Interview with Professor Nicolaus Tideman
Professor Tideman's recent paper shows a 5% increase in the tax rate on the value of U.S. land, balanced by decreases in tax rates on labour and capital, would increase economic output by 15% to 25%.
Professor Nicolaus Tideman is a co-author of the recent paper, Post-Corona balanced budget fiscal stimulus: The case for shifting taxes onto land, which found a 5% increase in the tax rate on the value of U.S. land, balanced by decreases in tax rates on labour and capital, would increase economic output by 15% to 25%.
Professor Tideman served as Senior Staff Economist to President Nixon's Council of Economic Advisors. He has held visiting positions at the Kennedy School of Government at Harvard University, the University of Buckingham, and the American Institute for Economic Research. Prior to holding his current position as Professor of Economics at Virginia Tech, Professor Tideman was an Assistant Professor of Economics at Harvard. He received his BA in economics and mathematics from Reed College and his PhD in economics from the University of Chicago.
Professor Tideman's work focuses on land value taxation, voting theory, and political philosophy. Professor Tildeman is the author of Collective Decisions and Voting: The Potential for Public Choice. He is the creator of the “Tideman method,” also known as the ranked pair voting system, which selects a single winner from votes expressing a preference ranking. He is also the creator of the CPO-STV proportional voting method. Further, Professor Tideman devised the independence of clones criterion, which both of his methods satisfy.
Professor Tideman kindly shared his time and expertise with the /r/georgism community. His answers to our questions are reproduced, below. The quoted passages hereinafter are from Post-Corona balanced budget fiscal stimulus: The case for shifting taxes onto land unless otherwise stated.
How do you stay excited about enacting new policy when everything in politics seems so gridlocked?
Like any good economist, I believe in division of labor and comparative advantage. I am not a skilled activist. My comparative advantage is in developing ideas. What excites me is not so much the possibility of success as the acquisition of new understandings.
What changes to the U.S. electoral system would make it easier to pass land value tax legislation at the local, state, and/or federal level?
I don’t think that electoral reform would assist in the effort for LVT. Rather, it is a matter of improving public understanding.
For those of us looking to engage on the local level, what do you suggest would be the best place to start?
Probably Boards of Supervisors, or other such local policy-making organizations.
What is the smallest step we can make in the short term to advance the cause in our own areas?
Get permission to implement a two-rate tax and then do so.
What are the best contemporary books and articles on Georgism you recommend?
Ask Polly Cleveland, Wyn Achenbaum, or Ed Dodson.
Do you have any experience trying to implement Georgist policies anywhere in Virginia?
A couple of decades ago, I spoke with a group that was interested in bringing a two-rate tax to Roanoke. They got legislative permission, but the city did not act.
If so, which localities would support or be ripe for them?
My comparative advantage is theory, not activism. Travis Adams tells me that the four cities in Virginia that have permission from the state legislature to implement two-rate taxes are Fairfax, Roanoke, Poquoson, and Richmond. So further progress should be easier in those cities than elsewhere.
I'm interested in starting a Hampton Roads community land trust as a counter-vailing force to the possible gentrification pressure an LVT might have. Do you have an opinion on community land trusts and their role in advancing Georgist policy?
Georgist land trusts in Fairhope Alabama and Arden Delaware have made pleasant communities, but they have done little to advance Georgism. As I see it, to advance Georgism, a land trust would need to collect all of the rent, rather than leave the residents with a surplus, and would need to donate any surplus to the poorest people in the world.
Texas presents two unique issues that I can see for land taxes. One is the issue of Mineral Severance, which has allowed many landowners to separate their oil and gas rents from the surface of the land; and the second issue is the Robinhood Tax system to fund public schools, which redistributes tax dollars state wide. What policy tools are available to deal with these issues on a local level?
As I see it, a Georgist approach to extractive industries would be to provide rewards for discoveries, and then have the combination of a severance tax on extractions and a land asset value tax on the value of exclusive access, subject to the severance tax.
Funding of public schools is hard to get right. We seem to want an element of local decision-making, while we are also concerned about the possibility that children from poor communities will receive inadequate educations because funding good schools can cost their residents so much more in higher taxes. I would suggest a system that might be described as having some “robin Hood” elements. I believe I would suggest a basic level of funding from a state-wide land tax, with additional funding available from a local land tax that would be supplemented by state land tax funds for communities with relatively little land value per capita.
What are the most effective ways you have personally found to educate and persuade people about land tax?
What seems to me to work best is to begin by seeking agreement that people have equal rights to natural opportunities, that all existing claims to own land are founded on injustice.
