Do you have more details on how these land leases would be distributed? In particular, if there is a current leaser who has the right to use the land, how does someone else acquire that lease? By persuading the current leaser? Or by persuading the city's land authority? I see potential problems either way.
Thanks for reading and thanks for the great question!
The leases would be fully transferable, so in the case where someone wanted to acquire a particular piece of already leased land/building, they would have to purchase it from the current lessee. The "catch" is that the value of these ground leases should approach zero (just like how with a LVT the buying/selling price of the land approaches zero). So in that event the purchaser is paying just the structure on the land, and then assuming the future ground lease payments.
The only instance the city could "take a lease back" is in the event of default/non payment or breach of the lease in some other material way. Thanks again for reading!
Thanks for your response, and sorry for my delay here.
How is the cost of transferring the lease determined? Presumably it’s a price agreed upon between the current leasee and the buyer. In that case, wouldn’t the price of the transfer implicitly contain within it the value of the land? And then we’re back to square one.
The only way I could see this working is if the monthly payment to the city the leasee pays varies based on the value of land. Is that right? And if yes, who determines the size of this monthly payment?
"the monthly payment to the city the leasee pays varies based on the value of land" - this is exactly it! I didn't get much into the land appraisal process in this post in the name of time, but you're exactly right. Each year the land is reappraised and the ground rent is adjusted accordingly. The ground rent would be priced using a cap rate on the land value - so if the land appraised for $1M and our current cap rate was 5%, the ground rent would be $50,000.
There are a few practical matters here. One is that it would probably be prudent for developers to request some cap on annual increases in ground rent so they can have some certainty. I think this is a reasonable concession to make, especially early on. How the cap rate gets set is another matter. One thought I've had is it could be based on some market rate of interest, like the current AAA Corporate bond yield. (currently around 5%)
The goal (just like with LVT) is to get the ground rent charged by the lease as close to 100% of the annual ground rent of the land so that if the lease is transferred its value is 0. It would probably be hard to get exactly there, but that's the goal.
Like you point out, if you only charge some nominal amount for the lease then that land value accrues to the market value of the lease, which is the same situation as today. I think this is kind of the issue in Amsterdam where they do use a ground lease system, but the rent payments are fairly low and fixed so the private leaseholders still capture the land value and real estate tends to get quite expensive.
Thank you for the wonderful questions and comments!!
"Ownership of those shares entitles you to a proportional slice of everything the Commonwealth City owns today (all the land within the city) and to a proportion of all future ground rents it collects."
I have always been interested in Georgism and LVTs for a few reasons. They align incentives for capital allocators in government. They have no deadweight loss vs other kinds of tax, and have a natural check on overreach if tax rates go too high. And in particular, they stop land from stealing from labor and capital; everyone benefits from the value that everyone creates together.
On this last point - "everyone" - would suggest to me that a corporate shareholder structure might get complicated.
Who is and is not an owner? How does one acquire shares? By paying for them, or by moving into the area, or both? Would shareholders be permitted to own shares in the Commonwealth City without living there?
Isaiah, thanks so much for reading! Your points about Georgism and LVT are spot on - that is why I'm so keen on seeing them implemented through some means other than a tax. I think an opt-in model like this would produce a truly better day to day life for folks, all while capturing the benefits you outlined.
You raise an excellent point. If the shareholder structure isn't thoroughly thought through then you risk ending up in situations with a lot of the same principal-agent problems of public companies today. My thinking right now is that residency in the city for at least some portion of the year - 3 to 6 months - is a requirement for share ownership. So no, there cannot be "absentee" ownership because the whole idea is that it's the presence of the community there that produces value, and the value they create should accrue entirely to them. Absentee owners would have skewed interests relating to how to reinvest ground rents: they would likely prefer a dividend to investment in a new park or transit system since they don't live there.
Re: share acquisition, yes anyone moving into or living in the city can buy shares as desired. I think early on there is a case to be made for the City issuing new shares to acquire new residents. The proposition would be very much like share issuance today: If the value we receive in new resident (Their LTV essentially) is greater than the cost to issue the shares then its a NPV positive investment for the city. So if you move you get $XX,XXX worth of shares. This is not unlike remote work incentive programs today that give cash to remote workers for expanding their tax base: remoteshoals.com. It is also not unlike a company issuing stock to purchase another company. They don't always do this in a truly value-creating way (often acquisitions destroy value) but that's the idea at least.
Thanks again for reading and appreciate the questions! If any more pop up would love to discuss further!
Let's imagine two Commonwealth Cities that spring up in some currently "useless" wilderness area outside of Tucson, Arizona.
Both commonwealth cities own all of their underlying land, and make rational and efficient and maximally productive and solvent infrastructure investments with the ground rents from efficient land-value taxes.
One city is called Dividend Springs. All rents are immediately sent as a UBI to shareholders, so the commonwealth is essentially a pass-through after covering mandatory debt service and routine city administrative costs. The shareholders could look at the infrastructure projects that might add to the value of their UBI in the long run, and when appropriate, vote independently for the commonwealth to issue debt or equity to fund those projects.
Another city is called Capital Canyon. After mandatory debt service and administrative costs are covered, cash flows are directed to all productive capital investments available to the commonwealth (no UBI or dividends, unless there is truly nothing productive remaining to be done by the commonwealth). Some kind of centralized committee (analogous to "management") makes the capital allocation decisions, and shareholders exercise high-level governance via standard Board elections and the occasional activist campaign or referendum if things go off the rails.
Both cities can align the interests of government and shareholders to make productive and efficient infrastructure decisions. Both can manage unique perils in governance, whether of a defective centralized management team in Capital Canyon, or of free riders and unsophisticated investors in Dividend Springs.
In my view, the central challenge is the gravity well of land owners swallowing value they don't "earn" in the way that labor and capital earns a return.
If there is a land rush, and I and other shrewd investors buy up all the shares in Dividend Springs cheaply before everyone moves in, the same exploitative dynamic exists; instead of the $ accruing to the illiquid value of my land holdings, I'll accrue steadily increasing dividends based on both the commonwealth's infrastructure investments, and the capital and labor that is invested on top of and nearby that land.
Unless we can fairly calculate individual contributions to LVT (which is an impossible task) I think the safest approach is to:
1. Require some kind of "buy-in" payment to cover the LVT-funded infrastructure costs of joining the commonwealth city; covering admin, traffic, sewer, schools, etc. - large enough to avoid free-riding, small enough to make NIMBYs really unhappy
2. Once you're "in" you are a shareholder, pro rata based on the full-time resident population of the commonwealth city (defined as residing within the borders of the commonwealth's land)
3. If you choose to spend half the year living elsewhere, your ownership is reduced by half; if you rent your home out on Airbnb for half the year, presumably your guests can also participate in the Commonwealth for the period they are present?
This structure would "punish" those who might be able to contribute significantly to land values even if they aren't physically present. And it restrains the city from issuing equity (which at the early stages, could make liftoff a bit difficult). I believe the benefits of alignment with your neighbors day-to-day and year-to-year wealth creation would outweigh these downsides in the long run.
First of all, I love “Dividend Springs” and “Capital Canyon” as residential development names! 😂 And love your thoughts overall.
This is a good point, and in some sense one could trade a lot of capital on the front end for a lot of land value without creating any of that value. Would a cap on ownership solve this? My thought had been: new residents can be issued a baseline level of equity at move in (again assuming the city wants to grow and the value of the new resident > value of equity being issued).
But any resident is free to purchase more on the secondary market. I think this is important because it allows people to more heavily align themselves with the city overall if they want to. As an example, let’s say I’m an entrepreneur with a fast growing startup. I may want to move to the city specifically because the growth of my company will also create a lot of land value. Instead of landowners taking a larger % of the value my company creates (as would be the case in any city today), I want myself and my employees to benefit from it instead. So I think it makes sense to let that entrepreneur increase his or her exposure and benefit from some of the value created.
It’s not land speculation because there’s nothing speculative about it - it is buying more of a productive asset that I am a contributing member of. Not unlike buying stock in my own company. BUT There should absolutely be a limit because you don’t want one person with 25%+ of the entire thing.
The buy-in payment you mention could be as simple as buying a certain number of shares on the open market - because in theory the market value of the shares should approximate the value of the land. That said, the market price could fluctuate pretty wildly, which could strengthen the case for issuing it directly to new residents. I like this approach because it maps to the way land value works - each new resident increases the value of the land in a city by X on average. If the city issues 20% of the value created by moving there in equity, then you have a sustainable growth model as your LTV is 5x your CAC.
The residency piece is a hard question. Ideally it’s as granular as possible - if I live there for six months then I only get to keep six months worth of value created. but this comes back to the idea that it’s impossible to measure individual contributions. What if I own a business in the city that is creating dozens of jobs? I’m still partially creating land value while I’m not there, so I don’t know that you could adjust ownership based on where I happen to be, beyond setting some minimum time like is done today for tax residency. I'm not at all against the idea, but I just haven't been able to see how it could practically be implemented.
