David Friedman recently wrote “One reason to respect natural rights is that it is a good thing to do, another is that respecting them can be expected to produce a healthier, wealthier, and happier world than violating them.” It is in that spirit that I approach the issue of this symposium: since other authors have and will comment more extensively on what is right and good and just with regard to natural resource ownership, I will comment on what sort of natural resource property rights regime leads to a world that is healthy, wealthy, and happy.

To me, the value of arguing from economic efficiency is twofold. For one, my own moral intuitions tell me little about what is a good and just distribution of land or what it should mean to own land – such issues, in my mind, are best informed by utilitarian calculus. Secondly, and in light of the first point, some authors have suggested that personal land ownership is not only unjust but also economically inefficient, employing an argument along the lines of 19th Century American economist Henry George.

Georgism and the Land Value Tax

Earlier today on BHL, we had George expert Fred Foldvary defending the land value tax from an economic efficiency perspective. Foldvary is a leading “neo” Georgist, adapting George’s ideas to the post-marginal revolution age. One of Foldvary’s most salient points is that the existing literature on public finance does not directly contradict the George plan. As he said today, “Public finance theory prescribes land rent as an efficient source of public revenue.”

That said, public finance theory is behind the curve. To remedy this, Bryan Caplan and I have a working paper criticizing the land value tax using an idea from information economics, search theory. Georgists look at the pricing strategy of landowners and see nothing but inefficiency: pricing in excess of opportunity cost, with landowners laughing all the way to the bank. What George and his admirers have missed is not entirely intuitive: while the price of natural resources may indeed be greater than marginal cost, suggesting inefficiency, what appears to be an economic rent is more appropriate called a quasi-rent.

Since in the long-run, no industry can earn anything but the normal rate of return, quasi-rents are necessary incentives for sunk-cost investments, like innovation. In our model, we call the sunk-cost investment “search,” as in the search for natural resources. Certainly, we best incentivize the discovery of natural resources by assigning ownership rights in these resources. But search is costly. For context, the current amount spent by the world’s five largest oil firms represents about 8% of their total operating costs, with spending on exploration increasing steadily since 2005. The largest oil company, ExxonMobil, spent $5.6 billion on exploration and capital projects. Exploration among the next 20 largest private held oil and natural gas providers has been steadily in-creasing since 1998. Aside from oil, mineral exploration costs have been rising rapidly over the past decade and were nearly $18 billion in 2011. If marginal cost pricing was enforced (meaning the oil companies could only charge the cost of extraction and distribution), exploration would cease to be a profitable enterprise. The effect of a Georgist land-value tax would be to move closer to marginal cost pricing (the resources, once discovered, are part of the land’s unimproved value). The only incentive to search is whatever amount of “unimproved value” the landowner can keep post-tax.

The clever Georgist will now respond that perhaps the natural resource discovery is an improvement and should not be taxed, posing no problem for the efficiency of an LVT. In fact, Foldvary recently commented on BHL:

“The economic meaning of land is natural resources, and these activities are labor and capital goods.  The value added to a site from exploration is a capital good, not the original natural resource.  Hence their critique is based on a fallacious meaning of ‘land.’”

But the sunk-cost investment could also be in the form of market research or trial-and-error. The entrepreneur seeks to create a market and provide a good where none existed before. There is no value to the land other than in what can be imagined to be done with it – if what we have used is a fallacious version of land, then there is no meaningful economic concept of land apart from capital goods (which is precisely Frank Knight’s point in his 1953 critique). Some of these things may seem obvious, particularly from a short-run perspective. But progress is made by finding non-obvious uses for what we have; otherwise we are left in stagnation.

An illustrative example: say an undeveloped lot near a residential area is valued at $x, the sale price at auction. The new owner, an entrepreneur, has local knowledge and believes that the lot is a good place for a business. He canvasses the neighborhood and decides to build a restaurant serving delicious BBQ sandwiches. He believes he has a solid chance of running a successful restaurant, so he takes the risk and embarks upon the project. Ten years later, the restaurant turns out to be a success. Sadly, the restaurant burns to the ground in a freak conflagration. The rubble is cleared and we are left with an empty lot. But is it the same lot as before? Should it be valued at $x? Now, everyone knows a successful restaurant could be built here, before, no one knew. The “unimproved” value has changed. For that matter, the value of nearby lots is likely to have changed as well. What happened to the value of big commercial lots in semirural areas after the first successful Wal-Mart?

Land development, like invention, might also be incentivized through the awarding of prizes. Ownership is only one way to create this incentive, but it seems the most appropriate, because it continually provides incentives to develop and improve land to its highest-valued long-term use.

