How Much Is the Land in America Worth? (Redux)

The land-taxers I know are pleased with Wonkblog’s decision to hand “land value taxation” its coveted “most worthwhile yet hopeless policy crusade of the year” award for 2013. I guess the land value taxation pilot program Connecticut approved last June isn’t good enough. However, Wonkblog courteously acknowledged Mason Gaffney’s work on the subject.

Aside from linking to the Slate post on the topic that I discussed back in October, Wonkblog linked to another one from December in which Matthew Yglesias informs us that his correspondents told him that the Federal Reserve’s Flow of Funds report contains enough data to calculate the value of privately held land in the U.S. The number? $14.488 trillion. He concludes:

So who cares? Well, you should care. This number is high enough that it tends to confirm that [sic] view that taxation of land and other natural resources, supplemented by pollution fees and things like congestion charges could replace all taxes on labor and investment and still fund an ample welfare state and public sector.

Lamentably, Yglesias doesn’t show his readers why $14.5 trillion in land value “tends to confirm that view that taxation of land and other natural resources … could replace all taxes on labor and investment.” Indeed, his statement implies that the only thing standing between handing every American a citizen’s dividend equivalent to median household income is a posse of mustachioed landowners.

Alas, this is not how land value taxes work, but Yglesias’ vague editorial provides an opportunity to discuss the difference between “land value” and “land rent.” Land rent is the annual amount one pays to use land. Land value is the purchase price of real estate absent improvements. Land rent is like annual income; land value is like lifetime income once you’ve accounted for your JD premium. The ratio of land rent to land value is the “capitalization rate,” a percentage that differs among cities. Basically, it’s the discount rate; the higher it is, the lower the land value.

When Georgists talk about taxing land rent, the calculation is easy: Just multiply the rental value by the percent to be taxed. Let’s say we have a parcel that rents at $100,000 annually. Divided by a capitalization rate of 5 percent, its land value is $2 million. If we want to tax 80 percent of the land rent, we get $80,000 in land rent tax. Easy-peasey.

Now, like the typical Slate reader you’re thinking, “Why not tax land values instead? Wouldn’t an 80 percent tax on that yield $1.6 million?” And it’d be a good question—two even. The reason is that the amount taxed gets subtracted from the rental value, so as the land rent tax goes up, the land value drops. The rental value, however, remains the same. Here’s the equation:

Land Value = (Rental Value ­– Tax Amount) / Capitalization Rate

So taxing $80,000 from our parcel leads to a net rental value of $20,000 divided by a 5 percent capitalization rate and we get a land value of $400,000, not $2 million. If we want to express the land value tax as a percentage, then we modify the equation:

Land Value = Rental Value / (Capitalization Rate + LVT Rate)

…And then solve for the land value tax rate. In our case, it’s a 20 percent land tax on a $400,000 parcel, not an 80 percent tax on a $2 million parcel. Got it? Good.


So we have a $14.488 trillion chunk of land that Yglesias believes tends to confirm the view that land taxes can finance an ample welfare state and public sector. Unfortunately, he gives readers neither his estimate of the land’s rental value nor that of the capitalization rate he used to close the accounting identity detailed above.

I can help. I’ll assume a generously low capitalization rate, 3.88 percent, the same as the current yield on 30-year T-bills (the aforementioned Gaffney recently demonstrated that wealthy people get much lower discount rates than poor people). We get a mere $562.1 billion in taxable land rent, which isn’t even enough to cover the federal deficit.

Now’s the part where Slate readers might question why Yglesias thinks this is sufficient to finance an ample welfare state and public sector, but they wouldn’t realize that government at all levels collected about $4.3 trillion in taxes in 2012. Add that back to annual GDP and we have $21.1 trillion to work with. How much of that is land rent? Again, we’ll have to fill in the annual rental value because Yglesias does not. Let’s say it’s only 20 percent, and we get $4.2 trillion in taxable land rent and at our 3.88 percent capitalization rate, $108 trillion in pretax land value.

You can tweak the capitalization rate and the percent of land rent as a share of GDP, but I think 20 percent is too low, if only because by the time you tax the land value down to $14.5 trillion as we do now, governments get less revenue than under the current tax system. This is implausible. Raise the percentage of GDP that goes to land rent to 30 percent, and you have well over the $5.7 trillion U.S. governments currently spend. Anything more is Hanukkah.

Of course, none of these calculations account for the increases to national income by recovering the deadweight losses imposed by our current tax system or the costs of administering it. Nor do we know if the Fed’s assessments undervalue land, which I—as does Gaffney—bet they do because hiding wealth in land is a time-honored practice. So yes, we should be confident that there’s enough land value (plus other rents, like spectrum rights, mineral rights, IP rights, etc.) to finance government and the welfare state, but a $14.488 trillion land value assessment alone is insufficient to prove it.