I am going to think on the point around concentration risk some more because I think you're right - that's a big risk. Thank you again for your wonderful comments!
"But any resident is free to purchase more on the secondary market. I think this is important because it allows people to more heavily align themselves with the city overall if they want to. As an example, let’s say I’m an entrepreneur with a fast growing startup. I may want to move to the city specifically because the growth of my company will also create a lot of land value."
I don't follow you here. The same argument would support a traditional land ownership-based investment model. For example, before a big California tech company announces that they are moving their headquarters to Austin, the executives buy a bunch of land and property in the area. Isn't the point of Georgism that this is a kind of unjust capture? That the land acts as a gravity well that unfairly takes from the capital and labor around it?
"It's not land speculation because there's nothing speculative about it"
I disagree. Instead of speculating on the land value itself, you're speculating on the stream of cash flows that is pegged to land values.
By locating your fast growing startup in the commonwealth city, the spillover land value created by your efforts will return to you pari passu, just as the spillover land value from your neighbor's efforts will return to you. As it should be.
"Instead of landowners taking a larger % of the value my company creates (as would be the case in any city today), I want myself and my employees to benefit from it instead."
To restate my point, I believe your proposal amounts to musical chairs: replacing the landowners of old with the commonwealth city shareholders of tomorrow.
The fact that you advocate for a limit suggests that you are seeing the inherently troubling dynamics of land ownership (or, ahem, Commonwealth City passive equity ownership that is a proxy for land ownership) and want to avoid concentration.
Why not just avoid the issue entirely? Every compromise to allow secondary market trading is a gateway to expropriate the commons.
If you want to deeply align yourself with the Commonwealth City, move there. If your fast growing startup is creating a lot of wealth, just *invest more in your startup* right? Or the other businesses and employees that are creating wealth in the new commonwealth city.
I still need to think more about residency and eligibility, especially if it entitles somebody to any kind of UBI-like cash flows. The politics of welfare states and immigration are complex.
I think the simplest solution is to think of the commonwealth city as a city state. One person, one vote. Budgets balance and citizens are on equal footing (nobody can "buy my share of the United States"). If every public dollar funded by LVT proceeds was spent smartly on great infrastructure and stellar local governance, with none left over for UBI proceeds, the problem is simplified, as benefits would flow to the people who are physically present (which is a pretty good proxy for those who are creating land value there, in my opinion).
Isaiah, thanks again for the great comment! I think I'm seeing that we see a couple of points differently:
"Isn't the point of Georgism that this is a kind of unjust capture? That the land acts as a gravity well that unfairly takes from the capital and labor around it?"
It's not that the land becomes more valuable that is a problem, but the structure of who owns land and how much. It is unjust capture by only a handful of people. Today it is only possible for the tech executives to buy land in any sufficient quantity to be used for investment purposes because the cost of land is so high. The idea is not to eliminate increases in land value (the more land value the better!) but to be sure that all members of the community benefit from those increases in value, even future members in the form of public goods investment.
To your next point, all members of the community will benefit equally from those increases in land value, but proportional to their share ownership. We do not want equality of outcome in exact $ terms but we do want equality of opportunity.
The reason is that people and institutions have vastly different time horizons, resources, risk tolerances, etc and the only way to achieve the optimal distribution of those is by ensuring people are free to own the amount they want above a certain minimum and subject to a very high (for an individual) cap. It would be silly to require an individual earning $40,000 per year and someone with a net worth of hundreds of millions to own the same amount.
This would stamp out a lot of otherwise very productive economic activity. Why would the person or company with a $100M net worth move and do business there if they can't own enough for it to move the needle?
The cap is only there to prevent a hostile takeover of some kind, not to keep people from owning a lot of shares. As a hypothetical example if the cap was 1% then in a city with land value of $10B that would be $100m. The problem today is that it’s nearly impossible for most people to acquire land of any kind in any highly productive place, not that people can buy a lot of land.
"To restate my point, I believe your proposal amounts to musical chairs: replacing the landowners of old with the commonwealth city shareholders of tomorrow."
This is true, and it's a very subtle but very important change. It's exactly like saying about the legal construct of the corporation: "you're just replacing the asset owners of old with the corporate shareholders of tomorrow". This seemingly small change is actually a critical abstraction that completely changes how this system operates. Instead of people owning all the individual assets in a company, we bundle those together into a legal entity called a corporation and let people own shares in that instead of the individual assets. This enables people to cooperate toward creating new wealth for society and resulted in ~100 trillion of global equity market capitalization.
So yes, we are replacing landowners of old with Commonwealth City shareholders of tomorrow because it completely changes the dynamics of land ownership and urban wealth creation, and it makes these things accessible to millions more people.
"Instead of speculating on the land value itself, you're speculating on the stream of cash flows that is pegged to land values."
I think this is a mostly a mix up of terms. Analyzing a stream of cash flows and purchasing ownership in that stream of cash flows is defined as investment, not speculation. It is just like buying ownership in an ETF or equity. There can be a speculative component in that you don't know what the future holds in appreciation, but if you are buying at an acceptable yield today then the appreciation is unimportant.
Speculation would be if there was no real basis for the investment other than the hope that someone else will pay more for the asset later. This is what most people do when they buy raw land because there are no cash flows, and even how many people "invest" in real estate. As an example, I understand it is impossible to purchase investment property in CA that cash flows from day one. This means real estate investors there are expecting 100% of their return to come from future land appreciation and rent growth. That is pure speculation. But buying a piece of commercial real estate at a 6% yield is an investment.
One could argue purchasing a stream of cash flows in the form of ground rents is even safer investment than an equity or bond because ground rents are more fundamental to economic activity than whatever a particular company happens to do.
I appreciate the comments! They are thought provoking but it’s clear we approach some of these issues differently. I think that’s a great thing, we need as diverse a set of perspectives on stuff like this as we can get, and thanks again for reading and sharing your thoughts!
"To your next point, all members of the community will benefit equally from those increases in land value, but proportional to their share ownership."
This is no different than our non-Georgist status quo, where people benefit proportionally to their land ownership.
"This would stamp out a lot of otherwise very productive economic activity. Why would the person or company with a $100M net worth move and do business there if they can't own enough for it to move the needle?"
Lots of multi-billion dollar startups have been created in Silicon Valley without the owners acquiring land as a prerequisite. I have yet to meet an entrepreneur in the wealth-creation phase of their life who would care about such things. I reject the premise that great businesses and wealth will not be built if the owners cannot get a disproportionate grasp of land value appreciation in the process.
Everyone I have met who engages in land investment schemes is in the business of wealth preservation, specifically, in buying a kind of "call option" on the future that will extract value from whatever future community happens to create it nearby (and hold its value steady if the community's efforts or great technological progress does not materialize). The WSJ has a few recent examples:
"Instead of people owning all the individual assets in a company, we bundle those together into a legal entity called a corporation and let people own shares in that instead of the individual assets. This enables people to cooperate toward creating new wealth for society."
This is one of the great benefits of our inheritance of British common law. But it's irrelevant in this example. Because, importantly, the *firm is not creating the wealth that it is distributing to shareholders* - it is instead *seizing* this wealth due to its status as the commonwealth city, with the power to tax land values away. Land values that it did not create. That land value is created by *everyone* in the community, not just the shareholders or employees of the commonwealth city.
I want corporations to run many things, because they align incentives for wealth creation, and allow a variety of people to participate in productive activities based on their skills, risk tolerance, etc. (whether as an employee, a lender, an equity investor, etc.). I want firm formation to create wealth: build new spaceships for interstellar colonies, build therapies to cure cancer, build clean and abundant energy, etc.
But it is *impossible* to have a firm functionally devoted to land value, unless that firm represents the interests of *all of us* equally. Because land value is a force of nature, a commons, and a wealth generator that the firm did not build.
Start reading this review of George's Progress and Poverty at the following location:
"Whenever anyone does labor, the owner of some piece of land – whether it's the farm in the middle of Kansas that grows your food, the lot upon which the server farm sending you these bytes sits, or the ground that right now sits beneath your feet – is sticking their finger in the pie."
What is the outcome of the system you propose? The same as the status quo, but instead of landowners sticking their finger in the pie, it's shareholders in the commonwealth city.
This is the key part of the review:
"If you improve land in some way, you're entitled to own and use that, of course. That's the product of your labor. But to claim exclusive and permanent ownership of the land itself – from which all wealth springs and without which labor is impossible – is to demand the product of other's labor. So to invoke the sanctity of private property to defend private land ownership is self-refuting."
Corporations (and the illustrative person or company with $100m net worth that you want to attract) are entitled to the value they create. That wealth creation *does not require land ownership* or equity investment in the Commonwealth City - which is just land ownership by another name.
"One could argue purchasing a stream of cash flows in the form of ground rents is even safer investment than an equity or bond because ground rents are more fundamental to economic activity than whatever a particular company happens to do."
