The Bounty Beneath
Beyond land value taxation
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If our goal is economic growth and general human prosperity, we ought to avoid taxing production and labor. We must lift the burdens placed upon hard work and innovation as much as possible. As previously discussed, Land Value Taxation is the ideal cornerstone of a truly progressive (pro-progress) tax system because it targets only land rents and produces near-zero deadweight losses. As such, LVT is perhaps the only tax we can levy that accelerates economic growth. As I also discussed, the challenge with LVT is determining the value of the land independent of the improvements built upon it, should there be any. There is another challenge, however, one that has vexed me for some time: what of the bounty beneath the land?
To be sure, purist Georgists, those who advocate strongly for LVT as a “single tax” solution, consider Earth's natural bounty, including the depletable resources found within the land, to be part of the “land” and therefore hold that LVT would capture those rents. For example, should oil be struck on a parcel of land, the rental value of that property would increase to reflect the discovery. LVT would then capture this unearned wealth, just as it captures the rents from pure surface location value. This notion, however, that we can simply extend LVT to include that which lies beneath the surface, will not work well in the real world.
The first problem we would encounter is the reality that resource deposits are rarely neatly confined to a single parcel. A reservoir of oil, for example, may be tapped from one parcel with one owner, but extend under the surface across many parcels with many other owners. Who, in such a scenario, has the right to tap this oil wealth? Do they all? And which is to be taxed? Would a parcel owner be taxed on land containing oil that only his neighbor is actively exploiting? These are very real questions with very unclear answers.
Further, because land is taxed annually as a function of time, the logical approach for anyone who discovers valuable resources within their land would be to extract them as quickly as possible, minimizing their tax burden, but exacerbating resource exhaustion. This, of course, would negate much of the value in having an LVT in the first place. Also note, I am handwaving the “searching costs” problem: what incentive is there to expend large sums of money searching for new natural resource deposits, if all of the returns will be taxed away? These are just a few challenges one encounters trying to extend LVT beneath the surface.
For this reason, for LVT to be workable in the real world, I believe that just as we must do our best to separate the value of the improvements built upon the land from the land’s pure location value, we must also cleave away the resource rights to the bounty found within the land. In other words, we require a separate tax regime, one that is focused on taxing only the rents of the bounty beneath, separate and apart from the surface’s location value.
Resource Rent Tax
Land value tax aims to preserve the incentive to search for the highest and best use of land. The human physical and cognitive labor in that search is rewarded, but the rents derived from land’s existence and location, which is not a product of that labor, are captured by the tax. Ideally, a tax on natural resources would be no different; like land, no human labor created them, but we must allow incentives to find and profit from their extraction and refining. Just as with land, however, to otherwise allow for full private rent capture creates a permanent rentier class, which exacerbates economic inequality, and ultimately contributes to stalling economic growth.
Traditionally, taxes on the Earth's depletable bounty that are “severed” from the Earth, known as “severance taxes,” were achieved by charging a fee at the time of extraction. This could be levied by quantity of units extracted (barrels of oil, pounds of gold, etc) or ad valorem (based on the value of the units extracted). In principle, a severance tax is a simple concept, but there is a cost to this simplicity; a fixed tax, charged either by quantity or by value, may inadvertently make extraction unprofitable at certain times and allow it to be wildly too profitable at other times. This is because a traditional severance tax fails to target economic rents.
For this reason, we need to design a Resource Rent Tax (RRT) that can capture resource rents while preserving the incentive to discover and explore. This is a tricky balancing act. As explained by
, many countries, especially oil-rich nations, fail to do this. Instead, they fall victim to the “resource curse,” where overreliance on resource rents produces yawning wealth inequality and wild boom and bust cycles from swings in commodity pricing. There is one oil-rich nation, however, that appears to get it right: Norway. Norway is an oil-rich state that also managed to become a diversified economy with a high standard of living and very low levels of economic inequality. Norway achieved this by successfully capturing the economic rents of its oil wealth and redistributing them to its citizens.To capture these rents, oil companies operating in Norway are subject to special taxation, with net profits taxed at an incredible 78%. Crucially, however, the tax code is designed for neutrality; projects that are profitable before taxation will also be profitable after taxation. Norway has adopted a cash flow tax for resources, allowing the full and immediate deduction of exploration, R&D, and operational costs. The tax code also allows for losses to be carried over to subsequent tax years. This ensures that there is always an incentive for exploration and exploitation of resources, regardless of market conditions and commodity pricing. It also encourages efficient usage of Earth’s resources. Whereas the extraction rate of an oil deposit is just 25% in much of the world, Norway averages 45%.
With the policy recommendations I have made throughout this series, I aim for maximum parsimony and simplicity. So I must admit that it pains me to recommend creating a separate tax regime for natural resources found within the land. Cleaving surface land usage rights from subterranean extraction rights, however, is necessary. This also allows us to capture resource rents from “land” that otherwise has no solid surface to tax, namely, the resources found under bodies of water. It would not be possible to levy an LVT on an oil rig stationed off the coast, for example. We would need a separate rent collection mechanism for this kind of activity anyway; we may as well extend it to all resources extracted from under the Earth’s surface.
An RRT offers an opportunity to further reduce the tax burden on human physical and cognitive labor by providing an alternative tax base. Like LVT, it offers us the closest thing in economics to a free lunch, pure revenue at virtually no cost to society, no additional burden on the plumber, the electrician, or the software engineer. Together, LVT and RRT should form the cornerstone of any progressive state seeking to maximize human achievement, prosperity, and growth. Only once we have targeted economic rents can we lift the burden on human labor and unleash our full productive potential.
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I am glad you are exploring these kinds of ideas, although I am not yet fully sold on the LVT realm. Keep up the good work.
"... offers us the closest thing in economics to a free lunch, pure revenue at virtually no cost to society, no additional burden on the plumber, the electrician, or the software engineer. "
Perhaps I don't quite yet understand all of this, but what about the plumbers, electricians, and engineers involved in mining or oil drilling? No different than for purely surface based productive activities? On the positive side of course, if wealth extraction is incentivized by the RRT then these skills are employed in the equivalent of an "underground factory" when they might not be employed otherwise.
As I was reading about your thoughts on underwater exploration, I was actually thinking about surface lands with static, mostly static, or running bodies of water and wondering if their existence was a plus or minus for the LVT side of land taxation? Might be useful or less so for recreational purposes, or for cooling a power plant or handling minding tailings?? But you are saying those considerations (regarding surface waters) are automatically considered when the LVT of that surface area is considered?
Some of the LVT argument seems to simply go against maximizing individual liberty. Why does someone who owns a parcel of land need to be incentivized to maximize its use from an economic perspective? Perhaps they are holding it in trust for their grandchildren, or waiting for more favorable market conditions (as they judge such conditions) before investing in productive uses, etc. That is, potentially non-economic values may be more important to them at a given time and situation/place, etc. Why don't "property rights" include the right to not use said property as some tax assessor might believe is "best use"? There are competing values among owners, politicians, laborers, et al., and no clear and obvious reason to favor one/some over others? [Again, I enjoy your posts on this and other risk topics].
You know what I'm going to say. You have an "assume can opener" to the problem of actual assessing the land or resource value.
And as an empirical matter, do we really believe there is a lot of land or resources that would not be developed/put into production because of property taxes including the value of the development of the land/resource and taxation of consumption of the owners of the land/resources when developed/put into production?