The central lesson is that the Georgist distinction between improved and unimproved land is illusory. The idea of land rent as a surplus – gains beyond costs – is an economic sophism. Like other goods, there is value not only in what is produced but also in the knowledge of what to produce. In the long run, there are no “economic rents,” just return on initial endowments, effort, and luck.

 

Long-Run Effects of Land Taxation

That we have established land as not fundamentally different from other goods is perhaps not enough to say there’s an efficiency argument for low land taxes. If we are going to tax something, why not the value of land short of obvious physical improvements, which seems fixed in supply at least in the short-run?

Tax system designers constantly face trade-offs between short-run and long-run gains. In the shortest of runs, everything is fixed in supply. The problem is that people respond to taxes by substituting one sort of behavior for another until every endeavor once again earns the normal rate of return. While not too many would quit their job today, or this week, if they found out that their income tax rates had climbed to 90%, in the long-run folks will consume more leisure, or switch to jobs with more non-taxable benefits (like being an academic?), and this will result in lower economic growth.

The long run effects of land tax increase are similar. In the short-run, folks continue as they have. But now, thinking of or searching for new uses for land earns below the normal rate of return. Sure, the empty lot might be perfect for a mall, but why bother finding out? Once you build the mall and prove it can be a success, the value of the land itself will increase. But you had the idea, did the research, and took all the risk, how do you get compensated for that? The same could be said for a large exploratory drilling project. In the long-run, land taxes disincentivize land ownership and development.

The tax tradeoff between short and long run gains results in a precarious equilibrium in a game between the taxing authority and the citizens. Individuals usually engage in productive activity with the expectation that they benefit from the product. They may know that the government can defect at any time, but they trust that they will not. This regime stability is the high-trust equilibrium that the developed world mostly enjoys. There is a second equilibrium where people constantly suspect that the government will defect, so they produce little, or go to the black market.

Land and natural resources are very important endowments, especially in a world with rapid population growth. It is imperative that the price system functions well; an unanticipated shortage or rapidly rising prices (due perhaps to a drastic change to the world’s tax codes) might have disastrous consequences. For the trend of decreasing scarcity and increasing population to continue in true Simonian fashion, we need a stable system of property rights which engenders innovation. This includes property rights to land.

 

References

Foldvary, Fred. (2005). “Geo-Rent: A Plea to Public Economists.” Econ Journal Watch 2(1): 106-132.

Knight, F. H. (1953). “The Fallacies of the ‘Single Tax’.” Freeman. August: 809-811

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  • http://www.facebook.com/EmbraceUnity Edward Miller

    Land value could still be captured under a georgist paradigm because if land is undervalued, and you claim it, you would be able to pay less than it is worth for awhile, until the market catches up with your more accurate values… just as in any other form of market activity. Georgists intend to set the tax rate according to market prices. If market prices were always totally accurate, then there would never be any room for significant profit, but we know that is not the case.

    If there is some benefit to encouraging the exploration of new land, it would make sense to allow for a non-permanent exclusionary access right, much like how patents work. Yet, patents thankfully do not last forever. Land titles, on the other hand, do indeed last indefinitely.

    As for your final paragraph, populations are not rising dramatically in the West, and even if they were a Land Value Tax would reduce living expenses for virtually everyone, and allow production to be untaxed. Gradual reform is of course preferable to overnight reform, but such strategic points are relevant to any kind of reform.

    • http://whakahekeheke.tumblr.com Cal

      A tax rate is not going to be better-informed wrt player incentives than the market signals themselves… you’re merely adding distortionary incentives pointing players away from mutual productive gain. And the post above is not just concerned with ‘encouraging the exploration of new land’ but the efficient utilization of land.

  • http://www.facebook.com/people/Dan-Sullivan/1408883609 Dan Sullivan

    Those who make utilitarian arguments need to look at results. The states that get the highest share of revenue from land value taxes tend to be the freest. New Hampshire gets two/thirds of its revenue from property tax, which is the closest approximation to land tax revenue that is categorized, and this is much higher than any other state. New Hampshire was chosen as the “free state” – the place to migrate to, by the libertarian “Free State Project.”

    The cities with the lowest property taxes had the worst affordability rates, and, consequently the worst real estate bubbles. See the two affordability pages under:

    http://savingcommunities.org/issues/taxes/property/

    Clearly, the so-called “rational” land speculator is a lot more rational when there is a real tax cost to holding land idle. Opportunity cost doesn’t count for much when people are so busily engaged in buying up land that they pass on opportunities to actually use the land.

    The problem is that Zac is using assumptions derived from production costs and applying them to the unimproved value of land. The only thing “produced” with regard to land is the title, which is produced by the state. There is really no difference between holding land as a large landlord and holding land as a municipality, except that there is some chance a municipality will be democratic.

    Indeed, “landlord” or “lord” is a feudal term for a level of government authority under the king. The only difference between a feudal landlords and today’s landlords is that feudal landlords had restraints and obligations.

