Significant strides toward a fairer tax system have been made in Scotland, where the establishment of a dedicated commission on land reform has cemented the policy direction of the leading Scottish National Party.
SNP, Scotland’s governing party, held its annual conference in March, and attendees were jubilant at the commitment made to some form of land taxation. An amended motion stated that as the government works through its land reform program it “must include exploring all fiscal options including ways of taxing the value of undeveloped land”.
Back in 2015, grassroots SNP members rejected the party’s proposed land reform policy, on the basis that it didn’t go far enough and was thought to be a watered-down version of the ideal policy. This was considered significant then because it is rare for a party’s membership to overturn a policy on its own and send its representatives back to the drawing board.
Writing for Bella Caledonia, Jen Stout explains that growing pressure for land reform in Scotland was bolstered by debate during the nation’s independence referendum in 2014.
“The stark inequalities that damage Scottish society so much were a frequent topic, and few statistics hit you so hard as ‘432:50’ – around 432 interests own half the private land in Scotland. That private land, incidentally, makes up 89 percent of our 19 million acres. Community ownership accounts for two percent. Just one man, the 10th Duke of Buccleuch, owns one percent of Scotland.”
Adding to the chorus of Land Value Tax advocates is the Scottish Green Party, one member of which has prepared a manifesto on implementing Land Value Tax. Andy Wightman writes that the only major barrier to achieving this is the establishment of a land register, which currently does not exist for Scotland.
“Land Value Taxation is no longer the preserve of advocates and lobby groups on the margins of public debate. It is now a mainstream part of contemporary debates over the future of public finances, local revenues and public infrastructure.”
“There are signs that the public is becoming weary of the house price escalator. For one thing, young people (and by that I mean almost anyone under the age of 30) are being impoverished through the high cost of accessing property. For another, the credit crunch has exposed the weakness of an asset-based debt model. Combined with pressure for just rewards, fairness and greater equality, the arguments for LVT suggest its time may at last have come.”
For all the progress being made in setting the priorities of major political parties, significant misunderstanding of the Land Value Tax policy remains. Public opinion regularly equates a land tax with explicit “community ownership”, which is a failure to grasp the concept of returning the value of public goods to communities.
Wightman writes that while some industries, like forestry and agriculture, and the owners of buildings on high-value land would be resistant to the new system, serious effort should be expended to educate low and middle-income families and the business, retail and industrial sectors on their potential cost savings.
Support for Land Value Taxation in Scotland is now a force to be reckoned with, and its proponents are numerous and well-respected. EarthSharing.org will be continuing to observe and encourage this debate as it develops.
Can inequality within and between societies be explained in terms of merit and intelligence, or are the most important determinants of inequality beyond individual control? Both economist Henry George and geographer Jared Diamond essentially asked this same question, examining the fundamental forces that have shaped human history. They come to startlingly similar conclusions. These similarities have not, until now, been connected and compared so directly. Henry George, as an economist, had a view of history which emphasized the importance of the privatization of the economic value of land. Jared Diamond emphasizes the importance of the orientation of large land masses along an east-west axis in shaping history. What is common to both theses is the importance of land – the petri dish which supports human cultures. Diamond’s Pulitzer Prize-winning Guns, Germs and Steel is probably the most popular book ever written about the role of agriculture in the evolution of human societies. George’s magnum opus Progress and Poverty was likely the best-selling book in the world, after the Bible, when it was published in 1879. Princeton historian Eric F. Goldman described a society in which enormous numbers of people found that their “whole thinking had been redirected by reading Progress and Poverty in their formative years. In this respect, no other book came anywhere near comparable influence.”
Both books tackle such large questions that they are frequently attacked for being deterministic and for broad-stroking details. While the details are contentious, the core theses are straightforward and robust. Postmodernism has made many scholars afraid to distil general forces and has turned ‘generalization’ into a pejorative term. But among those seeking useful answers for the current state of the world, Diamond and George are responsible for paradigm shifts within many fields of inquiry. It is not my goal with this piece to defend all of these thinkers’ ideas with an exhaustive list of historical examples, but merely to compare their most defining ideas. Land Determines Human Progress
Diamond’s thesis is that Eurasia had ideal conditions for agriculture and the success of its people was not due to intelligence or merit. Essentially, crops that flourished in the fertile crescent (self-pollinating hermaphrodites) could move east and west much easier than they could move north and south. Globally, those who controlled land on this east-west axis were able to grow huge food surpluses and advance rapidly, inheriting selectively bred food crops, technology, and ideas at a much faster rate than areas not on this physical and intellectual jet stream.
Diamond writes that effective agriculture and food storage were “prerequisite for the development of settled, politically centralized, socially stratified, economically complex, technologically innovative societies. Hence the availability of domestic plants and animals ultimately explains why empires, literacy, and steel weapons developed earliest in Eurasia and later, or not at all, on other continents.”
Food surpluses freed people’s time and energy for innovative pursuits, supported dense hubs where people could exchange ideas, and supported large militaries to exact tribute and rent from traders and inhabitants. In other words, it was principally differences in access to well-located land that made it possible for some societies to advance to the point of being effective at conquest and colonization.
If George were aware of Diamond’s thesis, he might remark that there is a global privilege, or economic rent, associated with controlling land on this east-west axis. George mostly goes about describing this within societies – as opposed to Diamond’s sole focus on comparing civilizations – arguing that those who control the best locations and can charge rent for them have a return far beyond that which is justified by their individual merit. On the collapse of societies, both thinkers boil it down to sprawling and wasteful land use.
In Progress and Poverty, HenryGeorge discusses how sprawl and the inequalityit produced was the cause of the decay and fall of the Roman Empire:
“Rome arose from the association of independent farmers and free citizens of Italy. It gained fresh strength from conquests, which brought hostile nations into common relations. Yet the tendency to inequality hindered progress from the start, and it only increased with conquest.”
“Great estates—“latifundia”—ruined Italy. The barbarism that overwhelmed Rome came not from without, but from within. It was the inevitable product of a system that carved the provinces into estates for senatorial families. Serfs and slaves replaced independent farmers.”
