Against LVT (as an ACX believer, now a day one skeptic)

Introduction

Many Nuance-oors like the promised pragmatic arguments for LVT (densification, lack of deadweight loss) and lament some of the principled arguments against (kicking out grandmas, unbounded gentrification). Here I build the intuition for the economic efficiency of the status quo (from here on SQ) over LVT which moved my opinion from "There is another way, have you heard of LVT?" to "Build more 1. houses 2. transport, it's literally the only way". It is not going to exhaustively prove any point or crunch many statistics but singularly gesture at a theoretical level why SQ has stronger economic arguments and LVT weaker ones than I have once believed. My intent is to put this perspective into the Overton Window, such that smarter people than myself may develop it. https://www.astralcodexten.com/p/does-georgism-work-is-land-really serves, as far as I know, the best low down on the idea. Please be familiar with LVT or read that article series first as a primer.

(also this is my first poast so if I make a big nono - let me know)

Land Values ARE Property Values

First let's put aside underground minerals, land marks, etc which Georgists would agree with and broadly define a property as a building ontop of land. The Georgist claim is that the value of the land is inexplicably independent from the value of the building. This is equivalent to "Here is AD and AS and yea.. that's the economy". This fundamentally claims that somehow property, land and buildings are all fungible amongst eachother. This is clearly incorrect but let us demonstrate why:

• Property fungibility: A school next to a prison is not the same school when it is not next to that prison. A kindergarden adjacent to a primary school adjacement to a highschool is not the same as the set of properties in which these are split apart.

• Building fungibility: A lighthouse next to the sea is not the same as a lighthouse not next to the sea or a more charitable example: a house with a sea view. A school next to public transport is not the same as a school not next to public transport.

• Land fungibility: A building with a garden will not have that same garden if it's land is smaller. A large building physically imposes requirements on the land it is built upon (such is the case for most buildlings) which may be even impossible for other plots of land.

• Even the same building on the same plot of land can be different (depending on orientation + placement it might have different views, shades, easements, etc)

Approached at differently:

• Las Vegas is in a desert with its main economic activity deriving from entertainment and gambling, both of which do not in anyway depend on the land it was built on. In such a way, there are plenty of other deserts which fulfill this same low bar. Does the land value of Las Vegas differ to the other identical deserts which could house Las Vegas? Indeed why does the land value within Las Vegas differ?

• The land value of many cities is high, the land value of farms is low (with magnitudes inbetween). Say we picked up the city and swapped it with the farm, what happens to the corresponding land prices?

And finally:

• Consider the beginning of Las Vegas (or any city) in which there is nothing but empty lots of land. We know that currently land prices are high, and previously they were cheap. It stands to reason that each successive building that was built increased the value of the land it was on.

• In a set of empty lots, the land values are all low. You build a building, the corresponding land value increases, but so do all the adjacent properties. If the next building is built adjacent to your property as opposed to further away, the cumulative increase on land prices is greater.

All this to say, land prices represent aggregation effects / density / access / proximity of buildings. They are the cumulative result of being surrounded by positive externalities which necessarily result from other buildings not land. It is the case that as more and more buildings are built, the impact of a single building to its land value diminishes although the value of its land is still due to the aggregation of and proximity to the buildings that surround it. Price is a signal. High land values signal being close to things. Low land values signal being far from things.

Principal-Agent Problems

LVT introduces the Principal-Agent problem by changing the nature of occupancy from ownership to renting. This is problematic for both building decisions and occupancy decisions.

Building Decisions

There are good buildings and bad buildings. Good buildings (shops, restaurants, schools) will increase the value of land, and bad buildings (garbage dumps, prisons) will decrease the value of land.

Consider an empty lot on which you can build either a garbage dump or a theme park, each of equivalent economic value. Under SQ, the theme park is built as the excess land value is capture by the land owner. Under LVT, the garbage dump is built as the reduced land values reduces their tax burden. The SQ encourages positive externalities, LVT encourages negative externalities.

Under LVT, to offset this the state will have to exhaustively categorise each building and value their expected positive / negative externalities such that proper incentives / disincentives can be made (and save us if those incentives can be gamed). Under SQ, individuals are incentivised to 1) occupy land 2) provide as much positive externalities as possible.