    But, back to Zac’s presumptions about utility. When one strips the question of morality from the question of utility, and then claims that untaxing land is useful, one must ask, “useful for whom”? Look at California, which, of all 50 states, gets the lowest share of its total tax revenue from land. What has happened to home ownership in California? What has happened to the California economy? When Proposition 13 passed in 1978, California’s affordability index was 10% higher than the national index. Today it is more than 400% higher, and 23 of the 25 least affordable  cities are in California. It is the birthplace of the 50-year mortgage and of interest-only payments during the first ten years. For whom is that “useful”? Or, look at Las Vegas, a city where real estate taxes were displaced by gambling revenues and state resource royalties. How “rational” is land use there?

    At the other end of the spectrum, look at Texas, the state that grew about as fast as California, but that high real estate taxes. Four of the six most affordable cities are in Texas. Or, look at Pittsburgh, which implemented land value tax in 1913 and never had a real estate bubble since. Even during the Great Depression, land values fell only 11% in Pittsburgh, far less than in comparable cities. (It even did better than Washington DC, the boomtown of the Great Depression.)

    Then there are the 20 Pennsylvania cities that shifted to land value tax, each enjoying a surge in construction while neighboring cities continued to decline, and the countless Australian municipalities that, one by one, shifted from property tax to land value tax by voter referendum. They, too, enjoyed construction surges and prolonged economic growth after shifting.

    I get the sense that Zac had decided that land value tax was a bad thing and then set out to construct rationalizations. The utilitarian rationalization does not hold up, but neither do the others. What is moral is ultimately utilitarian, even if it doesn’t work the other way around. Bad trees do not bear good fruit.

    • http://profiles.google.com/entelechy77 Kurt Horner

      I’m sure the divergence in home prices between California and Texas has nothing to do with the fact the most of Texas is ugly wasteland with awful weather. It must be their property tax regimes. [/snark]

      More seriously, divergences in land value between taxed and untaxed land are obviously going to occur. The question is not whether land is cheaper in Georgelandia (duh!), but whether its utilization is retarded.

      • Logan Boettcher

         If you read what Dan actually wrote, he says that Texas has more affordable housing than California (i.e. housing costs as a % of income), not that house prices were lower in Texas compared to California.  Misreading this of course can allow you to “snark” at his post.

        • http://profiles.google.com/entelechy77 Kurt Horner

          That doesn’t actually change the point, since we would expect housing to be a lower percentage of income in places where land is cheaper. Again, duh.

          Moreover, he’s reporting this difference as if it necessarily says anything at all about the impact of property taxes. It does not. In order to say that you would need to control for all sorts of other variables. Which hasn’t been done, because he’s not citing studies, he’s listing a bunch of anecdotes. Even the link he provides is just a bunch of cherry-picked charts with no attempt to control for differences in climate, house size, age of home being sold, unemployment rates, or anything else that might explain the variation. In fact, since there’s no regression done, we don’t even know whether the slope of property taxes versus affordability differs significantly from zero even without controlling for these fairly obvious potential confounding variables.

          What’s worse is that even if there was a relationship, you still wouldn’t necessarily have causation. It could be that property taxes are just higher in high affordability states because otherwise they wouldn’t raise enough revenue. There could even be a third variable that controls both, like, say the fact that cheap states tend to vote GOP and the GOP tends to be anti-income tax, so they make up for it property taxes. 

          The point is that a lot more work would need to be done to have real evidence here.

          • http://www.facebook.com/people/Dan-Sullivan/1408883609 Dan Sullivan

             Kurt is simply wrong. Yes, if a single city were compared with another single city, one could suppose that other factors might be responsible for differences. This is similar to the tobacco industry defense against cancer charges, whereby they argued that one could not prove that a particular person’s cancer was caused by smoking.

            But when 20 Pennsylvania cities shifted to land value tax, and comparable cities did not, all of the land taxing cities out-performed the property-taxing cities around them. Th esame is true of the Australian cities.

            I am repeating all this, because Kurt is repeatedly ignoring it. The evidence in the aggregate is overwhelming, and the “other factors” argument falls flat. Specifically, comparing the climates of Texas and California fails to answer why California land was affordable until it curtailed its property taxes. It also fails to explain why Bakersfield, the most affordable city in California, is far less affordable than Austin, the least affordable city in Texas. Bakersfield is a notoriously unpleasant place, a harsh desert with nothing but oil derricks, irrigated vinyards, and dust.

          • http://profiles.google.com/entelechy77 Kurt Horner

            I’m not ignoring your evidence, I’m saying that you need to provide a valid study. For example, with the 20 Pennsylvania cities, you would need a control group of comparable cities, data on confounding variables, a multiple regression and very large differences in land value (since that sample size is very small). I’m not just going to take you at your word that the claimed better performance was significant.