George, firstly, notices that private property is a natural thing related to human production and in ancient times when the population was sparse “ownership of land merely ensures that the due reward of labor goes to the one who uses and improves it.” But over time, with the density of the population, rent increased forcing civilizational sprawl.
Conquests led to appropriation of land and slavery. The Roman armies moved outwards from Latium demanding land; victory gave more land to the farmers; excessive demands again brought exhaustion of fertility; again the armies moved outwards. Early 20th-century professor of economic history Vladimir Simkhovitch wrote: “Province after province was turned by Rome into a desert, for Rome’s exactions naturally compelled greater exploitation of the conquered soil and its more rapid exhaustion. Province after province was conquered by Rome to feed the growing proletariat with its corn and to enrich the prosperous with its loot. The devastation of war abroad and at home helped the process along.”
Diamond describes the way in which Middle Eastern and Mediterranean civilizations grew crops and grazed cattle in an irresponsible and wasteful manner. If land was plentiful for the dominant culture, who had subdued the inhabitants, they could afford to destroy the soil and move on. The only reason western Europe was able to survive similar irresponsible methods, according to Diamond, was its rainfall, unlike the drier Mediterranean and more inland areas of the Middle East, which were not always deserts.
In this way, George and Diamond agree on the importance of land and resource management in the rise and fall of civilizations, as opposed to the individual merit of those involved, but they describe very similar phenomena through unique and largely comparable lenses. It is difficult to compare thinkers from such different times on issues like the environment. However, one possible difference between George and Diamond are their views on population. George viewed humans, unlike other species, as capable of multiplying their productivity, using fewer resources to produce more wealth. Diamond’s theory that Easter Island, for instance, was a Malthusian (population) trap might put George’s and Diamond’s philosophies at odds. George was likely more of an optimist in terms of population and technology, if the land problem could be adequately addressed first. Resource Distribution within Societies To illustrate, Vikings, a popular historical drama on the History Channel (spoiler alert), features the fearless upstart Ragnar Lodbrok. Ragnar bases his legitimacy as a ruler on the idea that he can supply his people with not only new sources of loot but, most importantly, land. He dramatically demonstrates this mid-battle in an impassioned speech to his warring countrymen. Instead of fighting each other for land, says Ragnar, they should join forces in killing other peoples. Despite historical inaccuracies common in such dramas, scholars believe the Vikings raided other parts of Europe principally out of a hunger for land.
According to George, when a society does not use its own resources well, it leapfrogs to others. He believed that the Western land tenure system creates extreme social stratification whereby the rewards of economic and technological progress go disproportionately to the owners of land. Fear of poverty and an emphasis on unearned wealth and status seeking surrounding this dynamic leads to militarization and a colonial leapfrogging mindset.
Contemporary Georgist economist Mason Gaffney referred to what causes this as ‘milking the core to feed the periphery’. The poor in the center of a society, like large cities, are paying a great deal of their earnings out as rent and those seeking to avoid this rent sprawl in a multitude of ways – from urban sprawl, to heading west during American expansion, to invading other countries for resources, as was the case with the Romans and Vikings as well.
Gaffney and Fred Harrison describe how land hunger drove millions of people to make the dangerous passage across the oceans to the Americas. Over the course of three centuries, those who came from the Old World gradually displaced or decimated the tribal societies of “First Americans” who occupied the continent for thousands of years. Such a huge, and resource-rich continent provided the oppressive Old World regimes with a safety-valve, or what Harrison describes as “a continental-wide bolthole to freedom.” At least for a time.
“When the land ran out in the 1890s,” writes Harrison, “the land of plenty turned into a hell of poverty.” The poverty that plagued the Old World had arisen with an equal vengeance in the New World cities established by the descendants of the first Old World migrants. Of course, the land did not actually “run out” in a literal sense; the commons was given away to the railroads, to politicians and their close friends, to land speculators, and to settlers.
After the Revolution, huge sections of land were bought up by rich speculators, including George Washington and Patrick Henry. As the veterans returned home, speculators immediately showed up to buy the land warrants given by the government. Many of the soldiers, desperate for money, sold their 160 acres for less than $50.
This kind of hoarding of land creates an artificial scarcity, and this can, in turn, be used to stoke public sentiment toward war. As was the case with Rome and other empires, George argued that this process is unsustainable; at some point, people become more focused on raiding and stealing the wealth others have produced than on creating real wealth themselves. The returns are just too low by comparison. Rent-seekers parlay their power, even if originally earned through productive means, into more rent-seeking and even buy political power to cement their positions. The social pact is destroyed as the society continuously undermines its productive base. This dynamic, which George viewed as cyclical, had happened long before the Viking raids of the Middle Ages. In Progress and Poverty, he wrote the following:
“In the history of every nation we may read the same truth: our primary social organization is a denial of justice. Allowing one person to own the land makes slaves of others. The degree, or proportion, of slavery increases as material progress goes on.
The effect of invention and improvement on the production of wealth has been precisely the same as an increase in the fertility of nature. What has been the result? Simply that landowners took all the gain. The wonderful discoveries and inventions of our century have neither increased wages nor lightened toil. The effect has simply been to make the few richer — and the many more helpless!”
Conclusion According to Diamond, people who were lucky enough to have come from land along the longest stretch of east-west land were able to parlay that ownership into more land, decimating those who got in their way. If these east-west cultures existed in environments with lots of water, they could withstand the assault of unsustainable agricultural practices and continue to conquer other parts of the world. If not, they collapsed. George thought that those lucky enough to own land within a society enjoy the same type of unearned luck and privilege. In this way, George describes the cause of poverty within societies, and Diamond describes reasons for inequality, poverty, and colonialism between societies. Both describe why this system of resource allocation and use are unsustainable and ultimately lead to social and environmental collapse, respectively. They also agree that land and location, both its geographic position and land policy, is the most important single factor in determining the fate of civilizations.