I think you are not well-versed in George's ideas, because the very features of land ownership as an investment that you tout in our current system ("safer than an equity or bond because ground rents are more fundamental to economic activity") are features because of the way that land ownership naturally expropriates labor and capital.
With the disclaimer that I do not have literally any professional skill in any related fields and could easily be missing something glaringly obvious...
It seems to me that the idea of shares here could also possibly be used for a more "political" implementation.
That is, my limited understanding is that one of the major obstacles to implementing Georgism is that fundamentally, you're taking value from landowners. Whether or not they are able to retain ownership of the land itself, even a solution where for example you let whatever they initially paid give them a sort of "buffer" against the LVT doesn't really make it fair. They bought the land as an investment expecting it to appreciate in value, and now it's being turned into a cost instead.
But it seems like you could do something where you compensate the landowners for the new tax with shares of the income generated by the tax, with shares proportionate to the current value of their land, such that the income received from the shares should roughly equal the tax they pay for the land.
The trick, I think, would be having a distinction between temporary shares, which have a cap on their income and can be bought back for a fixed amount (which any income from shares counts towards, but which is some percentage higher than the base value of the share), versus permanent shares that aren't capped and can generally be bought and sold at whatever prices that market allows. With each resident of the city able to hold a maximum number of permanent shares based on total shares available divided by population (non-residents could only hold temporary shares).
So actual like home and small business owners should mostly break even, landlords would probably end up getting a short-term boost from their temporary shares that would eventually fade out but still presumably be profitable if they're doing the actual work to be competitive (and the short-term boost should give them the time to do so, or to sell to somebody who can), and even speculators should end up seeing a positive return on their investment, but not as big a one as they would have gotten if they had been able to just hold indefinitely.
Over time as the city buys back the temporary shares, they can distribute some to residents freely, with others held to either provide income for other things or sold at regular market values. Or sold to non-residents as temporaries as a loan-like option for generating revenue. And then over time you could fiddle with the numbers to do things like replacing other taxes at the cost of lower income from shares and/or higher land taxes, or whatever.
I think you're right and if this was implemented in an existing city then the right way for it to grow would be to freely purchase property from nearby property owners. I think issuing shares to do that could work, but I bet some property owners are going to be confused by that and will probably prefer cash. The City can choose to pay cash or shares.
I think this model is most interesting if done in a ground-up city rather than in an existing built area. Simply because over the 20th century our land use and system of land value has created built environments that are dysfunctional beyond repair in many cases. In the case you're starting in "raw land" then the acquisition becomes easier as you can simply pay cash for several thousand acres of land and then layer the Commonwealth on top of that by consolidating the land into a single entity and then issuing shares in that.
Thanks again for reading and for your great comment!
How Land Value Taxation (LVT) Can be Made Politically Acceptable (In Answer to David Tiggs)
Much as the Single Tax proposal of Henry George is greatly appreciated here for having the most significant ethical principles at its core, one finds that its introduction is simply not practical. Apart from use of the word “Tax”, which in any case no politician wants to propose or introduce, we must eliminate the offense that these proposals for LVT will cause to landlords. Obviously they will be strongly opposed to having to pay a new tax (or anything else we might like to call it). Then the solution is not to fight them, nor try to convince them on ethical grounds, but to find a way to make them want to pay for their land access rights, through revenues.
To achieve this there should be introduced a gradual change in the way that land is being owned. This requires the making of some new laws. Whenever a site or prospect of land (or real-estate with buildings} is being offered for sale, or whenever ownership of such a site is being transferred between family members (and on which an inheritance-tax would normally be collected), the change being introduced here is that the government automatically buys the land at its current normal price. This is done simultaneously when the buildings are being sold in the usual way, or when their ownership is being transferred. (The courts shall be empowered to settle the land-value, if or when doubt is expressed–prepared land-value maps being publicly accessible.)
The previous landlords or their heirs will no longer have any serious financial objection, since the money from the land sale will greatly exceed the subsequent annual lease-fee (see below) for access rights to this land. This change will also eliminate the (hated) inheritance-tax. It is estimated that this process of all the land sales and governmental purchases will be spread over at least 40 years.
Immediately a site belongs to the government, this land should be offered for occupation and use by it being leased. The first refusal for this must be to the new or bequeathed owner of any buildings thereon. The lease-fee should be set according to normal amounts of rent for other similar sites, (and again the courts should decide on it, when there is disagreement.) The above first refusal for this leasing offer is necessary, because any buildings of practical use and value on the site will still be sold or bequeathed as items of durable capital goods, as before.
However, the government should deny access to the site and its buildings, until the site is being leased to the person or organization who/which have purchased (or have inherited) the buildings in the usual way. All taxes that are applied to subsequent building development on the site and its additional value should be abolished at this time.
Then the new owner would acquire the building-property more cheaply than before, because it is now without the price of the land under and around it. Such a buyer can then use or give for hire (rent-out) any building for its access rights and use, as if it were any other item of durable capital goods. In the unlikely but possible chance of the land leaser not owning the buildings, his/her incoming ground-rent (from the building owner), shall be legislated not to exceed the out-going lease-fees by more than 2% (say). Should nobody initially lease the site and its buildings (if any), because of there being no demand for their use, the buildings may be pulled down by the next (eventual) leaser, who will be free to re-develop the site, and normally would want to do so.
The government should borrow the money for site purchase, or even can offer national redeemable “land-bonds” to raise money for it. The previous landlords might even be inclined to purchase these bonds, which presumably are a more stable source of income than the tenant’s rent was. As the lease money begins to flow to the government, it uses this to:
a) repay part of its loan for site purchase, which may be extended, and b) purchase more sites as and when they become available, and c) cover the interest on the loan and on the new bonds and their eventual redemption, and d) eventually and gradually reduce and eliminate the many other kinds of taxation.
It will be appreciated that over the long-term the lease fees are equivalent to LVT, but due to the greed of landlords (who behave as if they were capitalists), the income from land sales will satisfy them better than their being more directly taxed. Eventually nearly all the land would then be leased from the government. Because the selling of land is a natural process which (if anything) is encouraged by the land returning to public benefit, the resulting lower priced buildings will ease their sale and this will not place such a limitation on their (entrepreneur) owners, who probably want to develop the sites.
Nationally leased land, in countries like Hong Kong, Singapore and Estonia, is close to 100%, and this kind of revenue gathering regime is known to be most successful, for the rate of growth of national prosperity. This proposal is not the same as land nationalization (at least no more than what currently applies), since no additional regulations are placed on how the land is to be used.
Also when the previous landlords have more money to spend, some or most of it will be invested in durable capital goods, making production costs lower as obsolescent durable items are more easily replaced. Consequently, the national prosperity will increase from the government’s investment in land values, too.
At the great risk of oversimplifying, it seems to me that the enticement to landlords is to pay LVT in exchange for the abolition of all other taxes. “Pay LVT and develop your land tax free!”. Sounds like a good sales pitch?
Alanna, This poem was sent to a number of Georgist places on the internet. But only here have I seen so much interest in my alternative proposal to our disliked new tax of LVT. The idea came from a question that was asked by David Tiggs at a past Georgist conference about how can we make LVT attractive to landowners. I wrote a longer and more technical reply and then got inspired to set part of it in poetical form. Would you like to see the unpoetical rest?
I think the writers about this subject should be complemented for their good work, but unfortunately it is unlikely that many people will seriously appreciate it. This is because they do not have a good understanding about our social system and how it works.
For that reason I am suggesting that "Progress and Poverty" is far too long and wordy for us today to bother to follow all of its details, but we certainly need something to bring us into the "Big Picture" of macroeconomics. My book "Consequential Macroeconomics--Rationalizing About How Our Social System Works", might be a bit better in this respect, although it was inteneded for an academic following too.
If you write to me at chesterdh@hotmail.com I will gladly send you a free e-copy of this 310-page explanation, which might be used for teaching after reviewing my two short working papers (not more than 10 pages): SSRN 2865571 "Einstein's Criterion Applied to Logical Macroeconomics Modelling" and my SSRN "A Mechanical Model for Teaching Macroeconomics". All of which explain and express our past dreary subject in a new and more lively way that is more easier to understand.
...Have you read Spencer Heath? This is his model, more or less.
In any case, this schema still divorces claimants to returns on ground rent ("shareholders") from the producers of land value (everyone in the city), rematerializing the landlord/tenant relationship, though admittedly in a more aligned way. Ideally you would establish this institution as a for-profit SOE to replace municipalities as legal entities and just give any remaining dividend after public goods investment to all lawful permanent residents.
The more capitalists the greater the poverty but the more understanding about how our social system of macroeconomics actually works, the less poverty.
