This is a response to an essay entitled, "A Critique of Georgism" © Paul Birch, 29th Aug. 2002. The original essay written by Mr. Birch can be found here: http://www.paulbirch.net/CritiqueOfGeorgism.html

The first half of Paul Birch's essay concerns itself with defining a common set of terms and classifying what Birch views as the different types of Georgism. It's certainly a very interesting read, and it's refreshing to see someone attempt to define the domain and context from which they will frame their argument. However, it does not itself consist of a critique, so there is no need to respond to it here. I will limit the scope of this rebuttal to Birch's specific critiques of Georgism.

Birch makes a number of arguments against Georgism and LVT in his essay.

The first argument concerns the reciprocal nature of the externality:

“It should thus be apparent why Georgists wish to capture site value for the community; it is a windfall to property owners resulting from the activities of other people. However, that windfall has not been created by the common activities of the community, but specifically by the other properties in the vicinity. Each property contributes externalities to the other properties as well as receiving externalities from them. Each property contributes to the site value of all other properties. “

The argument here is that not only does a landowner benefit from a positive externality (the increase in their land value as a result of others' actions), they also contribute a positive externality (the increase in the value of others' land as a result of their actions). This is not an argument against LVT per se, it is an argument against setting the LVT rate at 100%. Henry George recognized this and advocated setting the LVT rate at around 95%. There is no reason why we can't implement a general rule and then deal with exceptions (where a landowner contributes to a significant rise in the site value of the surrounding community) as they occur on a case by case basis.

Birch goes on to state:

“On average, properties contribute just as much as they receive. Georgists ignore this side of the equation.”

Birch commits the fallacy of exclusion here. While it is true that the sum total of external benefits received must equal the sum total of external benefits provided, Birch leaves out the primary source of the external benefits - government investment in public infrastructure such as roads, bridges, schools, city water and sewer lines, public transportation, etc. These infrastructure investments are generally funded by the community as a whole through a variety of taxes that fall on both landowners and non-landowners. Therefore, the average landowner receives far more value than he contributes.

There is a more subtle point here as well. Most critiques of Georgism mistakenly associate the ownership of land with the use of land. It is easy to show clear examples where the land owner and the land user are two separate and distinct entities - in the case of a strip mall, the land may be owned by one individual or corporation while the strip mall may have been built and operated by a second. The confusion stems from situations where the owner and user are the same person or legal entity. In these cases, even though the owner and user are the same person, they are playing different roles in the process. The roles can be thought of as aligning with the three classical factors of production - land, labor, and capital. The person, in one of these cases, expends labor and receives a wage for that labor; expends capital and receives a profit for that capital; owns land and receives a rent for the land. The fact that the whole process is controlled by one person who receives one payment does not change the fact that the one payment is composed of three components for three different functions. The mere ownership of land does not contribute any positive externalities to the community, rather, it is the other functions that contribute the positive externality; the burden of the LVT does not fall on those functions.

The next argument concerns the difficulty of estimating rural site values:

Birch makes the argument that there are numerous ways of estimating urban land values but that the estimation of rural land values is more difficult.

“Site values can be estimated by considering the market prices of nearby empty lots. We assume an urban environment, subdivided into many lots, a sufficient fraction of which are at any time empty, or due for demolition, and a sufficiently liquid market in those empty lots. In these circumstances it is possible to create a reasonably reliable map of site value, which we can expect to be low in the surrounding countryside and increase progressively towards the city centre. Discontinuous contributory factors, such as the extra value of corner lots, scenic views or site aspect, can be extracted from the statistics and used to adjust the estimates for affected properties. Such assessments will not be perfect, but are likely to prove sufficiently accurate for purposes of taxation.

Typically, site values will tend to contribute around one third of the total value of the property, buildings and other on-site improvements accounting for the remaining two thirds. Other things being equal, the more that has to be paid for the lot, the more expensive and valuable a building it makes sense to construct on it.

Rural site values are more problematic, because it is difficult to find such a thing as an empty lot, devoid of on-site improvements, or even identify the land's natural state. Any parcel of land that has been left wild is probably not characteristic of neighbouring land — or else it would have been similarly utilised. Rural property values are also strongly dependent upon natural features unique to each parcel of land — whether the ground is level or undulating, high or low, chalky or loamy, or slopes north or south, etc. — but the contribution of these natural features is not a natural value. It is a variation in the profitability of on-site and off-site improvements (the source of both improved and unimproved values), leading to divergent investments on-site and divergent impacts of externalities.