If George were alive today, he and Diamond might sit down together and decide that they liked the idea of a global system for sharing the value of land, perhaps as a citizen’s dividend (basic income), which would equalize the historically generated value of land with the descendants of conquerors and the descendants of victims of conquest alike. This would help correct at least the economic misfortunes of people disadvantaged by their geographic position. This would overwhelmingly help those in the global south, the people who not only did not benefit from being on the east-west axis but who were also colonized by those people who did benefit. If done correctly, it could eventually wipe out disadvantages due not to merit, but simply being born on the wrong side of the proverbial railroad tracks.
Simkhovitch, V. G. (1916). Rome’s fall reconsidered. New York: Ginn. Zinn, H. (2003). A people’s history of the United States: 1492-2001.
“Housing is at the centre of an historic structural transformation in global investment and the economies of the industrialized world with profound consequences for those in need of adequate housing.”
Adequate housing is a human right, and securing it for all people is not only a moral imperative, it is one of the 17 Sustainable Development Goals that have been developed by the United Nations and targeted for achievement by 2030. All signatory member states are bound to pursue this goal in earnest.
Leilani Farha is the U.N. Special Rapporteur on adequate housing, and she has reached some unsettling conclusions about the worsening of what she terms the “financialization of housing” in a report presented to the U.N. Human Rights Council at the beginning of the month. Prosper Australia’s (Earth Sharing Australia) Speculative Vacancies report is held up as a primary source of evidence regarding the scale of the issue, a study that EarthSharing.org is excited to replicate in the United States as well.
After the enormous losses incurred from the 2008 global financial crisis – by homeowners, banks, and taxpayers – it seemed reasonable to expect that any legislative response would crack down on the deficiencies in the system that had made such a crisis possible. In a nutshell, the opportunities for corporate finance to turn housing debt into a commodity were left unchecked, and the practice of packaging mortgage-backed securities into enormous bundles and selling them as an investment became widespread.
According to Farha, the resulting catastrophe of mortgage defaults and foreclosures actually ended up being a huge win for corporate finance, as companies were able to sweep up billions of dollars worth of property at fire sale prices from state governments who had been forced to assume responsibility for high-risk mortgages.
“Individuals and families who were affected by the crisis were often blamed for taking on too much debt and new rules and regulations were put in place to restrict their access to mortgages. Austerity measures cut programs on which they had relied for access to housing options, and the march towards the financialization of housing continued.”
There is a need now more than ever to reclaim housing as a social commodity and to disincentivize its treatment as a cash cow, an asset for the accumulation of wealth and an easy tax haven for the world’s super-wealthy.
Farha outlines the way in which a vast amount of investment properties are being left empty and suggests that even without occupants, a property can generate significant value for the owner. In Melbourne, a full 20 percent of investor-owned properties are vacant, equating to about 82,000 homes. In London, the wealthy suburbs of Chelsea and Kensington saw a 40 percent increase in vacant properties between 2013 and 2014.
“In such markets, the value of housing is no longer based on its social use. The housing is as valuable whether it is vacant or occupied, lived in or devoid of life. Homes sit empty while homeless populations burgeon.”
Farha says there is a “gross imbalance” between the resources that governments devote to assuaging the needs of the ownership class and what is a “complete deficit” of attention paid to those who cannot meet their needs for a safe, affordable place to live. The situation is likely to worsen with the proliferation of international trade agreements, which tend to have the effect of intimidating governments out of regulating investment in property and the development of luxury rentals. A precedent has already been set by cases of treaty arbitration wherein millions of dollars in damages have been awarded to foreign investors.
The human right to adequate housing is enshrined in the 1948 Universal Declaration of Human Rights and half a dozen other international conventions and covenants. This right, under our present system, is in constant conflict with the use of land as a store of wealth and a means of capital appreciation, and governments have made the problem worse by providing tax subsidies for homeownership, tax breaks for investors, and bailouts for corporate finance.
A system of Land Value Taxation would discourage such ubiquitous property speculation and exert downward pressure on prices. Confronted with tax bills that more accurately reflect the public value of centrally-located land, speculators and other stakeholders will find it much less attractive to hold onto housing as a deposit box for wealth. The revenue generated from this tax could be used to revitalize the stock of public housing, though this would simply be a cherry on top of the more significant shifts in incentives created by the Land Value Tax.
Most of the wealth being generated in Silicon Valley is the result of advanced engineering, risky venture capital and cut-throat business acumen in the face of rapidly-evolving competition. Visa, HP, Intel, Adobe, Ebay, Apple, Google, Facebook – the concentration of multi-billion-dollar enterprises in this tiny pocket of Santa Clara Valley is staggering.
But not everyone making big money in Silicon Valley had to major in a STEM field or produce any real wealth to do so. For those who have speculated on rising land values, the last 40 years has been a gamble that keeps paying off. In the 1960s, when the land in Santa Clara Valley was producing prunes instead of circuits, John Arrillaga Sr. and Richard Peery could see the wheels of a new boom beginning to turn. These young entrepreneurs spent the next decade building the corridor through which much of Silicon Valley’s world-changing innovation would pass.
By constructing custom and cost-effective office units quickly for emerging tech companies, Arrillaga and Peery dominated the region and became its go-to developers. Their signature, low-slung concrete buildings called tilt-ups made for cheap and quick construction early on. The pair was also among the first to build before tenants were confirmed, in the hopes that immediate availability would be attractive to businesses. The land they had bought up as young men began to generate formidable returns, and the speed of technological progress coupled with an apparently insatiable demand for more space created today’s Silicon Valley, synonymous with skyrocketing land values. While this new value injected into Santa Clara Valley draws people to the area and creates prosperity for those in innovative industries, it also attracts speculation where it is possible to capture significant wealth simply by owning land.
Arrillaga is worth more than $2.5 billion, a fortune earned in part from unparalleled skills as a developer, but also because he was able to extract a great deal of unearned wealth. The contribution of pioneering land developers to economic growth is undeniable, but unfortunately, taxation structures have not kept pace with the rapid transformation of unproductive land into a cybercity of millionaires and billionaires. The wealth that has been obtained from constructing buildings is hard earned, but the enormous increase in rental income resulting from rapidly-increasing land values has not been earned. It’s not as if aging structures have grown more valuable, it’s the land underneath them that has skyrocketed in this hub of innovation, land values created by an aggregation of economic activity not attributable to any one person, developer, or tech company. The value of this land is indeed a socially-created value.
