Market-priced Land Taxes
The puzzle
I’ve been living in the Bay Area for 5 years now which has given me some time to reflect on the housing problem here. All along I’ve wanted to fully understand why this problem exists. In general, I think rushing to implement solutions without a solid understanding of the causes is likely to be ineffective or counterproductive. So I tried to find the root cause, which initially seemed simple, but turned out to be more subtle than I expected.
Whenever I see a serious problem or inefficiency in the economy, the first thing I do is look for a corresponding government policy that infringes on liberty and consequently hinders the natural process of optimization. This almost always explains the problem, and it initially appeared to explain the Bay Area housing problem too. The local governments of the Bay Area have strict housing policies that limit increases in the housing supply. As the population grows and demand for housing increases, the supply can’t keep pace and prices rise. So the government policy infringes on the liberty of property owners who would like to increase housing density, and we see market inefficiency as a consequence.
Although this may be a valid explanation of the current situation, I wasn’t content that this was the full understanding. My concern arose from questioning whether it’s possible to claim in general that restrictive housing policy is always an infringement on liberty. What if everyone in the community unanimously agreed to the policy, then who’s liberty is being infringed? This was the puzzle I had to figure out.
As an example, imagine that a group of people decide to start a new city from scratch in the wilderness. They buy a large tract of land and divide it up into parcels and distribute it amongst themselves subject to covenants that they all unanimously agree to. Let’s say the covenants place housing density limits on the land and forbid an owner from selling to anyone unless the next owner agrees to sign the covenant. This effectively sets up the same housing policy issue that much of the Bay Area has but in a purely voluntary non-coercive way. If it’s all totally voluntary, then we shouldn’t expect the government to interfere with their private contracts. But if the land in that area becomes very valuable in the future and a lot of people try to move there, you would still end up with a housing problem.
Some people might argue that it’s not really a problem; the city founders got there first, took the risk, and invested in the land so they deserve to capture the benefits of their work for as long as they wish. This perspective makes sense when the value of the land itself is very small relative to the value of the improvements because they are just earning dividends on their efforts.
But what if the value of the land exceeds the value of their improvements, perhaps because of exponential population growth around the world? The founders didn’t make the land and it doesn’t really make sense to award them a permanent monopoly on a valuable natural resource that they did nothing to create. Up to a point it might be reasonable to ignore this consideration and let some landowners get away with unearned benefits, but as land becomes more scarce this approach becomes increasingly detrimental to non-owners. When you reach the point where all land is owned and most people are born without a land inheritance, land owners accrue substantial economic rent at the expense of non-owners, which can lead to economic oppression.
It’s also possible that the value of the land derives largely from proximity to the economic activity that the city founders created. In this case one could argue that even the land value represents the fruits of their labor and so a monopoly on this value is not unearned. This perspective becomes less justifiable when there are renters contributing to the local economy, which is almost always the case. Even if there aren’t any renters, under modern conditions there’s no good reason to assume a correlation between the size of land owned and contribution to the economy. Therefore it seems overall more reasonable in general to consider land values an unearned value than the opposite.
So our current system of land ownership awards an unearned privilege to land owners: the ability to capitalize on the value of a natural resource they did not create.
But is this an infringement on liberty? Our current system would say no because if you don’t own land then you have no right to exist unless you can convince someone with land to sell you some or rent to you. I’m sure some of our founding fathers would have argued along similar lines that owning slaves is not an infringement on anyone’s liberty because slaves are property, so they don’t have any liberty to infringe in the first place. It’s futile to discuss principles of liberty within a political framework that is flawed in its foundations.
We can still see the housing problem as arising from a government policy issue, but it’s perhaps not within the bounds of an infringement on liberty; it’s deeper than that. There are multiple ways that governments can create problems:
1. Poor enforcement of the law
2. Lack of good laws
3. Laws that infringe on liberty (and hinder optimization)
4. Laws that establish a bad definition of liberty (and optimize the wrong thing)
I believe land ownership issues fall in the last category.
Geolibertarianism
There is a political theory called geolibertarianism that addresses this issue with land ownership. It’s a combination of libertarianism and Georgism (the political theory of Henry George). The general idea is to consider all land and other natural resources “unowned” while still allowing individuals to obtain exclusive rights over natural resources if they pay compensation for the damages they are causing by excluding others from that resource. The compensation would be distributed as a citizen’s dividend, which could provide a basic income for all adult citizens. The tricky part is determining the amount of compensation required for each parcel of land and unit of other natural resources.
