Posted by: graemebird | March 19, 2009

The Blessed Price System Underestimates The Need For Vertical Development.

We have to, in the first instance, cut off Georgist economic analysis from Georgist land-tax advocacy. From there we want to further flesh out and develop some of the ideas of Georgism. And then see whether a better solution than land tax might be in order. Or to see whether some level of land tax would seem to be necessary. One doesn’t prejudice these matters in advance. But rather one works through all the angles and accepts the most JUST solution, no matter what that would be.

THE PRICE SYSTEM UNDERESTIMATES THE NEED FOR VERTICAL DEVELOPMENT.

Thats the best summary I can give to the anomalies which have lead to the advocacy of the Georgist tax in some circles. I think the Georgists have a point and we ought to meet them part of the way but not necessarily go to that part-way meeting place assuming that TAX is to be the solution to these anomalies that we will allude to here. We don’t wish to be like Sado-Pigouvians and assume that if there is negative or positive externalities that this automatically implies either a tax or a subsidy. And if in the end a tax does appear to be necessary this ought not mean that it is a heavy tax, or a tax to be brought on precipitously. We assume that we have no knowledge of the answer until such time as we have fleshed out the reasoning. There is no need to jump to conclusions here.

THE PARADOX OF LAND

The paradoxes of land in economics. I here refer to only LAND and not natural resources which are sometimes rolled in under the one heading. Here we use the term to refer only to ground-space and location location location. In economics nonsensical paradoxes crowd out the valid ones. And where economists have learnt and believe in the bullshit ‘paradox of thrift’ they appear unable to recognize certain paradoxes to do with land and how land is a good like no other.

It is like that always. People who learn the nonsense fiscal multiplier can never quite get their head around all the implications of the real and valid bank-cash-pyramiding multiplier….. I sez “valid” as an economic concept and not as a banking practice.

Anyway I was replying to a Georgist that just now landed on my site. And on the one hand I didn’t want to appear gung-ho for any increase in taxes, but on the other hand I wanted to show that I did appreciate the economic realities that inspired Henry George.

Now I hate triangulaters, compromisers and professional holier-than-thou fence-sitters. Quislings like this really piss me off. But re-reading what I wrote it sounds a bit like I’m being that way myself. Well I’m not but its a complex subject.

First we need to come to grips with the fact that vertical development ought to be the first cab off the rank no matter what. The anomalies that I’m calling the “paradox of land” really do stipulate that any obstruction to vertical development is gravely anti-social and more than normally economically destructive.

Hence any country right now has much to gain by systematically looking at their tax code and regulations to see if there is any unnatural discouragement to vertical development WHATSOEVER And this might be done with whatever policy mix one has on the fly without yet reaching for the land-tax bludgeon…. At least in the first instance.

Anyway I’ll include my response to the Georgist, and maybe some of you will be able to come to grips with part of what I am talking about, and not be so unnuanced, absolutist, and pig-ignorant as Sinclair Davidson for example. No paradox of land to see here says Sinclair. I see nuh-think. I know nuh-think ………. says Sinclair in effect.

Here is a re-written version of my earlier post:

Right. It would be going to far to call myself a full-blown Georgist. I think most of the damage is done by height restrictions on buildings, the failure to recoup money on peak-time road provision, and also a great deal of the problems George pointed to would seem to come from fractional reserve monetary expansion.

As well there was the problem of the enclosure movement going too far. Cutting off each last bit of land so that we were fenced in. Most land that is private property did not become that way via homesteading and even when it did, the extent of the land claimed was probably in error.

Many boneheaded types who dismiss George outright, as if he made no point at all, don’t realise that it is somewhat meaningless to point out that there is a lot of unused and barely used land. In this theory since there is marginal and unused land how can there be a problem of people locking up the land unjustly or counter-economically?

But what this does not take into account is that if another NewZealand opened up in the Middle Of The Pacific it still would not relieve land shortages in inner Sydney. The absolutist anti-Georgians continue to look at land as if it is just another good that you could put into a container and export. They assume their neoclassical models apply as if this importability and exportability were the case.

But if you fence off some land and it becomes private property, that means that someone else must travel a greater distance around that fence.

If the economic circumstances of the country are such that people will lock up land and use it less intensively then elsewhere, what this means is that relatively speaking, people have to travel further to get to the capital goods that make their labour valuable. Hence the practice of greater land usage per person, than what might be otherwise the case, under different policy, is such that it does impose costs and it does extract a rent of sorts.

The idea then is to systematically cull any measures that are leading to this less intensive, lazier (shall we say) use of the land. Land has to be looked at differently, since we cannot import the land in the Western deserts into the middle of Sydney, where it might be more useful…… and even if we could it would only set us further apart from things, so we see that we must consider any measures which lead to less vertical development as highly anti-social.