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Making Macroeconomics a Much More Exact Science
Today macroeconomics is treated inexactly within the humanities, because it appears to be a very
complex and easily confused matter. But this does not give it fair justice, because we should be trying
to find a viable approach to the topic and examine it in a way that avoids these problems, and for us to
better understand of what it comprises and how it works. Suppose we ask ourselves the question: “how
many different KINDS of financial (business) transaction occur within our society?” The simple and
direct answer shows that that only a limited number of them are possible or necessary.
Although our sociological system comprises of many millions of participants, to properly answer this
question we should be ready to consider the averages of the various kinds of activities (no matter who
performs them), and simultaneously to idealize these activities so that they fall into a number of
commonly shared operations. This approach uses some general terms for expressing the various types
of these transactions, into what becomes a relatively small number. Here, each kind is found to apply
between a particular pair of agents—each one of which has individual properties. Then to cover the
whole sociological system of a country, it requires only 19 kinds of exchanges of the goods, services,
access rights, taxes, credits, investments, valuable legal documents, etc., verses the mutual and
opposing flows of money.
The argument that led to this initially unexpected result was prepared by the author. It may be found in
his working paper (on the internet) as SSRN 2865571 “Einstein’s Criterion Applied to Logical
Macroeconomics Modeling”. In this model these double-flows of money verses goods, etc., necessarily
pass between only 6 kinds of role-playing entities (or agents). Of course, there are a number of different
configurations that are possible for this type of simplification, but if one tries to eliminate all the
unnecessary complications and sticks to the more basic activities, then these particular quantities and
flows provide the most concise yet fully comprehensive result, which is presentable in a seamless
manner, for our whole social system and one that is suitable for its further analysis.
Surprisingly, past representation of our sociological system by this kind of an interpretation model has
neither been properly derived nor formally presented before. Previously, other partial versions have
been modeled (using up to 4 agents, as by Professor Hudson), but they are inexact due to their being
over-simplified. Alternatively, in the case of econometrics, the representations are far too complicated
and almost impossible for students to follow. These two reasons of over-simplification and of complexity
are why this pseudo or non-scientific confusion has been created by many economists, and it explains
their failure to obtain a good understanding about how the whole system works.
The model being described here in this paper is unique, in being the first to include, along with some
additional aspects, all the 3 factors of production, in Adam Smith's “Wealth of Nations” book of 1776.
These factors are Land, Labor and Capital, along with their returns of Ground-Rent, Wages and
Interest/Dividends, respectively. All of them are all included in the model, as a diagram in the paper.
Page 2 of 2
(Economics’ historians will recall, as originally explained by Adam Smith and David Ricardo, that there
are prescribed independent functions of the land-owners and the capitalists. The land-owners speculate
in the land-values and rent it to tenants, whilst the capitalists are actually the owners/managers of the
durable capital goods used in industry. These items may be hired out for use. Regrettably, for political
reasons, the concept of these 2 different functions were combined by John Bates Clark and company
about 1900, resulting in the later neglect of their different influences on our sociological system-- the
terms landlord and capitalist becoming virtually synonymous along with the expression for property as
real-estate.)
The diagram of this model is in my paper (noted above). A mention of the related teaching process is
also provided in my short working paper SSRN 2600103 “A Mechanical Model for Teaching
Macroeconomics”. With this model in an alternative form, the various parts and activities of the Big
Picture of our sociological system can be properly identified and defined. Subsequently by analysis, the
way our sociological system works can then be properly seen, calculated and illustrated.
This analysis is introduced by the mathematics and logic, which was devised by Nobel Laureate
Wellesley W. Leontief, when he invented the important "Input-Output" matrix methodology (that he
originally applied only to the production sector). This short-hand method of modeling the whole system
replaces the above-mentioned block-and-flow diagram. It enables one to really get to grips with what
is going-on within our sociological system. It is the topology of the matrix which actually provides the
key to this. The logic and math are not hard and are suitable for high-school students, who have been
shown the basic properties of square matrices and the notation of the calculus.
By this technique it is comparatively easy to introduce any change to a pre-set sociological system that
is theoretically in equilibrium (even though we know that this ideal is never actually attained--it simply
being a convenient way to begin the study). This change creates an imbalance and we need to regain
equilibrium again. Thus, sudden changes or policy decisions may be simulated and the effects of them
determined, which will point the way to what policy is best. In my book about it, (see below) 3 changes
associated with taxation are investigated in hand-worked numerical examples. In fact, when I first
worked it out, the irrefutable logical results were a surprise, even to me!
Developments of these ideas about making our subject more truly scientific (thereby avoiding the past
pseudo-science being taught at universities), may be found in my recent book: “Consequential
Macroeconomics—Rationalizing About How Our Social System Works”. Please write to me
at chestdher@gmail.com for a free e-copy of this 310 page book and for any additional information.
How Land Value Taxation (LVT) Can be Made Politically Acceptable (In Answer to David Tiggs)
Much as the Single Tax proposal of Henry George is greatly appreciated here for having the most significant ethical principles at its core, one finds that its introduction is simply not practical. Apart from use of the word “Tax”, which in any case no politician wants to propose or introduce, we must eliminate the offense that these proposals for LVT will cause to landlords. Obviously they will be strongly opposed to having to pay a new tax (or anything else we might like to call it). Then the solution is not to fight them, nor try to convince them on ethical grounds, but to find a way to make them want to pay for their land access rights, through revenues.
To achieve this there should be introduced a gradual change in the way that land is being owned. This requires the making of some new laws. Whenever a site or prospect of land (or real-estate with buildings} is being offered for sale, or whenever ownership of such a site is being transferred between family members (and on which an inheritance-tax would normally be collected), the change being introduced here is that the government automatically buys the land at its current normal price. This is done simultaneously when the buildings are being sold in the usual way, or when their ownership is being transferred. (The courts shall be empowered to settle the land-value, if or when doubt is expressed–prepared land-value maps being publicly accessible.)
The previous landlords or their heirs will no longer have any serious financial objection, since the money from the land sale will greatly exceed the subsequent annual lease-fee (see below) for access rights to this land. This change will also eliminate the (hated) inheritance-tax. It is estimated that this process of all the land sales and governmental purchases will be spread over at least 40 years.
Immediately a site belongs to the government, this land should be offered for occupation and use by it being leased. The first refusal for this must be to the new or bequeathed owner of any buildings thereon. The lease-fee should be set according to normal amounts of rent for other similar sites, (and again the courts should decide on it, when there is disagreement.) The above first refusal for this leasing offer is necessary, because any buildings of practical use and value on the site will still be sold or bequeathed as items of durable capital goods, as before.
However, the government should deny access to the site and its buildings, until the site is being leased to the person or organization who/which have purchased (or have inherited) the buildings in the usual way. All taxes that are applied to subsequent building development on the site and its additional value should be abolished at this time.
Then the new owner would acquire the building-property more cheaply than before, because it is now without the price of the land under and around it. Such a buyer can then use or give for hire (rent-out) any building for its access rights and use, as if it were any other item of durable capital goods. In the unlikely but possible chance of the land leaser not owning the buildings, his/her incoming ground-rent (from the building owner), shall be legislated not to exceed the out-going lease-fees by more than 2% (say). Should nobody initially lease the site and its buildings (if any), because of there being no demand for their use, the buildings may be pulled down by the next (eventual) leaser, who will be free to re-develop the site, and normally would want to do so.
The government should borrow the money for site purchase, or even can offer national redeemable “land-bonds” to raise money for it. The previous landlords might even be inclined to purchase these bonds, which presumably are a more stable source of income than the tenant’s rent was. As the lease money begins to flow to the government, it uses this to:
a) repay part of its loan for site purchase, which may be extended, and b) purchase more sites as and when they become available, and c) cover the interest on the loan and on the new bonds and their eventual redemption, and d) eventually and gradually reduce and eliminate the many other kinds of taxation.
It will be appreciated that over the long-term the lease fees are equivalent to LVT, but due to the greed of landlords (who behave as if they were capitalists), the income from land sales will satisfy them better than their being more directly taxed. Eventually nearly all the land would then be leased from the government. Because the selling of land is a natural process which (if anything) is encouraged by the land returning to public benefit, the resulting lower priced buildings will ease their sale and this will not place such a limitation on their (entrepreneur) owners, who probably want to develop the sites.
Nationally leased land, in countries like Hong Kong, Singapore and Estonia, is close to 100%, and this kind of revenue gathering regime is known to be most successful, for the rate of growth of national prosperity. This proposal is not the same as land nationalization (at least no more than what currently applies), since no additional regulations are placed on how the land is to be used.
Also when the previous landlords have more money to spend, some or most of it will be invested in durable capital goods, making production costs lower as obsolescent durable items are more easily replaced. Consequently, the national prosperity will increase from the government’s investment in land values, too.
Excellent post.
Do you have more details on how these land leases would be distributed? In particular, if there is a current leaser who has the right to use the land, how does someone else acquire that lease? By persuading the current leaser? Or by persuading the city's land authority? I see potential problems either way.
Thanks for reading and thanks for the great question!