In the book Radical Markets, Eric Posner and Glen Weyl propose a system where every property owner publicly lists a price for each piece of property they own and stands ready to sell at that listed price to any buyer. Then a fixed percentage of that listed value is the property tax payment required. This very clever idea seems more fair and accurate than either allowing the government to set property tax rates or only reseting rates when a sale is made, which is how property taxes are currently handled.
Although I was very impressed by the idea of determining tax rates using a decentralized market-based mechanism, I think there are some serious problems with the details of their proposal. The first problem is that they suggest that all forms of property should be subject to the same system as opposed to just natural resources, even things like your refrigerator or shoes. Not only would this be very complicated and create huge practical overhead, but the philosophical argument for a system like this only applies to natural resources because people should be entitled to the fruits of their labor.
More importantly, I think Posner and Weyl’s price-setting system is problematic. For example, let’s say you buy a house for $200,000 and live there for a decade and the market value hasn’t changed much, but during that time you’ve grown attached and you wouldn’t be happy to move for less than $1,000,000. In Posner and Weyl’s system, to be safe you would have to pay 5x higher property taxes as a defensive measure even if nobody was interested in buying your house at anywhere near that value.
Their system puts the option to execute in the hands of the buyer rather than the seller, which is a big disadvantage to the seller. This is great for big corporations that want to acquire a bunch of land for a new railroad (as in their Hyperloop example), but isn’t so good for the individuals who just want to feel secure in their homes. It optimizes GDP over the well-being of individuals. My proposal is to shift the option to execute to the owner.
The Proposal
My proposal is to implement geolibertarianism with market-priced land taxes. Market-priced land taxes go up in proportion to the market demand for the parcel. You pay compensation based on what the market thinks your land is worth.
Buyers place bids on land parcels through a government-regulated exchange. Owners have the right at any time to sell their land to the highest bidder. The buyer cannot back out after their bid is executed. If the owner wishes to remain on their land, they pay a tax based on a fixed percentage of the time-averaged highest bid for their land on the exchange.
The exchange would require that buyers deposit funds into escrow before they could place a bid. Each bid would be fully backed by escrowed funds to make it impossible for a buyer to back out of a bid after it gets executed, though bids could be cancelled at any time prior to execution. Multiple bids could be collateralized with the same escrowed funds; when one bid executes all under-collateralized bids would be automatically cancelled by the exchange.
If an owner defaults on their land taxes, it is treated as equivalent to the owner accepting the highest bid; the bidder is forced to pay the bid price to the owner and the owner is expected to vacate the land. Defaulting on land taxes is not a crime and it doesn’t affect your credit score because it isn’t a debt, but the defaulting former owner will be treated as a trespasser if they don’t vacate before the deadline.
Note that there are no taxes on a parcel that has no bids. This is fair because the owner isn’t depriving anyone of a valuable natural resource since the market doesn’t put a value on it. There could also be a personal exemption where the first $1000/year of land taxes are waived for each citizen so that you could always have the option of moving to a low-demand area and not pay any taxes at all and just collect citizen’s dividends.
Owner’s are free to remove or destroy any improvements to the land prior to yielding their parcel to a bidder. This means that bidders have to place their bids under the assumption that all they will get is the land and not any improvements. Even though this sounds potentially wasteful it is important that property tax rates are set according to the land value and not the improvement value so as not to discourage improvements. And practically it would be very rare that an owner would agree to sell a developed property for the bid price because the bid price would be based just on the land value. Even if they were unable to afford the land taxes they would most likely sell the property on the real estate market just as they would in the current system. In this case, the sale contract would set the terms of what improvements would come with the property.
As an example, imagine that a buyer wants to buy a house in a certain neighborhood where the land is valuable but there aren’t any properties listed on the real estate market because the owners aren’t very interested in selling. Let’s say the properties all have existing bids for around $100,000 and there is a 5% land tax rate, so each owner is paying $5000/year. The buyer can deposit $200,000 into escrow and place a bid on all the properties in the neighborhood for $200,000. The owners are notified that their land taxes will be doubling to $10,000/year for as long as the bid stands. If any owner is willing to sell, they can try to negotiate a normal market sale with the new bidder. Perhaps they will sell for $200,000 because the bidder is willing to pay more to guarantee that they will receive the home with the land. If this happens, everyone’s land tax reverts to $5000/year. If nobody wants to sell, then everyone in the neighborhood will have to pay $10,000/year while the bid stands, which applies continuous pressure to incentivize someone to sell.
