Foundational Principles and Derivatives

CS Clay Shentrup Public Seen by 363

We set out with some basic principles on what to tax or subsidize. https://medium.com/@ClayShentrup/what-to-tax-or-subsidize-42cd7dc5c726


Clay Shentrup Wed 25 Oct 2017 4:43AM

The activity is "land ownership." Not all people own land.

But there's no reason to tax people who happened to own land. You want to tax people based on their wealth, not the particular asset they've traded their dollars for. Simple thought experiment: Bob sells land to Alice. If the LVT goes into effect before the sale, Bob is taxed. If it goes into effect after the sale, Alice is taxed. Completely and totally arbitrary.

All economic activity is ultimately derived from land, so if you tax land, you tax all economic activity on an even basis.

A. You don't want to tax all economic activity. You want to tax externalities and wealth.
B. Economic activity is as derived from all sorts of matter, not just dirt. Air drives combustion engines and water drives steam, etc. Plus there's lots of stuff that we've pulled out of the "land", like precious metals, lithium, etc. It' not even clear what the exact definition of "land" is.

Land owners are monopoly rentiers - their wealth earned from investment in land is not in proportion to the risk that they would take as if they were loaning their money to the capital markets. Because of this, it is far more ethical to tax them then a capital gains tax or an income tax.

This makes no sense, because the prices of various assets from land to Google stocks already reflect risk. People routinely choose to invest in stocks, Bitcoin, etc. over land assets like REITs. James Altucher even points out:

“But its an investment,” you might say to me. Historically this isn’t true. Housing returned 0.4% per year from from 1890 to 2004.

Land taxes tax wealth

No. You could have 10 times my wealth but have it invested in stocks instead of land, and LVT affects me more. AND it doesn't even affect people equally over time. It only impacts the people who happen to be stuck holding the land at the time the LVT goes into effect.


Felix Sargent Wed 25 Oct 2017 2:47PM

Bob is taxed. If it goes into effect after the sale, Alice is taxed. Completely and totally arbitrary.

Any tax is arbitrary. Why do you think a "Good tax" must be applied to every person? Poll taxes are a notoriously bad and unpopular thing.
On the other hand, because land+labor*capital is the source of all goods, any tax on land will tax the entire economy evenly.
Let's not argue implementation details but instead discuss what an ideal system of taxation should be.

You want to tax externalities and wealth.

What's your definition of wealth? I feel like I'm just quoting "Progress and Poverty"
Wealth is stored wages. Wealth is made from either Rent, Wages, or Interest. If you tax interest, investment decreases. If you tax wages, production decreases. If you tax Rent, nothing bad happens.
We don't have to invent a new definition of Land. The existing one works just fine. There are surface, air, and mineral rights - but the money you charge from the use of your land is called Rent.

Citation needed on James Altucher. https://howmuch.net/articles/this-animated-map-shows-the-rising-cost-of-land-past-forty-years-gif4

I can't recommend reading Progress and Poverty enough. He explains the arguments far better from both an economic and moral perspective than I am able to explain by rebutting your arguments.

  We may as well cite historical illustrations of the attraction
  of gravity; the principle is just as universal and just as obvious. 
  Rent must reduce wages. This is as clear as an equation: the larger the subtractor, the smaller the remainder.
  The truth is self-evident. Put this question to anyone
  capable of consecutive thought:

  “Suppose some land should arise from the English
  Channel. This land will remain unappropriated—like the
  commons that once comprised a part of England. An
  unlimited number of workers can have free access to it.
  Here, a common laborer could make ten shillings a day.
  What would be the effect upon wages in England?”

  They would at once tell you that common wages
  throughout England must soon rise to ten shillings a day.
  Ask, “What would be the effect on rents?”

  After a moment’s reflection, they would tell you, “Rents
  must fall.”

  If they thought out the next step, they would tell you
  that all this would happen without much labor being diverted
  to the new natural opportunities. Nor would the
  forms and direction of industry change much. The only
  loss would be the kind of production that now yields, to
  labor and landlord together, less than labor could secure
  on the new opportunities.