            (As for Austin vs. Bakersfield — in the latter you can drive a little over an hour and reach places that are not only pleasant, but spectacular. Such is not true for Austin. I thought Geolibs understood that proximity to things of value increased the value of land?)

          • http://www.facebook.com/people/Dan-Sullivan/1408883609 Dan Sullivan

            One does not usually post entire studies to the comments section, or even 40 links to 40 studies. Here is what the real estate editor of Fortune had to say, after examining the first five Pennsylvania cities to act.

            http://savingcommunities.org/docs/fortune/hightax.html

            Note also that I am responding to assertions by Zac that land value tax would impede good land use. Zac’s assertions have no examples of empirical data to back them up. Zero, nil, nada. Kurt demands no such examples from Zac, and gives no data to back up his own empty assertions.

            His empty assertion about Bakersfield is mind-boggling. He doesn’t say what “spectacular” place one can drive to from Bakersfield in a little over an hour, nor does he explain why someone would pay 5.8 years of income for a house in a miserable climate in order to drive an hour to a pleasant climate, instead of just living in that pleasant climate. And if this were real value, and not a speculative bubble, why does California lead the nation in foreclosures? Why did California suddenly *become* more desirable after Prop 13? I mean more desirable to people looking to live and work there, not more desirable to speculators. (Note that taxes on production and exchange increased to supplant the curtailed property taxes.)

          • http://profiles.google.com/entelechy77 Kurt Horner

            1) Testimonials are not studies. You don’t have to post 40 links. One would be a good start though.

            2) No examples? You mean like Gochenour and Caplan’s paper? It’s not empirical, but it does develop a model for why decisions could be harmed. At the very least it’s reason for doubt, and it’s far more rigorous than anything you’ve yet produced.

            3) Pismo Beach, Seqouia National Park, etc. Even the cheapest areas of California are close to spectacular vacation spots. And California didn’t “suddenly” become more desirable, prices just grew slightly faster there, and it diverged over time (as one would expect in the context of a major credit expansion — the initially larger assets got larger still).

      • http://www.facebook.com/people/Dan-Sullivan/1408883609 Dan Sullivan

         Yes, there are other factors. However, these factors did not abruptly change when California and Massachusetts curtailed their taxes, or when 20 Pennsylvania cities and even more Australian cities shifted from property tax to land tax. Specifically, it does not address why California’s affordability index (median house price divided by median household income) went from 10% above the national average when Prop 13 passed, to more than 400% over that average in the peak year of 2005.

        And yes, the question is whether utilization is retarded by land speculation. The fact that shifting to land value tax consistently led to increased construction in case after case, without stimulating price bubbles, pretty well answers that question.

  • William Peirce

     A properly implemented LVT does provide a continuing incentive for development.  First, remember that the existing property tax is levied on the new building, as well as the land, so the entrepreneur confronts an increased tax for his efforts at development.  Second, the relevant concept for assessment is opportunity cost; i.e., what is that land worth to the person who sold it, not to the entrepreneur with the brilliant idea for development.

    • http://whakahekeheke.tumblr.com Cal

      Disregarding the unlikelihood that some strictly imagined LVT (or any such policy) would be ‘properly implemented’ by a self-constrained state seems unwise.

      Existing property taxes may be well be worse than a theoretical tax on the value of unimproved land, or they may not be, but that’s irrelevant the point of contention in the post. (And Gochenour & Caplan propose taxing externalities as preferable alternative, not property taxes). You’re off the mark regarding opportunity cost. The opportunity cost of the provision of completely unimproved resources may well be zero, but it is precisely the search-theoretic argument of Gochenour that there’s no such thing as privately owned and completely unimproved land–there is no such thing as economic rents accruing to owners on a market:

      The central lesson is that the Georgist distinction between improved and unimproved land is illusory. The idea of land rent as a surplus – gains beyond costs – is an economic sophism. Like other goods, there is value not only in what is produced but also in the knowledge of what to produce. In the long run, there are no “economic rents,” just return on initial endowments, effort, and luck.

      • Logan Boettcher

         (And Gochenour & Caplan propose taxing externalities as preferable alternative, not property taxes)

        And the land value tax is a tax on the positive externalities that gives land some of its value.  Courts, police, schools, roads, and other government services add to land value, and so that value should be returned to the government.  You may not agree that some or all of those services should be provided by the government, but you surely must agree that land values are higher where government provides comparably better services vis-a-vis other governments.  And if government provision of services leads to gains in land value (i.e. building a subway system or a nice school next to your property), then what canon of taxation could possibly be cited to support giving a benefit, either through a capital gain if the property is sold or an increase in services provided, at a fraction of the cost?