Today, the success of entrepreneurs starting tech companies has made Silicon Valley the most expensive place to live in the United States. As these tech giants grow, the reach of their impact on the housing market spreads, and migrant employees move with their money to suburbs farther and farther out from where they work. In so doing, they shape land values and make other lasting changes to the urban environment. The gains generated by developers like Arrillaga and captured by speculators can ripple out into the wider community and inflate the cost of living.
The incredible wealth now being generated by high-tech industries in Silicon Valley has put a premium on all surrounding land, both commercial and residential. Working-class residents can only hold on to rent-controlled accommodation for so long before the profit motives of private developers see them evicted, and their housing demolished. According to the Guardian:
Between 2000 and 2013, the number of low-income households in the Bay Area increased by 10 percent, but the region lost 50 percent of units defined affordable for this population, according to researchers at the University of Berkeley, California, who have closely studied gentrification and displacement.
The proliferation of wealth in our communities is a wonderful thing; the only reason it causes such polarization is because systemic inequalities go unaddressed.
We can have the best of both worlds. For men like Arrillaga and Peery to have the opportunity to create these cash cow business parks and bring thousands of talented professionals to Silicon Valley is incredible, it should be celebrated.
As people have come together to produce a great deal of wealth in the tech industry, land values have boomed. Those who were able to get on the property ladder before an oncoming swell in land values simply sell or rent for huge windfall gains, unearned wealth, while prior tenants are displaced. Incoming renters are squeezed or turned away entirely by the high rent.
The problem is not the tech companies or their workers, and it is not the vulnerable tenants; it’s not even the landlords who benefit from, perhaps unconsciously, playing the working class renters and the angry anarchists off the techies. It’s our system of property taxation. The best and simplest way to correct the imbalance, to give justice to everyone, is to implement a system of Land Value Taxation while reducing taxes that harm the poor and the production of new wealth.
From the developer’s’ perspective, a Land Value Tax would in no way detract from the incentive to build in the first place, as the taxes on buildings would be eliminated, after sales and wage taxes. Furthermore, the incentive to build on unused, centrally-located land would increase. They would have an even greater incentive to build immediately because owning the land without having tenants would leave them in the red after paying their Land Value Tax bill each month. The site would not be a speculative asset, but one that only yields a positive return if a developer uses it well to meet people’s needs.
For Arrillaga and Peery, the taxes due on their development portfolio would have grown with the unprecedented business success of their tenants, from dirt cheap taxes on empty lots to large tax bills on lucrative land accommodating high-end office buildings. This would have generated a massive amount of public revenue without harming incentives toward innovation. The seeds of gentrification are nurtured by insufficient housing supply, but Land Value Tax would mean that centrally-located land would be developed to accommodate increasingly more people at comfortable densities.
This policy encourages landowners to maximize the revenue they can generate by constructing and maintaining buildings of the highest caliber to attract tenants. As opportunity brings more people to an area for work, demand for housing pushes land values even higher, which increases revenue from the Land Value Tax even more. A landowner can then create more housing, often vertically, to cover the larger tax, or if they are unable or unwilling, sell to a developer who will. This applies not just to Silicon Valley, but to any in-demand area where the concentration of jobs forces living costs higher than many can afford.
Land Value Tax can be used as a source of revenue to fund great social programs, even while reducing wage and sales taxes -from health vouchers to housing for mentally ill homeless people, or even a universal basic income. Without a Land Value Tax, however, the benefits these social programs create will simply be captured by landlords through higher rent charges. Thus, the positive effects of these social policies would nearly be wiped out, funneled into the pockets of landlords as rent hikes. For example, if everyone was given a $10,000 basic income each year, all else being equal, what would happen to the cost of rent? It would go up by a comparable amount, and largely cancel out the benefits of basic income to the most vulnerable people. However, with Land Value Tax, incentives to increase housing supply would result in people being able to protect their basic income from rent hikes.
Governments will not be able to subsidize their way out of this housing crisis with palliative measures. Creating a system of incentives in which the market is enabled to correct itself is the most sustainable way forward, and offers the best hope of ensuring affordability for all while simultaneously giving a boost to incredible growth in future industries.
If variety is the spice of life, then why are so many of us drawn to old habits? You might think of this phrase in the context of your Friday night plans, but economists are asking it about our approach to public policy. Despite a growing body of research indicating that the structure of U.S. property taxes could be vastly improved, we tend to be content with the status quo, and it hasn’t always been clear why. But now, using experimental economics, a professor at the University of Delaware is undertaking a one-year study to identify why people don’t respond to smarter economic policy that could greatly enhance their lives.
Joshua Duke, Professor of Applied Economics at the University of Delaware, sees a big problem with how cities and municipalities in the United States tax property. Governments levy taxes according to the value of buildings and productive activities on the land instead of the land value itself. While property tax is by far one of the best taxes, especially over wage and sales taxes, it is still not as good as a land value tax. A land value tax is virtually the same as a property tax except that the tax is on the land value only, not the building. Property taxes have been structured this way for centuries, but Duke believes we could implement an alternative tax structure that raises tax revenue and stimulates economic development. This would run in contrast to the existing tax structure, which tends to generate and exacerbate wealth inequality by taxing regular people for working and exchanging, but fails to tax unearned income like that from passively owning an ever appreciating vacant urban lot.
“The idea is that if you’re going to tax anything in society, probably the best thing to tax is the value of land. Not the value of the improvements on land, like a house, just the value of land, and the reason is that it’s non-distortionary**. That means that it doesn’t provide the incentive to do less property improvement than is optimal,” Duke said.
According to Duke,“[land value taxation] really would make society a lot better. It’s one of these major things we could do. We don’t have to create anything, we can just change the way things are taxed and [as a result] increase society’s wealth,” Duke said.
