alt.politics.economics

Andy F. wrote:
> wrote in message
> news:46ea1e1d$0$18998$4c368faf@ ...

>
> Interesting post. However, a change in spending patterns due to income
> effects is not the same as a 'deadweight loss'.
> Feldstein's analysis doesn't support your claim that LVT is inefficient.
>
>

It does for 2 reasons. First, the decision on investing in capital is
distorted. Second the wage is passed to the laborer.

Feldstein shows that a perfectly inelastic supply of land and perfectly
elastic supply of capital are necessary to avoid dead weight loss.

These are assertions that still lack data to back them up. Once the
traditional assumptions are relaxed the fact that tax can be shifted
will result in a dead weight loss. If neither supply nor demand are
perfectly inelastic then the quantity on the market will drop and trades
that showed a net benefit prior to the tax will not be made.

I realize this is an extension of Feldstein. However, the classical
assumption about elasticity have yet to be shown. In fact the few
studies I found estimating the elasticity of supply of land show it is
not 0. There is little reason to believe the supply of capital is
perfectly elastic. I have shown why the traditional assumption of 0
elasticity may be wrong. Through application of asset pricing models and
the concepts of the supply curve. By using tools not available to
Ricardo or George it is easy to show why we should not assume that the
elasticity of supply of land is 0. It could be if prices are higher
enough but we can not say with certainty it is.

The argument is simple. The traditional assumptions rest on the rigid
role of landowner and land user. If the land owner can use the land then
there are profits the land owner can reap. He will only sell if the
price of land exceeds the present value of the stream of profits. He
will only rent if the renter is willing to pay more than the flow of
profits. If indestructible characteristics of the land affect the stream
of profits then different lands yield different profits. The owner will
only sell if the price is equal to or greater than the present value of
future profits. He will only rent if the rental rate is equal to or
greater than the profits could be had from using the land himself. This
means changes in prices will affect how much land is offered for rent or
sale. The elasticity is not 0.

This means the land owner can pass the tax on to the renter by raising
the rental rate. If the elasticity of supply of rental land is not. The
land owner and renter will both pay the tax because the owner can adjust
how much he will he will rent. The rental rate will not fall by the tax.
He can also adjust how much he SELLS on the market when prices go down.
If price is now lower than what the value is after shifting taxes he
will not sell. This can occur because the reservation prices do not drop
by the full tax because the burden of the tax is shifted to capital owners.

Understand if you use the traditional assumptions no shifting occurs
because land owners and land users are different. There is the absurd
notion that being an owner excludes you from using the land. This is
where Roy gets the absurd notion there is no value from ownership. Break
that and the house of cards falls. This is what yields zero elasticities
in land and rental markets. If the owner can decide to use the land,
rent, or sell then he has a reservation price that is based on the
stream of profits he can gain from using the land. He will not rent
unless the rental rate is higher than the stream of profits he can
obtain from the land. If this is different for different pieces of land,
the elasticity of supply of land for rent is not 0. Therefore the land
owners can react to the tax by using the land themselves rather than
renting. Meaning a drop in price will mean less land rented.

In a sale the price must be higher than the stream of profits from rent
or from using the land. If price drops the owner can keep the land
instead of sell it and make more money by doing so.

Now the other linchpin here is assuming that the owner of the land bears
the full burden of the tax. If I can not shift the tax the preceding
analysis does not matter. I pay $400 when the tax goes up $400. If I can
shift the tax I pay less than $400. If the market raises rental rates by
$200 to offset the tax, meaning that demand is not perfectly elastic and
supply is not perfectly inelastic, then the tax is shifted. Rental rise
and less land is rented. This is because I can react to the tax by
raising rental rates simply because I can not offer the land if the
rental rate is too low. In this case I only pay $200 of the tax and even
if I adjust reservation price it will be by $200 instead of $400. The
land rented will drop. This means land that could have netted a higher
profit by a different user says in the hands of the owner who nets a
lower profit.

If I can expand capital and shift the tax onto to capital users by
lowering returns then my reservation price will not fall by the amount
of the tax. Demand will shift more than supply. Note this is not a
problem if the elasticity of supply is 0, the same amount of land will
be rented or sold. If not that means the amount of land sold on the
market will drop.

So the the linchpin to George's idea that land is an Uber-tax are
separation of land owner and land user. If that falls the whole the
analysis that there is no dead weight loss from the tax falls. Now
owners have a value to land and make decisions to rent or sell based on
the value to them. They have value because they can use the land not
just rent or sell it. This means there is absolutely no reason to assume
an elasticity of zero in rental land or land for sale. That breaks the
assumption of non-shifting which breaks the assumption that the price
will fall by the amount of the tax which breaks the assumption that the
tax does not distort behavior.


If the land is not used for production then the owner bought the land
because ownership had a value to him or he is a speculator. If all are
speculators the analysis works and there is reason to believe the
elasticity of supply of land is 0. So we are back to George's claim that
the tax does not cause an inefficiency. If not then we only if all
owners place the same value on the land or if price is sufficiently high
will price not affect how much is offered for sell on the market. If
values different we have different reservation prices and prices can
cause a change in the amount offered on the market. The rest of the
analysis is the same the owner will only rent if the rental rate is
greater or equal to the value he places on the property. He will only
sell if the price is greater than his value of ownership. The fact that
rental and sale decisions are motivated by price again shows the
elasticity of 0 assumption fails. It also shows the value tax can be
shifted to renters. So the land market will be affected. If I can shift
some of the tax to a renter than my reservation price does not change by
the tax liability. Only the liability after shifting the tax to renters.
Demand will shift more than supply and we are back to the question of is
the elasticity of demand 0 or not.

George needs very rigid assumptions for his argument to work fully.
These have not been adequately tested. I have shown if the assumption
fails the assumption of no tax shifting and that the assumption the tax
does not affect market decisions falls like a house of cards. It can no
automatically be assumed to be preferable to other taxes. It distorts
incentives for labor and capital just like an income tax does. It
becomes and empirical question as to which has the least dead weight loss.