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LAND VALUE TAX VS. SPECULATION

Jeffrey Smith had said most Americans move so often they are like serial tenants and Peter Colwell had said there was a difference: ownership brings the right of a residual and with a mortgage the owner has a call option (see Summary 3). Jeffrey Smith asked if Colwell was lumping together those who've paid off their mortgages and those who haven't? Although homeowners get back their equity (actually their community's growing land value) when they sell, most plunk that into their next home, so they remain serial tenants until they can finally quit paying altogether -- and start helping their children qualify for and pay off their mortgages. What could any fair person have against shifting the property tax from buildings to locations?

Colwell said he'd been talking about mortgaged property and the important point was that homeowners do not get back their equity. The value of the underlying asset (the real property) is a variable. Owners get the value of their equity but this has little to do with the initial investment of equity. If the value of the property dropped precipitously to half of its original value (suppose the loan was 70% of the original value), what would the owner get? If you play around with different hypothetical values, you note a kink that occurs right around the loan book value (perhaps a little below it). Imagine a tenant who has that kind of payoff (granted, leasehold is a property right and might have some value). Ownership is not equivalent to serial tenancy. If he'd meant to include properties with no mortgages, he wouldn't have mentioned the call option, because the kink in that case is at about zero value. (It is not a particularly interesting case.)

There would be an administrative problem taxing land but not improvements, said Max Kummerow. How does the tax assessor know the appropriate level of development (and hence property value)? Just because there is an office building next to a vacant site does not mean the vacant site could support enough office building; there is not enough demand for every site to be developed. A single tax requires the tax assessor to step into the shoes of the market and it is not wise to ask the assessor to do that. The market will do it more credibly. Assessors already have enough trouble, given their limited resources, figuring out property values. Could they do a feasibility study on each site to determine optimal development (and what would "optimal development" be?)? Moreover, one nice feature of property taxes is that they are proportional to wealth; the burden seems reasonably equitable and unavoidable. Wouldn't a tax only on land in effect allow tax avoidance through ownership of highly developed sites?

Every tax faces some administrative difficulties, said Mason Gaffney. The art of valuing land has been highly developed over many years. The valuer does not set the market, but follows it. (See major works by Babcock, Somers, Pollock, Zangerie, Murray, Purdy, et al.) On the second point, various studies have shown that when you rank residential properties by value, the land fraction rises with value. See for example, a recent study for D.C. presented in November by Bob Schwab at U. of Md. at the annual meeting of the Nat. Tax Assn. in Austin.

A hypothetical development is not all that difficult, said Bryan Kavanagh in response to Max Kummerow, and that's only one of a number of alternative approaches. Kummerow lives in Australia, where land is taxed all the time -- and accurately. Kavanagh is a valuer and he's heard even qualified economists put up with the other old canard, "How can valuers possibly assess the land value in fully built-up areas." Are they being disingenuous? What amazes Kavanagh is that most economists ignore or grossly underestimate the annual value of land, which is 20% of the economy and arguably one of its most dynamic factors. John Murray, in his text PRINCIPLES AND PRACTICE OF VALUATION (1969), said that if you want to take control of the economy, you should reintegrate the study of valuation into economics as it was in the days of Sir Thomas Petty (who understood Ricardo's Law of Rent well before Ricardo).

Jeffrey Smith asked if land is harder to assess than land plus buildings. It might be, in places that rely on the usual property tax, but in places that tax land only (such as New Zealand), assessors claim their job is much easier because they don't have to tally up each new sun deck. The staff of assessors is smaller and complaints to appeals boarders are much fewer in places that tax only land, not buildings. As for tax avoidance, some owners who now put their sites to highest and best use may get a tax break, but if they are putting their site to best use they are depriving their community of nothing -- in fact, are making it better. Generally the land tax is far more progressive than a property tax. Most land value is in urban land and most valuable urban land is owned by very few rich people, usually absentee owners. In places where ten rich families own half of urban land value, they would pay half of the local tax burden. You can't get much more progressive than that.

Adam Monroe had said (Summary 3) that to sacrifice such a fair, efficient system as the land value tax just so land speculators could continue exacting an undeserved degree of profit was a mistake -- that overinflated land prices benefited neither society nor the economy. Mark Heywood responded that Monroe seemed to have it in for land speculators (not the only ones who buy things at one price and sell at another), accusing them of anti-social behavior. He could perhaps understand Monroe's viewpoint but it wasn't pragmatic. What, for example, is an "overinflated land price"? Few participants would disagree that a market for rights to occupy land is a healthy way to exact greater (though imperfect) efficiency in land allocation. If you tax at rental values you eliminate the landowner's fraction and thereby any return on the landowner's skill managing land toward higher income and higher capital growth uses. The result: no market; effectively land nationalization. Okay: leave it to the state, nationalize land, but first support the benefits of such a policy with solid evidence of enlightened management of state-owned land -- from the former communist bloc? Does state control bring about more "just" allocation than the market? Maybe in Utopia. In northern Russia (Tver. Pskov) in 1994 a USAID study unearthed much anecdotal evidence that many rural (and very poor) people were not taking up their land entitlements because of the contingent land tax liability, which was modest relative to rental value (deduced as about 40% of the net return from farming). In the 1970s the U.K. government introduced Development Land Tax, a tax on the development value of land. The community benefit? A marginal tax rate of 40% (as he recalled) levied on sale. Naturally landowners don't sell except at a price discounting the tax. Result: land supply reduced (not just by development controls), price up, and, finally, tax repealed.

The European standard for Open Market Value, continued Heywood, is "the best price at which an interest in the asset might reasonably be expected to be sold at the date of valuation either by private treaty, public auction, or tender as may be appropriate, assuming a willing seller (and willing buyer), a reasonable period in which to negotiate the sale, values remaining static throughout the period of marketing, free exposure to the market. No account is taken of the additional bid by a special purchaser."

Mason Gaffney said he thought Mark Heywood had misconstrued Adam Monroe's proposal, which was to

(1) exempt improvements from the tax base,

(2) raise the land tax rate to compensate,

(3) remove or lower many existing taxes, such as those on sales and income, and

(4) raise the land rate some more to compensate for that.

Beyond that, one could speculate about raising rates still more to finance social dividends, but until we figure out how to finance the social security we already have it might be premature to propose more social dividends. Britain has a somewhat different system of taxing property, in which the base is something more like the imputed rental value of improvements in place. Monroe, Gaffney surmised, was talking about modifying the U.S. system (also found in Australia, Canada, South Africa, and many European nations, with Denmark often presented as the purest example).