Much of the value of rural land is due to clearance, drainage, irrigation, hedges, fencing, farm and forest tracks, etc. — things that have little consequence for urban lots. Since no market comparable to the market in urban empty lots exists, it is hard to do much better than simply assume that rural site values are, say, one third of total values, as in urban areas. Even if we were to estimate the current cost of bringing land to its present standard from the natural state, we could not know whether these improvements would be appropriate to today's market; without an independent measure of site values, their present value can only be guessed; and without a market value for the improvements, the site value cannot be extracted. To the best of my knowledge, Georgists have failed to propose any non-arbitrary mechanism for separating improved and unimproved values in the rural situation. “

I think Birch is making a big issue out of nothing here, and I don't see any basis for his assumption that rural site values are the same fraction of total values as they are in urban environments (unless he has defined total value as being exclusive of improvements). I think the real issue here is that markets for rural land tend to be far more illiquid than markets for urban land. Still, the market price for a parcel of unimproved rural land can still be viewed as the capitalization of the rent of that land. An adjustment can be made for clearance, drainage, fencing, etc. The portion of land value subject to the LVT would still be a large fraction of the market value of the unimproved property, far higher than one third. In the grand scheme of things, rural land, particularly unimproved or partially improved land, makes up a tiny percentage of total land value in the United States. The important thing is not coming up with an exact valuation for a parcel of partially improved rural land situated between two parcels of natural land, rather, the important thing is capturing the increment to that land value over time as the area is developed.

The next argument concerns the implementation of the LVT:

“For Type I Georgism, a one-off tax equal to the site value is levied upon the landholder. This is trickier than you might think. Our hypothetical Georgist municipality would have to calculate site values, as described above, before announcing its policies or allowing news of them to leak out. Once landholders suspected that they were about to be single-taxed, the market price of empty lots would fall, notionally to one half of the full price (at which price purchasers, after subsequent payment of the single tax, would just have paid out the full price of the lot). However, holders of more than one property might deliberately sell their empty lots at very low prices in order to minimise local site values (this is practicable because the single tax will fall on all their properties whereas the empty lot sales that define site values are relatively rare). Afterwards, once the one-off single tax had been collected, market prices would revert to full value. “

I was about to write that this section was confused and full of mistakes until I realized that here he is arguing against what he terms, "Type I Georgism". Since I am not aware of anyone who actually advocates this particular approach (Henry George certainly did not), I'll just label this a strawman and move on.

Now we get to the true Georgist proposal for the implementation of LVT.

“Type II Georgism, that is, capture of the site rental, is easier to implement and less obviously unjust (though appearances are deceptive). Based on historic data, the annual single tax for each property is calculated to equal the site rental, which may be approximated by the site value multiplied by the current interest rate. If the full site rental is successfully captured by the single tax the market price of empty lots will fall to zero.

The tax authority must then adjust the tax rate annually to maintain close to a zero price, the corrections being typically equal to the current price (which could be negative) multiplied by the current interest rate. How can a market persist with zero or negative prices? Simple. Each landholder is liable for the single tax on his property. If he no longer wants the land he is not permitted merely to abandon it, but must transfer liability to another person; the price paid is the positive value of the land plus the negative value of the tax liability. If the expected liability exceeds the perceived value, the landholder will have to pay to get someone to take it off his hands. If the landholder dies without net assets or skips out the authority may need to take possession of the land and either use it itself or place it back on the market.

Is the authority then free to cheat landholders by raising tax assessments at will? Not really. Excessive assessments could be appealed to the courts; evidence of negative prices on empty lots would be hard to refute. Some limited room for manoeuvre and small-scale gerrymandering would remain, due to the statistical nature of the assessments and the inescapable presence of market uncertainties, but gross fraud would be impracticable (unless the courts themselves were unashamedly corrupt, which seems unlikely). All in all, we could expect Type II Georgism to be much less prone to political manipulation and excessive imposts than our existing systems of local taxation.”

Well, there you have it. So much for his critique of Georgism.