      • http://www.facebook.com/people/Dan-Sullivan/1408883609 Dan Sullivan

        Assessors know that the above statement is nonsense. The only rational way to assess real estate is to assess the land first and then assess the improvements, discounting the latter if the improvements are not well suited to the land.

        Accurate assessing is a political problem, not a technological problem. Usually, the people working to shift away from real estate taxes are the same people who work to undermine quality assessing.

  • http://www.facebook.com/people/Rick-DiMare/100000504645309 Rick DiMare

    Zachary and Bryan Caplan state in their paper “A Search-Theoretic Critique of Georgism:”

    “Henry George’s writing comes on the heels of the American Civil War and
    the end of slavery, an era of exploration and spreading population and infras-
    tructure. The construction of railroads was followed quickly by the annexation
    and purchase of new land, and the country was rapidly industrializing.”

    Yes, and George was also writing when the Treasury Department had control over the monetary system, the Treasury-Direct Greenback being the predominant currency.  Also, the Civil War regulatory income tax on the irredeemable Greenback ended in 1872 and the Specie Resumption Act restored redeemability in 1875, so the threat to human labor (by treating wages as income instead of property) did not exist, as it does today.  In fact, there was great hope in George’s time that the former slaves would also soon acquire property rights in their labor.

    But to get to the point, I agree that George’s land value tax, as a “single tax,” may not be relevant today, but let’s not overlook the intense debate over income taxation that George initiated. In fact, a few years before his death, the Supreme Court struck down a federal tax on rental income in Pollock v. Farmers’ Loan (1895) because the tax might be an unconstitutional direct tax on real estate. And it was this decision that led to the need for the Sixteenth Amendment and its “from whatever source derived” language, which Amendment simply assured the nation that taxes on income derived from real estate (a property source) were not direct taxes on the real estate itself.

    • http://www.facebook.com/people/Dan-Sullivan/1408883609 Dan Sullivan

       George did not initiate income tax: he consistently opposed it.

      • http://www.facebook.com/people/Rick-DiMare/100000504645309 Rick DiMare

        George would have opposed taxing wages received by an employee as income for sure, but not taxing income derived from the exploitation of natural resources, nor would he have opposed levying a second income tax on the corporate resource extractor (simply for seeking the corporate privilege from government and gaining an unfair advantage over non-incorporated farms, for example). 

        One of the main reasons I blog is to raise awareness about the significant differences between the two classes of income taxes: 

        (1) taxes on “income derived from property sources” (IDPS), a concept which Henry George’s political philosophy initiated, and which caused his Congressman son to support ratification of the 16th Amendment; and 

        (2) taxes on “income derived from non-property sources” (IDNPS). And, to make things more confusing, there are two very different kinds of IDNPS, taxes on income derived from corporate privilege (which Henry George and his son supported) and taxes on income derived from regulated currencies (which Henry George would not have supported because it forces the treatment of wages as income, thereby preventing wages from being one’s personal property). 

        Taxes on IDPS worked quite well to control (more like pissed them off) landlords, “lendlords” and large corporate shareholders between 1913 and 1937, which is when the currency regulating tax on wages as IDNPS began. 

        My point is that to get back to what George was standing for, we must not only look at the land value tax, but at that 1913-1937 period when taxes on IDPS ruled the day.

        • http://www.facebook.com/people/Dan-Sullivan/1408883609 Dan Sullivan

          Rick has long been grasping at this straw. George was clear and consistent in his claim (often citing Ricardo) that a tax that falls on a landlord’s income, as opposed to a land value tax, would be entirely passed on to the tenants. That’s because it would not be a tax on holding land out of use, but entirely a tax on using land or allowing others to use that land. As such, it would reduce the incentive to allow people to use the land.

          All of Zac’s criticisms would be valid if the tax were on rental revenue, rather than on land value.

          • http://www.facebook.com/people/Rick-DiMare/100000504645309 Rick DiMare

            Dan, read my last sentence. 

            Both taxes are needed, the land value tax “on holding land out of use,” as you say, and an income tax “on using land or allowing other to use.”

            The LVT is needed (whether land is being used or not) because of government costs to maintain: boundaries, land courts, land titling systems, punish trespassers, etc.  In other words, an idle land holder or speculator should not get all this protection for free.

            The tax on “income derived from property sources” is needed to account for the varying degrees to which people will use and exploit land.

  • http://profiles.google.com/daviddfriedman David Friedman

    One historical point worth mentioning is that, although Adam Smith spoke favorably of the idea of taxing rent, David Ricardo pointed out a problem. Putting his argument in modern terms, it was that, if the government is trying to tax away site value, the market value of land (net of the tax) depends on decisions made by government actors. Hence land will tend to be held not by those who can best make use of it but by those who can best predict or influence the government actors who are controlling the tax.