Peter Colwell supported Mark Heywood's position on speculation: Clearly, a 100% land value tax would eliminate speculation. Would that be good or bad? Some participants seem to have a visceral reaction to the term "speculation," a sense that speculators do not earn their rewards. And this is definitely incorrect. There is little appreciation for the good things speculators do for society. Perhaps there should be a more neutral word than "speculate" -- perhaps "land arbitrage," and "arbitrageur." Only a mother could love a "speculator." What precisely do speculators do? They buy land, hold it, and sell it later. They forgo a return on an alternative investment, which is definitely doing something, with real costs to them. Why should society reward the speculator for doing that? Waiting to develop parcels is valuable to society. One service the speculator provides society is to avoid spatially continuous development. Some participants might not consider this socially valuable; after all, isn't leapfrogging -- another underappreciated term -- one element of urban sprawl? (Sprawl has two components: leapfrogging and large lots -- low capital-to-land ratio. Many of us like to live on large lots.) Consider the value of waiting. Why should we extract nonrenewable resources at a less than infinitely fast pace? Why should a society wait before exercising the option to develop a parcel of land? Similarly, why wait to tap a keg of wine? Why go through a long job search; why not just take the first thing that comes along? Austrian capital theorists recognized the value of waiting with the old-time point-input point-output models. Think of something that may be worth more in the future than it is now (such as a forest, a keg of wine, or an urban lot). Now think about maximizing the net present value of cutting the forest, tapping the keg, or building on the lot. These are actions that cannot be repeated. As for building on the lot (exercising the development option), it may be decades before the redevelopment option is "in the money." Building now may be optimal or building later may be optimal, in which case the investor is called a land speculator.

Think of this common form of speculation: retaining a corner of an agricultural tract, which is otherwise developed for residential use, and using that corner ultimately to build a church, a school, a shopping center, a firehouse, whatever. The point is that a better use comes along later. If there were spatially continuous development, houses and streets would have to be demolished to make way for the later, more valuable use. The speculator saves society from a waste of resources.

What other good things do land speculators do? For one thing, continued Colwell, they increase liquidity in the land market (by reducing the bid-ask spread). This is valuable to society because it reduces the volatility of prices and the associated tendency to avoid investments on land (a thinly traded commodity). They incur risk that would have to be borne by some other entity if they didn't bear it -- in a land value taxation environment, the citizens would bear it, although they might not realize that. Some of the risk speculators bear is related to the problem that the better, later use will not be sufficiently better to fully compensate the speculator for lost opportunity costs (the investment forgone). And speculators definitely do not always win. But the reason speculators are -- the market is -- reasonably good at this is that the very speculators that control this process benefit when they do it well.

Edward Dodson said his experience in community development lending suggests that what is wrong is not speculation per se. Allowing (public or private) entities to hold onto sites with nominal carrying cost has a destructive long-term impact on communities, however. Redevelopment authorities aggregate land over long periods of time, removing sites from the market and as a source of revenue for public services. (Bad accounting regulations allow them to book imputed but uncollected rent as an expense on the public books.) It may take a while to pull together locations for large-scale development but the community should be paid market rent in compensation for withholding the locations from use by others. "Highest and best use" might occur under competitive market conditions but our communities don't develop that way. Urban sprawl would not have occurred with such extreme circumstances if the U.S. government hadn't been in the business of financing the acquisition of rural land for highway construction (in the process changing the definition of distance from miles to hours).

Of course speculation and sprawl bring social costs, replied Peter Colwell. Speculators could bear damn near all these costs if we would use special-assessment user costs or a tax based on frontage to cover such things as the extension of roads and utilities. What about an area tax to cover the incremental costs of fire stations? A frontage charge could also handle police patrols and bus routes (including school buses). We want the right amount of speculation and sprawl. Zero is not the right amount. The community should want speculators to withhold property from alternative uses to a significant extent. There should not be a tax on the withholding activity itself but, at the same time, he agreed that speculation should not be subsidized.

Edward Dodson responded that he sees government's role in private economic affairs as that of umpire, enforcing the rules of the game. But the rules themselves must be just. The U.S. talks a good game, calling for laws to enforce "equality of opportunity," but in his opinion those laws enforce privileges in the form of economic license. Titles to locations are a form of economic license, permitting the private appropriation of site rent. For society to be just, all locations should be leased at market rents. We have permitted, even encouraged, the creation of an enormous bureaucracy with thousands of complex regulations (the manipulation of which siphons off billions of dollars into the pockets of lobbyists and attorneys). Public policy blocks market efficiencies. Speculators are sometimes investors working the system; equally as often, speculators are not investors by design. For example, U.S. tax law exempts sites (and improvements) owned by many nonprofit entities and religious organizations. The services provided by these tax-exempt groups are not generally available to all citizens so he would argue against exemptions for the sites they control. As for the right amount of speculation and sprawl and speculation not being subsidized: One characteristic of buildings is that they begin to depreciate immediately. The average useful life of a building is from 30 to 35 years. Within that period the building will fall apart without constant maintenance and replacement of mechanical systems. Interestingly, if the community wants to keep open space or to concentrate development to maximize the efficiency of mass transit system investment, the taking of locations through eminent domain and condemnation actions would -- in an environment where the full payment of rental value to the community occurs -- not require taxation or borrowing to pay private owners for the capitalized value that results from imputed and uncollected location rent.

In response to Peter Colwell's comments about the value of waiting, Caspar Davis said that, on the contrary, we seem hell-bent on extracting non-renewable resources, including the dwindling supply of hydrocarbons on which we have become dependent, at as close to an infinitely fast pace as we can. Even during the current "glut" (reflecting reduced consumption because of the unfolding crash) Davis didn't think many people were sitting on oil waiting for the price to go up; he understood that Saudi Arabia had explicitly refused to do so. Unlike nonrenewable resources, land is very seldom "used up." And the fact that it is used for one thing does not preclude other uses. As for speculatively setting aside a piece of land to prevent spatially continuous development, which might require that houses be torn down later so something with a higher use could be built, Davis said that there might well be sufficient benefit from living in the houses until a church (or whatever) is needed to justify building them even if a church is envisioned eventually, especially in this era of planned obsolescence when buildings are expected to last only a few decades at best. An alternative, as Jeff Smith suggested, is for the community to hold the land as a park or green space until the church is needed -- surely a much better use than a weed-filled vacant lot. Moreover, the presence of houses or other buildings seldom deters development where political will is generated. South Carolina had no compunction about buying (for $36.6 million) and demolishing a 1,000-acre residential neighborhood so it could lease the land to BMW for $1 a year so they could build a plant. (The total cost to South Carolina taxpayers for this and other subsidies to attract BMW will amount to $130 million over thirty years, according to David Korten.)

