Does Georgism Work?

Does Georgism Work?

There is a basic idea in economics that if you tax something you get less of it. Georgists argue that we should tax land since land is a fixed quantity that we won’t get less of. This is true in the sense that there is a certain amount of land in the world and outside of rare events (falling sea levels, land reclamation projects) we don’t get more of it. What this ignores is the relevant quantity for land is not the total amount of land but rather the occupied amount of land.  The occupied amount of land can and will decrease if you tax it.

In many Georgist proposals a land value tax replaces (almost) all other taxes. This LVT is a tax on the unimproved value of land designed to offset the economic rent of land. For a typical $1.5 million property in the suburbs where I live, the structure value is something like $250,000 and the land value is something like $1.25 million.  Many Georgists disagree about what precise rate would be used to tax land. A lower bound can be computed off the 5.5% that prominent Georgists have proposed for a property tax which includes the value of improvements on the land. If we assume that 80% of the property value is land and 20% is structures this would suggest a 6.875% rate.

While Georgists insist that the only fair way to do LVT is based on the economic rents, this ignores that as a single tax, government would expect it to pay for all of government. Residential property value is 33.6 trillion and commercial property value is 20.7 trillion. If we assume 80% of residential property value is land and 50% of commercial property value is land we get a total land value of 37.23 trillion. To generate the 4.05 trillion tax revenue the federal government had in 2021 a tax rate of 10.87% is needed. If we assume the other levels of government together cost half as much as the federal government we get a total tax rate of 16.32%.  So the actual tax rate will likely be somewhere between 6.875% to 16.32%. For the aforementioned suburban property this would be between $87,937.50 and $204,000 in LVT per year.

I think that very few individuals would choose to pay that when a 50-story condo with 10 units a floor could be built on five times the land.  Assuming a single floor of administration and two floors of amenities such a structure would have 470 units. The LVT burden assigned to a single unit would be somewhere between $935.50 and $2170.21. Even assuming condo fees in the area of $1200 a month this is at most $16570.21. You can add the cost of a mortgage for the condo itself and still end up far cheaper than just the tax burden on the paid off structure on the vacated property.  The difference in costs is that staggeringly large. Admittedly you’d be living in half the land so if you wanted condos or twice the size they’d need to be built on ten units of land instead of five. This would raise costs to $18,740.42 per year which is still astronomically less than the single family residence.

As people favour the far more affordable condos and vacate single family homes the government is faced with declining revenue. The theory says they need to lower the LVT to have the properties come into use but they will be under pressure to raise it to make up the revenue shortfall. Even assuming they do the right thing and let revenues fall they will be forced to cut services or greatly increase the national debt.

If municipalities adapt quickly and zone land for mixed use some of the vacated residential land might become commercial but I doubt it would be enough to replace the exodus from single family homes into denser and more affordable housing. Ultimately, I think if you tax occupied land you will get less of it. Any Georgist system needs to deal with the possibility that land may well end up empty leading to a substantial decline in government revenues.

There is a theorem called the Henry George Theorem that argues good government investment will increase land values enough that the additional taxes will pay for the investment. This makes it possible to create a virtuous cycle of development that could be extremely beneficial. What Georgists ignore is that the reverse is also true. If government revenues falling leads to a decline in services this leads to land values falling forcing further service declines. The feedback loop could in theory crater the land value in an area.  It could also create a permanently impoverished government.

One might argue that government should just spend its way out of trouble as the Henry George Theorem guarantees the revenues will come from the increased land value.  However, the Henry George Theorem assumes the land that increases in value is occupied and paying a land value tax. If the land is unoccupied because no one wants to pay the associated taxes the results won’t hold. If the increase in taxation from increased land value drives people off the land it might decrease revenues instead of increase them. So there are substantial problems to be solved.

I posit that in a Georgist taxation regime we are unlikely to occupy all the land we do currently. Very few people have a $60,000+/year preference for houses over condos and it seems to me that even for modest LVT rates that level of preference is exposed. As such an exodus from single family dwellings is incredibly likely. It’s up to Georgists to prove someone else will occupy all that land so government can achieve sufficient revenues. Failing that Georgism may just be a recipe for government collapse.

To note how severe the problem is observe that even at the highest LVT we had a tax of approximately $4340.42 per condo. In my province, we spend $14,000+/year to educate a single child. This means a single taxpaying family is underpaying even just the education bill by a factor of over three. Or worse if they have more than one child.
The tax shortfall by individuals optimizing their economic preferences and avoiding high LVTs is staggeringly large, perhaps even enough to collapse society.

I think it’s not a stretch to claim that something like 80% of single family homes would be vacated for the much cheaper condos. Even if zoning permits redeveloping that land to business purposes, do we have enough commerce to replace 80% of residential land with commerce? It’s a difficult question.

A fair criticism that Georgists may have is that the land value needs to decrease in response to widespread vacation of land. This is legitimate and could probably be done but my counter is that this preference driving land value downward is enough to crater government revenues.

We estimated that a 16.32% LVT would match government revenues. We also observed that a 6.875% LVT would likely result in unoccupied land. So we are likely seeing some sort of transition where a lower rate is needed to adequately price land. Government might end up with one quarter their previous revenues. If the Henry George Theorem applied perfectly they might be able to rebuild to previous levels. Unfortunately, as we already argued, driving land prices upwards will cause people to vacate and unoccupied land will eliminate the revenue gains. Government is likely to be left with a substantially lower tax base.

In short, while I want to believe in a transition to a Georgist taxation structure I have deep skepticism about it being able to generate sufficient government revenues. Individual incentives will create strong downward pressure on government revenues and I question whether the new government can handle this collapse in revenue. I look forward to hearing from Georgists and other interested parties on how to solve these problems.