  1. ML,

    Although I am semi-sympathetic to the land tax idea (not being a California coastal property owner insanely profiting…twice!…from Fed QE repression of interest rates) all the detailed land tax justifications provided seem to quickly glide over one very important fact – they all operate as *wealth* taxes…taxing (again!) value that has *already* passed through the *income tax* gauntlet.

    Why not go “full Cyprus” and “wealth tax” *all* savings (as manifested in bank accounts, T-bills(?), etc.)?

    I’m sure there are plenty of “political expediency” justifications (harder to evade a land wealth tax than a bank account wealth tax) but I can’t think of too many *ethical* justifications for privileging one form of savings over another. (Although the vile QE-derived goosing of land values is one…but that is really more a justification for nuking DC than anything else).

    (Btw and for the record, I also think the capital gains/ordinary income differential is asinine and economically unjustified).

    In any event, multiple rounds of taxation stinks of political confiscation.

    (One reason why estate taxes are hated…although I think *inheritance* taxes probably have the greatest moral justification of all…)

    So before trying to exact more revenue for the Feds, I think *very* close examination should be brought to bear on the expenditure side of the ledger – there is more than enough eternal corruption/systemic political vote buying going on there to justify *starting* there.

    Until the Augean stables are cleaned out, I don’t think figuring out ways to buy more ponies is going to fix things.

    If your car is on fire, your first thought shouldn’t be, “How do I pay for more gas?”

    1. cas127,

      You appear to be operating under a few misconceptions.

      One, the point of land taxes is they replace income taxes, so there are no multiple rounds of taxation. In fact, it’s technically not a tax; rather, it’s a user fee for the monopoly privilege of being able to use land to the exclusion of others.

      Two, the ethical justification of taxing land value is manifest: It’s not created by individual efforts. When Jed Clampett goes out hunting for some food and up comes a-bubbling crude, I hasten to point out that he didn’t create it. It was there before he was and he got lucky, so why should he be able to sell it for a fortune and move to Beverly Hills with his stereotyped hillbilly family? How is that fair? Likewise, why should whoever who owns the vacant rowhouse a block north of where I live get to hold it out of use when there are homeless people in NYC?

      Finally, if you think land taxes are politically expedient, what does that make justifications for all other taxes?

    2. I for one think it’s wrong to take someone’s money when land isn’t being taxed, but for practical purposes, if we taxed wealth, the wealth would move. Land doesn’t move.

  2. “One, the point of land taxes is they replace income taxes, so there are no multiple rounds of taxation.”

    Fine in theory, rare in practice – only a few jurisdictions have property taxes but no income taxes (and those jurisdictions are generally hated by the Left—>Texas).

    The vast majority of jurisdictions have property taxes *and* income taxes.

    Further, the transition from income to land taxation would necessarily double tax *existing* land owners, whose land-buying income *did* have to already run the gauntlet of income tax once.

    Money used to buy land has to come from *someplace* and in modern American life, you can assume that place has been taxed.

    Which leads to your second point regarding the Clampett’s oil lands/rowhouse.

    How did *they* buy the oil bearing land/rowhouse?

    By means of *earned* income, already taxed once – via income tax.

    In contemporary times, with very few exceptions, resource bearing lands are *bought* (with post-tax income) not granted free of charge by some government.

    It would be a different story if Jed got the land as a grant from King George – none too likely in contemporary times.

    Such purchases are paid for by dollars that have already been income-taxed.

    This is even *more* true of the rowhouse (whose true cost/value is less likely to be an “unearned” surprise).

    Finally, I’ll grant that at some level all implemented taxes are expedient (that is how they end up actually being implemented…).

    But if we are hunting for “unearned” income in the name of higher ethics and greater taxation, I think a much stronger case can be made for inheritance taxes.

    Granted, the assets in estates have *also* run the income tax gauntlet once – but *not while under the control of the beneficiaries* who have essentially done *nothing* to “earn” their bequests.

    Why isn’t the Left hammering on this?

    I don’t believe they are really cowed by calls of “death taxes” (“death panels” didn’t stop Obamacare, which I reflect upon as I wait over two hours on hold – repeatedly – to talk to *anyone* about the dysfunctional website…).

    Instead, per usual, I believe the Left is morally compromised by its constituent interest groups (who parade as champions of “social justice”).

    The wealthy Left are not voluntarily handing over their fortunes to the government upon death, they are estate planning the sh*t out of that mother and setting up questionable tax-free foundations.