As for land being a thinly traded commodity, this is true only if there is little demand or (more usual) if the price is artificially elevated by speculators who are holding it off the market until their price is met, said Davis. There is risk in everything, but the risks in building on and using a piece of land, or holding it as a park, are very different (and much more socially useful) than holding it off the market to drive prices up. Speculators are ingenious at justifying their own actions but Davis does not find their (or their supporters') protestations convincing.

Colwell had asked what an overinflated price was. Davis said it was a price that is higher than the price at which a piece of land will sell within a reasonable amount of time -- which would be different in a desert than in a highly developed area. The land value tax need not equal the whole rent to work its magic -- 75% of the rent would be ample, and much less has produced almost miraculous benefits in many Pennsylvania towns and cities. Not "the state" but the community should control just allocation of land use. The revenue from land tax could easily replace most state and local taxes, including destructive sales and payroll taxes. Jeff Smith argues that the resulting surplus would pay a "geo-dividend," such as the Alaskan oil dividend. As for the study in Northern Russia, about which Colwell mentioned the contingent land tax liability being modest relative to rental value (deduced as about 40% of the net return from farming): 40% of net income didn't strike Davis as modest. And the Development Land Tax introduced and repeated in the U.K. was very different from a land value tax, which must be paid as long as the land is held.

As an urban planner, said Alain Bertaud, he supported Peter Colwell's defense of speculation but thought most of their colleagues would strongly disagree. (Fischel also did a good piece on the subject in THE ECONOMICS OF ZONING.) In a city without land speculation, how would land prices be established when sellers were limited to those who owned land in the immediate narrow fringe of the built-up area? Land prices, because of limited supply, would escalate, and in the long run would probably run into a positive density gradient (or at least a flat gradient, as in Seoul, where the strictly enforced greenbelt serves as a chastity belt for speculation).

Omar Razzaz agreed with Colwell about the benefits of speculation. Speculators, betting that the future value of land in real terms would be higher than its current one, take risks, can get burned, and frequently do, as we see in East Asia). But at what point does a speculator or group of speculators gain "market power" and stop being simply "price takers." Do any studies show this, so we can put the issue of speculation to rest empirically rather than theoretically? (Obviously it would be hard to do in urban areas.) Razzaz did wonder how speculation increased liquidity. Also, did it necessarily reduce volatility? It seemed to Razzaz that one of the acceptable costs of speculation is that every now and then speculators think prices will keep beating inflation and when they realize they do not, there might be a bandwagon effect and thus volatility.

Roy Langston asked if "waiting for a better use" was the same as "waiting for government to increase the value of the land through upgraded zoning." It is especially pleasant, he said to Colwell, to live on a large lot when the government didn't charge for the full value it created in the lot. The point about the land value tax, he said, is that the land user pays the same total of landlord-pocketed land rent and passed-on land tax. What the land tax does is reduce -- without any associated economic penalty -- the taxes of the user and everybody else.

Anything a speculator can do, said Jeffery Smith, a land value tax can do better and at less cost. Cities have vacant lots surrounded by fences, filled with wind-blown trash. For this we should be thankful? A more rational approach might be to levy an LVT, drive down the price of land, then buy up what we want to set aside for public use. Speculation holds down volatility? It didn't do so in Asia recently. A more rational approach to calming the boom-bust cycle would be to socialize public rents that attach to land, keeping prices low (even as rents may rise). Rather than imagine a city with land taxes, check out the cities that do have land taxes -- such as Sydney -- or those existing on public land -- such as Canberra, Hong Kong, or the Port District of San Diego. These places do not all charge the same amount for every parcel; they charge relative to market value. If land price is still capitalized rent, the rent must be known before price can be. And rent does not depend on who owns the land. Much more land is available for sale or new use than just the fringe. In most cities at least a quarter of the area is vacant or underused. Ask any assessor. With a land tax, owners of underused sites would be motivated to put their land to better use or to sell to someone who would -- which increases, not decreases the supply. The owners would lose land collateral, a value they did not create, but they would gain untaxed homes, income, sales, and savings. It's a win/win for everyone in the long run and for 75% in the short run. The only potential losers are lenders, who would have to re-adapt to pre-World War II lending rates. We can agree that if society collects its due -- land rent and other rents -- what changes is not how much one pays so much as to whom -- to one's neighbors instead of to a private owners.

Richard Green asked Smith a practical question. He assumed the idea was to tax the land rent based on highest and best use. But without a market price for land (presumably the idea is to get land values to zero), how do we determine what highest and best use is? And so how do we know what tax to levy?

Smith responded that price, capitalized rent, does not give you any more info than if you had only rents. Land's value (unrealized rent) must be known before the rent, price, or tax can be set. People do bid on land -- private or public -- all the time. The bidder's notion of value merely measures the kinds and amounts of economic activity going on around the site. Any parcel has a set value at any one point in time. If tax goes up, price must come down, but value stays the same. If tax goes down, price is allowed to rise, but value stays the same. So realized value (rent) can always be channeled to the owner through price or to the community through dues (tax, fee, liturgy, etc). Which you choose -- putting public values into the public treasury or into private pockets -- will affect how fast that parcel's value changes.

Mason Gaffney, also in response to Green, gave three answers: (1) In practice, it is rare to get land tax rates high enough to lower selling prices to zero. Even if the current tax absorbs the full current net product, or rent, sanguine investors will still pay prices based on forecasts above-average in optimism, including an expectation that they may get tax rates lowered in the future. (2) If zero selling prices should occur, there are two solutions: (A) Base the tax on a current appraisal of annual values, as is done in England anyway. (B) Include the capitalized tax flow as part of the tax base, which would of course involve lowering the tax rate a great deal, to avoid exceeding the net product. If we agree that it is a good idea to base taxes on the net product of land, there are ways to do it (as there are ways to implement all kinds of things, if we really want to). One can throw up dozens of problems, real and imagined whatever the plan. The question is always, what goal does one seek?

In response to Smith, Colwell said he was willing to stipulate that the government could provide the speculative function -- but was it likely to do so well and at low cost? Speculators sometimes make terrible mistakes but they are punished for their mistakes: They suffer losses and they try something else. When a government makes a mistake it usually decides that if it just did more of the same things would improve. Some (not Colwell) might believe that government has wisdom that private parties don't have and will act on that wisdom and allow the appropriate waiting time. But blaming speculators for wind-blown trash on vacant city lots is silly. The biggest trash problems are on lots that have become public properties through tax default. Does that bode well for government undertaking the role of speculator? The big speculators Colwell has known try to keep their properties occupied with low-capital activities such as farming and parking lots.