The leases would be fully transferable, so in the case where someone wanted to acquire a particular piece of already leased land/building, they would have to purchase it from the current lessee. The "catch" is that the value of these ground leases should approach zero (just like how with a LVT the buying/selling price of the land approaches zero). So in that event the purchaser is paying just the structure on the land, and then assuming the future ground lease payments.
The only instance the city could "take a lease back" is in the event of default/non payment or breach of the lease in some other material way. Thanks again for reading!
Thanks for your response, and sorry for my delay here.
How is the cost of transferring the lease determined? Presumably it’s a price agreed upon between the current leasee and the buyer. In that case, wouldn’t the price of the transfer implicitly contain within it the value of the land? And then we’re back to square one.
The only way I could see this working is if the monthly payment to the city the leasee pays varies based on the value of land. Is that right? And if yes, who determines the size of this monthly payment?
"the monthly payment to the city the leasee pays varies based on the value of land" - this is exactly it! I didn't get much into the land appraisal process in this post in the name of time, but you're exactly right. Each year the land is reappraised and the ground rent is adjusted accordingly. The ground rent would be priced using a cap rate on the land value - so if the land appraised for $1M and our current cap rate was 5%, the ground rent would be $50,000.
There are a few practical matters here. One is that it would probably be prudent for developers to request some cap on annual increases in ground rent so they can have some certainty. I think this is a reasonable concession to make, especially early on. How the cap rate gets set is another matter. One thought I've had is it could be based on some market rate of interest, like the current AAA Corporate bond yield. (currently around 5%)
The goal (just like with LVT) is to get the ground rent charged by the lease as close to 100% of the annual ground rent of the land so that if the lease is transferred its value is 0. It would probably be hard to get exactly there, but that's the goal.
Like you point out, if you only charge some nominal amount for the lease then that land value accrues to the market value of the lease, which is the same situation as today. I think this is kind of the issue in Amsterdam where they do use a ground lease system, but the rent payments are fairly low and fixed so the private leaseholders still capture the land value and real estate tends to get quite expensive.
Thank you for the wonderful questions and comments!!
"Ownership of those shares entitles you to a proportional slice of everything the Commonwealth City owns today (all the land within the city) and to a proportion of all future ground rents it collects."
I have always been interested in Georgism and LVTs for a few reasons. They align incentives for capital allocators in government. They have no deadweight loss vs other kinds of tax, and have a natural check on overreach if tax rates go too high. And in particular, they stop land from stealing from labor and capital; everyone benefits from the value that everyone creates together.
On this last point - "everyone" - would suggest to me that a corporate shareholder structure might get complicated.
Who is and is not an owner? How does one acquire shares? By paying for them, or by moving into the area, or both? Would shareholders be permitted to own shares in the Commonwealth City without living there?
Isaiah, thanks so much for reading! Your points about Georgism and LVT are spot on - that is why I'm so keen on seeing them implemented through some means other than a tax. I think an opt-in model like this would produce a truly better day to day life for folks, all while capturing the benefits you outlined.
You raise an excellent point. If the shareholder structure isn't thoroughly thought through then you risk ending up in situations with a lot of the same principal-agent problems of public companies today. My thinking right now is that residency in the city for at least some portion of the year - 3 to 6 months - is a requirement for share ownership. So no, there cannot be "absentee" ownership because the whole idea is that it's the presence of the community there that produces value, and the value they create should accrue entirely to them. Absentee owners would have skewed interests relating to how to reinvest ground rents: they would likely prefer a dividend to investment in a new park or transit system since they don't live there.
Re: share acquisition, yes anyone moving into or living in the city can buy shares as desired. I think early on there is a case to be made for the City issuing new shares to acquire new residents. The proposition would be very much like share issuance today: If the value we receive in new resident (Their LTV essentially) is greater than the cost to issue the shares then its a NPV positive investment for the city. So if you move you get $XX,XXX worth of shares. This is not unlike remote work incentive programs today that give cash to remote workers for expanding their tax base: remoteshoals.com. It is also not unlike a company issuing stock to purchase another company. They don't always do this in a truly value-creating way (often acquisitions destroy value) but that's the idea at least.
Thanks again for reading and appreciate the questions! If any more pop up would love to discuss further!
Joel - taking this line of discussion further:
Let's imagine two Commonwealth Cities that spring up in some currently "useless" wilderness area outside of Tucson, Arizona.
Both commonwealth cities own all of their underlying land, and make rational and efficient and maximally productive and solvent infrastructure investments with the ground rents from efficient land-value taxes.
One city is called Dividend Springs. All rents are immediately sent as a UBI to shareholders, so the commonwealth is essentially a pass-through after covering mandatory debt service and routine city administrative costs. The shareholders could look at the infrastructure projects that might add to the value of their UBI in the long run, and when appropriate, vote independently for the commonwealth to issue debt or equity to fund those projects.
Another city is called Capital Canyon. After mandatory debt service and administrative costs are covered, cash flows are directed to all productive capital investments available to the commonwealth (no UBI or dividends, unless there is truly nothing productive remaining to be done by the commonwealth). Some kind of centralized committee (analogous to "management") makes the capital allocation decisions, and shareholders exercise high-level governance via standard Board elections and the occasional activist campaign or referendum if things go off the rails.
Both cities can align the interests of government and shareholders to make productive and efficient infrastructure decisions. Both can manage unique perils in governance, whether of a defective centralized management team in Capital Canyon, or of free riders and unsophisticated investors in Dividend Springs.
In my view, the central challenge is the gravity well of land owners swallowing value they don't "earn" in the way that labor and capital earns a return.
If there is a land rush, and I and other shrewd investors buy up all the shares in Dividend Springs cheaply before everyone moves in, the same exploitative dynamic exists; instead of the $ accruing to the illiquid value of my land holdings, I'll accrue steadily increasing dividends based on both the commonwealth's infrastructure investments, and the capital and labor that is invested on top of and nearby that land.
Unless we can fairly calculate individual contributions to LVT (which is an impossible task) I think the safest approach is to:
1. Require some kind of "buy-in" payment to cover the LVT-funded infrastructure costs of joining the commonwealth city; covering admin, traffic, sewer, schools, etc. - large enough to avoid free-riding, small enough to make NIMBYs really unhappy
2. Once you're "in" you are a shareholder, pro rata based on the full-time resident population of the commonwealth city (defined as residing within the borders of the commonwealth's land)
3. If you choose to spend half the year living elsewhere, your ownership is reduced by half; if you rent your home out on Airbnb for half the year, presumably your guests can also participate in the Commonwealth for the period they are present?
This structure would "punish" those who might be able to contribute significantly to land values even if they aren't physically present. And it restrains the city from issuing equity (which at the early stages, could make liftoff a bit difficult). I believe the benefits of alignment with your neighbors day-to-day and year-to-year wealth creation would outweigh these downsides in the long run.
First of all, I love “Dividend Springs” and “Capital Canyon” as residential development names! 😂 And love your thoughts overall.
This is a good point, and in some sense one could trade a lot of capital on the front end for a lot of land value without creating any of that value. Would a cap on ownership solve this? My thought had been: new residents can be issued a baseline level of equity at move in (again assuming the city wants to grow and the value of the new resident > value of equity being issued).
But any resident is free to purchase more on the secondary market. I think this is important because it allows people to more heavily align themselves with the city overall if they want to. As an example, let’s say I’m an entrepreneur with a fast growing startup. I may want to move to the city specifically because the growth of my company will also create a lot of land value. Instead of landowners taking a larger % of the value my company creates (as would be the case in any city today), I want myself and my employees to benefit from it instead. So I think it makes sense to let that entrepreneur increase his or her exposure and benefit from some of the value created.
It’s not land speculation because there’s nothing speculative about it - it is buying more of a productive asset that I am a contributing member of. Not unlike buying stock in my own company. BUT There should absolutely be a limit because you don’t want one person with 25%+ of the entire thing.
The buy-in payment you mention could be as simple as buying a certain number of shares on the open market - because in theory the market value of the shares should approximate the value of the land. That said, the market price could fluctuate pretty wildly, which could strengthen the case for issuing it directly to new residents. I like this approach because it maps to the way land value works - each new resident increases the value of the land in a city by X on average. If the city issues 20% of the value created by moving there in equity, then you have a sustainable growth model as your LTV is 5x your CAC.
The residency piece is a hard question. Ideally it’s as granular as possible - if I live there for six months then I only get to keep six months worth of value created. but this comes back to the idea that it’s impossible to measure individual contributions. What if I own a business in the city that is creating dozens of jobs? I’m still partially creating land value while I’m not there, so I don’t know that you could adjust ownership based on where I happen to be, beyond setting some minimum time like is done today for tax residency. I'm not at all against the idea, but I just haven't been able to see how it could practically be implemented.
I am going to think on the point around concentration risk some more because I think you're right - that's a big risk. Thank you again for your wonderful comments!
Thanks Joel. I'm enjoying the back-and-forth!