    And Bill Gates Sr. ain’t handing any checks to the US Treasury until *everybody else* is along for that ride.

    (Btw, I always find it hilarious that Sr. is continually trying to morally grandstand by advocating for the expropriation of Jr.’s vast fortune – between that and Jr. dropping out of Harvard, it must make for some interesting Thanksgiving dinners. Bill Jr. probably just sends an android in his place…)

    1. Further, the transition from income to land taxation would necessarily double tax *existing* land owners, whose land-buying income *did* have to already run the gauntlet of income tax once.

      Michael Simkovic went to an elite law school that’s hard to get into, and he may have borrowed significant amounts of (now) nondischargeable debt to do so. He passed the required courses and probably the bar. He demonstrated to employers that he was a productive worker. To my knowledge he produces scholarship his employers approve of and teaches his courses competently. He files his federal, state, and municipal income tax returns every year; he pays his student loans if he has them—and in return he gets a salary paid out of federal loan dollars.

      By your logic, Simkovic paid his dues to become a law professor, so taking away the federal loan program would unfairly damage him, so it’s morally justified for the loans to continue flowing. Forget the taxpayers who support him even if it’s at a loss to society.

      If you think law professors are parasites, then a fortiori you feel the same about land speculators. FULL STOP.

      1. Not up to your usual standards, Matt (and I’m not even *that* opposed to some increased land taxation so long as it is done honestly, for clearly declared reasons, and accompanied by extensive DC spending reforms).

        You seem to analogize MS’ professional perfidy to that “demonstrated” by every existing land owner (every? really?)

        Basically, the underlying claim seems to be that sunk investments should *never* stand in the way of reforming bad policy.

        Which may be fine as far as it goes (specifics really do matter in practice, though) but I don’t agree that the avoidance of multiplicative, cumulative taxation (intended to save the bacon of a political class with the moral rectitude and fiscal wisdom of a crack whore) is necessarily “bad policy”.

        Unfortunately, I think this is the sort of place your “all waste is good” economic theories lead – “Who cares if we expropriate people – who may in fact be overwhelmingly deserving of their accumulated wealth – so long as we liberate – to the greater social good – those harmful, “frozen” savings that Keynes warned us about”

        Not only is this a *tremendously* “end justifies the means” point of view (goodbye law and due process) but it may in fact turn out to be tremendously wrong-headed even as amoral policy.

        Masses of people who feel they have been unjustly expropriated in order to further the interests of some remote political class will respond in ways *truly* destructive to the long-term interests of the country.

        As in transferring their wealth, loyalty, and future efforts to nations that *don’t* behave capriciously and opportunistically.

        Or they will, with very clear conscience, become the actual, evasive outlaws that the political class paints them as being (to the political class’ own great personal profit).

        There is a reason why political banana republics suffer from habitual currency flight and tax evasion – their political “word” is worth sh*t.

        And the result is much lower domestic investment than there would otherwise be.

        (Brazil and Argentina were leading nations economically around 1900 – a few generations of habituated political corruption put an end to that)

        If this is Tuesday, this must be Argentina…

        Americans used to know this intrinsically in their bones – but just a few decades of having their political recklessness absolved by a reserve currency that promises eternal immunity from economic consequences has turned the country into something that is casually immoral – and therefore shortsighted, foolish, and damned.

        Not having been able to retrieve an economic fiasco of their own making by means of having expropriated the earnings power of every saver (ZIRP1 and 2, QE 1, 2, 3, 4) the political class now proceeds against everyone’s *principal*.

        Why not forced labor in the name of statistical “full employment”?

        I mean, other than the fact it might be considered “less popular”.

  3. Matt, good work on those rebuttals, I’ve heard this nonsense so many times (why not tax other forms of savings? But I bought the land out of taxed income! etc)

    As to this: “$14.488 trillion land value assessment alone is insufficient to prove it…” you are quite right, the annual site only rental value of that is about $500 billion.

    But I did the workings using real figures for actual site only rental values in the UK and the answer is about £200 billion for residential plus about £40 billion for commercial = $400 billion and the US economy/population is five times bigger than ours, so if you did the numbers properly, I’m sure the annual rental value is closer to $2 trillion than $500 billion.

    1. Thanks Mark.

      I liked your post on valuations, but I’m unsure of some of your figures. If the rental value of land in the UK is £240 billion and its GDP is £409.9 billion, then land rents, imputed or real, are more than half the economy. This seems a bit high.