There must be a better way than putting public values into the pockets of private speculators, responded Jeffery Smith. Because markets are efficient, do put land into markets -- which socializing its publicly generated values does. Because governments are not reliable, constrain their power to tax; let them just go after rent, preferably with fees. LVT takes only the market value of a parcel. If you see value in holding a site out of use, why insist upon paying less than the cost to do so? LVT asks only that you pay what it's worth to speculate.

Responding to Smith, Edward Dodson said that the implementation of a tax shift from improvements to locations made over time would not harm lenders. Lenders have by necessity reduced down-payment requirements to make home ownership more widely available to households whose savings have not kept pace with housing prices. Scheduled shifts over, say, 15 years, would be smoothly absorbed by shifts in investment decisions by large-scale investors seeking a market or better-than-market ROI. Dodson would like to see a detailed study of housing price changes over time in the communities that have at least partially shifted the tax burden to locations. Harrisburg, Pennsylvania, for example, implemented such a shift about ten years ago. Dodson's understanding is that the increase in demand for land kept land prices up but the reduced tax burden on improvements led to new construction and rehabilitation. So the median price of housing in Harrisburg has risen over time but remained affordable for those at 100% of the HUD area median and below, the group generally eligible for down payment, closing cost, and rehab grant assistance.

Alain Bertaud told Jeff Smith he agreed about the underuse of land in most cities and had no problem with a land tax per se but doubted that it was possible or even desirable to adjust the tax to the full value of land. Often the largest land owners are government or quasi-government bodies such as railway companies (whose landholdings in India and Bangladesh, for example, are great). If the army, the police, and the government were taxed equally on the value of the land they occupy, something interesting might happen.

The word "speculation" has more connotation (baggage) than denotation, said Mason Gaffney. Whoever holds title to land is speculating; it goes with the territory. There are two parts to land value: the value derived from current (first-generation) use) and the resale value, representing value derived from all future time. The question is, what tax system will induce landowners to put the resource to the best use, considering intertemporal dependencies? Reducing it to that might resolve differences more easily -- it becomes a matter of maximizing net present value.

In response to questions about speculators reducing volatility, Colwell said that while some speculators have been active in various Asian markets which have experienced extreme volatility, it is not necessarily the case that speculation caused this volatility. Would volatility have been less or more if speculators had not been involved? Speculators try to guess future spot prices, enter the market in the present, and bid for assets they believe will rise in price. This activity raises current prices -- that is, decreases the difference between current and future prices. Of course, going short in property markets in which the speculator believes prices are dropping is very difficult, but that is a limit of current institutions, not a criticism of speculators per se.

Mason Gaffney said that Nic Tideman had addressed the issue of speculation in a piece in the NTJ about 10 years ago. Working from conventional neoclassical premises (being a Chicago Ph.D.), Tideman acknowledged that there might be optimal "waiting," as Colwell posits, but showed that a tax on site value is neutral as to the timing of durable improvements. When we get into cash-flow effects, income effects, wealth effects, etc., the picture may change. Gaffney's observations of friends and relatives who sit on land for long periods leads him to think that one must look to highly noncommercial explanations for what actually happens (or doesn't). Neoclassical premises may serve us ill when decisions are dominated by inner psychology (we all have war stories there). A good beginning is the section of Thorstein Veblen's ABSENTEE OWNERSHIP on "The American Farmer."

Peter Colwell responded that in the case of a 100% site value tax -- which he had posited only to discuss a pure case -- there can be no private speculative function. The site value tax is a clever device, said Colwell, but there are many things it does not do. He will not await what must be a deus ex machina from Nic to get dynamic neutrality in the face of a 100% site value tax. In most static (and comparative static) models, site value taxation is allocatively neutral (especially in the long run), which is neat -- but it is useful to explore the problem areas. He had highlighted one; there are others. He took Gaffney's point that someone may so want to be a farmer, say, that he will subsidize his farming operation by draining off the farm work schedule. Thus the farm is not converted to a residential subdivision when it would otherwise have been. Or someone just can't bring himself to leave the family farm. Those are probably the kinds of stories Gaffney has in mind. He sees no societal problems there (maybe personal problems); those personal values are meaningful and should be respected. It might interest Gaffney to know that certain federal agencies, in cahoots with an appraisal trade association, are trying to say that the value that grows out of somebody owning a conservation property cannot claim that its conservation value should be considered (as in a taking). Bill Kinnard of the Real Estate Consulting Group of Connecticut would have the details.

In practice, said Mason Gaffney, some landowners, faced with a high site value tax, still speculate on the probability that the tax will not keep up with the current economic value. Their % gains from a small fall in the tax rate are extremely high, and their political motivation is equally high. Gaffney understood what Colwell was saying, but the idea of a 100% tax that will remain 100% in perpetuity is a theoretical construct with little counterpart in real life. (Nic Tideman's thesis is based on the same premises so Colwell should find it germane.)

Adam Monroe had hit the nail on the head, said Tony O'Brien. Economists must recognize that (1) land is a separate element in the economic equation, not part of wealth or capital and (2) not to consider the private appropriation of economic rent is to render a discussion useless. The question of private appropriation of rent is central and any proposed solution that ignores it will fail. In his country, Australia, a simple site rent charge would, at 10% of current unimproved site and resource values, generate more than $100 billion in revenue, enough to fund all of the infrastructure and social services government should provide. No doubt similar ratios between site values and revenue requirements apply in most countries. The cost of government would be vastly reduced if vast armies of tax lawyers, accountants, collectors, checkers, investigators, and enforcers were no longer required. Liberated from government employ, they could practice their entrepreneurial skills in a free, open, untaxed market. Those clerical battalions could become wealth producers instead of consumers. In this system, the community would agree to forego public access to a site, natural resource, or asset in return for a public assessed annual payment by the user. This rent would initially be set at 10% of the unimproved value. Implementation would be simple but dramatic. There would be initial panic among those whose income derives from economic rent in one form or another but even those people would see the benefits to the economy and society of such a radical change. Violently opposing the scheme would be those the bulk of whose income is from the appropriation of economic rent through monopolistic holdings of land, resources, or exclusive licenses, as their positions wold be threatened and they would have to rely on skill and effort to produce income. Such a measure would force people to live on earnings, not incomes.