Height restrictions on buildings is one. Council regulations making it a hassle and a red tape nightmare to throw in a granny flat or multi-level basements would be another.

George has made a good enough point, that we ought to take the view; that any known tax that hurts the landowner ought to be deep-sixed and for every few dollars the government lets go of it might well claw back one dollar in land tax. ((((Whether or not the land tax would thereafter be retained is another matter. Since I believe I have a better solution.))))

So that if general property taxes were deep-sixed, rental income were made non-taxable, stamp duties were revoked. Well lets say the government were losing 10 billion in revenue in the context that there may be a windfall in land values. In that context I could see them clawing back maybe one billion in land tax. I can think of an even better solution than that. But I’ll get into this better solution later.

But the problem is this. We want the land owners to have the incentive to build vertically. Of course if they are broke already, and you hurt their 1.cash-flow AND 2. capital value 3. BOTH AT THE SAME TIME ….. with an increase in land tax UNDER THE WRONG CIRCUMSTANCES…. well you are just abusing them and making it harder, and not easier, for them to contemplate such a program to more intensively use their land.

And there is another factor here. If monetary policy were reformed then the price of land would be likely to collapse to one third its current value in many places. So that increasing the land tax regardless of context would seem to be openly abusive without producing the results that the original economic-theory, and the paradox-of-land, would have suggested that gains could be made.

In general I think what we are after is to get to a stage where the up-front cost of land is reducing in nominal terms. Where land, in a sense, is becoming more plentiful regardless of location. What this really means is to orchestrate a slight, but continuing and insipid, over-supply of vertical living and working space.

Land tax may be part of this oversupply. But it strikes me as sort of Sado-Pigouvian, not to try and tap out all other ways of attempting to achieve this oversupply goal, in most situations, prior to reaching for the tax solution. Or at least prior to reaching for this solution in a heavy-hitting way.”

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Responses

  1. Seems to me that untaxing buildings and uptaxing land is a fine step toward accomplishing your goal of incentivizing vertical development in places well-served by existing infrastructure, in order to promote a vibrant economy and prevent the premature development of agricultural and wild land for housing and commercial purposes.

    And going further, it seems to me that if there is still some economic rent accruing into landowners’ portfolios after we do that, we might reasonably shift off labor some of the taxation we impose on it (starting at the bottom of the income spectrum, which I suppose means shifting taxation off wages and thus funding that which we fund with FICA withholding some other way); AND/OR shifting taxes off sales of goods produced by workers.

    Land value taxation is better than the other taxes we rely on now, and we ought to be moving toward it post haste.

  2. Hmmmmmm. I’m not faulting you on logic here. But consider what I was saying about monetary policy. If we had 100% backed commodity money its likely that land prices could drop by two thirds. Just to take land out of being an investment good and into being a consumer-durable….. (ie something falling in value that people didn’t choose to invest in) would be a good enough start.

    And then consider what getting rid of zoning would do. And taking all the height restrictions off buildings…. and congestion tax charging….

    All those together would kick the living shit out of capital values. And therefore out of the landowners ability to respond to any incentives by increasing his vertical development.

    So in our case in Australia I think anything more than very slight incremental adjustments are premature. We ought to look to the goal of more abundant land via the substitution of the demand for land with the supply of vertical development……

    But I don’t think we ought to jump ahead and anticipate that this must needs mean any great increase in Land tax anytime soon.

    I am currently thinking of New South Wales where the land tax is pretty heafty and yet there is no sign of these guys getting rid of height restrictions, zoning, or of cutting back on their splurging.

    They used to call it “Political-Economy” and its something to remember that what might seem right on the basis of technical economics alone, is likely to slip up when the totality of political-economy is taken into account. These people are thieves. One has to be very careful about justifying their thieving.

    Let them do all the small things above that hurt land values…. and if there is to be some small increase in land taxes let it only come to pass when we have a roll-back of taxes and spending more generally.

    We have to promote a sort of Georgist economics quite separate from the land tax issue.

  3. Re-reading your post I see that it is a very measured and moderate post and not calling for any great increase in any tax anytime soon.

    I will develop matters further to make the argument that there is another way to handle this from a purely technical economic point of view. But there are problems with this “other way” as well when it comes to the political and ethical side of things.

  4. Its a very difficult subject isn’t it. I mean we cannot be out there actually promoting a tax. Because the clear and present problem is just thieving. Just public sector thieving running amok.

    If we are arguing that a tax is somehow JUST then when that gets out there on the net you wind up fighting on the side of evil.