For owners who don’t want to be exposed to the risk of such fluctuations in their land taxes, insurance providers can provide land tax insurance to stabilize the rate for the owner.
Note that the 5% number used above is arbitrary and doesn’t necessarily represent what the actual percentage would be. The actual number would be set by congress in response to the needs of the public. However a key principle is that the percentage applies equally everywhere, so if it’s high then everyone will get a larger citizen’s dividend that will offset land tax costs.
It’s also important to note that a system like this would liberate a lot of land that is currently privately owned but un-utilized because it would become uneconomic to just hold land for the purpose of speculation or hoarding. This would increase the supply of land and housing and make it cheaper to live.
This system elegantly resolves the issue of the community with density-restricting covenants. Outsiders who want to use the land continue bidding for the properties until some of the existing owners can no longer afford to pay the land taxes. Then the owners will try to find buyers who are willing to sign the covenant so they can do normal sales. But if they can’t find buyers who are willing to sign the covenants, they will default on their land taxes and the land will transfer to the bidders who never signed the covenant, which allows the parcel to escape the covenant and higher density housing construction can begin. This would also encourage owners to make covenants with some kind of escape clause to avoid the risk of being forced to sell at the land value of their properties.
Although I used the term “land tax” here for ease of communication, technically it isn’t a tax if you accept that nobody actually owns natural resources because nobody made them or has any justifiable claim to them. It’s more like a fee for renting a public space than a tax because you aren’t forced to pay it. So this system has the potential to provide increased economic efficiency and a universal basic income along with the elimination of all taxation, especially if supplemented with assurance contracts and fees for government enforcement of contracts.
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Very interesting read. A big question is how is the land “tax rate” set? Also, what happens to all of the lost productivity in capital in the escrow accounts? Also, I am trying to imagine how an equilibrium would be met between bidders and sellers to produce more stability. I know you mention insurance, but it is hard to see how that could play out. I wonder if you could set up a simulation with some reasonable assumptions and see how it would evolve over several generations.
The tax rate could be set by congress or whichever level of government the system is implemented in. Although this means it is possible for it to be set too high or too low, it should have a tendency to be self-correcting. The people wouldn’t want the rate to be set too low because that would reduce their citizen’s dividend and if it was set too high there would be a lot of unclaimed land and it would start hurting the economy. Just as there’s a tension between various interests in our current system that produces a semi-stable equilibrium tax rate, I think there would be an equilibrium tax rate in this sytem, though I think the equilibrium in this system would be much better for the economy overall.
Regarding the capital being held in escrow, I don’t view that as lost productivity because money isn’t productive in and of itself. If you put a bunch of cash under the mattress and leave it there forever, it’s economically equivalent to destroying that money, which would just increase the value of the remaining money. The productivity that may be associated with money is in how intelligently it is allocated to productive enterprises. So if all the intelligent investors in the world put their money under their mattresses and everyone else was left to direct the allocation of the remaining value, that would be bad for the economy, but it’s not because a lot of money is unutilized, it’s because the money that is in use is being utilized poorly. In this case, the money in the escrow accounts is actually serving a valuable economic purpose: pricing land values, and investors would have the opportunity to allocate it efficiently. Also, the ability to make many bids with the same escrowed funds means that bidders could have very high execution rates on their capital.
For the land tax insurance, the insurance provider could estimate future taxes and charge the customer a premium each month. So if they estimate that the tax on a parcel would be $1000/month, they might charge the customer $1200/month for the guarantee that they would cover the land taxes for the duration of the contract. If the insurance company sold insurance in geographically diverse areas, random errors in estimation should cancel out and they could be fairly safe in ensuring that they would make a profit. And considering that the exchange data would be public, this would make the underwriter’s analysis quite efficient.
A simulation sounds fun, but I don’t put much stock in simulations of the economy because the economy is so complex. But even without a simulation I think we can have a lot of confidence in policies that optimize the proven strengths of the capitalist system.
Great post!!
I wonder… I would prefer that any societal solution be able to be implemented in a decentralized, polycentric, bottom-up manner if at all possible. As soon as a scheme is implemented in a centralized, concentrated way, it immediately attracts organized and powerful human parasites that can be hard to throw off. This decentralization may require costs in immediate inefficiency, but could overall be preferable and worth the cost. Or, a decentralized solution might just be more efficient in finding the correct tax/reimbursement rate.