The rate would be struck on its raw (economic rent) value, its value as an unimproved site -- less all buildings and improvements, said O'Brien. The asking price for unimproved or underused land and resources would probably fall dramatically when the site/resource rent system was introduced and within a year would drop to zero as the supply of sites outstripped demand. At that point, site/resource rent would be the sole source of government revenue. The occupiers would enjoy exclusive use of the site as long as they continued to reimburse the community for the benefits their exclusive access gave them. In that way, the value created by the community presence -- the economic rent -- would be returned to the community as government revenue. The occupiers would have complete security of tenure so long as they paid the economic rent. What could be simpler or more just? Site rents would not come just from land or mine sites. All natural resources have a natural value and those resources belong to all people. Individuals wishing exclusive use or occupation of any of them must pay the community or the country for that use. Land and resource rentals would be levied on all privately or corporate-owned resources including all

residential, commercial and industrial sites

agricultural and grazing lands

dock, rail, bus, and airport sites

underground water resources

dam and reservoir sites

exclusive access to parking spaces

fishing grounds

forest sites

minerals, oil, gas, and other natural resources

electronic, microwave, television, and radio wave bands

satellite orbit paths

shipping and air transport routes.

Rents from all these resources are the natural income source for all nations, said O'Brien. Systems for assessing and collecting the community site rent already exist in most countries, including Australia. Unrestricted public bidding would be used to value sites or resources. Valuations would be regularly updated by professionals and open to public scrutiny at all times. Local authorities would handle notification and collection of site rents with no more difficulty than is now associated with notification of shire or council rates or property taxes. Revenue from site rents would more than replace all the direct and indirect taxes that currently burden labor and impede and punish labor.

As for Peter Colwell's defense of land speculation, in O'Brien's adoptive country, Australia, aboriginal societies managed to survive and develop for 60,000 thousand years before the first property speculator introduced himself to them. Speculators hardly have altruistic motives in speculating; they buy a site because they expect it to be more profitable than other investment opportunities available to them. And far better than protecting against spatially continuous development by preserving parcels of undeveloped land would be to build on the site now to satisfy current demand and then demolish and develop it later when a better use turns up. What if three-quarters of New York or London had been held vacant for the last few hundred years awaiting divine revelation? As for the alternative, the leapfrog development being forced on weak-minded administrations by land speculators' activities, it's easy to see which approach benefits society more. The "leapfrog" and "ribbon" development patterns seen in almost every town and city in the world cause untold hardship, disruption, wasted resources, inefficiency, and massive squandering of wealth -- thousands of kilometers of unnecessary motorways and highways, all the excess infrastructure (sewers, communication cables), millions of hours lost commuting, millions of liters of fuel up in smoke, higher prices for consumer goods because of extra transport costs, billions of cubic meters of pollution, environments destroyed by extracting excessive resources, frazzled and sometimes homicidal tempers in traffic snarls. Need he go on? All this, while the speculator sits benignly dreaming of the best future use of his site. The altruistic speculator would never lean on the local council or city administration to alter zoning, change the traffic flow around the site, or fund a nearby multi-story carpark to boost his site's value.

Property speculators gamble, at very short odds (better than for many stockmarket alternatives) that the value of their holdings will increase faster than will alternative options. Unless they help fund development on the site, they are not producing anything yet their gain comes from the site's increased value, which is a direct result of local community and government activity. The community pays pay for the infrastructure and the speculators pocket the wealth. Property speculation exists because we accept the notion that people can own land. Land is no more ownable than air and water. Who owns the Atlantic Ocean? Who owns the sky? Property speculation, which confiscates wealth created by others, is ethically unsupportable.

Bryan Kavanagh agreed that speculation was a dead weight on society, with no saving grace. He did not see speculators as bogeymen, however; they followed fairly logically the dictates of a perverse tax system. That week, following the release of good GDP growth figures, Australians congratulated themselves on not succumbing to the "Asian contagion." But a sharp spike in real estate sales showed that real estate speculation was alive and well and outperforming the economy. They would probably witness the usual economic denouement in the wake of a real estate collapse in the next few months. Meanwhile, Australian banks were falling over each other lending more on real estate.

Mason Gaffney agreed with O'Brien and Monroe that the World Bank should promote heavy taxing of land values but wanted to put a different spin on it. When the World Bank and other establishment organizations preach "liberalization," they mean free markets and laissez-faire but contradictorily they insist on high taxes on exchange, income, payrolls, consumption, and the like. They go even further, calling for "tax harmonization," by which high-tax nations bully low-tax nations into raising their rates on income tax and/or VAT, so they won't embarrass the high tax nations. True trade liberalization and laissez-faire economics (as the French Physiocrats meant it) would require ending repressive, distortionary taxes. This could be done by taxing the value of land.

Gaffney gave O'Brien credit to focusing on a central issue. Those who rationalize holding land from its highest use on the grounds that next year's use will be higher yet need to come up with a model of optimal timing against which to compare what happens in the brawl of real life. Faced with rising demand and the need to build fixed-scale units all at once, to last about 50 years, one should probably begin by overbuilding for the current market and anticipating having undercapacity and obsolescence for some later market -- say, years 35-49. If the demand curve shifts continuously to the right during that period, there is only one brief moment when the improvement is optimal for current demand. To solve this interesting optimizing problem one needs a balanced model that acknowledges forces favoring early overcapacity as well as forces bidding that the owner wait, without building anything. Until we have such a model (at least roughly in mind), spirited debate will not solve the optimal timing problem. But one relevant principle need not wait: Taxes levied on improvement or on activities complementary to improvements (such as related office work) bias the timing, favoring deferral over current improvement. Taxes that vary with the use to which land is put bias owners against uses that are more heavily taxed -- which means they are biased in favor of deferring improvement past the socially optimal (pre-tax) time, the time that will maximize the net present value of the sum of private and public revenues. This aspect of the excess tax burden hinders supply. It disturbs Gaffney that economists hasten to fault land-value taxes for inducing premature improvement (which is doubtful) without balancing that by noting how most other taxes induce post-mature improvement (which is not at all doubtful). The issues are related because to get rid of the burdensome taxes requires turning to the less burdensome ones. He made an analogy (drawing on Ely's "ripening costs" rationale) about the decision whether to buy a computer this year, knowing they will be cheaper next year. How many of us do the calculus and then take the plunge anyway? Time is costly and land services perish with time, used or not.