  The great rise in wages would be at the expense of rent.

  Next take some hardheaded business owners who have
  no theories, but know how to make money. Say to them:

  “Here is a little village. In ten years, it will be a great city.
  The railroad and the electric light are coming; it will soon
  abound with all the machinery and improvements that
  enormously multiply the effective power of labor.”

  Now ask: “Will interest be any higher?”


  “Will the wages of common labor be any higher?”

  “No,” they will tell you. “On the contrary, chances are
  they will be lower. It will not be easier for a mere laborer
  to make an independent living; chances are it will be

  “What, then, will be higher?” you ask.

  “Rent, and the value of land!”

  “Then what should I do?” you beg.

  “Get yourself a piece of ground, and hold on to it.”
  If you take their advice under these circumstances, you
  need do nothing more. You may sit down and smoke your
  pipe; you may lie around like an idler; you may go up in a
  balloon, or down a hole in the ground. Yet without doing
  one stroke of work, without adding one iota to the wealth
  of the community—in ten years you will be rich!
  In the new city you may have a luxurious mansion.
  But among its public buildings, will be an almshouse.
  In all our long investigation, we have been advancing
  to this simple truth:

  *Land is required for the exertion of labor in the production
  of wealth. Therefore, to control the land is to command all
  the fruits of labor, except only enough to enable labor to continue
  to exist.*


I came to this argument after buying my first home and renting it out. My renter pays my mortgage, HOA fees, and a small profit on the side. I couldn't believe my luck. My wealth is increasing year by year and I'm doing little if any work. Not only is it generating income, and paying my loan, but the home itself is appreciating in value. No other economic activity behaves like this. It's not normal. It's not the same as owning a stock.

Agree or disagree -- what's your alternative? You pick a form of taxation that we should use to tax the rich, and then let's compare.


Clay Shentrup Wed 25 Oct 2017 3:25PM

Any tax is arbitrary.
No. Ideally we're choosing them to optimize human welfare.

Why do you think a "Good tax" must be applied to every person?
To optimize human welfare.

because land+labor*capital is the source of all goods, any tax on land will tax the entire economy evenly.
I don't know what this is supposed to mean. A tax on land certainly does not tax all people evenly.
It just takes money away from the person who happens to be holding it when the LVT goes into effect. And if land is the source of all goods, then that will be factored into its price. And again, there's nothing special about land here. Minerals that have been pulled out of the ground are assets that drive the economy too.

What's your definition of wealth?
We can just say "money" or "things that can be converted to money" to avoid semantic digressions. You may have heard the term "net worth".

If you tax interest, investment decreases. If you tax wages, production decreases. If you tax Rent, nothing bad happens.

Taxing wealth doesn't tax any specific source of wealth. So it just decreases the incentive to get wealthier in general. You obviously have to be careful here and only tax to the point where the benefit you can cause with the wealth transfer outweighs the harm to production. But with LVT you're just taxing random people who happened to own land. It's no different than if you looked up people in the phone book and rolled dice to decide who to tax. This is much less efficient because those people may be nowhere near the richest, and thus your tax causes more harm to them than if it had been applied to rich people.

And if you think taxing a random person (e.g. LVT) has the benefit of not distorting incentives, you're wrong. Because a random tax feels identical to a universal tax of an expected percentage of your wealth. E.g. if you tax 10% of people 100% of their wealth, it feels like taxing 100% by some percentage of their wealth (I forget the logarithmic math to get that percentage atm).

My wealth is increasing year by year and I'm doing little if any work.

Sigh. Are you arguing that 100,000$ worth of land is worth more than 100,000$ worth of gold or Google stock? Do you see how this doesn't make sense? This is enumeration of favorable circumstances. You're ignoring all the people who lost money on rent. And even if land owners made more money, so what?! Just tax the richest people regardless of how they made it.

It's not the same as owning a stock.

It is exactly the same.

You pick a form of taxation that we should use to tax the rich

What do you mean "form" of taxation? You just tax them.