The next argument concerns the amount of revenue that could be raised by the LVT:

“How much would the single tax amount to? On the order of 5% of GDP, similar in magnitude to present day local taxation, but a factor of ten less than central government expenditure, and much less significant than some Georgist rhetoric might lead one to believe. (A rough calculation follows: In the UK, residential site values are currently around £40K, yielding an imputed rental of £1600 per annum at an interest rate of 4% pa. Other uses, including commercial, industrial and public services, account for around 20% of total site value, equivalent to another £400 per household, to a total of £2000 pa. Another estimate starts with the value of suburban land, £100/m2, at a population density of 100m2 per person, to a total value of about 2 x £10,000 per person, allowing for the contributions of city centre land, up to £10,000/m2, and rural land, down to £1/m2. At 2.5 persons per household that's £50,000 or at 4% pa, £2000 pa, in agreement with the first estimate. With 20 million households, that's £40 billion a year, or about 5% of GDP. I would not expect results for other countries to differ greatly, though details of the calculation will of course vary.)”

Birch does not cite a source for his figures, but states that rent amounts to 5% of GDP while government spending amounts to 50% of GDP. I'm not familiar with the data for the UK, but I am familiar with the data for the US. Rent as a fraction of US GDP has been estimated at 20% to 25% [Hudson, 1997]. For government spending as a percentage of US GDP, we need look no further than the website of the Bureau of Economic Analysis website. For FY2003, GDP was $11.3 trillion. Total government expenditure and investment (federal, state, and local) was $2.1 trillion. As a matter of simple arithmetic, government spending in the United States in 2003 represented 18.5% of GDP. http://www.bea.doc.gov/bea/newsrelarchive/2004/gdp104f.xls

The next argument concerns the effect of the LVT on markets and behaviors:

“Given a single tax of the sort described above, what are its consequences? Georgists are disposed to argue that not only will it not distort the market, it will eliminate property speculation and increase the supply of affordable housing. They are seldom able to perceive the contradiction inherent in such claims. They also seldom specify any baseline for comparison. It should be obvious that if the single tax had no effect on the market it would be completely pointless. It should also be obvious that there is no a priori reason to suppose that investment decisions will be identical in a free market or under the single tax, nor that land use will not be radically altered. Structural transfers alter the dynamics of any economy; it is a matter for analysis whether they do so in a beneficial, catastrophic or relatively neutral way.

The initial effect of the single tax on the market is slight. Because the existing capital investment in property is effectively trapped in its present use and location, land use and gross rents will initially stay more-or-less the same. The net effect is a systematic transfer of wealth from landholders to the tax authority. However, we may assume that the authority now returns these revenues to the community, either by direct dividend or by the reduction of other forms of taxation. The members of the community, in their capacity as tenants (and even householders are in a sense tenants in their own properties), have more money to spend, so rents will rise as the landholders seek to pass on the tax. If the distribution of the tax is egalitarian in nature, as Georgists often assume, low rents will rise more than high rents; however, if the "single" tax merely replaces or reduces an existing tax, this will not occur, and all rents will tend to rise by approximately the same factor. Commercial rents will also tend to rise by a similar percentage, because the additional spending money will cause prices generally to rise, leaving firms with more money to pay higher rents. The whole rigmarole ends up with landholders passing on the new tax to the beneficiaries of the tax in the form of higher rents. “

This is incorrect. The quantity of land in existence is fixed. Therefore, the price elasticity of supply is zero (perfectly inelastic). It is a point of fact in microeconomics that a tax levied on something with a perfectly inelastic supply will fall wholly on the seller (the landlord in this case). Imposing a land value tax does not increase or decrease rent, it merely transfers the collection of the rent from the landlord to the government.

“Georgists are apt to deny that landholders will be able to pass on the tax by increasing rents, or to attempt to make it so by legislative fiat, but in this they are inconsistent. One of their main arguments against the present system is that landlords and landowners are able to capture the benefits of any tax reductions or wage increases in the form of higher rents, without doing anything to deserve it, by exactly the above mechanism. And, in the short term, and with some provisos, they are correct. Where they go wrong is in forgetting, or denying, that in the longer term the supply of rentable properties is elastic (as is the demand, since the number of persons per household is not fixed and rent can be diverted to other goods); if rents rise it becomes profitable to build more houses or apartments, thereby stemming the rise. Supply and demand works with property just as it does with other goods. More slowly, perhaps, than the market for widgets, but still effectively.”