O'Brien's proposal is typical of today's advocates of the single tax proposed by Henry George a century ago, said Alfred Anderson, whose main concern, as founder of the Tom Paine Institute, is sustainable justice, extending to future generations. All around the world billions of people are getting poorer while an elite few get super rich, largely through a near-monopoly "private" ownership of our natural common heritage. He believed true economic justice would put an end to poverty around the world. World poverty in the midst of superaffluence is the result of injustice about access to nature, including land and natural resources. Taxing land at full market value would put an end to the land speculation that increases poverty but a land tax is not enough. He agreed with Georgists that natural capital should not be privately owned but should be held in some form of common-heritage trust. Some such trusts (covering the seas, atmosphere, and cyberspace) should be global and some local. Nonrenewable resources (such as fossil fuels) should be sold outright at a sustainable rate but the income from such sales should not be used to finance government operations nor distributed to the people (as Alaska does). Rather, that income should be used to provide alternative energy and other resources to replace and remedy for future generations what past generations have depleted. Renewable resources, such as land surface and air space (as used by skyscrapers and airplanes), should be leased out at whatever value would generate the most revenue for each trust. He agrees with Georgists that such a policy would largely prevent profiteering through land speculation and political manipulation of zoning favorable to speculators and exploitative of poor people. He disagreed with Georgists about using such leasing income to finance government operations, as it was fairer to distribute financial and other benefits to all the earth's residents (including nonhumans, who need livable habitats rather than money), after subtracting for administrative costs. He estimated the average family of four in the U.S. would receive $36,000 as a right, in addition to receiving a fairer wage or salary through basic-income bargaining. Those currently on "welfare" would received social services and benefit from safety nets not as "welfare" but as "substitute rights," compensation for common-heritage rights that had been denied in past. These rights would be paid for by those who have benefited from inheritance and passive wealth. Government operations should not be financed from sales or leasing of common heritage rights.

Mason Gaffney agreed with Anderson that natural capital (land and natural resources) should not be privately owned but should be held in some form of common-heritage trusts, but said that was not what Henry George had proposed, nor was it what Tony O'Brien proposed. O'Brien had proposed a 10% ad valorem tax on land held privately.

Activists in the trenches of economic redevelopment and affordable housing are not familiar with economic theory but instinctively try to gain control over community assets, especially land, says Edward Dodson. They are not interested in collecting ground rent from titleholders; the see the solution as community land trusts to acquire as much land as possible, to keep it out of the private market forever. They then lease that land to homeowners at a ground rent significantly below what the private market would charge, to households that meet tests of modest household income and assets. Consider, for example, people who for generations have lived in sparsely populated areas near mountains, areas that in recent decades have become the playgrounds of the well-to-do. Land prices within reasonable commuting distance of these mountain resorts have climbed so high that families with six-figure incomes cannot afford even modest homes there without grant assistance or subsidies of land purchase or construction. Land trust Activists see the private land market as inherently destructive. They pursue land trusts to preserve open space and land for agricultural and other uses counter to "highest and best use." They do not consider large second homes for absentee owners to be highest and best use.

In this imperfect world, responded Mason Gaffney, market forces do not necessarily allocate land to the socially highest use partly because (1) both income tax and capital gains taxes exempt the imputed income of owner-occupied lands, letting owners deduct the cost of ownership, and (2) cap rates vary among individuals. Rich folks moving into poor mountain areas have deeper pockets than the hillbillies they displace, can borrow for longer terms at lower rates, and put up whatever equity is needed to get those loans. Some don't need to borrow at all and operate with low internal cap rates. The annual cost of holding land at a given market price is lower for those with more equity and better credit.

One effect of a high land tax, to the extent that it is capitalized into lower prices, is that it weakens effects that favor the rich. It is as though new buyers borrow in perpetuity and pay interest on the debt in annual installments -- and the same loan terms and rates apply for everyone. The land tax accomplishes as a byproduct what all our costly apparatus of subsidized lending seeks, but generally fails, to accomplish.

Adam Monroe apologized for having seemed to be condemning land speculators or accusing them of unseemly behavior. Just as he would not condemn the poor for stealing from the rich, rising in rebellion, nationalizing the products of the work of outsiders, or cutting the throats of their oppressors, neither would he condemn land speculators, who rarely do anything as frightful as the poor, for doing the best they can with the situation they are given. The tax system in most nations rewards land speculation above nearly any other method of accumulating wealth; under those circumstances it makes sense to speculate in land. It is quite another thing to believe that it is good for land prices to rise relative to other commodities. Land is essential for every human being and form of business; its use is not optional. So the higher the relative price of land, the higher the cost of living and doing business. Why should life or trade be made more difficult than necessary? As for buying low and selling high, he does so himself at every reasonable opportunity. He once purchased a painting for $75, sold it for $4,000, and was not in the least ashamed. What he objects to is tax systems that reward waste and punish productivity, that give one group an unfair advantage over another or to any degree make one group slaves to another. Everyone must do the best they can with what they have; to fail to do so can be spiritually mortifying. But to win an unfair fight or to leave the world a worse place than it was before is no spiritual blessing.

If speculation does something for society, Monroe said he would be eager to learn of it; until then, he considers it a drain on productive activities. Speculation is certainly not unprofitable and is not done out of the good of the speculator's heart. Moreover, he did not see the downside of spatially continuous development. Urban sprawl forces the more rapid use of marginal lands; resource preservation is not aided by tax policy which rewards land speculation. And he couldn't see why the corner couldn't be put to a better use right away -- or why the market wasn't better at deciding about the better use than a speculator would be. Not to mention that the value of waiting was not always the same. (Waiting to apply the brakes when driving, for example, could result in death.) Society is plagued with landlessness, which forces people to work for starvation-level wages or resort to criminal behavior for their survival. We have drastically underestimated the social costs of maintaining the profitability of land speculation. The number of the earth's poor is growing to dangerous levels. Throughout history, growing rates of poverty have resulted in violence against the perceived oppressors. It is a safe bet that if poverty is not alleviated, this will happen again. Tax policy that rewards land speculation is poverty's main source. His complaint is about tax policy that punishes productive behavior and rewards private interests for holding land for ransom, for such policy results in poverty, hunger, crime, pollution, war, and death. Peter Colwell had made the mistake of thinking that the public collection of land's rental value means that government would somehow become a landlord, which isn't the case. Land value taxation, by reducing the profitability of holding land without using it, would decentralize land ownership, allowing more parties to participate in decision making. Market efficiency would no doubt be aided by that process. In a more open market, it is not the government or a few privileged individuals, who decide land use, as under current tax policies.

