32: LeFevre's challenge

American Journal of Economics and Sociology, The, April, 2004 by Damon J. Gross

Land-Value Taxation and Development

LeFevre gave three economic arguments that purported to show that land-value taxation would inhibit development. First, LeFevre argued that land-value taxation would discourage development because it would increase the risk of the developer losing his investment.

   With the state as landlord, the profit motive respecting the
   development of land, while not eliminated, would be thwarted and
   twisted. It is implicit in the Georgist proposal that the more the
   land is developed, and the larger the populations depending on its
   output, the larger the value it has. The larger the value is
   presumed to be, the larger the land rent will become. Assuming that
   the state would abide by its contract and not increase rents during
   an existing contract, the fact would emerge that with each passing
   month and year the leasehold decreases in value. (25)

Here LeFevre anticipated a phenomenon that could occur, but he did not understand it. Removing the remnants of LeFevre's misinterpretation, consider land-value taxation in a region where land values are rising and reassessment is done infrequently but at predictable intervals. In such a case it is likely that land-value taxation would not capture all the rent all of the time, so the land would have a non-negligible selling price at all times. But the rent that is left to the landholder would not be at a constant level. It would be near zero just after each reassessment and then rise to a peak just before the next assessment. The price of the land would also not be constant, because, with a cyclically fluctuating income stream, it matters whether one can expect a valley first and then a peak, or a peak first and then a valley. And the price would begin to decline before each reassessment, in anticipation of the next valley. LeFevre saw this minor temporary downward adjustment in the price of land, due to the anticipation of a sudden predictable but temporary drop in an income stream, and thought someone was at risk of losing an investment.

But he went on: "This would be especially true were the land to be improved. If the contracting party enhances the value of his land holdings by investing money in improvements, he finds that each additional dollar invested increases the likelihood of an increased rent at the time his contract expires." (26) Here he was just mixed up. Either he thought that George was proposing a tax on both land and improvements, or that the improvements on each parcel significantly increased the value of that particular parcel. But neither is the case. At any particular time, the land-value tax on an improved parcel would be equal to the tax levied on a similarly situated parcel that is unimproved, so it cannot discourage development in the way LeFevre thought.

LeFevre went on in this fashion for two paragraphs and then concluded his argument with the following remarkable passage:

   In the event of an eviction occasioned either by the expiration of
   the lease or the increase in land rent, or both, the occupant would
   be able to take with him only those things which are portable.
   Certain types of land improvement would thus become highly risky and
   extravagant; for example, sewer systems, underground wiring,
   underground development of water resources. Additionally, structures
   built on the land would tend to become flimsy and portable rather
   than solid and fixed. Dwellings would tend toward prefabrication,
   toward a maximization of sheet material and the elimination of brick
   and masonry work. Landscaping, the planting of trees and flowers,
   the installation of walks and driveways, and other appurtenances
   which become a part of the land itself, would become risky
   investments. (27)