And to repeat another thing that I keep trying to hammer on, an LVT only affects the people who owned the land at the time the LVT went into effect. That's it. Then it's over. They'll have to discount the land when they sell it, by the NPV of the LVT. So a future Rich Guy owner who buys it next is totally unaffected by the LVT.

As an analogy. Suppose I'm renting a car space. Every day I pay 10$ for it. Then one day the government decides to double the price. I can leave if I think that's too high. Easy as pie.

But suppose instead that I BUY the parking space from the government, for 10,000$. Then one day they add a 10$/day fee to it. Now it's worth 0$. If some rich guy buys it from me, he only pays 0$. I bought something for 10k and sold it for 0. I was taxed. No one else is taxed, effectively.


Felix Sargent Wed 25 Oct 2017 3:44PM

I'm going to skip over a few things on LVT, as I'd like some more information about your own proposal.
Tell me more about how you would tax the wealthy - What mechanism would you use to do it? Would you look into their checking accounts? How do you evaluate their wealth?


Clay Shentrup Wed 25 Oct 2017 4:19PM

How Is tax the wealthy is only pertinent if you're agreeing that we should be taxing wealth.


Felix Sargent Sun 29 Oct 2017 5:03AM

Yes, tax wealth! I agree 100%. Measuring wealth is hard though. Taxing it is even harder. What would you suggest?


Clay Shentrup Mon 30 Oct 2017 6:03AM

What would a rich person do if his valuables burned down in a fire or were stolen? In order to get an insurance payment or prove to the police that a stolen good is yours, you need documentation of what you own. So there should be opportunities to roughly calculate net worth. I suppose you can just hide assets in offshore bank accounts or Bitcoin, but that carries its own risks and inconveniences.

In any case, the advent of LVT doesn't really fix anything because it's effectively a one-time tax on the people who randomly happened to be owning the land at the time the LVT went into effect. In decades, different people will be wealthy and the LVT will have no effect on them. The original landowners will be forced to eat the cost of the NPV of the LVT when they sell. Future owners are effectively immune.

Although another thought experiment just occurred to me. Suppose you accepted a one-time tax from people in place of the yearly ideal wealth tax. That would seem to work in principle, converting a revenue stream into a net present value. But then in years to come, people's wealth could change. A rich person could have a bad turn of fate, while a poor person could become wealthy. So then your tax won't really be progressive anymore. So... I can now see an advantage to an ongoing tax payment instead of one-time payments at least for some payments.


Oh my... I think this solved it. I was thinking that a LVT is like a one-time tax, because the buyer will just discount the purchase price by the NPV of the LVT. But he can't, because of constrained supply. An NPV actually can largely be passed on to the next buyer, because lots of land purchasers are already today paying less for land than they're willing to (deadweight loss).

What would then happen is that if the landowner gets poorer, then the marginal utility of his dollars goes up, and it makes sense for him to sell the property—because the dollars he gets for it become worth more than the loss of the land. LVT then just becomes a way to fix that deadweight loss.

Okay, so LVT makes sense as long as you only think of it as an approximation of the real ideal of taxing wealth.


Felix Sargent Mon 30 Oct 2017 3:39PM

!!! Hooray discussions on the internet. Yeah, it's not perfect, but it's fungible.


Clay Shentrup Wed 1 Nov 2017 7:12PM

HOWEVER... when instituting the LVT, the state should start by "buying" the land back from the owner for the present value. You want to maintain trust in government. The existing "contract" is that if you buy land, it's yours. So to just effectively take it by reducing its value to zero (with the LVT) hurts incentives.


Felix Sargent Wed 1 Nov 2017 8:33PM

Yeah, it's fair. I've read arguments which say that "Rent" income is morally corrupt so screw em, take the money. I think that's far less practical. The best thing would be to take existing property taxes which combine both land and improvement tax, and adjust them so improvement taxes go to 0 and land taxes take up the rest. Then you can incrementally reduce super terrible taxes like Sales tax and increase land taxes as appropriate. Make it appear revenue neutral, and everyone should be fine.

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