Last year, Astral Codex had a series of interesting posts on Georgism. The claims felt very counterintuitive to me, so I dove into it until I could at least sort out the theory. And I emerged with a better understanding, which I think would be useful to share here.
Key points:
- In theory at least, Georgism is correct that a land tax will not cause rents to rise.
- Land will become cheaper to buy, and there will be more pressure to use it in an economically viable way.
- The economy as whole will benefit.
- However, a land tax will not cause rents to fall, either. Indirectly, the better economy may cause them to rise, in fact.
For those who are deep into economic models, you can see a Georgist land tax as causing a deadweight loss in a situation of perfectly inelastic supply - ie no deadweight loss at all, and all the tax will be paid by the inelastic supplier. For a longer explanation, here's the rest of the post.
Marginal rents and taxes
Adage: If you want less of something, tax it.
Quick quiz: if you tax cars, does their purchase price go up or down?
Well, if you put a sales tax, paid when the car is bought, then the price will go up. If you put a road tax, paid every year by the car owner[1], then the price will go down (since it’s now more expensive to own the car, hence less interesting to buy it in the first place).
Second quiz: suppose you have a nice community of a hundred renters, in identical homes. The rents are reasonable, and everyone renting is much happier to live here than anywhere else. What will happen to the rents?
They will rise, of course. As long as everyone renting prefers to live here than anywhere else, then they will continue to stay here even as the rents rise. And so, rise they will. And they will continue to rise until... until someone living here finds them too high, and moves away. At that point, they stop rising[2]. So the rent price is determined by the person who is just on the edge of moving away. In economics, this is what they refer to when they talk about the “marginal buyer[3]”: the gal or guy who thinks “this is not a very good deal; I could go either way on it”. That unsatisfied marginal renter is the one that determines the price.
And, once the prices have reached this level, the landlords can no longer raise rents. Maybe I pay €1,000 for a rental that I value at €1,500. Then the landlord might be tempted to charge me, say, €1,250. But if they do so, then I can just go to another landlord and offer them €1,125, which they will accept. Because of this, my landlord will not raise my rent. If we ignore transaction costs and moving costs then the same will happen if my landlord increase the rent to €1,002: I’ll offer another landlord €1,001.
So if my landlord wants to have anyone in their house at all, they have to price it at €1,000, like everyone else[4].
What happens if we charge a yearly tax to all the landlords in the community? Well, some of them will decide to move out of the rental business, there won’t be as many rental properties, rents will rise and...
Ok, what happens if we charge a tax to all the landowners in the community? Then landlords won’t move out of the rental business, as that doesn’t gain them anything. And they can’t raise rents. Those are still determined by the marginal renters: if the landlords increase rents, their properties will stand empty.
Ok, so rents won’t rise. What about land prices? These will fall. Just as with road tax example above, if owning land is less profitable, then it will be less expensive[5].
I haven’t said anything about the level of this yearly tax. You don’t want it so high that the landowners just abandon their land; but any amount below that will do. This is where the “ground rent” tax comes in: over the long term, the amount you can tax without causing people to abandon their land is based on the value of the land if there were nothing build on it.
Georgism in theory
If you’re like me, then at this point in the argument, you’d be highly suspicious. The argument seems to work, as far as it goes, but the conclusion is very counterintuitive. What is the trick that makes the magic happen?
One “trick” is that, in the tradition of spherical humans on airless frictionless infinite planes, we’re making simplifying assumptions and assuming everyone is rational, informed, and that there are no transaction costs. And I’m going to mainly keep that assumption, because I want to see how Georgism could possibly work in theory, which is already counterintuitive enough, before worrying how it works in practice.
So, if I did the argument above with, say, car rentals, then it would be false. Even if I raised a road tax paid by any car owner, then car rental prices would go up (everything else being equal). Why? Because there would be fewer car rentals available. Why? Because there would be fewer cars. Why? Because cars are less valuable to own and won’t sell for as high a price, so people will produce fewer cars.
And that’s where land differs. Georgists often say that land is special because you can’t make any more of it. Another way of looking at it is that you can’t make any less of it. You can tax it to whatever extent you feel, without causing any of it to disappear. As long as you tax the land itself, and not any development, change, rental, or anything associated with the land, you’re good.
In another universe, where cars were indestructible artefacts left by a long-dead alien civilization, and you could reclaim land from the sea at trivial cost, the equation would flip. Georgism would apply to cars and not to land.
Georgism doesn’t hurt OR help rents
This brings me to the most surprising part of my analysis. When people talk about it, Georgism often seems to have a moral dimension, contrasting the lazy rent-seeking landlord with the oppressed tenant. And while land taxes would hurt the landlord, they wouldn’t help the tenant at all.
Why? Because the supply and demand argument runs in reverse. A land tax will not make landlords raise rents, because the supply is constant and the demand is unchanged. But it won’t make them lower rents... because the supply is constant and the demand is still unchanged.
So Georgism won’t help tenants directly. It would help the economy, by redirecting taxes from inefficient sources. It would help governments raise revenues and hence provide services without distorting the economy. But it would not lower rents. In fact, if it makes the area more economically viable and a better place to live, it will end up raising rents, because the demand will rise.
