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In praise of the land value tax
May 5, 2015
Businesses are expanding in D.C.’s northeastern quadrant.
Ben’s Chili Bowl not only survived, but is thriving. How can we encourage more nimble-but-rooted businesses like this? Here’s one thought: Pass a national land value tax. I know what you’re thinking: “How the hell is another tax going to help?” But bear with me for a moment.
The key thing to realize about a land value tax (or LVT for short) is that nothing you do can affect it. If you build something new on the lot or improve some already existing structure, that doesn’t raise the LVT, as it would with a property tax. If you make more money doing whatever you do with the land, that doesn’t raise the LVT either, as it would with an income tax.
This is why economists love it. By definition, an LVT only captures “rent” — in economics-speak, income you earn by happenstance or luck rather than by actually creating new wealth.
Your tax burden under an LVT goes up only if the value of the land itself — the one thing you have no control over — also goes up. And the way the value of the land goes up is if the local economy becomes more vibrant and productive and thus a place more people want to live and work in. If you own a business, that increased vibrancy will bring you new sales and income, allowing you to keep up with the increased LVT payments. If you’re a landlord, that vibrancy will naturally allow you to charge people more to live in your building. There will of course be marginal cases where businesses that would survive without the LVT get killed by its existence. But on the whole, the tax’s burden is naturally anchored to the productivity of the local economy.
The other crucial thing about an LVT is it makes all that good behavior we listed above more likely. If you’ve got valuable land, it’s not as profitable to just sit on it and wait to make a killing, or to just jack up rents and get fat off the proceeds while you sit on your thumbs. You’ve got an incentive to either invest in the land or the business you own on the land; improve it, create something new on it, hire more people to work, etc.
That would help fight economic blight in abandoned urban centers, and nudge developers to build more housing to alleviate the housing crisis. It would also discourage land hoarding, since it makes it less attractive to own land unless you’ve actually got something productive to do with it. That, in turn, would make land ownership a bit more distributed, encouraging small and local businesses like Ben’s Chili Bowl that actually own their plot. And that would help fight inequality, since the increasing value of land looks to be the key driver of the rising wealth inequality documented by Thomas Piketty.
The LVT isn’t a panacea. It could put something of a ceiling on inequality, but we’d still need to raise the floor. Ben’s Chili Bowl survived gentrification — which is basically people with little purchasing power getting pushed out by people with more purchasing power — but many other business aren’t so lucky. The LVT would discourage landowners from just sitting around and waiting to get rich off gentrification. But we’d also need to raise the purchasing power of the people already in any given neighborhood, so that bringing vibrancy to the area doesn’t require their displacement, and so they can supply the raw demand that will allow more Ben’s Chili Bowls to arise.