Claiming that the supply of land is elastic is, in effect, claiming that people can create land.

“So the single tax has raised rents, encouraging investment in new construction. However, since all benefits of location are taxed away from the developer, there is no longer any incentive to build preferentially in the most economically beneficial locations (that is, where the positive externalities are large). One might just as well build anywhere. In fact, it's a little worse than that; the expected benefits are taxed away, but the uncertainty remains, so building in higher-tax areas is riskier, for zero expected gain. Risk aversion suggests that one should then choose only the cheap locations. In a perfect market urban site values will fall sufficiently to compensate for this effect; but if the tax authority does not immediately reduce tax rates to match, average urban site market prices will stay persistently slightly negative, creating a slight net disincentive to build there. In principle, if the tax authority could restrain its natural short-term greed, and assess site values with total honesty, this disincentive could be eliminated; but in the real world political bodies are not so trustworthy. “

The single tax has not raised rents, as explained above. The claim that a land value tax would discourage people from building in economically beneficial locations is illogical. Businesses and individuals locate in high value areas precisely because of the economic benefit. They are willing to pay for that benefit. Under the LVT system, they would still pay the same amount for that benefit, the difference being that they would pay the community rather than private landlords. The situation Birch describes would occur if the LVT rate was set higher than the rental value of the land, but clearly, no one advocates that.

“A further point to note about the Georgist incentive structure is that site value, and hence the single tax, is a somewhat arbitrary function of the subdivision into separate properties. Let there be two properties, combined into a single property. Then, assuming positive externalities:

S1&2 = S1 + S2 - E12 - E21 < S1 + S2

Thus combining plots has reduced the net site value (some externalities have been internalised) and should thus reduce the single tax. A similar effect can be obtained by moving activities from one property onto another. Thus Georgism provides an incentive to internalise externalities, favouring malls over single shops, apartment buildings over single dwellings, complexes over simplexes. “

Since when is the internalization of externalities considered negative? Economics teaches us that it is highly desirable.

“The form of land-use towards which the single tax pushes us is one in which the countryside is randomly dotted with perpendicular towers (tapering wastes land), 200 metre or so on a side, 2000 metre or so high, each tower a complete small town of 50,000 or so, inclusive of apartments, shops, offices, services and factories, but paying no more tax than a single suburban house. The internal economy of those towers will have some similarities to Type III market Georgism, but with the crucial distinction that no one who wishes to cease renting a unit when the current lease expires has any further liability; finding a new tenant is the responsibility of the tower owner. Most of the surrounding countryside will be abandoned or common land and thus effectively exempt from taxation. “

The form of land-use towards which the single tax pushes us is one in which each parcel of land is used most productively given the physical properties of that particular land, the characteristics of the surrounding community, and the tastes of the individuals who make up the community.

“That doesn't mean that existing towns would just disappear — there is too much already invested in them — though dereliction would tend to set in over much of the urban area over the course of a century or so as abandoned properties reverted to common ownership. This trend would be offset by the sharp reductions in site value and tax rates entailed, allowing continued economic occupation of neighbouring properties. An interesting effect arises where the single tax is imposed upon green properties (parks, gardens, playing fields and the like) within an area of high site values. Although such properties may create considerable positive externalities for the area, there is no way they can collect rent commensurate with the imposed tax. The landholders will thus find it necessary to maximise their rent base by building over the green properties, as densely as possible, ideally in the form of a single immense tower, and hope that they will thereby cause neighbourhood site values to fall markedly and reduce their own taxes. It is indeed a general rule under Georgism that landholders will wish to reduce the positive externalities their properties emit and increase the negative externalities as much as they can get away with, because by doing so they reduce their own exposure to the single tax.”

On the contrary, the land value tax would virtually eliminate the vacant lots and abandoned buildings that mar cities under the current system of taxation. It would be uneconomical to own abandoned lots under the LVT system because you'd still be responsible for paying the tax. Meanwhile, since buildings and other improvements would be tax-free, there'd be an enormous incentive to improve your property. Regarding negative externalities, they'd be handled much as they are now - pollution laws, noise ordinances, etc.