"But any resident is free to purchase more on the secondary market. I think this is important because it allows people to more heavily align themselves with the city overall if they want to. As an example, let’s say I’m an entrepreneur with a fast growing startup. I may want to move to the city specifically because the growth of my company will also create a lot of land value."
I don't follow you here. The same argument would support a traditional land ownership-based investment model. For example, before a big California tech company announces that they are moving their headquarters to Austin, the executives buy a bunch of land and property in the area. Isn't the point of Georgism that this is a kind of unjust capture? That the land acts as a gravity well that unfairly takes from the capital and labor around it?
"It's not land speculation because there's nothing speculative about it"
I disagree. Instead of speculating on the land value itself, you're speculating on the stream of cash flows that is pegged to land values.
By locating your fast growing startup in the commonwealth city, the spillover land value created by your efforts will return to you pari passu, just as the spillover land value from your neighbor's efforts will return to you. As it should be.
"Instead of landowners taking a larger % of the value my company creates (as would be the case in any city today), I want myself and my employees to benefit from it instead."
To restate my point, I believe your proposal amounts to musical chairs: replacing the landowners of old with the commonwealth city shareholders of tomorrow.
The fact that you advocate for a limit suggests that you are seeing the inherently troubling dynamics of land ownership (or, ahem, Commonwealth City passive equity ownership that is a proxy for land ownership) and want to avoid concentration.
Why not just avoid the issue entirely? Every compromise to allow secondary market trading is a gateway to expropriate the commons.
If you want to deeply align yourself with the Commonwealth City, move there. If your fast growing startup is creating a lot of wealth, just *invest more in your startup* right? Or the other businesses and employees that are creating wealth in the new commonwealth city.
I still need to think more about residency and eligibility, especially if it entitles somebody to any kind of UBI-like cash flows. The politics of welfare states and immigration are complex.
I think the simplest solution is to think of the commonwealth city as a city state. One person, one vote. Budgets balance and citizens are on equal footing (nobody can "buy my share of the United States"). If every public dollar funded by LVT proceeds was spent smartly on great infrastructure and stellar local governance, with none left over for UBI proceeds, the problem is simplified, as benefits would flow to the people who are physically present (which is a pretty good proxy for those who are creating land value there, in my opinion).
Isaiah, thanks again for the great comment! I think I'm seeing that we see a couple of points differently:
"Isn't the point of Georgism that this is a kind of unjust capture? That the land acts as a gravity well that unfairly takes from the capital and labor around it?"
It's not that the land becomes more valuable that is a problem, but the structure of who owns land and how much. It is unjust capture by only a handful of people. Today it is only possible for the tech executives to buy land in any sufficient quantity to be used for investment purposes because the cost of land is so high. The idea is not to eliminate increases in land value (the more land value the better!) but to be sure that all members of the community benefit from those increases in value, even future members in the form of public goods investment.
To your next point, all members of the community will benefit equally from those increases in land value, but proportional to their share ownership. We do not want equality of outcome in exact $ terms but we do want equality of opportunity.
The reason is that people and institutions have vastly different time horizons, resources, risk tolerances, etc and the only way to achieve the optimal distribution of those is by ensuring people are free to own the amount they want above a certain minimum and subject to a very high (for an individual) cap. It would be silly to require an individual earning $40,000 per year and someone with a net worth of hundreds of millions to own the same amount.
This would stamp out a lot of otherwise very productive economic activity. Why would the person or company with a $100M net worth move and do business there if they can't own enough for it to move the needle?
The cap is only there to prevent a hostile takeover of some kind, not to keep people from owning a lot of shares. As a hypothetical example if the cap was 1% then in a city with land value of $10B that would be $100m. The problem today is that it’s nearly impossible for most people to acquire land of any kind in any highly productive place, not that people can buy a lot of land.
"To restate my point, I believe your proposal amounts to musical chairs: replacing the landowners of old with the commonwealth city shareholders of tomorrow."
This is true, and it's a very subtle but very important change. It's exactly like saying about the legal construct of the corporation: "you're just replacing the asset owners of old with the corporate shareholders of tomorrow". This seemingly small change is actually a critical abstraction that completely changes how this system operates. Instead of people owning all the individual assets in a company, we bundle those together into a legal entity called a corporation and let people own shares in that instead of the individual assets. This enables people to cooperate toward creating new wealth for society and resulted in ~100 trillion of global equity market capitalization.
So yes, we are replacing landowners of old with Commonwealth City shareholders of tomorrow because it completely changes the dynamics of land ownership and urban wealth creation, and it makes these things accessible to millions more people.
"Instead of speculating on the land value itself, you're speculating on the stream of cash flows that is pegged to land values."
I think this is a mostly a mix up of terms. Analyzing a stream of cash flows and purchasing ownership in that stream of cash flows is defined as investment, not speculation. It is just like buying ownership in an ETF or equity. There can be a speculative component in that you don't know what the future holds in appreciation, but if you are buying at an acceptable yield today then the appreciation is unimportant.
Speculation would be if there was no real basis for the investment other than the hope that someone else will pay more for the asset later. This is what most people do when they buy raw land because there are no cash flows, and even how many people "invest" in real estate. As an example, I understand it is impossible to purchase investment property in CA that cash flows from day one. This means real estate investors there are expecting 100% of their return to come from future land appreciation and rent growth. That is pure speculation. But buying a piece of commercial real estate at a 6% yield is an investment.
One could argue purchasing a stream of cash flows in the form of ground rents is even safer investment than an equity or bond because ground rents are more fundamental to economic activity than whatever a particular company happens to do.
I appreciate the comments! They are thought provoking but it’s clear we approach some of these issues differently. I think that’s a great thing, we need as diverse a set of perspectives on stuff like this as we can get, and thanks again for reading and sharing your thoughts!
"To your next point, all members of the community will benefit equally from those increases in land value, but proportional to their share ownership."
This is no different than our non-Georgist status quo, where people benefit proportionally to their land ownership.
"This would stamp out a lot of otherwise very productive economic activity. Why would the person or company with a $100M net worth move and do business there if they can't own enough for it to move the needle?"
Lots of multi-billion dollar startups have been created in Silicon Valley without the owners acquiring land as a prerequisite. I have yet to meet an entrepreneur in the wealth-creation phase of their life who would care about such things. I reject the premise that great businesses and wealth will not be built if the owners cannot get a disproportionate grasp of land value appreciation in the process.
Everyone I have met who engages in land investment schemes is in the business of wealth preservation, specifically, in buying a kind of "call option" on the future that will extract value from whatever future community happens to create it nearby (and hold its value steady if the community's efforts or great technological progress does not materialize). The WSJ has a few recent examples:
https://www.wsj.com/articles/sunbelt-land-boom-brings-big-profits-and-big-risks-11660013835
https://www.wsj.com/articles/housing-shortage-reflects-the-cheap-cost-of-holding-vacant-land-11669069202
"Instead of people owning all the individual assets in a company, we bundle those together into a legal entity called a corporation and let people own shares in that instead of the individual assets. This enables people to cooperate toward creating new wealth for society."
This is one of the great benefits of our inheritance of British common law. But it's irrelevant in this example. Because, importantly, the *firm is not creating the wealth that it is distributing to shareholders* - it is instead *seizing* this wealth due to its status as the commonwealth city, with the power to tax land values away. Land values that it did not create. That land value is created by *everyone* in the community, not just the shareholders or employees of the commonwealth city.
I want corporations to run many things, because they align incentives for wealth creation, and allow a variety of people to participate in productive activities based on their skills, risk tolerance, etc. (whether as an employee, a lender, an equity investor, etc.). I want firm formation to create wealth: build new spaceships for interstellar colonies, build therapies to cure cancer, build clean and abundant energy, etc.
But it is *impossible* to have a firm functionally devoted to land value, unless that firm represents the interests of *all of us* equally. Because land value is a force of nature, a commons, and a wealth generator that the firm did not build.
Start reading this review of George's Progress and Poverty at the following location:
https://astralcodexten.substack.com/p/your-book-review-progress-and-poverty
"Whenever anyone does labor, the owner of some piece of land – whether it's the farm in the middle of Kansas that grows your food, the lot upon which the server farm sending you these bytes sits, or the ground that right now sits beneath your feet – is sticking their finger in the pie."
What is the outcome of the system you propose? The same as the status quo, but instead of landowners sticking their finger in the pie, it's shareholders in the commonwealth city.
This is the key part of the review:
"If you improve land in some way, you're entitled to own and use that, of course. That's the product of your labor. But to claim exclusive and permanent ownership of the land itself – from which all wealth springs and without which labor is impossible – is to demand the product of other's labor. So to invoke the sanctity of private property to defend private land ownership is self-refuting."
Corporations (and the illustrative person or company with $100m net worth that you want to attract) are entitled to the value they create. That wealth creation *does not require land ownership* or equity investment in the Commonwealth City - which is just land ownership by another name.