Determined to understand why land value taxation is so rarely used, Duke is harnessing the power of experimental economics. He is constructing a virtual city, in which land value taxation is financially advantageous to all citizens. The citizenry will be composed of 100 students of business, economics, and engineering. Ultimately, Duke hopes to identify why people, given the option of introducing financially advantageous land value taxation, tend to reject this tax structure.
“Economics is all about simplifying reality. What we’re trying to do is reduce problems to the fundamental incentives that we want to study. You have an amount of income; how much of your income do you devote to improving your land and how much do you devote to consumption? Then do you feel that, over time, you’re being treated fairly by the tax system and do you vote to reject it? So we set up a little democracy using our computer program where participants in our experimental economics platform can vote,” Duke said.
Duke is already planning his next study. After the completion of this one-year project, he will use his findings to identify ways to help citizens overcome political objections to land value taxation initiatives. Ultimately, he hopes to aid economists and policy experts who are eager to see cities and municipalities usher in smarter economic policy.
**Distortion, in the most basic sense of the word, simply means change. In economics, it is almost always considered a harmful mutation in an idealized market, where there is perfect competition and no externalities, e.g. almost alltaxes vis a vis reducing productive incentives, misallocating resources, etc. Just as breaking up inefficient monopolies encourages competition and benefits the market, land value taxation encourages competition and captures distortionary externalities. This encourages behavior that is good for markets and for people, which is what Duke means when he says that land value taxation is “non-distortionary.” In fact, shifting to land value taxation actually increases productive incentives, what we might call a positive distortion.
Who owns outer space? Our most idealistic visions of the future require us to transcend our narrow personal or nationalistic interests, but increasingly, space seems likely to be divvied up among the powerful, as has so often happened with the Earth. Can space be managed to serve the common interest?
Managing a Commons
Space is generally thought of as a commons. A commons is a resource which is not under the exclusive control of anyone. This makes it an interesting and challenging economic coordination problem. The US Department of Defense classifies outer space as one of the “global commons” alongside the oceans, atmosphere, and cyberspace. Former Under Secretary of Defense for Policy, Michele Flournoy, and Shawn Brimley of the Center for a New American Security write:
“…as rising nations and non-state actors become more powerful, the United States will need to pay more attention to emerging risks associated with the global commons, those areas of the world beyond the control of any one state—sea, space, air, and cyberspace—that constitute the fabric or connective tissue of the international system.”
Even during the heated Space Race between the United States and the USSR, there were lofty ideals about how to treat the cosmos. The Outer Space Treaty, ratified by all major world powers at the time, limits the use of orbital pathways and celestial bodies to peaceful purposes. Weapons of mass destruction are specifically banned. More interestingly, it also prohibits any signatory nation from claiming ownership of celestial resources.
The resources of space were not to be seen as just a bunch of loot waiting to be plundered. According to the Treaty, managing outer space was viewed as an international responsibility of utmost importance, for the benefit of all.
New Space Race
But a new space race is on. This time, a private space race. Billionaires are funding serious commercial spaceflight companies such as SpaceX, Blue Origin, Planetary Resources, Virgin Galactic, Stratolaunch Systems, and Bigelow Aerospace, and other lesser-known private companies and defense contractors are also competing. Additionally, competitions like the Google Lunar X Prize are under way. All of these enterprises share the goal of making space more accessible.
Elon Musk once raised the possibility of launching as many as four thousand micro-satellites into low Earth orbit for the purpose of providing worldwide high-speed internet access. Mark Zuckerberg had planned a similar service via Internet.org. Both men have quietly put these plans on the back-burner; however, the inexorable trend of cheaper spaceflight is continuing to increase satellite congestion surrounding Earth.
The progress that SpaceX has made with reusable launch vehicles does help reduce the quantity of space junk per-launch, but it also makes spaceflight cheaper thus encouraging more congestion. Junk continues to accumulate much faster than it is burned up.
Space junk is any small debris left in orbit by spacecraft. The problem is that it can impact orbiting spacecraft at speeds up to twenty times faster than a bullet. Worse yet, in the event of a collision, more debris is created.
In the worst-case scenario, this process of collisions creating more debris starts a chain reaction called Kessler Syndrome. If there are enough orbiting satellites, this chain reaction can eventually consume all of them, and leave behind a speeding cloud of bullets encircling the Earth and keeping humanity grounded for a century or more.
To reduce this threat, a number of mechanisms have been proposed. Decommissioning large obsolete satellites can significantly reduce the likelihood. However, doing so is expensive and of little direct benefit to the individual spacefaring organization. Nonetheless, the European Space Agency has already planned missions as part of its Clean Space initiative.
Another theoretical mitigation technique includes the development of lasers to shoot down space junk, or to redirect it whenever it threatens important orbital spacecraft.
Financing cleanup efforts
Who ought to be paying for these cleanup efforts? If billionaires intend to start launching thousands of satellites, is it simply up to the public to clean up the mess?
The ‘polluter pays principle’ is standard in environmental law. In addition to aligning with our moral intuitions for responsibility, taxes on pollution have the benefit of discouraging the damaging activities that create pollution in the first place.
In keeping with this thought, it would be sensible to propose a Pigouvian tax on anyone who creates space junk, in proportion to the amount of junk that they create. Since this junk can be accurately detected, it would be straightforward to measure and determine the tax.
Amending the Outer Space Treaty and establishing a body to implement the polluter pays principle would be a common sense method by which we could work to eliminate the threat of space junk.
There’s another possible source of revenue if we consider that the orbital paths themselves are a finite resource. Satellite collisions have happened in the past and will continue going forward. Indeed, every satellite launched brings with it a small risk of collision. And the more satellites we have, the greater the likelihood of collision and, eventually, of triggering Kessler Syndrome.
Certain orbital pathways are more desirable than others. Geo-stationary orbits might be more desirable than low Earth orbit; a sun-synchronous orbit may be more desirable than an alternative orbit. If billionaires start launching thousands of satellites, it is entirely possible that we could eventually be forced to allocate these orbital paths by auction, in order to fund general collision insurance.