    • Logan Boettcher

      “Hence land will tend to be held not by those who can best make use of it
      but by those who can best predict or influence the government actors
      who are controlling the tax.”

      And this doesn’t happen at present when government is not trying to tax away site value?  I believe I saw a story not so long back (http://www.masslive.com/politics/index.ssf/2012/02/congressional_earmarks_sometim.html) about US Congressman directing transportation and other infrastructure spending not only to their home states/districts, but curiously close to properties that they happen to own (shocking!).  And this is not to mention non-government actors who contribute to congress and council critters who happen to improve the parts of town where they have bought up derelict properties or lobby to have zoning changes that happen to dramatically increase the values of their property.

      Taxing site value would mean that improving the area around those properties (and thus increasing the amount of rent that can be collected) would mean a concomitant increase in taxes paid.  You know, payment made for benefits received.  And yes, this will mean land will be held by those who can make best use of it, because actors who seek only to obtain land for capital gains realized through taxpayer dollars will give it up to people who actually want to use the land.

      • http://www.facebook.com/people/Dan-Sullivan/1408883609 Dan Sullivan

        Yes, land speculation is the original form of “rent-seeking behavior.” When the rent is taken by the government, land speculation does change from people trying to hold land out of use in order to “cash in” on government actions (as well as private actions) that will give them a windfall, to people being careful to anticipate changes in the rent they might have to pay.

        Moreover, David Friedman’s comparison is as nonsensical as comparing “those who walk to school vs. those who carry their lunch.” Land would only be held by those who can use it, for there would be no incentive to pay taxes on usused land, even if one could predict rises and drops in value. Yes, people would *also* learn to predict changes in land value in order to determine whether their intended use would continue to be an economical use. I don’t see a problem with that.

  • Bryan Mills

    There’s an interesting distinction to be made between resources based on the rate of replenishment.  The sort of “land” that George had in mind was presumably that used for agriculture and shopkeeping.  The former is on a fairly short-duration cycle – sunlight renews every day, and soil nitrogen, with proper crop rotation, on a cycle of less than a decade.  The latter is a somewhat longer cycle (of urban expansion, decay, and renewal).

    What’s interesting to me is when we try to expand the arguments into modern resources that are, for all intents and purposes, non-renewable – things like the supply of oil, the heat dissipation capacity of the atmosphere, and supplies of rare-earth metals.  I think this article in particular confuses some of the arguments by drawing conclusions from examples across classes without addressing the differences in the nature of the resources.

    • http://www.facebook.com/people/Dan-Sullivan/1408883609 Dan Sullivan

       Extraction royalties can be charged against non-renewables and slow-renewables. This slows down extraction and lowers the taxable value of the mineral rights. In the western provinces of Canada, royalties are indexed to world oil prices. Mineral rights are held by the crown, and private companies are free to explore and bid on ten-year leases. The results of the explorations are kept private so the explorers are bidding based on exclusive information.

      • Bryan Mills

        Sure, but how do you price the extraction royalties?  Do you auction them all off at once?  (But then you’re right back to perpetual private ownership and speculation in natural resources, just with a different set of initial owners — speculators instead of claimants.)  Do you ration them somehow?  But then what time scale do you use for the rationing?

        I’m not arguing against severance taxes as a concept; I’m interested in how to arrange the details so that the system actually does what it’s intended to do.

  • Bryan Mills

    The central lesson is that the Georgist distinction between improved and unimproved land is illusory. The idea of land rent as a surplus – gains beyond costs – is an economic sophism. Like other goods, there is value not only in what is produced but also in the knowledge of what to produce.

    I think this is a correct and important insight.  If we want to track “unimproved value”, we would need to be able to assess the value of the land absent any improvements.  But the value of the land itself is context-sensitive: for example, fertile land with tough soil is not very useful unless you have the technology of the plow; similarly, uranium deposits are at best a liability unless you have the technology of nuclear power.

    And what do we do when the value of “improvements” turns out to be negative?  (For example, what about the Chernobyl region?)  It seems oddly asymmetric to exempt long-term improvements from the calculation but not incorporate long-term damage.

    Similarly, how does one distinguish between “investment” and “speculation”?  If I’m building a new community center and I also buy some land around it, and then property values in the area rise, how much of the rise is to be attributed to the “capital investment” of the community center and how much to the “natural increase” of property values from everyone else in the area?  It seems implausible to suggest that we can mathematically account for all the variables involved.

    • http://www.facebook.com/people/Dan-Sullivan/1408883609 Dan Sullivan

      Again, it is not hard to assess unimproved value. “Investment” would be the construction, operation and management of the community center, all of which are currently taxed, and none of which would be taxed under the proposal Bryan is arguing against. Also, there is no reason to separate the unearned value people get from proximity to the community center from the unearned value created by the community. If the purchaser buys nearby land to put it to use, he will benefit from those uses being untaxed.

