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Land Value Taxation: Rebuttals to Common Objections

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Author Topic: Land Value Taxation: Rebuttals to Common Objections  (Read 7157 times)
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« on: August 23, 2010, 03:59:10 pm »

Didn't Austrian economist Murray Rothbard refute the LVT?

No, but not for lack of trying. Rothbard's argument against the LVT is fatally flawed for at least two reasons -- one moral, the other economic. From a moral perspective, it completely ignores the unjust interference that the overextension of law-made property imposes on labor-made property. From an economic perspective, it is based on a false understanding of what conditions are necessary for land to have rental value.

In Libertarian Party at Sea on Land, LP activist Dr. Harold Kyriazi explains why Rothbard's attack on the LVT was misguided at best. The following is from pages 57-61 of that book (all emphasis original):


The only well-known libertarian writer whom I know to have explicitly, and at great length, opposed the idea of community collected user fees for natural resources is Murray Rothbard, which is odd, given his admiration for Albert Jay Nock and Frank Chodorov, who, in turn, revered Henry George. Rothbard apparently had extensive discussions with Georgists:

    If every man owns his own person and therefore his own labor, and if by extension he owns whatever property he has "created" or gathered out of the previously unused, unowned "state of nature," then what of the last great question: the right to own or control the earth itself? ... It is at this point that Henry George and his followers, who have gone all the way so far with the libertarians, leave the track and deny the individual right to own the piece of land itself, the ground on which these activities have taken place. (pp. 33-34, For a New Liberty.)

The following is taken from his The Ethics of Liberty.

    (p. 50, footnote 2): A modified variant of this "Columbus Complex" holds that the first discoverer of a new island or continent could properly lay claim to the entire continent by himself walking around it (or hiring others to do so), and thereby laying out a boundary for the area. In our view, however, their claim would still be no more than to the boundary itself, and not to any of the land within it, for only the boundary will have been transformed and used by man.

With this statement, Rothbard may seem to have carried the "first use" doctrine to its illogical extreme. (If walking over some land constitutes transformation and use, then is it just one's footprints that one owns? Or does one's rightful claim extend out to all the underbrush one has cleared away? Or, can one claim land as far as the eye can see? This is the very definition of the word "arbitrary.") But in his defense, to convert the claim into actual ownership would, Rothbard would say, require actual use (though we're again faced with the question of what constitutes "use" -- see p. 79, "Anti-Rothbard..."). For example, earlier, in a Robinson Crusoe paradigm, he stated that Crusoe's "true property--his actual control over material goods--would extend only so far as his actual labor brought them into production. His true ownership could not extend beyond the power of his own reach."

What, then, would Rothbard say about large American corporations owning, but not using, millions of acres of land, as some now do? He gives us his answer in an essay he wrote on Henry George's Land Value Tax idea, entitled "The Single Tax: Economic and Moral Implications" (FEE "Special Essay Series," 1957). Here are a few examples from that work:

    Well, what about idle land? Should the sight of it alarm us? On the contrary, we should thank our stars for one of the great economic facts of nature: that labor is scarce relative to land...Since labor is scarce relative to land, and much land must therefore remain idle, any attempt to force all land into production would bring economic disaster. Forcing all land into use would take labor and capital away from more productive uses, and compel their wasteful employment on land, a disservice to consumers.

Of course, LVT would and could do no such thing, as those who strive to put idle land into productive use would have to bid against other land users for labor, and only the best uses of labor and land would win out. Thus, rather than forcing all land into use, LVT would discourage all but the most productive use of land, just as any market tends to allocate resources most wisely. Another thing that would happen is that the earnings of labor would increase due to increased competition for it, and (ideally) none of the produced wealth would go to landowners qua landowners. Let me rephrase Rothbard's last sentence in a way that makes sense: Forcing land users to pass over ideal idle land and utilize marginal land instead, is wasteful of human labor and natural opportunities, a disservice to all mankind and a boon only to landlords and land speculators.

But here's the most embarrassing passage:

    A 100% tax on rent would cause the capital value of all land to fall promptly to zero.


    Since owners could not obtain any net rent, the sites would become valueless on the market.

False! They'd be valueless only to those market participants who wish only to speculate in land, not to those who wish to use land in some productive endeavor.

    From that point on, sites, in short, would be free.

Wrong again. While it's true there'd be no sale price for vacant land, one would still have to pay the ground-rent to use it.

    Further, since all rent would be siphoned off to the government, there would be no incentive for owners to charge any rent at all.