Such a model would certainly be more fair and predictable than our current process, which is for companies to patent orbital pathways, and sue anyone who infringes on it (regardless of collision risk). Granted, the FAA’s Office of Commercial Space Transportation also has a permitting process in the United States. But permitting practices vary by nation, and there’s little or no international coordination for revenue-sharing, insurance, or cleanup. Motherboard interviewed Andrew Rush, a patent attorney and entrepreneur with expertise in space law, who said “As more and more companies start commercial activities using satellites, and using new and innovative ways to do so, we should see an uptick in patent activity.”
“We may also see the attendant uptick in patent litigation around some of those activities,” he added. “I personally hope that’s not the direction that we go. I hope there’s a lot more licensing and a lot more cooperative ownership and stewardship of patents, rather than just suing each other. “
An exemplary model of proper resource management can be found in the Norwegian Oil Fund. Upon discovery of its oil reserves, Norway instituted the collection of economic rent based on the revenue generated from oil extraction, plus oil exploration licensing fees. The resulting revenue was then kept in a trust fund and used to invest both within Norway and internationally. As of June 2015, the fund has accrued $873 billion. Given its size and stake in companies worldwide, the fund has become an significant player in international affairs. As such, it pursues economic and social justice through its decisions concerning its holdings, divesting from companies that violate its ethical standards.
If our civilization is able to use market pricing to collect economic rent from the Earth’s geosynchronous orbits, we would enjoy similar success as Norway while preserving a critical resource. Such concepts are already proving successful here on Earth. London uses congestion pricing to reduce traffic in its city center, and uses that revenue to fund public transportation. Congestion in space is ultimately no different. Let’s preserve our common inheritance of space for future generations, not at the expense of our current generation, but by achieving justice. We all deserve to share the benefits and the value of outer space.
The lessons of the 2008 financial crisis are quickly being forgotten. That market collapse was precipitated by an extraordinary rise of US land values, which was driven by the emergence of subprime lending on a mass scale.
Prices of residential and commercial real estate are once again on the rise. A major driver of this astounding rebound has been Chinese real estate investment. Chinese investors, seeking promising investments and a way to move their money out of the slowing Chinese economy, have poured $110 billion dollars into US real estate in the past five years. By contrast, the Chinese real estate market, which is putting a drag on the Chinese economy, has been called by many the largest land bubble in history. Chinese investments in the US market are inflating housing prices across the country and placing home ownership further out of reach of many Americans.
Over the past several years, Chinese investment in commercial properties has captured headlines. For example, in 2015, the Anbang Insurance Group purchased the Waldorf Astoria Hotel for $2bn and attempted to purchase Starwood Hotels for $14bn. However, the vast majority of Chinese speculative investment has been in the residential market, to the tune of over $93bn. Cities with the most rapidly rising housing costs–San Francisco, New York, Los Angeles, and Seattle–are popular markets with Chinese buyers. But as housing stock across the country continues to gain value, buyers are now turning their speculative intents to Chicago, Miami, and regions of middle America.
When people speak of rising real estate prices, they certainly aren’t talking about bricks, they are talking about land. As a consequence of all this land speculation, Americans are finding it harder to obtain affordable housing and commercial space, and not only because of rising prices. Close to 70% of Chinese buyers pay cash, which is more appealing to sellers because deals can close much faster. This puts US residential buyers who require a mortgage at a disadvantage. Bidding wars with deep-pocketed foreign speculators also has the effect of pressuring US buyers with more limited liquid assets to sign off on larger mortgages than they can financially handle.
Prospective home buyers are not the only ones feeling the crunch. As homeownership becomes more unaffordable, the number of people in the rental market increases, driving up rents across the country. In 2016, rent increases are expected to outpace wage increases by about one percentage point. Faster than the general rate of inflation.
The periodic bubbles in real estate markets are a symptom of this rush to pocket the rising value of land, whether by foreigners or citizens. So far, the United States is not taking steps to curb either domestic or foreign speculation in real estate. Instead, Congress is going in the opposite direction by encouraging foreign “investment” in US property.
An alternative to such measures, which numerous eminent economists recommend, is a tax on land values. Land value taxation (LVT) is a twist on conventional property taxation, whereby improvements to the land are not taxed, but the land itself is taxed. Proponents argue that we ought to shift as much taxes as possible away from productive activity and onto land values. While other strategies would serve to limit foreign land purchases, taxing land values would actually halt idle landholding in general by making the speculative ownership of raw or underdeveloped real estate unprofitable.
When markets are operating correctly, profits are simply a return for productive activity, not a windfall that is achieved by excluding others as with the landed gentry in the feudal era. With LVT in place, Chinese or other foreign investors who wanted to make money by purchasing land would have to actually develop that land. They would need to attract residential or commercial tenants by providing desirable amenities and reasonable rents, and shouldering the risks involved in any sort of productive activity. This would result in a growth of construction activity and an increase in US housing supply. Increased construction activity and decreased cost for commercial and residential real estate would stimulate the rest of the US economy, simultaneously decreasing unemployment and raising wages. In effect, taxation of land values would convert the current Chinese desire for US land into a sustainablemeans of growth for the US economy.
Once Detroit was motown, the home of Mustangs, Chevies and Cadillacs, of Aretha, the Jacksons, the Temptations. What happened? How can it be turned around? How can other cities escape the suffering that Detroit has endured?
In the 1960s, in the town of Southfield, the Detroit suburb where the Council of Georgist Organizations (CGO) annual conference will take place, a forward-thinking Mayor, James Clarkson, and an expert Assessor (Ted Gwartney, who will be one of our featured speakers) implemented reforms that made Southfield one of the fastest-growing cities in the country. Southfield’s success reprised the tax and business climate Detroit enjoyed in the early 20th century, the policies that made it the USA’s automotive capital.
This conference will explore that fascinating history, and bring together social scientists and reformers from around the world to focus on innovative solutions to today’s most “intractable” economic problems. The CGO looks beyond the ideological limits of “Left” or “Right” to explore viable Third Way policy solutions that can move society toward greater equality, without sacrificing prosperity.