"One could argue purchasing a stream of cash flows in the form of ground rents is even safer investment than an equity or bond because ground rents are more fundamental to economic activity than whatever a particular company happens to do."
I think you are not well-versed in George's ideas, because the very features of land ownership as an investment that you tout in our current system ("safer than an equity or bond because ground rents are more fundamental to economic activity") are features because of the way that land ownership naturally expropriates labor and capital.
With the disclaimer that I do not have literally any professional skill in any related fields and could easily be missing something glaringly obvious...
It seems to me that the idea of shares here could also possibly be used for a more "political" implementation.
That is, my limited understanding is that one of the major obstacles to implementing Georgism is that fundamentally, you're taking value from landowners. Whether or not they are able to retain ownership of the land itself, even a solution where for example you let whatever they initially paid give them a sort of "buffer" against the LVT doesn't really make it fair. They bought the land as an investment expecting it to appreciate in value, and now it's being turned into a cost instead.
But it seems like you could do something where you compensate the landowners for the new tax with shares of the income generated by the tax, with shares proportionate to the current value of their land, such that the income received from the shares should roughly equal the tax they pay for the land.
The trick, I think, would be having a distinction between temporary shares, which have a cap on their income and can be bought back for a fixed amount (which any income from shares counts towards, but which is some percentage higher than the base value of the share), versus permanent shares that aren't capped and can generally be bought and sold at whatever prices that market allows. With each resident of the city able to hold a maximum number of permanent shares based on total shares available divided by population (non-residents could only hold temporary shares).
So actual like home and small business owners should mostly break even, landlords would probably end up getting a short-term boost from their temporary shares that would eventually fade out but still presumably be profitable if they're doing the actual work to be competitive (and the short-term boost should give them the time to do so, or to sell to somebody who can), and even speculators should end up seeing a positive return on their investment, but not as big a one as they would have gotten if they had been able to just hold indefinitely.
Over time as the city buys back the temporary shares, they can distribute some to residents freely, with others held to either provide income for other things or sold at regular market values. Or sold to non-residents as temporaries as a loan-like option for generating revenue. And then over time you could fiddle with the numbers to do things like replacing other taxes at the cost of lower income from shares and/or higher land taxes, or whatever.
Thanks for reading Dustin!
I think you're right and if this was implemented in an existing city then the right way for it to grow would be to freely purchase property from nearby property owners. I think issuing shares to do that could work, but I bet some property owners are going to be confused by that and will probably prefer cash. The City can choose to pay cash or shares.
I think this model is most interesting if done in a ground-up city rather than in an existing built area. Simply because over the 20th century our land use and system of land value has created built environments that are dysfunctional beyond repair in many cases. In the case you're starting in "raw land" then the acquisition becomes easier as you can simply pay cash for several thousand acres of land and then layer the Commonwealth on top of that by consolidating the land into a single entity and then issuing shares in that.
Thanks again for reading and for your great comment!
Great piece.
Excellent! This will be help for our LVT implementation projects in Baltimore, Nigeria, Philippines and Indonesia. see www.theIU.org
How Land Value Taxation (LVT) Can be Made Politically Acceptable (In Answer to David Tiggs)
Much as the Single Tax proposal of Henry George is greatly appreciated here for having the most significant ethical principles at its core, one finds that its introduction is simply not practical. Apart from use of the word “Tax”, which in any case no politician wants to propose or introduce, we must eliminate the offense that these proposals for LVT will cause to landlords. Obviously they will be strongly opposed to having to pay a new tax (or anything else we might like to call it). Then the solution is not to fight them, nor try to convince them on ethical grounds, but to find a way to make them want to pay for their land access rights, through revenues.
To achieve this there should be introduced a gradual change in the way that land is being owned. This requires the making of some new laws. Whenever a site or prospect of land (or real-estate with buildings} is being offered for sale, or whenever ownership of such a site is being transferred between family members (and on which an inheritance-tax would normally be collected), the change being introduced here is that the government automatically buys the land at its current normal price. This is done simultaneously when the buildings are being sold in the usual way, or when their ownership is being transferred. (The courts shall be empowered to settle the land-value, if or when doubt is expressed–prepared land-value maps being publicly accessible.)
The previous landlords or their heirs will no longer have any serious financial objection, since the money from the land sale will greatly exceed the subsequent annual lease-fee (see below) for access rights to this land. This change will also eliminate the (hated) inheritance-tax. It is estimated that this process of all the land sales and governmental purchases will be spread over at least 40 years.
Immediately a site belongs to the government, this land should be offered for occupation and use by it being leased. The first refusal for this must be to the new or bequeathed owner of any buildings thereon. The lease-fee should be set according to normal amounts of rent for other similar sites, (and again the courts should decide on it, when there is disagreement.) The above first refusal for this leasing offer is necessary, because any buildings of practical use and value on the site will still be sold or bequeathed as items of durable capital goods, as before.
However, the government should deny access to the site and its buildings, until the site is being leased to the person or organization who/which have purchased (or have inherited) the buildings in the usual way. All taxes that are applied to subsequent building development on the site and its additional value should be abolished at this time.
Then the new owner would acquire the building-property more cheaply than before, because it is now without the price of the land under and around it. Such a buyer can then use or give for hire (rent-out) any building for its access rights and use, as if it were any other item of durable capital goods. In the unlikely but possible chance of the land leaser not owning the buildings, his/her incoming ground-rent (from the building owner), shall be legislated not to exceed the out-going lease-fees by more than 2% (say). Should nobody initially lease the site and its buildings (if any), because of there being no demand for their use, the buildings may be pulled down by the next (eventual) leaser, who will be free to re-develop the site, and normally would want to do so.
The government should borrow the money for site purchase, or even can offer national redeemable “land-bonds” to raise money for it. The previous landlords might even be inclined to purchase these bonds, which presumably are a more stable source of income than the tenant’s rent was. As the lease money begins to flow to the government, it uses this to:
a) repay part of its loan for site purchase, which may be extended, and b) purchase more sites as and when they become available, and c) cover the interest on the loan and on the new bonds and their eventual redemption, and d) eventually and gradually reduce and eliminate the many other kinds of taxation.
It will be appreciated that over the long-term the lease fees are equivalent to LVT, but due to the greed of landlords (who behave as if they were capitalists), the income from land sales will satisfy them better than their being more directly taxed. Eventually nearly all the land would then be leased from the government. Because the selling of land is a natural process which (if anything) is encouraged by the land returning to public benefit, the resulting lower priced buildings will ease their sale and this will not place such a limitation on their (entrepreneur) owners, who probably want to develop the sites.
Nationally leased land, in countries like Hong Kong, Singapore and Estonia, is close to 100%, and this kind of revenue gathering regime is known to be most successful, for the rate of growth of national prosperity. This proposal is not the same as land nationalization (at least no more than what currently applies), since no additional regulations are placed on how the land is to be used.
Also when the previous landlords have more money to spend, some or most of it will be invested in durable capital goods, making production costs lower as obsolescent durable items are more easily replaced. Consequently, the national prosperity will increase from the government’s investment in land values, too.
At the great risk of oversimplifying, it seems to me that the enticement to landlords is to pay LVT in exchange for the abolition of all other taxes. “Pay LVT and develop your land tax free!”. Sounds like a good sales pitch?
Alanna, This poem was sent to a number of Georgist places on the internet. But only here have I seen so much interest in my alternative proposal to our disliked new tax of LVT. The idea came from a question that was asked by David Tiggs at a past Georgist conference about how can we make LVT attractive to landowners. I wrote a longer and more technical reply and then got inspired to set part of it in poetical form. Would you like to see the unpoetical rest?
yes
I think the writers about this subject should be complemented for their good work, but unfortunately it is unlikely that many people will seriously appreciate it. This is because they do not have a good understanding about our social system and how it works.
For that reason I am suggesting that "Progress and Poverty" is far too long and wordy for us today to bother to follow all of its details, but we certainly need something to bring us into the "Big Picture" of macroeconomics. My book "Consequential Macroeconomics--Rationalizing About How Our Social System Works", might be a bit better in this respect, although it was inteneded for an academic following too.
If you write to me at chesterdh@hotmail.com I will gladly send you a free e-copy of this 310-page explanation, which might be used for teaching after reviewing my two short working papers (not more than 10 pages): SSRN 2865571 "Einstein's Criterion Applied to Logical Macroeconomics Modelling" and my SSRN "A Mechanical Model for Teaching Macroeconomics". All of which explain and express our past dreary subject in a new and more lively way that is more easier to understand.
...Have you read Spencer Heath? This is his model, more or less.
In any case, this schema still divorces claimants to returns on ground rent ("shareholders") from the producers of land value (everyone in the city), rematerializing the landlord/tenant relationship, though admittedly in a more aligned way. Ideally you would establish this institution as a for-profit SOE to replace municipalities as legal entities and just give any remaining dividend after public goods investment to all lawful permanent residents.
