Why’s the Land Value Tax Progressive?

A few months ago I was asked what’s so progressive about the land value tax by a skeptical progressive friend, and ever since I’ve been kicking myself for responding with what now sounds to me in retrospect like kind of a weak case. I don’t think I was very persuasive so let’s try this again.

One theme I’ve heard from various progressive writers in the wake of the financial crisis is that we need to get back to an economy that rewards people who make stuff. There’s something inequitable about an economy where the financial sector is allowed to capture all the nation’s income through financial alchemy and speculation, while people working hard in the real economy continue to see their real wages stagnate.

The land value tax is a way to apply these political values at the local level. Instead of rewarding people for speculating in land and treating it like a financial instrument, LVT would reward the people who are making stuff – putting their small piece of the city into productive use as a house, or an income-generating property like an office or apartments, or a restaurant, etc.

The property owners who spend their time and money improving their properties are literally adding value to the city. They are improving the land values in their neighborhoods, and growing the tax base for city services.
Lot owners who hold land off the market for development for a long time while the neighborhood prospers benefit from their neighbors’ hard work via rising land values, but contribute nothing to the real economy.

This is the opposite of the Job Creators story. The people who are the Job Creators of this economy are not a handful of rich bankers, but the hundreds of thousands of people of varying incomes making small improvements to their properties and un-blighting their neighborhoods. The big developers banking land for skyscrapers and megaprojects aren’t the only people who matter. Let them pay the carrying cost of landbanking while regular people make thousands of small untaxed improvements to their neighborhoods.

This is an especially important issue in light of recent debates in the left wonkosphere about whether automation and robots will increase inequality, with capital grabbing an ever larger share of the nation’s income from labor.

That looks to be what’s happening, but as Matt Yglesias points out, you really need to separate “capital” out into its component parts:

“Capital” for these purposes includes what the classical economists would have considered “land”—the valuable dirt that hosts San Francisco houses, buildings and North Dakota oil wells. It also includes intellectual property. It also includes, of course, the stuff that a classical economist would have recognized as “capital”—machines used in the production process. I continue to think that conservatives are write to believe that the tax code should in fact favor the accumulation of production equipment rather than the accumulation of consumption goods. But land and natural resource extraction should almost certainly be taxed much more heavily (it’s in Ricardo) and we should be acting more decisively to make municipal policy less biased toward creating land scarcity.

The idea here is that if a greater and greater share of the nation’s wealth will accrue to land, leaving less and less for wages, then the ticket to achieving a less unequal distribution of wealth is by taxing land values. The land value tax is going to be an increasingly effective tool for curbing inequality in the future. Democratic-leaning cities and egalitarian-minded activists need to be all over this!