Re: Land, Labour and Capital Taxation....

From: Igor (jjweatherby_at_houston.rr.com)
Date: 12/13/04 

Date: Mon, 13 Dec 2004 11:49:23 GMT

Mark Monson wrote:

> Well said. There is another consideration and has to do with the fact that a
> better location is a labor multiplier, not simply a labor saver. A shift to a
> more generally efficient land allocation system thus increases total output
> geometrically. The indirect effect of LVT is to allocate and reallocate all
> locations to highest/best use according to ever shifting market demands.

This is not necessarily the case the LVT has to be set right. Even
George stated that if you tax 100% of rents then the land market would
cease to exist. George advocates letting owners keep a small percentage
of rents. If you set the LVT to high it is no longer efficent and will
start to affect decisions of land owners. George advocated 5% of rents
which of course is a number pulled out of a hat. THE PROBLEM STILL
REMAINS HOW DO YOU CALCULATE RENT SO YOU FIND A TAX RATE THAT WILL NOT
TAKE AWAY ALL RENTS OR MAKE RENTS NEGATIVE? Empirically this is tough
because George nor Ricardo have a good idea of what a baseline land is.

Ricardo introduced the idea of rents with three grades of land. The
highest settled first. The idea was a landowner could get rent off of
grade I and II land because it was more productive than grade III land.
So if your land has better soil and given the same production techniques
yields twice the output of grade III land, the owner of grade III would
be willing to pay you an amount somewhere below or equal to the extra
profit that could be gained from cultivating the better land. So the
landowner could gain rents by leasing the land to someone who has lower
valued land. The problem is finding a baseline for what the lowest grade
land is. If Ricardo is right and different land has different productive
value, which is likely, this means an LVT would not BE UNIFORM. More
productive mines, for instance, could obtain MORE rent than a slightly
less productive mine. To tax that rent at the same rate as the rent of
the slightly next productive mine is taxed MEANS A HIGHER TAX RATE ON
THE PROPERTY VALUE. Yes the lost lowest productivite land would have the
lowest value BUT WOULD ALSO OBTAIN ZERO RENT and therefore should not be
taxed.

LVT as described by George would be an administrative night mare. The
sheer cost of implementing the tax would be extermely high. Once the
cost of calculating rent and possibly setting a different tax rate FOR
EACH landowner is factored in there would little money left over for the
government to spend. The majority would go into paying the cost of
setting the tax and administering the tax.

Now if you are advocating something slightly different from George. That
is just a land tax and not a land tax that preserves something like 5%
of rents for owners that is a bit differnt. In the end though this is
the same effect as a corporate profit tax. It is a fixed cost that most
be paid and will not effect production decisions. Both profit and land
taxes do this. This is the static analysis only.

What is differnet between land and profit taxes is that profits are not
sold on a market. The tax on land will no doubt decrease land prices
because future returns will be lower meaning holders are more likely to
sell and potential buyers will demand less, because other investments
will now pay relatively more. There would be less speculation. The
problem becaomes if land is the only tax.

There is no federal land taxes but States and localities do tax land. So
some LVT are in place now. There have been arguments about state land
taxes instead of local and redistribution between localities because the
land tax means local systems are unequally funded. Localities with
higher property values and lower population, such as some industrial
localities, receive more money per student than say a inner city area
with low property values and high population. The local tax system has
led to a big inequality in the quality of schools in Texas. It is not
unheard for people to get a P.O. Box in a town close to where they live
so their children can enroll in the better funded school district. Land
taxes do have to be purely local but if Federally implemented states
plenty of opposition of states with higher land values who have to pay a
higher percentage of taxes than say a state like South Dakota with low
valued land.

At this point state and local land taxes are no where close to stopping
speculation much less shutting down the land market. The problem is if
ALL other taxes were eliminated would the increase in land taxes do
this? I do not think we have a political climate where governments would
cut spending due to lower revenues from land taxes. At some point the
revenues would drop as land prices lowered, if you by value you mean
market value. So the government may need another tax. That taxes would
be better as a profit tax. Which does not distort static decisions.

That being said. A land or a profit tax can have dynamic implications.
It does lead to less profits for the firm. Retained profits are
important in future capital accumulation and expanding the firm. These
are added to credit lines to finance expansion. So these taxes could
lower future investment and possibly get slower job growth in the future.

> This
> would have the effect of generally increasing wages for both paycheck workers and
> the self employed.
>

Not only would wages increase but the amount of people hired would
likely increase as well. Assuming that labor supply is not perfectly
inelastic. Workers get more take home pay and firms actually pay them
less than with the tax. Workers are willing to accept a lower wage
without the tax than with the tax because take home pay would be the same.

This has been a big argument the last couple of years in the Houston
area. Management of the Houston Astros has contending, and it seems
rightfully so, that they have an advantage in the free agent market
because Texas has no state income tax. So if they offer someone like
Carlos Beltran less money than the New York Yankees do, Beltran may
actually get more take home pay because New York has a state income tax.
So if the NY income tax is 10% then every dollar paid in Texas is equal
to $(1/.9) or $1.11 offered in New York. That is because every $1.1
earned in New York means the guy actually takes home roughly $1. It is
not exact here due to rounding. So a $15 million dollar contract in New
York would yield Carlos Beltran the same amount of take home pay as a
$13.64 million contract in Houston.

So the decrease in wages paid could offset the negative effect on
profits of a profit tax or a land tax.

> But people who have trained themselves to ignore the concept of the general interest
> refuse to even consider proposals like LVT that improve the entire economy. They
> have bought into the silly idea that the economy is a zero sum contest where the
> only way to get more is for somebody else to get less.
>
> MM
>
>

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