Mark Heywood had said that if you tax at rental values you eliminate the landowner's fraction and thereby any return on the landowner's skill managing land toward higher income and higher capital growth uses. Monroe responded that any financial reward for owning land beyond what might be gained through its productive use would serve to lessen that use, not increase it. Eliminating the financial rewards to land ownership in and of itself would not eliminate land ownership. The ownership of land is of far greater use to the user of the land than to anyone else. If the use of land became the primary condition of owning land, it is safe to predict that land would be put to more productive and economic use than if the only condition for owning land was, as it is now, the whim and capital for its initial purchase. Nationalizing land's rental value through land value taxation (which results in the greatest possible number of different landlords) is a far cry from nationalizing land itself (which results in the fewest). No two land policies could be further from one another. Collecting public land rent does not result in state allocation of land; the current predominant system does, by divesting the public of the increased value their presence and activity adds to land and by allowing that public money to flow, instead, into the hands of private parties with little or no financial incentive to see that their parcels are productively used. The current system causes massive inequity and waste in land appropriation and development, necessitating countless agencies, bureaus, and publicly funded occupations to stem the resultant tide of poverty, crime, pollution, hunger, war and so forth. Were land's rental value collected publicly, the degree of competition for the use of (especially urban) land parcels would reach its highest possible level, for there would be no longer any financial reward for owning land for which one has no immediate use. The private collection of land rent is the feudal system. That's why it was so clear to the Physiocrats, Adam Smith, David Ricardo, John Stuart Mill, and other classical economists -- who had had plenty of experience with aristocratic government -- that the public collection of ground rent is essential to economic fairness and efficiency. There is no free market in land when some are allowed greater access to it than others, when one segment of the populace can exact land's rental value from the rest. That is more aptly described a monopoly.

Monroe did not see see how taxing land at its full rental value would make people want to purchase land containing nonrenewable resources. If the full value of those resources were reflected in the land tax rate, owning such parcels would seem an unprofitable burden and current owners would try to divest themselves of such parcels, not accumulate them and try to exact greater profit than the market thought was there. As for land parcels containing nonrenewable resources, they had been discussing rural, not urban, land parcels. Land value taxation would cause urban (not rural) land parcels to be most intensely used. It is the profitability of land speculation that forces the price of rural parcels to rise inordinately and for rural parcels to be overused.

Monroe couldn't see what the value of waiting to develop urban land parcels was. He also could not see why land speculation reduced the bid-ask price, thereby increasing liquidity. A great amount of land speculation takes place around the world, yet he has not noticed any less haggling over the price of land than any other commodity. Moreover, incurring risk does not automatically result in any net benefit for society. And why would anyone conclude that non-landowners tend to avoid owning land? Who would choose to rent at a higher price than to own? Land speculation has given land an artificially high price, which increases the likelihood of the land price bubble bursting soon, which might make one feel not enough people were looking to purchase land these days. Without land speculation, the price of land would be decided on the open market. Eliminating land speculation would make land more available, not less, and the price of land would be lowered, not raised. Greenbelts generally force the price of land (both within and without the greenbelt) to rise because the amount of land available is limited. In Portland, Oregon, this has resulted in higher prices for basic commodities, higher property taxes for farmers, increased poverty-related crime and other social problems. He shares others' distaste for greenbelts but doesnÆt see why anyone equates greenbelting with land value taxation.

Monroe hastened to clarify that he was calling for a rental tax on land, not a sales tax. The Development Land Tax introduced by the U.K. government in the 1970s and later repealed was a sales tax, not a rental tax. A tax levied at the point of sale forces the price of the commodity higher, not lower. A tax on the ownership of a commodity for a given length of time, a rental-style tax, has the opposite effect. If it costs more to own a commodity, you cannot exact as high a price from the potential buyer. Land value tax makes land cheaper to purchase because of its rental style of collection. Every year (month, whatever) a percentage of the parcel's market value is levied against the owner. Making it less profitable to own land if you are not using it gives the advantage to the buyer rather than the seller.

As for the European standard for Open Market Value that Heywood had cited, Monroe responded that if those standards applied the same way to land as every other commodity, they were of the neoclassical school of economic thought, which is nonsensical in substance and corrupt in origin. Land is critically different from every other commodity. No person produced it yet every person must use it. Every other commodity was produced by a person and the use of every other commodity is optional, not essential. Neoclassical economists obfuscate the very soul of political economy -- the difference between natural resource and human product.

Land price bubbles lead to bank bailouts, continued Monroe, and public revenues are used for bank bailouts, so the public incurs the greatest burden when land price bubbles pop, yet it does not enjoy the profit when land prices rise. Unless the World Bank prefers to participate in such bailouts -- which he admitted might be the case -- Monroe couldn't imagine why it would not begin to recommend that nations institute a gradual shift in tax policies from taxes on wages, sales, income, and especially property improvements to taxes on land values. If participants had no argument with the following, they should have no argument with the public collection of land's rental value:

Every human being must use land in order to survive.

Taxation for the use of resources is more economical than taxation for how much wealth people produce.

All other things being equal, the lower the relative price of land, the lower the cost of living and of doing business.

Asked how land speculation reduces the bid-ask spread, Peter Colwell responded that haggling occurs where information is incomplete and commodities are thinly traded (check out the variation in bid-ask spreads across stock markets). There is little haggling about commodities that are continuously traded on easy-to-observe exchanges. There is a lot of haggling when each commodity item is different (as land is different with regard to location). Speculators provide information (thru the prices they pay) and reduce the thinness of the market. The speculative motive generates a source of demand that reflects future expectations. At any given moment, land may be sold at a price that reflects those expectations. The information that does exist (however poor in quality it may be) is contained in the prices. The existence of speculators increases the frequency of transactions and thereby provides ongoing (but far from continuous) information on market prices.

As for whether risk benefits society, Colwell responded that speculative risk exists whether or not you want to recognize it. If there were a 100% land tax and no explicit speculation, society would lose time after time if it should have retained vacant land and instead allowed it to be developed. If there is a risk, it is useful if those who can best bear the risk do so. Clearly, an equity investor and a mortgagee may share some risk. Colwell guessed that the public sector is not an especially good risk taker.

Monroe might have stumbled upon one thing on which they could agree, said Colwell: Public entities should not have to bail out the failures of private decisionmakers. That just generates goofy private decisionmaking. S&L's moved into risky investments when they realized they were essentially insolvent (close to the kink on their payout schedule) and that the government insurance would bail out the depositers. At the same time, it is important not to allow the money supply to collapse in the midst of these sorts of crises. The government sector must figure out how to keep up the money supply and, at the same time, not reward the goofy decisionmakers. The Japanese may have a problem in this regard.

Finally, Colwell took a stab at Monroe's proposition that people are better off with lower land prices. Land prices act as an allocative device. High land prices get people to use more capital per unit of land. Crowding is a mechanism that substitutes vertical for horizontal people movement and increases the amount of space (not land) per person. On the other hand, low land prices generate more extensive (less intensive) use of land. This is useful where densities are low, but a disaster for the welfare of people where densities are high. In any event, land value taxation does not lower land prices. The tax becomes the periodic price and should be about the same as the price if there were no taxation at all. He presumes this would be a corollary to the theorem that the land value tax is allocatively neutral. Proponents of land value taxation should not suggest that the price is diminished in the sense of what the ultimate land user pays.