“We can thus see that over the long run a Georgist single tax would drastically change the patterns of land-use, by imposing an artificial and one-sided incentive structure. As described here, the results would not be economically disastrous, but could nevertheless be expected to be far from optimally efficient. From a Georgist's perspective many of the consequences would be perverse (a society in which most people are tenants of a few big landlords, whose property is hugely more valuable than the small parcels of land on which it is situated). It is therefore all too likely that various ad hoc regulations would be introduced in an muddled attempt to overcome the laws of economics and force the evolution of society down what may be perceived as politically more palatable paths (as in today's interventionist welfare states); it is hard to predict what forms this distorted Georgism might take, nor how much damage they might cause. “

Birch offers no supporting evidence for his claims that land ownership would become more concentrated or that additional government regulation would be required.

The next argument concerns what Birch views as potential improvements to the LVT system:

“An unfortunate feature of the single tax as described above is that it imposes a permanent liability upon landholders. Land is a hot potato. An alternative approach might be to permit any landholder to abandon possession at any time. Legal possession would revert to the communal tax authority and collection of the single tax would cease. Persons wishing to make temporary use of the land would then not be deterred from doing so by the danger of being stuck with an unserviceable liability. “

I am not aware of any provision of Georgist philosophy that would prevent landowners from simply turning their land over to the tax authority if they no longer desired to use the land and pay the tax.

“The difficulty with this approach is that there would no longer be room for a liquid market in empty lots at a price fluctuating around an average of zero. Negative prices would not occur (since the cost of abandonment is zero) so the price would have a floor at zero. But the tax authority and the courts need those below-zero prices to tell them when site value assessments are too high. It is true that abandonment is evidence of what would otherwise be a negative price and could perhaps be used as a proxy, but combining rates of abandonment with above-zero prices in a statistically sound fashion, in order to update the site value map, would not be easy, and would at best introduce further uncertainty and lack of transparency into the proceedings. “

When the markets began to experience clearing problems, the tax authorities would simply decrease the LVT until the markets cleared. This would implicitly reflect lower land values.

“The tax authority could attempt to ameliorate this problem by entertaining a policy whereby abandoned land is always brought back onto the market (with the possible exception of land set aside for public use), by progressively reducing the assessed site value (and hence tax rate) until a willing holder is found. “

LOL. What was the point of articulating a supposed problem when the solution was obvious? I thought this was supposed to be a critique of Georgism.

“The ability lawfully to abandon possession of land would tend to hasten the land-use changes discussed above, but the end result would be similar, except that instead of mainly abandoned and common land, there would be widespread private holding of low-value land for non-non-portable-capital-intensive activities (yes, that word does make sense — try starting at the end and working backwards!), that is, activities that don't tie you financially to that piece of land. “

Again, where is the problem? This is an example of a market performing exactly as it should.

“An alternative to the single tax is a site-rental auction. All the land is owned in common by the community; anyone who wishes to use it must rent it; and each lot is rented out to the highest bidder. Calculations of site values and the maintenance of a sufficiently liquid market in empty lots thus become redundant. “

Yes, that is one of many options that you will find in the Georgist literature.

“The problem here is that although buildings and other on-site improvements are supposed to remain purely private property, there is no easy way a landholder can remove his property without destroying it if he is outbid in the annual auction. A competing bidder might therefore risk paying considerably over the odds in the reasonable expectation of getting free use of the buildings until the following year, when the original owner may end up paying the market rental on the full property value, not merely the site value, in order to guarantee access to his own property. A sufficiently cheeky tenant could even demand rent from the property owner for allowing the property to remain on the tenant's rented land!

In effect, the community is expropriating almost the full value of these properties, including the value of on-site improvements by the erstwhile owners. This is clearly inconsistent with Georgist ideals, although it would presumably be possible to compensate the owners for this loss or buy them out prior to the implementation of the auction scheme. “

LOL again. This is becoming a habit. Just as I'm about to provide a solution to the problem Mr. Birch raises, he comes up with the identical solution on his own. Obviously, compensating the previous owner for the improvement would be a prerequisite for completing the transaction under an auction model.