It’s become a convention, on the news, to refer to the Jihadist force that’s been gaining ground in Iraq and Syria as the “so-called” Islamic State. This seems to be a requirement. Sure, they call themselves a state — but they’re not! States are sovereign. They have governments, and ambassadors and such; they have seats in the UN General Assembly — like Syria, for example.
What is it, really, that constitutes a sovereign nation?
To begin with, it has to do with authority and control; we think of it as “where the buck stops.” It may be comforting to think of this as an absolute thing (i.e., Israel absolutely has it; the Palestinians absolutely don’t). But it is not all-or-nothing, of course; there are degrees. The “national sovereignty” of a place like “The Republic of South Vietnam” (or post-Dubya Iraq) is an evanescent thing, crafted on the fly to suit the interests of a larger power. Nevertheless, international diplomacy rests, however shakily, on the concept of national sovereignty. So far in human history, is nations that make and enforce laws. International law is an ad hoc matter. It is enacted by means of treaties, and only enforced at the national level, if nations choose to do so. (Has the International Criminal Court ever compelled the United States to do anything?)
Nations have various degrees of power, and various degrees, alas, of legitimacy. If the nation is not powerful enough, it may fall to conquest by external powers. But what if it is not legitimate enough? The (so-called!) Islamic State’s legitimacy is bestowed by Allah — the same Deity that confers legitimacy, via the Queen, to land tenure in Great Britain. (It has to be the same Deity: both faiths believe there is only one.) The classical Chinese concept of national legitimacy was called “The Mandate of Heaven.” It was thought possible for a ruling dynasty to lose this, become illegitimate, and become deposed. If a nation is not legitimate enough, therefore, it may succumb to internal revolutionary forces.
Eventually, Divine bestowal of sovereign power came to be vested in hereditary monarchs. In the minds of the Enlightenment philosophers, however, sovereignty came to rest in the incontestable, and infallible, will of the people. Thomas Jefferson, for example, wrote that governments are instituted to secure the people’s inalienable rights, and that their powers — if they are just — are derived from the consent of the governed.
This raises questions. Who are “the governed”? How is their consent ascertained? How, and where, and in what ways are they to be “governed” — presumably through the exercise of the sovereign powers of a “government” which the people have chosen? According to Jefferson, a governments just powers are derived from the consent of the governed — and it wields those powers through the process of creating and enforcing laws. Does this mean that if a majority of a nation’s citizens decide, through some representative process, that slavery is OK, then slavery is OK? Well, it’s legal, anyway; fee-simple private ownership of human beings was legal in the United States for 75 years.
Furthermore, the idea of government cannot be separated from the question of jurisdiction. Over what area does sovereign control extend? There is no global government. Our concept of sovereignty is inextricably bound up with the idea of nationhood. Now, sometimes we might speak of a “nation” in spiritual or cultural terms — a holy covenant? a community brought together by its victimhood? a romantic generational consciousness, such as the “Woodstock Nation”? But, in stark political terms, such notions are frivolous. In the “real world,” nationhood is a matter of jurisdiction over a defined portion of the planet: a territory — a piece of land.
Job #1 for any nation is the administration of its territory: its boundaries and their defense; the duties and prerogatives of states, municipalities and other lesser jurisdictions; and — most important — what people can do with that territory: what rights they have to its possession and use. This has obvious economic implications, because all economic activity must use land in some way. It is incumbent upon a sovereign nation to set rules concerning how people use the land: to make stuff, to live on, and to dump their garbage in.
Fine, OK — all of this sounds so commonplace as to hardly be worth mentioning. But, when we start to think about how these issues play out, we find some astounding breaches of logic.
Many smart people have told us that international trade agreements, such as the Trans-Pacific Partnership, or TPP, dangerously erode national sovereignty. Democratic societies have repeatedly chosen to implement regulations deemed necessary to protect health, safety and the environment. Pacts like the TPP seem to be taking these powers away from governments. I wonder how many citizens in struggling, export-dependent poor countries have any inkling what prerogatives their “sovereign governments” have given away in order to stave off trade sanctions.
But it’s not just the poor countries that are “yielding up their sovereignty” to multinational corporations — oh, no! Lots of people in the Great and Powerful USA are exercised about the increasing ease with which corporations reconfigure their profits into other jurisdictions to avoid paying “their fair share” of US taxes. Have the governed given their consent to that? Perhaps not, but the Emperor, in any case, has made it legal.
If Job #1 of a nation is to administer its territory, what can we say of a country that allows private investors to hold hundreds of thousands of hectares of that territory entirely idle, while its people have no place to make a living? Hasn’t that nation’s sovereignty been seriously degraded?
Furthermore, if a corporation is making “obscene” levels of profit in the United States and then paperworking them into another country to avoid taxes, well — did it not need land, locations and natural resources, to undertake the activities that created those profits? Did it fully compensate the community for the privilege of using that land?
Questions like these have a way of making one’s head swim. They seem to sudden, too sweeping. One is tempted to back-track to see whether some key factor has been left out. That impulse is both understandable and necessary — because in today’s discussions of economic policy a key factor is left out.
So let’s back-track. We’ve said that the most vital task of a nation is the administration of its territory. It defends against invasion, creates and enforces laws, and provides all kinds of infrastructure, both civil and physical. To the extent that nations do these things effectively, they become pleasant and prosperous places to live and do business. And to the extent that they become pleasant and prosperous places, the land in them — most of which is held in fee simple by private interests — increases in value.
Any nation that allows fee-simple ownership of land has already — long since — yielded up its sovereignty to private interests. These recent “sovereign giveaways” are just minor embellishments. We can close the barn door if we like, but the horse is long gone.
One of the many things this means is that, while the TPP will exacerbate a number of problems, the solution to those problems is not to be found in protectionism. “Local self-sufficiency” will only make the local landlords a bit less rich.
