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How Much Rent is Too Much?

In his efforts to do away with LVT, Rothbard pulls out the age-old canard of assessibilty:

How, then, will the government be  able  to  separate  site  value  from  improvement  value?  No  doubt,
the single taxers would hire an army of tax assessors. But assessment is  purely  an  arbitrary  act  and  cannot  be  anything  else.  Value can only be determined in exchange on the market. It cannot be determined by outside observers.

It is true that value can only be determined in exchange on the market, but it is in no way interesting when discussing LVT, for one simple reason.  In order to understand it, we need to remember a simple truth. It is not the seller of land that performs the ultimate assessment, but the buyer.  That the seller may state a price, it is true, but if no buyer actually wants the land at that price, then it will not sell.  In a rental situation, the landlord will always be seeking to increase his rent.  If he tries, and the tenant stays, then the land is clearly worth what the landlord is charging for it.  If he leaves, and no one else takes his place, then the landlord will ultimately reduce the price until someone does.  Rent pricing is essentially an iterative process, with the occupied state of the property being feedback.  The longer a plot remains unoccupied, the more obvious it is that the rent is too high.  More importantly, the longer a plot remains unoccupied, the longer that the landlord is not receiving income.

Where a government is levying LVT (in effect being the landlord), none of these dynamics change in the slightest.  A government wants to raise maximum revenue and will tweak the LVT until it does.  This will never be a perfect process, and never has been, not even under the current system, but it is good enough to have a workable economy, as the world around us demonstrates.  In short, LVT already exists, and is already assessed arbitrarily. The only difference is that the landlords are private entities.

Taxing Rent Eliminates Rent?

Rothbard however, has one more objection to LVT, and this one’s a doozy:

A  100  percent  tax  on  rent  would  cause  the  capital  value  of  all land to fall promptly to zero. Since owners could not obtain any net rent,  the  sites  would  become  valueless  on  the  market.  From  that point on, sites, in short, would be free. Further, since all rent would be siphoned off to the government, there would be no incentive for owners  to  charge  any  rent  at  all.  Rent  would  be  zero  as  well,  andrentals would thus be free.

The first consequence of the single tax, then, is that no revenue would accrue from it.

And thus, by the stroke of a pen, Rothbard enters La-La-Land.  He has a whole raft of terrible consequences of LVT at his disposal now (locational chaos, urban over-concentration, mass inefficiency, etc) – none of which are important because his basis for claiming them, that land would be free, is utterly false.

Let’s examine this for a second.  Let’s assume, as Rothbard does for sake of argument (and as I have already shown is perfectly feasible), that the taxing authority is setting the level of LVT reasonably.  Rothbard’s first statement is true – captial values would approach zero.  However, to claim that sites will thereafter be free is to ignore time, which Rothbard makes a great deal of when trying to attack other aspects of Georgism.  Yes, there are no longer upfront costs to occupation, but there are known recurring costs (the LVT).  Whoever is going to occupy the land has to be able to economically justify it, i.e. has to be able to show that he can utilise the land well enough to turn a profit, in the presence of the tax.

Note then, that from the perspective of the renter absolutely nothing has changed.  If he was going to rent the site from a private landlord, he would have to economically justify it.  He would have to be able to turn a profit, in the presence of the rent.  The users of land are unaffected by the levying of LVT.  What changes is who receives their rent.

For the landlord, however, everything has changed.  As there is no net ground rent,  there is no advantage to simply being a middleman.  In order for the landlord to profit, he must actually provide something.  In short, he must become a land-user.  If he has no intention of doing so, he will relinquish control, almost certainly to the current user of the land, who is thus an owner-occupier legally, but effectively renting from the government rather than the private landlord.

For land speculators, also, everything has changed.  As they are now in effect renters, rather than owners, they must now economically justify their (dis)use of the land.  As their refusal to allow the land to be used must be based on an expected capital increase (’cause they sure aren’t getting any rent), the collapse of capital values means they now must either subsidise their holding of the land from some other income, or relinquish control.  Who then, would control fall to?  A new renter, who will actually perform some kind of industry, will step in, moving from whatever less-productive site they had been forced onto.

In short, the effect of LVT is not to get rid of rent (which geometry shows us cannot be done), but rather to get rid of private rent-seekers, replacing them with a rent-seeking government.  Why rent-seeking should be a public (or more accurately, communal) function rather than a private one, will be discussed later in The Morality of LVT.  For now, though let’s move onto why rent is important economically.

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