the first being the idea that LVT somehow stops property bubbles.
I don't know why Georgists should, for some reason, not give more weight to foolish central bank policy in causing asset price bubbles, or assume that property bubbles are bad, but other bubbles - like say, the dotcom one of the 1990s, are less so. One Georgist likes to raise the example of Hong Kong, which has a LVT. But that example won't fly as there have been big gyrations in the price of accomodation, which hardly suggests LVT did much to alleviate the situation, or by much. In fact I would say that proves pretty conclusively that LVT, on its own, cannot fix this sort of problem if monetary policy is deranged by Keynesian demand-management or other economic quackery.

Ah, yes, but at least land is fixed, is it not? Um...
There is another, even more fundamental problem with the Georgist position about land. The problem is that it does not distinguish between the fact that while land is, by definition, fixed, available land is not. This is why the likes of John Bates Clark, an economist of the late 19th Century, demolished the land value tax movement's arguments as did Murray Rothbard half a century later. Both men pointed out that the LVT argument ignores the fact that the price of land is driven by its marginal productivity, and in that sense is no different from labour or physical or human capital. To single out land for special tax treatment will lead to a misallocation of resources, encouraging more building density than is rational, etc. The total amount of land is fixed—obviously–but the total amount of sellable land is determined by the amount of marginal buyers and sellers, a very different thing. If demand is heavy enough, new land comes onstream. Just ask the Dutch.

Quite. Do go and read the rest of the post which, amongst other things, lays out Rothbard's case against Georgist taxes.

Source: The Devils Kitchen

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