      • Bryan Mills

        Again, it is not hard to assess unimproved value. “Investment” would be the construction, operation and management of the community center, all of which are currently taxed, and none of which would be taxed under the proposal Bryan is arguing against.

        How is it not hard to assess unimproved value?  If you try to use comparable properties, you have to make sure that your assessment controls for all of the variables used by speculators and investors – which means that first you have to know about them.  I don’t think that condition is feasible.

        Also, there is no reason to separate the unearned value people get from proximity to the community center from the unearned value created by the community.

        I think you misunderstood my point here.  You need to separate the value added by construction  and operation of the community center from the unearned value from proximity to the rest of the community, because the former is a capital investment while the latter is a rent.

  • http://profiles.google.com/entelechy77 Kurt Horner

    See reply to Logan above. In addition, your before and after comparisons need a control group. 

    • http://www.facebook.com/people/Dan-Sullivan/1408883609 Dan Sullivan

       You might be wise to ask about control groups instead of supposing they did not exist. Or, you might read more carefully. All of the Pennsylvania cities that shifted to land tax fared better than the rest of Pennsylvania, than the rest of Pennsylvania’s cities, and than the nearest comparable city. Scranton out-performed Wilkes-Barre, Allentown outperformed Bethelehem, McKeesport out-performed Clairton and Duquesne (until the latter cities shifted to land value tax and then also enjoyed surges), Altoona out-performed Johnstown, etc.

      • http://profiles.google.com/entelechy77 Kurt Horner

        Source? Has someone with an elementary grasp of statistics written about this situation? Can you even produce the data, let alone an analysis?

        • http://www.facebook.com/people/Dan-Sullivan/1408883609 Dan Sullivan

           Know how to use Google? Google Altoona Johnstown land value tax and you get substantial data and analysis. Substitute any pair of cities I noted and get the same thing.

          Or, you can read this article by the real estate editor of Fortune:

          http://savingcommunities.org/docs/fortune/hightax.html

        • http://www.facebook.com/people/Dan-Sullivan/1408883609 Dan Sullivan

           Here are some statistics on real estate tax rates and housing affordability during the peak year of the bubble, 2005. Note that California, which gets the lowest share of its revenue from real estate taxes (and, consequently, from land value) has the worst affordability problem, and leads the nation in foreclosures since 2008.

          http://savingcommunities.org/issues/taxes/property/affordabilityrank.html

          For a grouping of cities by property tax rates and affordability, see:

          http://savingcommunities.org/issues/taxes/property/affordabilitycharts.html

          In my link below, I point out how to find a wealth of statistics (and analysis) on urban performance, and to a Fortune magazine article, where the real estate editor of Fortune (and his assistant) spent three weeks in Pennsylvania, independently confirming every piece of data at the local building permit offices.

          This might be a good time to ask, “Where is the data on your side?” The claims Gochenour makes are empirically contradicted.

          The point of a hypothesis is to ask a question and adjust the answer to fit the data, not to adjust the data to fit the answer. Given that the data is consistent and overwhelming, I am eager see what Gochenour does in this regard.

  • http://www.facebook.com/people/Dan-Sullivan/1408883609 Dan Sullivan

    Once people adopt a polarized position, they twist and spin the facts to accommodate that position. This is equally true of socialists who believe that government should control everything, to neolibertarian capitalists who believe that everything should be private property. Each view requres a complete disregard for the rights of those excluded – those who are outside the political monopoly of socialism and those who are outside the property lines of capitalism.

    When confronted with contradictory data, or contradictory facts about the people whose legacy they claim, cognitive dissonance drives them to grasp at straws and throw up arguments that do little more than beg the question.

    The libertarian movement changed dramatically after the American progressive movement (which had been quite libertarian) was taken over by socialists and simultaneously co-opted by the establishment (particularly by the Wilson administration). This lead to the remaining libertarians over-reacting and eventually being taken over by reactionary anti-socialists. This phenomenon, which I call the “neolibertarian shift,” caused libertarians to break with their predecessors, while claiming those predecssors as their legacy. Thus socialists and neolibertarians both contort the writings of Locke and Smith to conform to their world views.

    It was Marx who first treated privilege (particularly land) as capital because the value of a privilege could be “capitalized.” This is as illogical as saying that something is sanitary because it can be sanitized. When Marxists attacked private ownership of capital as if it were land, neolibertarians, in a knee-jerk nay saying of every Marxist argument, defended land as if it were captial, and, in so doing, bought into the underlying Marxist lie that land and capital are the same.

