A big benefit of land-value taxation is that after the transition, the typical landowner has no tax burden, because the tax replaces what would otherwise have been mortgage interest, as LVT reduces the price of land to provide a normal return on the remaining asset value. But this land-value reduction stirs up opposition to the tax shift. That raises the issue of compensation for losses and how to deal with mortgaged landowners.
First of all, compensation for the loss of land value is not morally required. The typical landowner has been receiving an implicit subsidy from the government, as public goods generate higher rent and land value. One could argue that justice requires the title holder to pay back the past subsidies. The situation is similar to that of slavery; would liberation require compensation to the slave owners? They had been unjustly taking the wages that would otherwise have been paid to the slaves. Rather than get compensated for the loss of the value of the slaves, one could argue that they should pay back the wages stolen from the slaves.
With land bought prior to the transition, but recent to it, the capitalized value of the subsidies would have been paid to the previous owner. Should all previous owners or their heirs pay compensation for their past subsidy gains? One can see that this becomes a tangled mess.
When income or sales taxes are increased, nobody talks about compensation. The reason this comes up with a land-value tax is that there is a significant change in asset value. But in reality, a higher income tax reduces an asset: the present value of the worker’s future income. The loss of value is more stark and evident with tangible property.
While compensation is not morally required, a payment for net losses would make the transition more politically feasible. The cases we can examine are 1) owner-occupied long-held debt-free land; 2) a landlord long-held debt-free land; 3) an owner-occupier holding recently bought debt-free land; 4) an owner with totally mortgaged land.
Because most taxpayers, households and enterprises, would have net gains, relatively few landowners would get compensated for a net loss. And as the removal of market-hampering taxes would result in greater employment, income, and growth, over time, the government debt that paid for the one-time compensation could be paid off. There would be no more deficits, so that the governmental debt would eventually disappear.
Thus is the transition to land-value tax not a moral problem, and is financially and politically feasible.
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FRED E. FOLDVARY, Ph.D., (May 11, 1946 — June 5, 2021) was an economist who wrote weekly editorials for Progress.org since 1997. Foldvary’s commentaries are well respected for their currency, sound logic, wit, and consistent devotion to human freedom. He received his B.A. in economics from the University of California at Berkeley, and his M.A. and Ph.D. in economics from George Mason University. He taught economics at Virginia Tech, John F. Kennedy University, Santa Clara University, and San Jose State University.
Foldvary is the author of The Soul of Liberty, Public Goods and Private Communities, and Dictionary of Free Market Economics. He edited and contributed to Beyond Neoclassical Economics and, with Dan Klein, The Half-Life of Policy Rationales. Foldvary’s areas of research included public finance, governance, ethical philosophy, and land economics.
Foldvary is notably known for going on record in the American Journal of Economics and Sociology in 1997 to predict the exact timing of the 2008 economic depression—eleven years before the event occurred. He was able to do so due to his extensive knowledge of the real-estate cycle.