    If this was India I would say that any land valued above the best agricultural land close to cities…… and then given a threshold for each man and his registered dependents…… Well with those two thresholds in mind I would say to straight away slowly be substituting away from other taxes to land tax….. thresholds in place.

    But then again the same problems arise as would arise here. We really need to pop land price bubbles by every conceivable measure short of increasing the land tax first… unless its simply the case of moving from straight property tax to land value tax.

    Property tax would have to be the worst of all taxes…. it might seem a subtle difference. But the property tax is killing the vertical development.

  5. LVT Fans name links to here:

    http://www.wealthandwant.com/

    I recommend that you all read every word that you can get hold of of Henry George. I recommend you use zen thought control techniques to avoid thinking in terms of advocacy for this here tax and just get a handle on the theory here.

    Now there is a couple of things to note. In retrospect we now know, that this was a period of growing fractional reserve banking in the States and therefore hateful monetary instability. Which the treating of land as a speculative or investment good would have made much worse the problems that Henry identified.

    The other thing is that in Henry’s time there wasn’t really the technical ability to add too many more floors. A wooden building doesn’t tend to go above 3 or 4 floors to my knowledge.

    If up-front land values are slowly falling to converge with the prices of the best agricultural land…. and if they are doing so at least in part because of powerful vertical development…. then we might say that this is “good enough” for the time being and that in this case any talk of increases to the land tax might be postponed.

  6. I DIDN’T ENDORSE A NEW TAX. YOU ARE LYING. AND THE LAST THING I WOULD ENDORSE IS THE THIEF-ECONOMICS IDEA OF REVENUE-NEUTRALITY. I’M TRYING TO RECOGNISE THE ECONOMIC REALITIES AND FIGURE OTHER WAYS AROUND THESE PROBLEMS.

  7. Uptaxing land value will bring land prices down, just as rising interest rates do. Taxing land value won’t reduce land *value*, just the selling price. (That is, a tenant would continue to be willing to pay just as much to USE the land; but an “investor” would be have no incentive to put his money into land because the anticipated net return would be poor — the economic rent would be passed along to the commons, to fund the various services and infrastructure that help make that site so valuable that the USER is willing to pay a premium to use it. And if we collected the rent, there would be no expected speculative gain.

    This is good; the investor would then have an incentive too put his money into something that creates … buildings, jobs, equipment … instead of into something already created (land). This would be a fine thing for the economy.

    And since the investor would not need to borrow to buy land, credit would be available for buildings and equipment and inventory — all of which would invigorate our economy.

    If it is true that no buildings in George’s day were beyond 4 stories — and I don’t know that it is — that doesn’t reduce the logic of his observations. He was writing from about 1870 until his death in 1897.

    Many American cities have vacant lots, parking lots and old low-rise buildings interspersed with much taller buildings. I’m not opposed to removing height restrictions, as long as the safety stuff is attended to, but think that better incentives would get some of those low-rise “taxpayers” razed and replaced with more suitable buildings. This week I see that the ground lease under 1625 Broadway in Manhattan sold for $26 million. Of course no articles seem to think the lot size relevant. “The site, located at the corner of West 50th and Broadway, contains a 40,532-square-foot office/retail building, which is home to the Snapple Theatre and Duane Reade. Air rights allow for an additional 120,000 square feet of development at the location.” Elsewhere, I find that the existing building dates to 1910 and is said to be 2 stories above ground, though the photo suggested it might be 4.

  8. There were probably taller buildings than that. But it wasn’t really the norm. What is this “air rights” business. Surely “air rights” run counter to the common interests. Rather we’d want healthy competition to build up so as to grab the best view.

    I don’t see how one can possibly, in justice, obtain air rights. Since people ought to be free to homestead the region above the land that they’ve bought. They cannot create the land. And often they cannot improve upon it by all that much. But what they can do is make original use of the region above that land.

    If I’m interpreting air rights as a restriction on vertical development then their abolition represents an untapped measure to help solve these various problems prior to reaching for the tax. That investors are assured that up-front land taxes must come down but that their yields will never be taxed would be a pretty good start to matters.

  9. http://wikileaks.org/wiki/Australian_government_secret_ACMA_internet_censorship_blacklist%2C_18_Mar_2009

    If we could get serious about mass-sackings and not having leftists in the public sector, none of this could be happening. Its virtually an “I told you so” moment. Its not funny when any leftist gets called to Canberra. Its not something to mock pro-liberty people about. Look at you all. Too scared to even link the sites.

    Yet you spent all your time mocking people who said that it was no good to have leftists in the public sector. And you all backed Soetoro in the American elections.


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