In discussion of the Georgist proposition among non-Georgist economists and laypeople, the point of contention is almost always the separability of land and improvements—valuation and the method of doing so. Many other criticisms eventually reduce down to this one issue, even to people who are otherwise convinced. These people tend to think of it as contrived and arbitrary. What do you feel is the best approach to tackle this problem?
One might possibly persuade a person that land assessment is facilitated by the fact that land value can be expected to be spatially smooth, that land taxes do not need to be uniform for them to be non-distorting (Adam Smith said this), that the two things you need for land taxes to be non-distorting are for the tax to not rise when the land is used more productively and for it to not be so high that no one wants to own the land, that assessors can learn the value of land by buying properties, removing any improvements, and then auctioning them, and that assessors could learn the value of land by buying options to sell specified parcels if they were to become available. One could also hold assessment contests, with prizes for those whose proposed land value maps came closest to predicting the prices of subsequent sales of vacant land and land with buildings on the eve of demolition.
Can you recommend any work from you or your colleagues pertaining to separability of land value from improvements?
See my attached, unpublished paper, “The Competitive Assessment Game: Toward an Efficient Mechanism for Assessing the Undeveloped Value of Land” For further advice, consult Ted Gwartney.
Many Georgists believe that any revenue that can be raised by taxes on labour and capital can be raised from taxes on land because of the principle of "All Taxes Come Out of Rent" (ATCOR) and "Excess Burdens Come Out of Rent" (EBCOR). Georgists argue this is because of the special role land plays in economics, being an essential factor of production and having strictly inelastic supply, so that taxes on labour and capital will reduce the rent people would pay for access to land. Therefore, many Georgists believe that not only is the land value tax efficient and incentivizes productivity, but that it can raise not only enough revenue to fund a generous welfare state, but also leave a large enough surplus to fund a UBI or Citizen's Dividend. My question is: to want extent do you buy into the principles of ATCOR and EBOR?
These principles are more and more accurate the smaller the area you are taking about. They depend on the perfect mobility of labor and capital, so they are completely appropriate for a neighborhood, quite relevant for a city, somewhat relevant for a state, and only slightly relevant for a large nation.
Do you think land value taxes can fund all government spending and a UBI/Citizen's Dividend?
It depends on how big a government people want and how many people are unable to provide for themselves and their children.
Is it true a single, worldwide land value tax at a rate of 100% will raise the greatest amount of tax revenues possible, more than any combination of other taxes?
When thinking about taxing land, it is important to distinguish a tax on land value from a tax on land rent. A tax on land rent has an upper limit of 100%. A tax on land value must have a time dimension to be specified. Thus a land value tax of 2% per year is a tax of 200% per century, indicating that there is no limit to the tax rate if the time dimension is high enough. A tax on land value of v% per year collects the share v / (r – g + v) of rent, where r is the annual interest rate and g is the annual growth rate of land values. If the annual interest rate is 7% and the annual growth rate of land values is 2%, then an annual land value tax of 20% will collect 80% of the rent of land. A land value tax of 20% per month will collect 97.96% of rent. I think that land taxes should be collected monthly and that we should aim to get about 90% of rent (to ensure against trying to get more than 100%) so I would suggest a tax of about 4% of land value per MONTH, collecting about 90% of rent and resulting in selling prices for land of about 2 years’ taxes. Such a tax on a global basis would of course be supplemented by a tax on emissions of CO2 and other greenhouse gasses, severance taxes on extractions of natural resources and of fish from the seas, and, I would suggest, on the “monopoly price” component of corporate value, that is, the excess of the value of corporation above the money invested in creating them.
That is the greatest tax system consistent with my understanding of human freedom, but if one was willing to impinge on human freedom, one could get yet more, because there is no other planet to which people could remove themselves and their capital if they were subject to taxes on their labor and capital, and the taxes could be structured in such a way that they lowered land value taaxes by less than the revenue they collected.
With so many people Working From Home (WFH), even becoming a required option by many job seekers, one estimate says 15% of want ads now have a WFH option. Will physical location still be as important a factor in production as before, or has a major shift occurred to make land less important than internet access?
The pandemic has taught us that we do not need as much face-to-face contact as we have become accustomed to.
What implications does WFH have for LVT and for city survival?
It will cause land values in the centers of cities to fall. Cities will restructure themselves and survive.
We approximate the US land share by subtracting the BEA measure of the stock of physical capital from the Fed Flow of Funds net worth of households and non-profit organisations.
Can you please explain why you chose this method of approximation?
It seemed to be the only plausible way to get an estimate with available data.
Are there any obvious draw-backs or systematic biases with this method?
Difficulties are that data developed on the basis of entirely different methodologies are combined, and “goodwill” and monopoly power get counted as land.