Wrong yet again. He's assuming the LVT would be set by an actual ground-rent charged by the landlord, rather than being an assessed value that would have to be recouped. And, I might add, total rental costs would tend to decrease as additional units come on the market as the monopoly stranglehold on land loses its grip.

    Rent would be zero as well, and rentals would thus be free.

He continues to pound a straw man.

    The first consequence of the single tax, then, is that no revenue would accrue from it.

He took a wrong turn, and just keeps going!

    Far from supplying all the revenue of government, the single tax would yield no revenue at all! For if rents are zero, a 100% tax on rents will also yield nothing.

Rothbard then goes on to state,

    Compelling any economic goods to be free wreaks economic havoc...the result is to introduce complete chaos in land sites.

Completely false. Even if LVT were applied at a national level, and there were no competition among municipalities for residents, people would still bid on the leases of occupied property, providing price information. (For more on this, see p. 97, "How would LVT work?")

In Power and Market: Government and the Economy (second edition, 1977), Rothbard went even further into the realm of irrationality in his attempt to refute Georgist land theory (p. 131):

    Contrary to Georgist doctrine, however, the land problem does not stem from free-market ownership of ground land.

I know of no Georgist who would ever use the phrase "free-market" in conjunction with our current, individual monopoly market in land.

    It stems from failure to live up to a prime condition of free-market property rights, namely, that new, unowned land be first owned by its first user, and that from then on, it become the full private property of the first user or those who receive or buy the land from him.

It is an obvious fiction that any use, however small or large the effort, should grant full private ownership for all time, unless we're talking about a make-believe world with unlimited land where access to all of it is instantaneous (i.e., where travel time is zero). This fiction ignores the fact that someone who, for example, puts up a fence and lets a cow graze, is much less the rightful "owner" of land than one who builds an industrial plant or a shopping mall. (For more on this, see p. 79, "Anti-Rothbard...")


In his contribution to Critics of Henry George: Volume 2 (see Chapter 31 of that book), Dr. Kyriazi provides an even more devastating critique of Rothbard’s fallacy-ridden arguments against Henry George’s Single Tax.

See also the following article by Gene DeNardo: (A Critique of Murray Rothbard's Critique of the Georgist Argument.)

Isn't land less important in today's economy than it was decades ago?

No. To understand why, simply ask yourself the following question. If the importance of land has indeed gone down, then why was the inflation-adjusted price of land so much higher in, say, 2006 than it was 50 years beforehand?

The answer is obvious: because, as the economy and population grow -- and as this, in turn, results in increasing numbers of people with higher incomes competing for access to the same amount of land -- the “importance” of land (as reflected in rents and land prices) grows along with them.

It is, of course, true that land values have recently dropped in many areas due to the collapsing real estate bubble. But as economist Fred Foldvary explains here, the speculation-driven real estate market tends to experience such price contractions about every 18 years, only to resume its former upward trend. If you made a historical chart depicting fluctuations in land values over the past century (adjusting for inflation), you’d notice an upward trend, not a downward one.

Are land values capable of generating the revenue needed for the legitimate functions of government?

The answer to this question depends on (a) how you interpret national income figures, (b) what you consider to be the "legitimate" functions of government, (c) the extent to which a reduction in taxes on labor and capital goods will drive up the rental value of land (and thus revenue capacity), and (d) the extent to which shifting to a land-based tax system will increase economic output (and thus the tax base).

With respect to national income figures, many economists accept (seemingly without question) the Commerce Department's claim that land rent makes up only 2% of the national income. Assuming for the sake of argument that this is true, that means a land-based tax system could yield no more than a few hundred billion in annual revenue.

Not all economists, however, subscribe to the belief that rent constitutes only 2% of the national income. For instance, in The Losses of Nations (1998), economist Fred Harrison explains how a study by Wall Street economist Michael Hudson revealed that the revenue capacity of land is actually about 14% of the national income, or what in 2009 would’ve amounted to approximately $1.7 trillion in annual revenue.

With respect to the "legitimate" functions of government, there are some who consider all current expenditures (including such things as corporate welfare and imperialist wars of aggression) to be "legitimate," in which case the LVT will need to generate well over $3 trillion in annual revenue for all levels of government. On the other hand, there are some who consider "legitimate" only those expenditures that go toward protecting individual rights (e.g., defending our national borders from military invasion, enforcing laws against force and fraud, adjudicating civil disputes, etc.) and toward maintaining some form of basic social safety net (particularly if provided with a minimum of bureaucracy, as a Guaranteed Income would do), in which case the LVT will need to generate no more than half of what is currently spent at the federal, state and local levels.