There was a West African nation that took a series of effective steps to assert its own rightful sovereignty — have you heard of it? It began with a military coup — nothing very noteworthy in that; there are lots of military coups — but this one set out to implement a novel program of reform. The country defaulted on its foreign debt. It proceeded to abolish all income taxes, VATs and tariffs, and to collect the value of land for its public revenue. And what happened? It no longer needed exports, or foreign loans, because its domestic markets were strong, its employment full. The most serious policy problem it had to deal with was the large numbers of people who wanted to immigrate. This country’s name is Alodia — but, alas, it is fictional. So far.
As world leaders assembled for an awkward “family photo” at this year’s G20 summit, Vladimir Putin was placed on the far right. This was done, perhaps in part, to keep distance between him and Australian Prime Minister Tony Abbott, who threatened to “shirtfront” rugby tackle the Russian president.
Local newspapers put it comically; Putin has been “exiled to social Siberia.” But behind the photos of shirtless Putin on horseback, and all of the flamboyant posturing surrounding the G20 summit are serious geopolitical and economic issues that affect us all.
Interest-group politics veiled as pro-market reforms
Participating countries in the G20 summit produced a report including a “growth package”, a set of reforms which the OECD and IMF promise will yield, an oddly specific, 2.1% increase in economic growth by 2018.
Many of these reforms are not really about facilitating fair competition. Instead, they create and sustain private monopolies and tax loopholes. Don’t take our word for it, see the report for yourself. Below are the reforms.
“Reducing regulation and the costs of doing business”
In general, it is a good idea to minimize bureaucracy, and remove particular regulations that maintain artificial privileges (e.g. restrictive taxi licenses). The report does a good job of addressing that issue. In many cases, regulation does fall most heavily on small businesses and new entrants, giving an unfair advantage to large existing corporations.
But in the G20 growth package, this “reduction of regulation” includes the following kinds of policies which are not as competitive, fair, or beneficial as they may seem.
a. Privatizing Basic infrastructure
Utilities and basic infrastructure are often natural monopolies, meaning it is not practical to have a competitive market for them. Take water and sanitation for instance. There is only so much space in a city available for pipes, sewers, etc. It’s not feasible to have many competitors all using different pipes and subterranean tunnels. Giving the privilege of providing vital services to private companies cannot be expected to “boost the competitiveness of the economy and the efficient allocation of resources.” (G20, p. 9)
However, it is sure to create very profitable business opportunities at the expense of the public. To continue using the previous example, if a private company is given the monopoly to provide all of the water for a city, they will charge very high prices. If there is no other way to get water, than to pay the water company, people will pay whatever it costs; nobody can survive without water.
Sure, people would spend more money (increasing GDP) if they were forced to pay ever more in water costs. However, it wouldn’t necessarily mean any more real wealth had been created, or that people’s lives had been improved; it’s quite the opposite actually. Yet, the report implies that everything will be peaches and cream if we focus on maximizing this narrow metric of economic success.
“Observed productivity and price changes in key infrastructure sectors in the 1990s … are estimated to have permanently increased Australia’s GDP by 2.5 per cent.” (G20 p. 5)
b. Reducing Pollution Fines
“The Government has also removed impediments to investment by repealing the mining and carbon taxes. The repeal of the carbon tax alone is expected to reduce annual compliance costs by $85.3 million. Both these reforms will directly reduce compliance costs and will contribute to a more dynamic economy.” (G20, p. 9)
The claim that such taxes would “contribute to a more dynamic economy” is dubious. Instead, it would likely just increase windfall gains for big polluters. Reducing the cost of polluting reduces a company’s incentive to not harm the environment. In other words, it will likely greatly increase pollution. If you want a more dynamic economy and less pollution, simply stop taxing regular people for working and make up for the difference by taxing pollution more.
c. Deregulation of university fees
In our current education systems, the value of a university degree is more in the privileges it grants than the actual quality of the tuition. The biggest personal capital one gains from university are the personal relations and the pre-selection premium to one’s professional status – both of which involve strong network effects. Having gone to Harvard does give one access to certain labour markets regardless of what they happened to learn while studying.
Allowing education fees to soar in high-status universities is likely to cause further polarization of privilege, which reduces social mobility and structural adaptability. The one part of the growth package that actually seems to increase “equality of opportunity” (G20, p. 1) is that the government will be “supporting over 80,000 additional students in 2018 at an estimated cost of $820 million over 2014-15 to 2017-18.” (G20, p. 8) But these suggested public education subsidies and the resulting “price signals” (G20, p. 8) are likely to result in further windfall gains to elite-status universities – instead of encouraging improvements in education quality, as the growth plan insists it would. In other words, universities would simply increase tuition without improving education.
In a market where educational services were separated from assessing professional competence, such competition between the education service providers would be more likely to “improv[e] the quality of tuition”. (G20, p. 8) In the current academic degree paradigm, where status matters and is dependent strongly on the body of students applying to each university, competition is unlikely to work efficiently for the benefit of all students.
d. Tax exemptions and deferment for options used in employee compensation (G20, p. 10)
This looks like nothing but yet another tax avoidance loophole for a few highly paid classes of employees (such as top management). Most employees are not compensated with options in any case, and there is no sensible reason to subsidize compensation in this form over regular wages.
“New investment and infrastructure”
Under current low interest rates, governments are likely to borrow in order to build expensive infrastructure projects. This results in large increases in surrounding land values. If a train station is built for instance, those that own land nearby will see their land’s value increase dramatically, allowing them to charge buyers and renters more. This is an unearned or windfall gain as economists call it.
If however, the value of land is taxed, and owners pay more for owning the best land near the new infrastructure, everyone will benefit equally. Infrastructure can even be constructed using borrowed money that is then paid back with the increased revenue coming from rises in land value. In many cases, it would actually be profitable for the public sector, creating extra revenue for other purposes: increasing access to education and medical care, lowering harmful taxes, and even providing a citizen’s salary (a.k.a. basic income). New infrastructure is great, but not if it is used as a means of raiding the public coffer.
This is part 1 of our coverage of the G20 growth package. Stay tuned for more.