Mason Gaffney said that Colwell's implicit assumption was that land use decisions occur in an unbiased market. In fact, said Gaffney, they are based on after-tax maximization of net present value. One of several tax biases is the deferral (and often outright forgiveness) of taxes on increments to land value. This factor makes land value gains at a certain % look more attractive than fully taxed returns at the same % rate on investments that yield "ordinary" income. To explain observed behavior we must take that into account.

Steve Malpezzi, returning to the conference after an absence, expressed surprise at how much traffic Georgist views had taken up in the debate, although George is and should be read by all serious students of land markets. For those who might not be familiar with George, he offered some background. Henry George was a 19th century U.S. social reformer whose best known work was PROGRESS AND POVERTY. By all accounts he was also a spellbinding speaker and polemicist. George, along with Ricardo and Marx, among others, took the classical view of land markets: land is in fixed supply. George reasoned that, given this fixity, a tax on land would engender no deadweight loss (the jargon is modern, not George's). Other taxes (such as income tax) distort economic decisions (such as participation in the labor force). George was careful to specify that the tax should be on land net of improvements; tax buildings or infrastructure and we're back to deadweight loss. George's interest was using this tax to fund schemes for social reform. It's not particularly fair or germane to criticize him on the grounds that government schemes may have their own deadweight losses, or that (since George's time) government spending has grown so much that even a 100-percent tax on land wouldn't fund most of it (U.S. land rents are roughly 6-8 percent of national output, a fraction that has remained roughly constant for a century; see Gregory Ingram, LAND IN PERSPECTIVE: ITS ROLE IN THE STRUCTURE OF CITIES). On the other hand, government spending is roughly 39% of GDP in the U.S. (state and local; 1993 data). Although we clearly can't use land taxes to fund all government, as George proposed,. they can be and (directly or indirectly) are significant taxes.

The neoclassical view of land is somewhat different, said Malpezzi. Although land in the aggregate is more or less inelastic (we are not going to colonize Mars anytime soon), the supply of land for a particular use is in more elastic supply. The supply of land for development in, say, Madison, Wisconsin, has some positive price elasticity (Madison can annex and expand into the surrounding countryside). Generally, the more narrowly we specify the use, the more elastic the supply. The price elasticity of supply of land for residential use in Madison is higher than that for all developed uses -- for Malpezzi's house, it is effectively infinite (he can buy all the land he could ever use in Madison without affecting the price). Malpezzi was not sure who first espoused the neoclassical view, but it pervades the writings of Richard Ratcliff, who wrote on urban land and valuation issues at Wisconsin long before Malpezzi's time.

The classical view of land markets is more relevant in the short run than the long, since in general any elasticity will be greater in the long run (the "le chatelier principle"), said Malpezzi. There are practical difficulties with implementing George's scheme. First, land must be taxed on its pure site value, net of all improvements, but we don't observe much such land -- and none in cities (which are roughly 3% of U.S. land by area but over half by value). Even vacant lots in cities are by definition serviced with infrastructure. So accurately valuing urban land truly net of improvements is impossible. Second, for George's scheme to meet the claims made for it, it must be implemented on all land that is potentially substitutable for the land in question. So even if Harrisburg (Malpezzi's home town, often cited by Georgists as one of the U.S. cities following the Georgist model), were to solve the valuation problem (which it has not), the land tax would still distort unless all surrounding jurisdictions in central Pennsylvania also adopted it. In fact, in deciding on a location, firms often consider a wide range of competing locations, so to meet the claims for it George's scheme would have to be implemented at least regionally or nationally.

Even if those objections are met, there is a serious distributional problem. George correctly identified the monopoly nature of rents when land is viewed through the classical lens, forward. But in any country with a functioning land market, most rents were appropriated in the past. Suppose I invest my retirement savings in a parcel of land, purchased today, and my friend Professor Green (with similar income and assets) invests his in the stock market. If Georgist taxation is imposed ex post, my savings are (more or less) wiped out by taxation, while Green's are untouched. This violates horizontal equity (and many violations of vertical equity would also occur, as land is so widely held in the U.S.). To capture the monopoly rents, we'd have to go after the estates of all previous owners, in proportion to growth in land value during their holding period, suitably discounted. And that is not practical.

It could be argued that in transition economies those rents have not yet been appropriated, and hence should be. That is the thrust of the well-known Georgist prescription for the Soviet Union drafted by Nicolas Tideman and signed by an impressive number of economists, including four Nobel laureates. That these ideas seemed reasonable to a number of those asked to sign suggests their power. But in Russia and other countries of the former Soviet Union, another important practical problem dominates all others. Continued government control of the allocation of land (as opposed to market allocation) is a powerful lever to give the remnants of the nomenklatura. There are good and bad ways to privatize, as we all understand now (the Czech experience or the infamous Russian "loans for shares" deals are examples of how not to do it; see the 1996 WORLD DEVELOPMENT REPORT for an overview). Few of these countries have the technical capacity or the political will to institute transparent public systems of land allocation that would in effect auction the leases (land to those with the most productive plans for it, subject to control of identifiable externalities through an appropriate regulatory regime). Many observers closer to the Russian scene than Malpezzi have made this point forcefully (among them, Olga Kaganova of the Urban Institute).

Even if all these objections were met, another important problem remains. If textbook Georgist taxation, at 100 percent of land rents, were imposed, what would happen to the incentive to hold land? Eventually all land would devolve to the government, since no private entity would choose to own it. Rather than tax owners, then, the logical outcome of a true Georgist policy would be public ownership, with land leased to users at rents that ideally approximate the Georgist tax. Consider this proposition further. If we tax away all the return to land, how do we allocate more valuable land to more efficient uses? What's the incentive for owning land if you can't make any money from it? It could be argued that if the tax is levied as if land were efficiently used, landowners would have to use land efficiently to avoid losses, which would lead to efficient allocation. But this in turn would lead to land becoming "radioactive": like plutonium, who'd want to own it, if it harms you (financially) unless you exert positive effort to keep losses at zero? It could be argued that capitalists would accept this zero return because they can't make any returns on other factors of production without some place to put them (which is true enough). Which leads to another issue about land's supply elasticity and substitutability that arises from the neoclassical production function. If there are n factors of production, only n-1 must be available in varying amounts to permit substitution among inputs. That is, even if land IS in fixed supply, for the purposes of the model, taxing land and not other capital and not labor will distort the capital/land and labor/land ratios. Back to deadweight losses.

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