With respect to the reduction of taxes on labor and capital goods (“capital” for short), and the effect this has on the rental value of land, economists throughout history have observed that, when said taxes are lowered, land rents tend to rise proportionately. Why? For the simple and obvious reason that, the more people can afford to pay for access to a fixed quantity of land, the more titleholders are able to charge higher rents. If, for instance, the payroll tax were abolished, most of the resultant increase in take home pay would eventually be absorbed by higher rents. Thus, it follows that the more the tax burden on labor and capital is reduced, the more the revenue capacity of land is raised by a comparable amount. (Economist Mason Gaffney explains this more thoroughly in Ch. 7 of The Losses of Nations.)

And finally, with respect to economic output, it is common knowledge that, all else being equal, an increase in output means an increase in tax revenue (regardless of the tax system in place). It is also common knowledge that, all else being equal, an increase in output means an increase in the rental value of land (regardless of whether land rent is collected publicly or privately). The question thus arises: to what extent will a land-based tax system increase output, and hence the tax base? On page 147 of The Losses of Nations, economist Nicolaus Tideman estimates that

    "...a shift to public collection of rent as the principal source of public revenue in the U.S. in 1993 would have increased the output of the U.S. economy by $1,602 billion above its actual level for 1993, implying that the U.S. economy is producing only 77 percent of what it could produce with a better tax policy."

All that being said, if you take the Commerce Department at its highly suspect word on rent being only 2% of the national income; if you believe that current tax revenue outlays at all levels of government should be maintained; and if you ignore the extent to which both economic output and the rental value of land will skyrocket in the absence of taxes on labor and capital, then you will undoubtedly conclude that land rent is not an adequate source of public revenue. 

If, on the other hand, you agree with Dr. Hudson's conclusion that rent is approximately 14% of the national income (if not more), then even if you oppose a moderate reduction in overall spending; and even if you ignore the increase in both economic output and land values that would accompany any significant decrease in the taxation of labor and capital, the LVT will still allow for the abolition of the federal individual income tax. But if you believe that $1.7 trillion could easily fund the legitimate functions of government, and if you realize the extent to which both economic output and the rental value of land would increase in the absence of taxes on labor and capital, then you will almost certainly conclude, as I have, that land rent is a more than adequate source of revenue for all levels of government.

How will the LVT be implemented?

In short, the same way it is now.

Critics of the LVT are fond of pretending that land values are not already being taxed, when in fact they are (albeit to a limited extent) by existing property taxes. The machinery for the LVT is already in place. Thus, all that is necessary to implement the LVT locally is to exempt houses, buildings and other improvements from taxation, and thereby focus existing property taxes on land values only. In this way the property tax will be converted to a land value tax.

As for state and federal taxation, geolibertarians advocate a bottom-up system whereby a portion of the LVT-revenue generated locally is sent to the applicable state governments, and a portion of that, in turn, to the federal government.

    "The question naturally arises: How should Federal, state, and local governments obtain the rental value of land? The practical answer is that we should return to the constitutional provision that requires our Federal government to apportion direct land taxes among the states according to their respective populations. The states, in turn, should obtain this revenue and the revenue for their own support by apportionment among their counties, in the way Nebraska, Texas, Montana, and a number of other states still do. The counties, as agents of the states, should collect their revenue, and the revenue needed by state and Federal governments, from the rental value of their lands, using existing property tax collection machinery. These changes would reverse the trend of the last 50 years. Instead of lower levels of government becoming increasingly dependent upon higher levels of government for aid, thereby losing their independence, the higher levels of government would return to dependence upon the lower. That is as it should be if we wish to preserve our liberties."

-- Robert De Fremery, Rights vs. Privileges, pp. 39-40

Ideally, this will be phased in over a period of years. That is, as the LVT is moderately increased each year, taxes on everything else are proportionately decreased.

This process will continue until all taxation is abolished save for that upon on land rent, at which point we will finally be operating under Henry George’s Single Tax.

« Last Edit: January 25, 2011, 06:39:19 pm by Geolibertarian » Report Spam   Logged

"For the first years of [Ludwig von] Mises’s life in the United States...he was almost totally dependent on annual research grants from the Rockefeller Foundation.” -- Richard M. Ebeling

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