      Likewise, you write, “the US economy/population is five times bigger than ours,” which I don’t think is correct. U.S. GDP per capita is about $48,000 annually, but the UK’s is $36,000. You can see the data here back when the Labor Dept. tracked foreign data for labor comparisons. Given that $2 trillion would imply a 13.5% capitalization rate, I believe the rental value is only in the hundreds of billions.

  4. A few points.

    1. The $14 trillion seems way too low. That’s only $44,000 per capita. In Australia the estimate of total land value is $4.5trillion for 1/15th the population. So I second Mark’s comment.
    2. Second, your capitalisation rate seems way too low. Just look at residential land for a second (which would be the majority of land values). Is anyone paying cap rates of 3.9%? Seems to me it should be >7%, which immediately doubles your estimate.
    3. I’m not sure why you add taxes back into GDP. Taxes are transfers between the private sector and government, and government spending is already counted in GDP. Adding taxes is gives you a meaningless number.
    4. Current land values are after current taxes. Every time you reduce taxes you will increase land rents 1:1.
    5. To cas127’s points. There is no ‘double taxing’ stuff going on. Yes, money cycles, and gets taxed at various points. It doesn’t mean anybody ‘pays twice’.

    1. As to (3), I was assuming that the government was borrowing 100 percent to cover its spending, which would free up private incomes. There’s no question that this assumption runs afoul of Ricardian equivalence issues, and it would certainly mess up capitalization and interest rates. However, the point wasn’t to create a hypothetical tax-free world but to show that given all taxes come out of rent (your fourth point), taking out the tax payments isolates the annual land rent.

  5. The estimate given by the Fed is only residential, owner-occupied, single-family homes. It doesn’t account for any of Manhattan, for example.

    1. No, it’s based on calculations in three balances (pdf – Note: these data have been revised): households and nonprofit organizations (B. 100, pdf page 1), nonfinancial corporate business (B. 102, pdf page 2), and noncorporate business (B. 103, pdf page 3).

      B. 100:
      Line 3: 21,610.9
      Line 45: -13,798.5
      (Line 48: -1,660.1)

      B. 102:
      Line 3: 9,866.9
      Line 34: -176.2
      Line 35: -7,933

      B. 103:
      Line 3: 9,704.4
      Line 34: -2,985.1
      Line 35: -1,800.8

      Yglesias didn’t subtract line 48 in B. 100, so the actual figure is $12.8 trillion. This is what happens when you trust him. He also omitted calculations of land held by federal, state, and local governments, but I’m not going to check if the flow of funds includes them right now.

      Also, plenty of Manhattan is residential.

  6. As a Democrat and staunch advocate of Land Value Tax like Henry George, Adam Smith, John Stuart Mill, Albert Einstein, Thomas Edison, Henry Ford and many other Educated Men & Women believe in here is MY OWN REBUTTAL to the “no significant $$$ argument against it. 1. That is over 500 Billion $$$ NOT GOING into the pockets of including landowners and lenders alike that enjoy profiting from the economic value of something NATURE MADE unlike an Automobile or House alone and if that was not bad enough there is no free market of choice for land rich in soil fertility, a beautiful view or perhaps good Port Access. Bottom line is NOBODY ever wants/deserves to get F*&^ED just to pay for housing or Commercial space. 2. This form of tax would be EXTREMELY CHEAP & EASY to Collect, Asses and Account for unlike Earned Income Tax, payroll, Capital Gains or any other Tax on income earned from ingenuity and productivity instead of taxing land rent income and fossil fuel/mineral extraction. 3. Because this tax diverts any and all potential income earned from unimproved land rent income from private citizens DIRECTLY into the public purse it has been proven time after time around the planet like Hong Kong and Taiwan in the 1947-1955 years, Japan in the 1990s and more recently Estonia and Denmark to STABILIZE Economies by removing any/all economic opportunity to SPECULATE on unimproved land values. 4. As has been witnessed around the planet in the examples listed above and in certain Pennsylvania cities, this tax system promotes Environmentally sustainable and extremely efficient use of land. Extremely expensive land (like beachfront property) and extremely cheap land would get abandoned in favor of people wanting to cluster (build-up) on medium value land that is good for most types of Economic activity and at least unlike super expensive land sites would allow most businesses and residents to minimize the land rent taxes on their own homes and businesses annually. 5. As for practical consequences 3% of GDP dollar/dollar tax replacement and reduced Accounting costs may not seem like much, but there are many other more positive and likely benefits like many wealthy and upper income people giving up expensive houses and office buildings with expensive rent taxes relative to other real estate costs for more modest facilities closer to MOST OF THEIR EMPLOYEES, helps to save EVERYBODY $$$ with real estate costs, transportation & distribution costs also.

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