I wonder who exactly deserves the reimbursement and in what proportions. Perhaps a centralized, “universal” national basic income is too broad and unrelated to liberties affected. Perhaps a decentralized system would disperse the funds in a more fluid and dynamic way, radiating out away from the concentrations of population/pollution and preferring to reach those more adversely affected by the concentration on and exclusion from the land. It seems that those most adversely affected, though, have been those at the periphery whose cultures, livelihoods, and lives/bodies are being or have been destroyed. Also, if the reimbursement is uniform and “universal”/national, then there’s (naively but probably incorrectly) less potential for political manipulation of where the funds go.
Another thing I’m concerned about is population density and how high densities provide both positives (social, intellectual, and technological exchange and advancement, economic cooperation, etc) as well as negatives (increased and concentrated pollution, reduction in freedom, increased political and economic parasitism, civilizational “collateral damage”, etc). (My ideal society would include both high-density locations and low-density locations that people could migrate between during their lifetimes.)
It currently seems that humans are determined to (b)reach the limits of what the planet can maintain in terms of population level and density, although this could be lessened by growing and strengthening cultures that can foresee the increasingly drastic decrease in quality of life due to pushing or breaking that limit. (See the book Civilized to Death if you are skeptical about decreasing quality of life.) An entropic cultural distribution seems to lead to an evolutionary advantage to whichever cultures can outbreed (and “out-disease”) the others, penalizing and destroying cultures that attempt to defend against the hordes and conserve land for pristine ecological life and simple livelihood.
(Reading a book such as Against the Grain seems to confirm the hypothesis that governments operate essentially as human farms, domesticating and parasitizing humans and inducing greater reproduction in order to maximize yield and use high population density as a means of control. Modern corporations seem to operate in a similar if yet more subtle and secondary manner. It seems that humans will have to break the cultural stranglehold that governments and corporations have upon most modern societies if they intend on creating more humane civilization.)
I wonder how this proposed geolibertarian tax/reimbursement scheme could help or hinder the efforts to create a culture that values and potentially enforces limits on population density, to defend against the hordes.
I wonder if there’s a way (besides the natural limits of the planet and standard economic competitive inducement) to penalize people who breed “too much”. Ideally, the progeny itself wouldn’t be affected, since they have no choice in the matter; it is the progenitors, the parents, that are to blame. Is there a natural way to “define liberty” in a way that appropriately sees irresponsible reproduction as a threat to liberty? Or is our only hope to change people’s values so that the hordes control themselves. Or does a high density naturally lead to non-breeding (“breeding in captivity” in the dense human tax and wage farms). Still, the dense population could bleed out into the country-side and out-breed the locals. (One traditional solution is to have nation-states with borders and immigration control enforced by police or military force.)
It seems that over-breeding is a kind of arms race, especially seen from the perspective of governments that conscript for battle, but also seen from the broader evolutionary perspective of the cultures that simply value over-breeding.
I should have said at the outset: I think this scheme you’ve laid out is far superior to the existing political systems just about everywhere. So, as a specific proposal, I think it’s worth supporting and promoting unless and until we come across better proposals.
My comments were meant not to discount your proposal but to continue an exploration of the concepts you’ve laid out, moving in a direction that I’ve found very productive in many contexts.
It would also be interesting to investigate how this proposal depends on other unstated or implicit concepts like borders, immigration, citizenship, etc.
I’d be more willing to support this concept at the (US) state level than the federal level, and see how it plays out in different states, especially if the states were to secede from the union. I’d prefer even more to see it be implemented from a smaller scale upward, if possible, with a simultaneous effort at secession or dissolution.
Regarding your comment on decentralization: this proposal is actually a step toward decentralization relative to the current system, but it’s not clear if there’s a good way to be any more decentralized without hearing some proposal on how to do it. In order to support a notion of land ownership it seems that there needs to be an authority to enforce it and I don’t see a way to do that well in a more decentralized way. I can imagine that it might be possible to create a deterministic formula to approximate the economically optimal tax rate though, which would prevent centralized manipulation of it.
Since we know that political markets have inefficiencies (bribery, regulatory capture, misleading/sparse information, etc) why settle for that when determining the payment rates? Is there not another mechanism we can use to discover rates? It is, after all, yet another kind of price.
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