The problem of taxation. Part two

Introduction

The post is a sequel to The problem of taxation. Part One. If you haven’t read that post, we urge you to read it first. In this post we will give a justification of the Land Value Tax (LVT), subsequently we will investigate how Space governments can establish a fair rental value. Thereafter we will propose a method to deal with defaulters. Finally we will address briefly the discussion of additional taxes.

Although we use in this post the term “land value tax”, we have explained in part one that a LVT is not a tax in an economic sense (however, it might be in a legal sense). Secondly, the discussion in this post is concerned primarily with land, however our argument applies equally to things like broadcast spectrum licensing.

Justification of the Land Value Tax

There are two defenses for implementing a Land Value Tax (this is actually a misnomer): 1) the classic Georgist defense and 2) Ronald Burgess’ theory of public value.

The first approached is based on the fact that land is a fixed quantity, that land cannot be destroyed or created by man. This statement might seem contrary to space colonization, which aims at the expansion of humanity’s living space. However we have to consider that though the Solar System is large it is still finite. Suppose that we should build a Dyson sphere, a sphere with a radius of one astronomical unit, we “create” an area much larger than the surface area of the earth but it is not infinite. Further we do create the space itself which occupied by the Dyson sphere. Land, in a Georgist sense, are the coordinates in space we occupy in space. Space itself is not created by man.

In the Second Treatise of Government English philosopher John Locke explained how people can become owners of land. According to Locke land becomes one’s property if one has mixed his labour with it, the rationale is that you own your body and hence [the fruits of] your labour. However Locke placed a restriction on the amount of land one can appropriate. This Lockean proviso states that one might appropriate land with the condition that there will be left enough land of sufficient quality for other people.

This proviso leads to a problem: if more and more people are appropriating pieces of land, the amount of unowned land will decrease. If simultaneously population is increasing, there will be at some time not enough land for some people. In Anarchy, State and Utopia (ASU) American philosopher Robert Nozick argued that because of this all previous appropriations are unjust. In order to solve this problem Nozick proposes a weaker version of the Lockean proviso (Nozick 1974: p.176-177).

However, this weaker proviso is still problematic and is also unnecessary. Earlier in ASU Nozick introduced his principle of compensation: if someone is violating your rights, then you are, according to Nozick, entitled to compensation by that person (Nozick 1974: p.78-84). If under the original Lockean proviso the appropriation of all lands is unjust, then the landholders are obliged, in Nozick’s theory, to pay compensation to the landless. Since there is no one-to-one relation between any particular landholder and landless person, it’s up to government to collect this compensation and to distribute to those whom are entitled to it.

A second defense for implementing a LVT is presented by British economist Ronald Burgess. According to Alfred Marshall the value of land is composed of two parts: the public and the private value of land. What is the public value of land? We can answer this question with an example: suppose I own an apartment complex in London, I can sell the building or more accurate the land on which it stands for a certain price. If I, however, would own that same building but now somewhere in the emptiness of the Sahara, I can sell it now only for a much lower price than in the previous case. Why? In the Sahara there are no public services, while in London there is a multitude of services.

The value of a particular location is partially determined by the amount of services available in the surrounding area. Infrastructure, schools, shops, police, hospitals etc. are all factors which increase the value of a certain plot of land. Suppose I own a plot of land outside a big city, at some day the city’s subway line is extended to my neighbourhood. As a result of this subway extension land prices are tripling. Without any effort on my part, I can make a nice profit by selling my land. This what is called the public value of land.

However, this increase in land value is due to public investments, not mine. Therefore it is perfectly reasonable if the community, which has paid for those investments, should benefit from this, according to Burgess (Burgess, 1998: p.98-102).

One might ask what the private part is. Well, this is the part of the value of your land which is the result of your own efforts. According to Burgess this is the part to which you are entitled to and which cannot or should not be sized by the government.

Since the investment in (certain) public services is related with the increase of public value of land, the imposition of a LVT which collects all public land value should raise enough money to fund public spending. Consequently, there is no need for the government to tax people’s private income or private property (Burgess, 1993: p.106-107).

How to calculate the LVT?

An important question is, of course, how we can calculate the value of land within a space habitat? The problem is that space colonization is about settling “new” area, in which almost by definition are no market prices to base our calculations on. We might set an arbitrary price, but this might be to low or to high. In Progress and Poverty George discussed the use an auction to sell land to highest bidder, however he rejected this because he didn’t consider it necessary to expropriate current property holders. Instead he preferred to tax the unimproved value of their land.

However, since there are in space no existing landholders, allocation of land through auction is a good idea. In fact this is also a simple method for determining a market comparable value. The auction of land inside a space habitat is a kind of multi-unit auction, an auction in which several items are allocated to sever bidders.

Multi-unit auction are either uniform or discriminatory price auctions. As explained on Wikipedia:

A uniform price auction otherwise known as a “clearing price auction” is a multi-unit auction in which a fixed number of identical units of a homogenous commodity are sold for the same price. Each bidder in the auction may submit (possibly multiple) bids, designating both the quantity of units desired and the price he is willing to pay per unit. Typically these bids are sealed – not revealed to the other buyers until the auction closes. The auctioneer then serves the highest bidder first, giving them the number of units requested, then the second highest bidder and so forth until the supply of the commodity is exhausted. All bidders then pay a per unit price equal to the lowest winning bid (the lowest bid out of the buyers who actually received one or more units of the commodity) – regardless of their actual bid. Some variations of this auction have the winners paying the highest losing bid rather than the lowest winning bid. (Wikipedia, visited at April 5, 2013).