So if you want to reduce rents, all the usual methods apply – remove restrictions on land use, encourage higher density housing, and all that jazz. Georgism is not a shortcut through that problem.
Real road taxes are only paid if the car is used, but we'll ignore that detail here. ↩︎
Unless someone else moves in and is willing to pay the increased price. ↩︎
Marginal renter, in this case. ↩︎
This is the picture for identical properties. For non-identical properties, it’s more complicated, but ultimately is still the marginal buyers that determine the rent levels. If everyone is very happy with their rents, those rents are too low, and will rise. ↩︎
You might think that, with rents the same but land prices falling, more renters will instead buy rather than renting. But remember that this property now has a yearly tax on it: it’s cheaper to buy, but more expensive to live on. The effects will tend to cancel each other. ↩︎
So I would argue that when Stuart says Georgism wouldn't lower rents, he's missing the differing effect on the urban core and the urban margins around that core. Georgism should raise the desirability (and hence rental value) of core regions by putting land there to its highest and best use. This means apartments/etc (and one of my geo-economist friends should have an article coming out in the future partially dealing with how Georgism incentivizes YIMBY and other removals of restrictions on highest and best use). But on the other hand, this also means that development won't be pushed out in the form of sprawl bc of vacant lots and severely underutilized land in the core. People and capital will be able to migrate to better lands in the core instead of being forced onto worse marginal (or even submarginal) land. This would mean that the rental value of existing marginal areas would actually fall as demand lowered.
This dynamic was fundamental to how Henry George argued that Georgism would enable true full employment. It would essentially recreate the frontier (except better, much more sustainable, and not dependent on ethnic cleansing). Theoretically, marginal land right around the core would be so much less in demand as to have a rental value of 0. This would mean that people would be able to eke out a decent living there free of rent and taxes. No man would feel the need to wage-labor under a boss for less than they could get in being self-employed at the margin. This would be a boon to the average unskilled worker currently subject to the "law of wages" that drives wages downwards. Employers would be competing for workers instead of the other way around, just like what happened in the early days of the historical frontier.
The problem with our current system is that the land right around the productive urban core is taken up by sprawl. It still commands rent and it's still taxed. This means that people have to travel very far to extremely crappy land if they want to find land that's cheap and "rentless". This land in turn is so far away and isolated that it's too crappy to viably self-employ on.
There is an interesting paper from 1978 called "Sectoral Shift in Antebellum Massachusetts: A Reconsideration" which seems to agree with Henry George's view. It argues that in the early days of settlement, the American frontier worked as advertised. Land was readily available to the average person a short distance away and employees had a viable alternative to working for an employer (as founding fathers like Benjamin Franklin pointed out). But as the land was gobbled up by speculators/etc, the frontier as a whole moved westwards, continually increasing the transportation/settlement costs/risks. This meant that there was a growing amount of poor people in the East due to imperfect labor mobility.
In terms of how this would function in the modern day, it might be instructive to compare the situation in the early 20th century when improvements in transportation briefly opened up a pseudo-frontier of cheap but still decent land around urban centers:
"Another example Ward provides is Walter Southgate, a former street corner agitator and founding member of the Labour Party. Southgate first built himself a carpenter’s bench, and then constructed an 8-by-16 ft. two-room hut, finally hiring a Model-T to move it in sections to the concrete foundation he and his wife had laid on their 2.5 acre site. They taught themselves brickwork in the process of building the chimney. They bought the land after the First World War, began construction during the General Strike of 1926, and completed the home in 1928. During the almost thirty years the Southgates lived in their home, they “produced every kind of fruit and vegetable, kept poultry, rabbits and geese, grew a variety of trees including a coppice of 650 saplings and in fact made their holding more productive than any farmer could.”
Ward considered the Southgates typical of dozens of people he investigated who, “with no capital and no access to mortgage loans, had changed their lives for the better.” For example Fred Nichols, who bought a 40-by-100 ft. plot of land for ten pounds in 1934, and—starting from a tent where his family was housed on weekends—”gradually accumulated tools, timber and glass which he brought to the site strapped to his back as he cycled down from London.” He sank his own well in the garden. Elizabeth Granger and her husband, who bought two adjoining 20-by-150 ft. plots for ten pounds (borrowing a pound to pay the deposit); like Nichols, they stayed in a tent there on days off, gradually building a bungalow with second-hand bricks. They raised chickens, geese and goats.1
Ward quotes Anthony King, in The Bungalow, on conditions in the first half of the twentieth century:
"A combination of cheap land and transport, pre-fabricated materials, and the owner’s labour and skills had given back to the ordinary people of the land, the opportunity denied to them for over two hundred years, an opportunity which, at the time, was still available to almost half of the world’s non-industrialized populations: the freedom for a man to build his own house. It was a freedom that was to be very short-lived.2"" -Kevin Carson, Organization Theory http://www.mutualist.org/sitebuildercontent/sitebuilderfiles/otkc11.pdf