The more capitalists the greater the poverty but the more understanding about how our social system of macroeconomics actually works, the less poverty.
Page 1 of 2
Making Macroeconomics a Much More Exact Science
Today macroeconomics is treated inexactly within the humanities, because it appears to be a very
complex and easily confused matter. But this does not give it fair justice, because we should be trying
to find a viable approach to the topic and examine it in a way that avoids these problems, and for us to
better understand of what it comprises and how it works. Suppose we ask ourselves the question: “how
many different KINDS of financial (business) transaction occur within our society?” The simple and
direct answer shows that that only a limited number of them are possible or necessary.
Although our sociological system comprises of many millions of participants, to properly answer this
question we should be ready to consider the averages of the various kinds of activities (no matter who
performs them), and simultaneously to idealize these activities so that they fall into a number of
commonly shared operations. This approach uses some general terms for expressing the various types
of these transactions, into what becomes a relatively small number. Here, each kind is found to apply
between a particular pair of agents—each one of which has individual properties. Then to cover the
whole sociological system of a country, it requires only 19 kinds of exchanges of the goods, services,
access rights, taxes, credits, investments, valuable legal documents, etc., verses the mutual and
opposing flows of money.
The argument that led to this initially unexpected result was prepared by the author. It may be found in
his working paper (on the internet) as SSRN 2865571 “Einstein’s Criterion Applied to Logical
Macroeconomics Modeling”. In this model these double-flows of money verses goods, etc., necessarily
pass between only 6 kinds of role-playing entities (or agents). Of course, there are a number of different
configurations that are possible for this type of simplification, but if one tries to eliminate all the
unnecessary complications and sticks to the more basic activities, then these particular quantities and
flows provide the most concise yet fully comprehensive result, which is presentable in a seamless
manner, for our whole social system and one that is suitable for its further analysis.
Surprisingly, past representation of our sociological system by this kind of an interpretation model has
neither been properly derived nor formally presented before. Previously, other partial versions have
been modeled (using up to 4 agents, as by Professor Hudson), but they are inexact due to their being
over-simplified. Alternatively, in the case of econometrics, the representations are far too complicated
and almost impossible for students to follow. These two reasons of over-simplification and of complexity
are why this pseudo or non-scientific confusion has been created by many economists, and it explains
their failure to obtain a good understanding about how the whole system works.
The model being described here in this paper is unique, in being the first to include, along with some
additional aspects, all the 3 factors of production, in Adam Smith's “Wealth of Nations” book of 1776.
These factors are Land, Labor and Capital, along with their returns of Ground-Rent, Wages and
Interest/Dividends, respectively. All of them are all included in the model, as a diagram in the paper.
Page 2 of 2
(Economics’ historians will recall, as originally explained by Adam Smith and David Ricardo, that there
are prescribed independent functions of the land-owners and the capitalists. The land-owners speculate
in the land-values and rent it to tenants, whilst the capitalists are actually the owners/managers of the
durable capital goods used in industry. These items may be hired out for use. Regrettably, for political
reasons, the concept of these 2 different functions were combined by John Bates Clark and company
about 1900, resulting in the later neglect of their different influences on our sociological system-- the
terms landlord and capitalist becoming virtually synonymous along with the expression for property as
real-estate.)
The diagram of this model is in my paper (noted above). A mention of the related teaching process is
also provided in my short working paper SSRN 2600103 “A Mechanical Model for Teaching
Macroeconomics”. With this model in an alternative form, the various parts and activities of the Big
Picture of our sociological system can be properly identified and defined. Subsequently by analysis, the
way our sociological system works can then be properly seen, calculated and illustrated.
This analysis is introduced by the mathematics and logic, which was devised by Nobel Laureate
Wellesley W. Leontief, when he invented the important "Input-Output" matrix methodology (that he
originally applied only to the production sector). This short-hand method of modeling the whole system
replaces the above-mentioned block-and-flow diagram. It enables one to really get to grips with what
is going-on within our sociological system. It is the topology of the matrix which actually provides the
key to this. The logic and math are not hard and are suitable for high-school students, who have been
shown the basic properties of square matrices and the notation of the calculus.
By this technique it is comparatively easy to introduce any change to a pre-set sociological system that
is theoretically in equilibrium (even though we know that this ideal is never actually attained--it simply
being a convenient way to begin the study). This change creates an imbalance and we need to regain
equilibrium again. Thus, sudden changes or policy decisions may be simulated and the effects of them
determined, which will point the way to what policy is best. In my book about it, (see below) 3 changes
associated with taxation are investigated in hand-worked numerical examples. In fact, when I first
worked it out, the irrefutable logical results were a surprise, even to me!
Developments of these ideas about making our subject more truly scientific (thereby avoiding the past
pseudo-science being taught at universities), may be found in my recent book: “Consequential
Macroeconomics—Rationalizing About How Our Social System Works”. Please write to me
at chestdher@gmail.com for a free e-copy of this 310 page book and for any additional information.
How Land Value Taxation (LVT) Can be Made Politically Acceptable (In Answer to David Tiggs)
Much as the Single Tax proposal of Henry George is greatly appreciated here for having the most significant ethical principles at its core, one finds that its introduction is simply not practical. Apart from use of the word “Tax”, which in any case no politician wants to propose or introduce, we must eliminate the offense that these proposals for LVT will cause to landlords. Obviously they will be strongly opposed to having to pay a new tax (or anything else we might like to call it). Then the solution is not to fight them, nor try to convince them on ethical grounds, but to find a way to make them want to pay for their land access rights, through revenues.
To achieve this there should be introduced a gradual change in the way that land is being owned. This requires the making of some new laws. Whenever a site or prospect of land (or real-estate with buildings} is being offered for sale, or whenever ownership of such a site is being transferred between family members (and on which an inheritance-tax would normally be collected), the change being introduced here is that the government automatically buys the land at its current normal price. This is done simultaneously when the buildings are being sold in the usual way, or when their ownership is being transferred. (The courts shall be empowered to settle the land-value, if or when doubt is expressed–prepared land-value maps being publicly accessible.)
The previous landlords or their heirs will no longer have any serious financial objection, since the money from the land sale will greatly exceed the subsequent annual lease-fee (see below) for access rights to this land. This change will also eliminate the (hated) inheritance-tax. It is estimated that this process of all the land sales and governmental purchases will be spread over at least 40 years.
Immediately a site belongs to the government, this land should be offered for occupation and use by it being leased. The first refusal for this must be to the new or bequeathed owner of any buildings thereon. The lease-fee should be set according to normal amounts of rent for other similar sites, (and again the courts should decide on it, when there is disagreement.) The above first refusal for this leasing offer is necessary, because any buildings of practical use and value on the site will still be sold or bequeathed as items of durable capital goods, as before.
However, the government should deny access to the site and its buildings, until the site is being leased to the person or organization who/which have purchased (or have inherited) the buildings in the usual way. All taxes that are applied to subsequent building development on the site and its additional value should be abolished at this time.
Then the new owner would acquire the building-property more cheaply than before, because it is now without the price of the land under and around it. Such a buyer can then use or give for hire (rent-out) any building for its access rights and use, as if it were any other item of durable capital goods. In the unlikely but possible chance of the land leaser not owning the buildings, his/her incoming ground-rent (from the building owner), shall be legislated not to exceed the out-going lease-fees by more than 2% (say). Should nobody initially lease the site and its buildings (if any), because of there being no demand for their use, the buildings may be pulled down by the next (eventual) leaser, who will be free to re-develop the site, and normally would want to do so.
The government should borrow the money for site purchase, or even can offer national redeemable “land-bonds” to raise money for it. The previous landlords might even be inclined to purchase these bonds, which presumably are a more stable source of income than the tenant’s rent was. As the lease money begins to flow to the government, it uses this to:
a) repay part of its loan for site purchase, which may be extended, and b) purchase more sites as and when they become available, and c) cover the interest on the loan and on the new bonds and their eventual redemption, and d) eventually and gradually reduce and eliminate the many other kinds of taxation.
It will be appreciated that over the long-term the lease fees are equivalent to LVT, but due to the greed of landlords (who behave as if they were capitalists), the income from land sales will satisfy them better than their being more directly taxed. Eventually nearly all the land would then be leased from the government. Because the selling of land is a natural process which (if anything) is encouraged by the land returning to public benefit, the resulting lower priced buildings will ease their sale and this will not place such a limitation on their (entrepreneur) owners, who probably want to develop the sites.
Nationally leased land, in countries like Hong Kong, Singapore and Estonia, is close to 100%, and this kind of revenue gathering regime is known to be most successful, for the rate of growth of national prosperity. This proposal is not the same as land nationalization (at least no more than what currently applies), since no additional regulations are placed on how the land is to be used.
Also when the previous landlords have more money to spend, some or most of it will be invested in durable capital goods, making production costs lower as obsolescent durable items are more easily replaced. Consequently, the national prosperity will increase from the government’s investment in land values, too.