It’s not hard to see how this would work for the owners of Space habitats. Suppose that in a O’Neill cylinder we have some 10 square kilometers for lease. We organise an auction and we ask potential lessees to submit a bid. In this bid they announce what amount and for what price per unit they are willing to lease a plot of land. The price is the rent to be paid per period (once a year, once per month).

A discriminating price auction works in the same, only in this case people do not pay the same price (say 10,000 per hectare). Instead the highest bidder pays the second bid, the second bidder the third bid etcetera.The question which auction gives the fairest price is a complicated one and is the subject of auction theory.

In order to deal with inflation, we suggest that the price as determined in the way described above should be corrected each year. One way of correcting the rental price to the rate of inflation is to fix it to the consumer price index. If this index increase by, say, three percent the rental price will rise by the same amount. If, however, the index will decrease, the land rents will also decrease. In this way public revenue is protected against inflation. Of course this annual adjustment will be communicated beforehand to the prospective lessees.

Failure to pay

Another issue we have to address is the possibility that some landholders might refuse to pay the land rents they owe to the public. We are familiar with tax evasion, tax avoidance and the like in our current tax systems, so it is reasonable to assume some people will try to forsake their obligations. There it will be necessary to have a method to deal with reluctant landholders.

A LVT has one benefit compared with modern tax systems: land cannot be hidden. Whilst people can decide not to report (part of) their income or use all kind of elaborate schemes to avoid to pay income tax; landholders cannot hide their land from the government, nor can they avoid to pay (some) LVT by using legal persons as strawman. Unlike the tax systems we are familiar with, the LVT system does not provide for a different treatment for corporations. One might decide to rent land through a trust, but that will not change the amount of rent.

In order to collect the LVT, the government has to register all landholders and some landholders might try to avoid registration. However, if some piece of land is not registered as already rented by some one, the government is free to rent it to someone else. Therefore landholders have a strong incentive to register.

So the only way landholders can avoid to pay their rent is simply to refuse to pay. What should we do in this case? Our proposal is simple: first we should send the landholder a reminder to pay within a reasonable period of time. If the landholder has not paid after this period, his tenure will be revoked and he will be evicted from his land. Subsequently the landholder will be placed on a blacklist, which means he cannot rent another piece of land as long as he has not paid to money he owes to the public.

We see no reason why we should waste our time with prosecuting and imprisoning reluctant landholders. Just revoke their land and blacklist them, until they come to terms.

Other “Taxes”?

This is a good moment to ask whether we should have another kind taxation as source of revenue. (This phrasing is, of course, wrong since a LVT as we endorse, is strictly speaking no tax.) The first question is whether is will necessary at all, however I will address this issue in another post.

One kind of taxation we consider to be appropriate are the so-called pigovian taxes. Actually these are also no taxes, they are called tax mainly because of legal reasons. In fact a pigovian tax is a monetary compensation for externalities caused by some one. Many activities have negative consequences for third parties, an example is pollution. Since this is an infringement on the rights of these third parties, they are (at least according to Nozick’s principle of compensation) entitled to some compensation.

However, often there is no clear direct relation to the person who cause a negative externalities and the people who suffer from it. Often we only know that some people cause the externalities and some people suffer, therefore it’s up to the government to collect this money and spend it in such way to reduce the effects of the externalities.

References

Nozick, Robert 1974. Anarchy, State and Utopia. Basic Books, New York.

Burgess, Ronald 1993. Public Revenue without Taxation. Shepheard-Walwyn (Publishers) Ltd, London.

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9 thoughts on “The problem of taxation. Part two”

  1. This is a well researched piece.
    I think it would be difficult for space colonisers to fail to register land unless they enter into deals with the registrars.

    1. “unless they enter into deals with the registrars.”

      Thanks for detecting a problem, I haven’t seen yet. Though this flawed has to be countered, it will be much tougher for landholders to occupy unregistered land than to evade current taxation systems.

      1. I think the first solution is that all must be registered and the register kept in a central registry. Since I think a registry of citizens will be kept, a requirement should be that they indicate the land parcels they might own. All unoccupied land, where possible should be fenced off though I think this would be expensive.

        1. The registry of both land and citizens will certainly be kept. The reason I might have not emphasized it here might be due to the fact that I live in a country where such registers already exist, so I took it for granted that a space colony would have these registers too. It’s a misnomer to say they “own” land, since they are renting land from the community, so a more correct phrase would be “the land parcel they might rent”. I don’t think fences are necessary, the authorities can easily use drones to patrol unrented land and detect illegal occupation. In which case the police will pay these people a visit, then they are offered the choice of either paying the rent or to leave immediately.

  2. Very educational 2-part series. What are the suggestions concerning inheritance tax and income earned from speculation (if that is possible in Lagrangia)?

  3. It seems to me this excellent article is written with a great academic understanding of economics but with less understanding of politics and psychology.

    I would hope that one of the main benefits of human expansion into space would be a maturing of th species and a leaving behind of many of the concepts that underpin the economics outlied above.

    I look forward to exploring more of this site

    1. “I look forward to exploring more of this site”

      In our reader guide you can find many more of our articles.

      “It seems to me this excellent article is written with a great academic understanding of economics but with less understanding of politics and psychology.”

      I guess that is more the result of the nature of this article, which primarily deals with economic concepts rather than with political ones.

      “I would hope that one of the main benefits of human expansion into space would be a maturing of the species”

      We share this hope with you, though it’s unlikely that space colonization alone will suffice, hence it’s of great importance to “design” proper social structures to facilitate this maturation.

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