Occupancy Decisions

Similarly, under LVT as all increases in property value must be assessed as improvements - the state must exhaustively categorise all actions an occupant can take which may effect building values and then proportionately value them as improvements / deprovements.

Unfortunately this is impossible because land value is in essence a public good shared by proximate neighbours and actions can be taken which reduce public land value yet cannot be considered deprovements.

• Someone might decide to litter because that will drop land values and thus tax burden when they are ambivalent to whether there is litter on the street.

• Maybe something like this?

This is slightly contrived, but it still stands that under LVT, the disincentive exists whereas under SQ, it does not (in fact the incentive exists).

Taxing What You Don't Want

From above: land values represent the increasing returns building aggregation (you must at least submit that high land values are generated by the same forces which cause that aggregation). In taxing land values, you are taxing building aggregation (or at least the forces causing aggregation). In such a way, a land value tax has a regularisation effect on building density, necessitating a spread of concentration. Let's assume a 100% LVT and then agree that the reality will be somewhere inbetween.

Consider a simple 1D row of empty lots. You are deciding where to build both a pharmacy and bakery (assume corresponding foot traffic uplift from the other is 0). Under the SQ, you build them next to each other such that you can maximally capture the land value increase of the other. Under LVT, you build them maximally apart to reduce your land value tax burden. The increased land value you obtained under SQ that was partially captured by you is now a cost being bourne out as inconvenience to the public under LVT.

Now we extrapolate to a simple 2D town with a baker, grocer, jeweller in the middle of that town (this is a stylised mall or main street) and a banker comes along (once again all corresponding foot traffic uplift is 0). Under the SQ, the banker is incentivised to join them in the middle by buying in and setting up shop because they instantaneously receive an increase in land value (of which all the others would welcome and partially capture). Under LVT, not only would the bank locate itself far away from the others, they too would be incentivised to move away from each other, in such a way minimising the total land value of the town and thus its total tax burden. Once again, this reduced land value represents the loss in convenienve of living in this town and now that cost is bourne out by the public whom must travel much further to reach all the stores.

If you find this thought experiment believeable then you might also agree with the intuition that this spreading does not necessarily have to occur simulateously and on a blank state but also sequentially in an already established set of properties.

The caveat of foot traffic uplift is essentially representative of the returns to aggregation which is the exact thing being taxed. They will spread proportionately to the tax. Any building which does not benefit from convenience or aggregation (i.e. those buildings that are essential and necessary to visit) is incentivised to be as isloated (the same as under SQ). A land value tax of 100% will make every building share that property.

Taxes Rule Everything Around Me

Taxes matter and they are in all ways optimised, managed and minimised. They change how humans behave, the buildings they inhabit and the fate of nations.

LVT seems to assume that people have so little attachment to their dwellings that they won't mind destroying a home to rebuild more densely or being forced for an economical downsize. It also seems to assume that people have so much attachment that they are inelastic in where and how they live that they won't meaningfully take action to reduce their tax burdens (and its unintended consequences)

Conclusions and Copes

LVT is probably overall a good thing in some places despite everything I've said (after more houses and transport). It's clear that housing is a huge problem and solving that huge problem for a smaller more abstract problem is an easy trade to make. Hammering the bent nail hard in the other direction is sometimes the only way to keep building.

In most cities, the land price in the centre is a magnitude larger than those in the suburbs which is another magnitude larger than those that are rural. As such, LVT would disproportionately impact the ubran centre and force empty lots to be utilised which is a good thing. My love of density extends to my hate of emptiness.

There is much more to be said about this debate and this piece is very very simplistic and isolated in all its considerations and largely unsubstantiated. There are other principled considerations (what it means to own land as property) and pragmatic considerations (YIMBYism, taxes vs zoning, political capital) which may utterly trump the above. But I have not seen any piece which represents this view and thus believe it is important and send this economical meme out, if only to be dismissed.

for more:

https://www.astralcodexten.com/p/does-georgism-work-is-land-really obviously

https://www.thediff.co/archive/ ($) has good pieces on housing though I lost access to the archive so I can't find you the links

https://worksinprogress.co/issue/the-housing-theory-of-everything/