“In the longer term, an annual rent auction would make investment in permanent buildings economically infeasible. Portable, disassemblable or disposable buildings would predominate. Then the losing bidder could simply fold his tents like the Arab and silently steal away. Although mobile homes and offices are certainly possible, and meeting halls can be replaced by tents, I cannot see such a drastic shift in land-use as being other than economically damaging — perhaps disastrous. Utilities would be especially problematic under such a regime, and heavy industry would be in scarcely better shape.

The solution is to allow bids for more than a single year ahead. If you can outbid all other bidders for each of a sequence of future years, then you will have guaranteed control over the land for that full period (though you will have to pay the full amount of all your bids, that is, the full rent for the whole period, straight away). The longer the lease, the less evanescent your investment in the land need be in order to remain profitable.”

LOL yet again. Is Mr. Birch critiquing Georgism or defending it? I'm beginning to think that Mr. Birch is a closet Georgist.

“The trouble with this, from the Georgist perspective, is the likelihood of speculative bidding on most lots out to hundreds or thousands of years in the future. The ownership of all or part of the lease would subsequently be linked to the sale or rent of the property; the special status of the land and its unimproved site value would then be lost. To all intents and purposes, existing non-Georgist arrangements, with all their supposedly objectionable non-Georgist features, would simply reappear. There would be undeserved windfalls, greedy landlords, idle rentiers, wanton speculation, and corporations ravishing the environment for filthy lucre. Georgists could not without inconsistency support an open-ended auction, whilst compromise schemes, such as auctioning ten-year leases instead of annual leases, would seem both morally arbitrary and economically unsatisfactory. “

There is a happy medium to be found between single year leases and thousand year leases. To believe otherwise is to fall prey to the logical fallacy of the false dilemma.

“Finally, Type IV Georgists might wish to modify the single tax to include only the net windfall Wi, that is, the excess of externalities received over externalities contributed. Some properties, those that receive more than they contribute, would pay a net tax; other properties, those that contribute more than they receive, would get a net payoff. If this could be achieved, and assuming that the transaction costs were sufficiently low, there would be net economic benefit from this internalisation of the externalities of land use, and the Type IV Georgist programme would have merit.

Unfortunately, no procedures for calculating this net windfall have been presented. The gross windfall is of course the site value, but the externalities created by the property are spread in an unspecified fashion over all the other properties, and inextricably tangled up with all the externalities created by the other properties too. Beyond the obvious fact that the externalities created are on average equal to the externalities received, we have no basis for assigning a net windfall figure to specific properties. In extreme cases we might be able to make a stab at it, but for most properties our best guess is simply a net windfall of zero — and no net tax. Without a better procedure than this we cannot proceed with Type IV Georgism. “

I have already responded to this criticism above. A primary source of external benefits is government investment in infrastructure. Additionally one must distinguish between the rdifferent roles of the land owner and the land user/improver, even if they are the same individual. The mere ownership of land does not contribute any positive externalities to the community.

The next argument concerns alternative means of dealing with externalities and public goods:

Mr. Birch suggests the use of indifference voting as a means of dealing with externalities and public goods. It's an interesting concept, and Mr. Birch discusses the pros and cons of the approach. However, it adds little to his critique of Georgism and while it may have applicability under a narrow set of circumstances, it's hardly something that would be practical for widespread use.

The next argument concerns the philosophical issue of the appropriation of land throughout history:

Mr. Birch discusses the fact that many Georgists like to point out that if land titles are traced back, it becomes clear that at some point in time they were forcefully appropiated from one group by another. That is a matter of historical fact, and he even admits as much, so I'm not sure why he brings it up. Generally, the only time Georgists bring this fact up is when someone else is arguing that landed property is some sort of inviolable natural right and that it's therefore immoral to tax it.

Mr. Birch then interjects:

“It is not morally reprehensible either to allow externalities to float free or to speculate to capture them; it is simply a prudential choice. Regrettably, and inconsistently, Georgists are apt to condemn both options. They share with socialists the illusion that the present and future value of things can be known with certainty and laid down unerringly, even in the absence of a working market.”

Wow, where to begin. First, externalities are perhaps the single, most clear examples of market failure that exist. Internalization of costs and benefits is a basic assumption of virtually all economic models and is a requirement for markets to be efficient. Second, comparing Georgists with socialists is a silly ad hominem attack that does nothing to advance the debate. Third, the absence of a working market is due to the presence of the positive externality. Imposing the LVT eliminates the externality and restores the market mechanism.