Professor Gaffney warned in The Hidden Taxable Capacity of Land against using government figures to estimate the potential tax revenue of a full, single tax on land values. In 2018, he advised me:
Some readers yearn for numerical estimates of the revenue potential of taxing rents, but most efforts to find such numbers are futile because they BEGIN with numbers that are either "official", or published by writers or "think tanks" with a strong bias towards understating the revenue potential. They do that by their choices of methods, techniques, and sources - and their omission of many novel sources of resource rents. They also fail to recognize the power of market synergies that can be released by zeroing out taxes on production and exchange, and illegalizing combinations in restraint of trade, and lubricating the sticky land market.
Are Professor Gaffney's criticisms valid in relation to the method of approximation above?
They probably are to some extent. The model we use allows land values to grow as distortive taxes are reduced.
Your model predicted a 20% LAVT, combined with commensurate reductions in other taxes, would cause an ~80% collapse in private land values in the short term and a ~75% loss in the long run. Do you have any thoughts on how we could soften the shock of a transition to a sizeable LAVT for retirees who own their home but who have little income or savings?
Remember that only the land component goes down. The land tax does not reduce the value of the house (unless the house in a place that is ripe for redevelopment, in which case the land value could go up despite the higher land tax). Remember that we propose a 20-year transition period. I would be willing to incorporate provision for old people to postpone their tax increases until they died. See my paper, Designing a System of Compensation for the Introduction of Public Collection of the Rent of Land as the Principal Source of Public Revenue, on compensation in the transition.
However, as a rule loans are repaid out of total borrower cash flow rather than through liquidation of collateral, and we show that unless a borrower derives their cash flow exclusively, or nearly exclusively, from rent, their total cash flow would improve.
Can you please explain in more detail how improvements to cash flow will mitigate losses in private land values?
A loss of land value is a one-time event. An improvement in cash flow goes on and on. You need to calculate the present value of all future increases in cash flow to know the extent to which the increased cash flow mitigates the loss in land value.
Land value is what you could get if you sold the land. If you are not going to sell the land, a fall in land value does not affect your financial viability. If some taxes go up and others go down, but your total tax bill is the same, you are not financially squeezed. I propose that to the extent that land is mortgaged, the tax bill should be sent to the mortgage holder, because when the mortgage holder goes to the courthouse to require that the mortgage interest and principal be paid before the land can be sold, the mortgage holder is thereby declaring himself to be the proper recipient of a share of the rent and therefore the proper recipient of a share of the tax bill.
Many of my friends work on the debt side of real estate financing. They lend to borrowers whose cash flow is derived primarily from contract rent, on behalf of pension and insurance funds. Will improved cash flows for the average taxpayer be enough to keep real estate lenders, borrowers, and investors in business?
Moving to LAVT involves a redistribution of wealth from the recipients of rent to the payers of taxes on labor and capital, and to those who are not yet born and will be born with a reduced burden of sales taxes, income taxes, and taxes on investments. After the transition is over, there will be work to be done involving financial intermediation, though not as much since most of the rent will be out of the flow to be intermediated. In the transition, the rentiers, those whose incomes consist of rent, will find their asset values falling, and their incomes as well, though there will be temporary increases in returns to capital and permanent increases in wages.
If the federal government bailed out real estate investments held by pension and investment funds, can your model predict a break-even point (in terms of time since implementation) when increased tax revenues from greater economic output covers the cost of the bail-out?
I don’t know. I recommend compensation for vulnerable individuals who are harmed. I do not see the argument for compensating organizations that are harmed.
Would an average earner, with no savings, and an average home subject to mortgage come out ahead if they had 10 years of income before retirement? 5 years?
Under a 20-year transition to a 5% increase in a LAVT, I would expect land prices to fall by about 1/3 and wages to rise by about 15%. The value of houses, as opposed to land, would be relatively unaffected. Retirement portfolios would probably fall by about 10%. Maybe you can figure it out from that.
If there was political will, this information could be produced and disseminated by governments, perhaps in the form of a representative set of tax returns that show ‘before’ and ‘after’ columns.
Do you have any other ideas how we could sell the benefits of a LAVT to voters and educate people about the downsides?
Taxing land has an efficiency side and a moral side. I believe it is important to present both. The efficiency side is that a properly administered land tax is a “lump sum” (non-contingent) tax, so that it does not harm economic incentives the way almost all other taxes do. The moral side is that no one can have a respectable claim to a disproportionately large share of the value of exclusive access to natural opportunities. Land titles without an obligation to compensate for a disproportionately large share are always unjust. These two ideas go together, and each one assists in understanding the other.