I mentioned Henry George’s book Progress and Poverty in the reading thread, and there was some interest in the subject. Here’s a thread as promised. @garlicsoup @JethOrensin
I’m not exactly sure how to start us off. It took me a while to fully underestand this idea, and I’ve found introducing people to it with few words and minor effort on their part is difficult. So I guess the best I can do first of all is to motivate you.
On that note, when I was introduced to this it was like a volcanic eruption in my political and economic consciousness. It’s likely the most important idea you’ve never heard of. For me, it was the sort of idea that made all the other ideas seem almost silly. We argue about details when the solution has been right there in front of us for 150 years.
We all know about wealth inequality. We talk about it all the time in politics, and we all have our opinions on its causes and solutions. It turns out that Henry George convincingly identified one of its major causes, if not the primary cause, all the way back in 1879, and it has been all but forgotten. You’ve probably never heard of him, but at the time he and his magnum opus were actually quite popular. In the 1890s, Progress and Poverty came second only to the bible in UK sales.
Why have you not heard of it, then? Well, the reasons for that are political, and we can get into that, but that would be putting the cart before the horse. First, the economic argument needs to be understood. I’ll write a short introduction, but don’t expect to come away from this post fully understanding it. By all means ask questions, but you’ll probably need to do your own research as well. There are resources online to deepen your understanding, and you could always read the book of course.
Land rent
The first thing to understand is economic rent, which is a factor when a resource used in production is in limited supply. Land is the most important such resource, and land rent is therefore the most important example of economic rent (monopolies from intellectual property are another). Let’s start with a quick example of land that yields rent: Consider land in the heart of Manhattan. This is in very high demand, yet in fixed supply. Normally when things are in high demand we make more of them. We cannot make more land in the heart of Manhattan, so it yields rent.
David Ricardo’s law of rent states that the rent of a land site is equal to the profit obtained by using the site in its most productive use, compared to using marginal land for the same purpose, given the same inputs of labor. You might want to read that a few times. I’ll explain it with a hypothetical:
Imagine you own two plots of land, both in the middle of nowhere (both “marginal”). You lease them to farmers who pay you some monthly fee for permission to use your land. This fee is not very high, because marginal land is not in high demand. Now imagine that near land 1, a city develops. Because of the city nearby, the farmer on land 1 is able to build a significantly more profitable farm than farmer 2. Land 2 is still marginal, and land 1 now yields rent. The rent of land 1 is equal to the profit obtained by using it in its most productive use, compared to the profit obtained by using land 2. Therefore, the law of rent states: The rent of land 1 is equal to the difference in profitability between farm 1 and farm 2.
Remember, there is a fixed supply of land in and around the city. Farmers who are competing for farmland to build a profitable farm on will therefore be willing to pay you, the landowner, a high price to use land 1. Normally when things are in high demand we make more of them, and the price would come down, but here that can’t happen. In practical terms this means that you can raise the price to such an extent that farm 1’s additional profits are wiped out and ultimately go to you, the landowner. This is the key insight, so make sure you understand it. Developments nearby, created by the community, enable more productive use of land, but the value that is added by this more productive use ends up being turned into land rent and is extracted by landowners, who contributed nothing in creating that value.
Consequences
When you buy real estate, whether it is to live in yourself or not, you also typically buy the plot of land underneath. The price of that plot of land includes centuries of accumulated rent. It is here, in the land rent, that much of the value added by centuries of economic growth is stored. Globally, we are talking hundreds of trillions of USD. Directly applicable to you and everyone else who needs a place to live (which is everyone) is the fact that your mortgage payments or monthly payments to your landlord would be significantly lower if you were not paying for centuries of accumulated land rent. Indirectly, it affects everyone because it makes production less efficient. Refer to the image above. The one doing all the work in using the land productively doesn’t reap the benefits. Land rent eats into their profit margin, which ultimately has to be passed on to the consumer. And these are just the economic effects. What about the justice of it? Why should landowners, by “virtue” of owning the rights of others to exist somewhere on earth, get to reap all the benefits of economic growth?
Does it seem a little strange to you yet that this is not typically mentioned as a primary cause of wealth inequality? If so, welcome to the club.
The solution
In Progress and Poverty, George makes what I believe to be a convincing argument for how to solve the problem. The solution, in his mind, is to capture land rent so that the returns don’t go to landowners but to the collective, so that everyone can share in the benefits of economic growth. We can achieve this by simply confiscating all land and leasing it to its users for a fee, effectively making the government the landlord of all land. But confiscating all land is a legal hassle, and there is a cleaner way to achieve basically the same thing: Taxation.
Let’s quickly note that when we tax something, we discourage it. When we tax alcohol consumption, we discourage it. When we tax income from labor, we discourage labor, even if we don’t want to. When we tax production (companies), we discourage production. In economic terms, when we tax something, supply and/or demand will decrease. Here’s a neat interactive visualization. Now remember, land is in fixed supply (supply elasticity = 0). Taxing it will not affect its supply. A tax on the value of land is therefore an economically efficient tax.
The proposal is this: A 100% tax on the unimproved value of land. (Land value tax, or LVT).
This means we are only taxing the value of the land itself, not the value of any improvements on top of it. The owner of an empty plot of land pays the same amount in taxes as the owner of a plot of land next to it which has an apartment building on it. We are only taxing any value that was already there, or added by the community, not value that was added by the owners of the land or its users. This way, we don’t discourage the improvement of land, which modern-day property taxes do. A high tax on the unimproved value of land is both more just and more economically efficient.
Imagine you owned a $300k piece of real estate. Currently, in locations with moderately high land rents, about half of that is the price of the land. About 1/20th of this 150k is the yearly land rent, which we would be taxing. This would be $7500 a year. The most important direct consequence is that it would no longer be worthwhile to hold land and lease it to users. After all, users would be willing to pay you $7500 a year to use your land, but you owe all of that in taxes. The price of land drops to almost zero, which means the price of the property drops to about 150k. If mortgage interest is 5%, meaning your mortgage payments are reduced by $7500, this means you end up with the same direct monthly cost of living as before.
But there’s an important difference between the situation pre-LVT and post-LVT: Your monthly payments are no longer all going to the bank. Half of them are now going to the state, meaning the state’s revenue increases significantly. This means it can partly replace other forms of economically inefficient and unjust taxation with this more efficient and just tax. It can significantly lower income tax rates and corporate tax rates, to the point where you, the owner of the house from the example, are directly better off than before, and it’s only the bank that loses.
Below is an illustration of this point. We are buyers of a real estate property in an urban environment where land is expensive. Remember this is just an illustration. The numbers won’t translate exactly to real-life results but close enough.
Current:
Post LVT:
The government can lower income taxes, which are both inefficient and unjust, and still retain the same amount of revenue because the revenue has been replaced with a more efficient and just tax. It would be a (partial) shift of the tax burden from the productive part of the economy to the unproductive, parasitic part.
The effects of the resulting improved economic efficiency are hard to overstate. The burden of rent on an economy is absolutely huge, as I hope you now understand. GDP growth would increase sharply, and of course with the LVT we are actually capturing that growth for the community, rather than having it be extracted by landowners passively.
Thanks for reading, I look forward to any responses.
There is neither motive nor ability for a normal person to get any land or build anything on it. Only the already rich can do that, but the author cannot say that, so the word “community” is used instead. 
