A Search-Theoretic Critique of Georgism
Economist Henry George famously advocated a 100% (or near 100%) “Single Tax” on the unimproved value of land. Many modern tax economists, most notably Joseph Stiglitz, conclude that George’s logic was sound: Since the unimproved value of land is perfectly inelastic, even an expropriatory tax is non-distortionary. Economists’ main objections to Georgism are merely that (a) it is difficult to implement in practice, and (b) politically impossible.
My co-author Zachary Gochenour and I have a new working paper arguing that the Single Tax suffers from a much more fundamental flaw. Namely: A tax on the unimproved value of land distorts the incentive to search for new land and better uses of existing land. If we actually imposed a 100% tax on the unimproved value of land, any incentive to search would disappear. This is no trivial problem: Imagine the long-run effect on the world’s oil supply if companies stopped looking for new sources of oil.
I can explain our argument with a simple example. Clever Georgists propose a regime where property owners self-assess the value of their property, subject to the constraint that owners must sell their property to anyone who offers that self-assessed value. Now suppose you own a vacant lot with oil underneath; the present value of the oil minus the cost of extraction equals $1M. How will you self-assess? As long as the value of your land is public information, you cannot safely self-assess at anything less than its full value of $1M. So you self-assess at $1M, pay the Georgist tax (say 99%), and pump the oil anyway, right?
There’s just one problem: While the Georgist tax has no effect on the incentive to pump discovered oil, it has a devastating effect on the incentive to discover oil in the first place. Suppose you could find a $1M well by spending $900k on exploration. With a 99% Georgist tax, your expected profits are negative $890k. (.01*$1M-$900k=-$890k)
You might think that this is merely a problem for a handful of industries. But that’s probably false. All firms engage in search, whether or not they explicitly account for it. Take a real estate developer. One of his main functions is to find valuable new ways to use existing land. “This would be a great place for a new housing development.” “This would be a perfect location for a Chinese restaurant.” And so on. As Gochenour and I explain:
Note we have not complicated the models by differentiating between improvements and the land’s “unimproved” value. Information about the land can be considered an improvement in its own right. Some of the land’s qualities have very low search costs to discover: is it arable, will it support any type of building, is it in the middle of a city or rural area, etc. Discovery of other potential uses may require significant search and/or investment in other technologies. An entrepreneur brings these qualities to market – they do not bring themselves. Until he does so, the value of the land is undefined.
Georgists might be tempted to reply: “Fine. We’ll limit the Single Tax to existing real estate, and exempt new development entirely.” But in the real world, such offers lack credibility. Past expropriation is a strong signal of future expropriation:
Previous attempts at land reform have more often failed than not, sometimes with terrible consequences. Consider the case of Uganda, where in 1971 dictator Idi Amin expelled approximately 60,000 Indian immigrants and expropriated their land (Jorgensen 1981). The idea was simple: expel the immigrants and redistribute their holdings among the native population to curry favor without affecting future output. In years to come, lack of foreign investment crippled the country, and even non-Indians mistrusted the government. In 1998, when the expelled citizens and their heirs were offered the opportunity to return and take back their businesses, (understandably) very few accepted the offer. Once a government shows a willingness to drastically alter their respect for certain types of property rights for certain types of citizens, everyone updates their expectations to account for this change.
The big puzzle for me: Why do tax economists spend so much time discussing mere curiosities like lump-sum taxation, excess profit taxation, and land taxation, when the completely realistic option of taxes on negative externalities is right in front of their noses?