    The neolibertarian claim to be in the tradition of Locke, Smith, Bastiat, Jefferson, Paine, and so many others who were featured in the 1913 work, “Liberty and the Great Libertarians” requires either a hiding or a distorting of what those people wrote, particularly on the land question.

    It further requires ignoring the views of LP founder David Nolan and Milton Friedman, both of whom called land value tax “the least bad tax,” of LP News founder Karl Hess, who called it “the one tax to levy until the state can be abolished entirely,” of Albert Jay Knock, founder of “The Freeman” and author of “Our Enemy, the State,” who wrote extensively in favor of land value tax, or of public choice economist James Buchanan, who wrote that “The landowner who withdraws land from productive use to a purely private use should be required to pay higher, not lower, taxes.”The underlying confusion is the failure to see that the land title is not derived from mixing labor, etc., but is a state granted privilege, and to see that there can be no such thing as a free market in privilege. This second confusion was well illustrated by the local treasurer of the Libertarian Party, who argued that there was “no need to abolish slavery because the free market would have eliminated it.” How could there be a “free” market in slaves? Indeed, how can the trading of any legal privilege be a free market phenomenon when privilege is itself a state creation?Once neolibertarians grasp the classical libertarian distinction between wealth and privilege, if they dare, they will see that the arguments that thoroughly apply to property in “the fruits of one’s labor” do not apply very well at all to property in privilege. Then they are left to grasp at utilitarian straw arguments (usually the domain of the socialists), like the ones Zac offers here. As I noted elsewhere, the data is overwhelming, and Zac offers no real data. I have linked to more data in the comments section than Zac has linked to in his study.

    • http://whakahekeheke.tumblr.com Cal

      The only ‘data’ you’ve offered is a link to a magazine opinion column. That and a lot of long-winded assertions that don’t address Gochenour & Caplan.

      And, on your other point here, you’re most likely wrong on the ‘data’: private property predates states.

      • good_in_theory


        And, on your other point here, you’re most likely wrong on the ‘data’ given that private property predates states.”

        In what world does that paper demonstrate that private property predates states?  By its own lights it demonstrates that private property predates domestication of plants and animals.

        At best you have this, which is a rather silly assertion, since it relies upon taking a very loose definition of “private property rights” and a very narrow definition of “states.” 

        “First, individually-held property rights in land, its produce, and other sources of people’s livelihood emerged with the domestication of plants and animals starting around 11,000 years ago, while in most cases states developed many millennia afterwards. Recognizably modern property rights existed in these newly agrarian societies without the assistance of states.”

        Apparently we have “peoples,” “communities,” “groups,” “collectives,” and “social orders,” but not states.   Make inane category distinctions and you can show anything precedes or follows anything.

        • http://whakahekeheke.tumblr.com Cal

          “Peoples,” “communities,” “groups,” “collectives,” and “social orders” quite obviously do not entail states… The state has a standard empirical definition in social science: simplistically, a territorial monopoly on mass legitimated coercion. See Max Weber.

          • good_in_theory

            One could just as easily (and in accordance with legal definitions) define “private property rights” (ppr) as property owned by legal persons  (and further qualify, if one wished, with something like ‘enforced in accordance with the rule of law’.)

            And then, magically, ascribing ppr to people 11k years ago is just as farcical as saying they had Weberian states, because there was little in the way of legal personhood 11k years ago.

            So, let’s avoid making non-sequitors by giving some terms broad scope  and others narr0w scope  arbitrarily so as to suit our polemics.  After all, in libertarian discourse (as opposed to social scientific discourse, in which there is more than Weber…) a state can be as simply defined as a coercive organization.

            So one could start by using Dan’s definition of a state.  How does Dan define a state?

            As an institution which grants privilege.

            For private property rights, let’s turn to Bowles:

            “The resulting growth of centralized enforcement bodies (chiefdoms and other proto-states, then states) eventually reduced the role of mutual monitoring and peerbased enforcement, ushering in the third party enforcement that characterizes contemporary private property rights.”

            “the rights to perform certain actions”
            =

            Rights to perform certain actions enforced by a third party.  

            But then, this might be merely contemporary ppr, not ppr generally.  And is contemporary ppr modern ppr?  Who knows.  Private property is only referenced 6 times, in the first, 5 references within the first 2 pages, the last on the 6th.   And are individual property rights the same or different from private property rights? 

            In any case, if states are simply privilege granting or coercion exercising organizations, then “third party enforcement” requires, by definition, granting privileges (to third parties) and coercion (enforcement), and as such ‘private property rights’ and some sort of a state (proto-state, chiefdom, whatever) are co-constitutive.

      • Logan Boettcher

        Once again, we should point out that like Kurt Horner, you seem to demand statistical evidence from those you disagree with ideologically and none from your ideological compatriots.  In fact, you’re just fine with Zac providing no empirical proof that site value taxation harms economic development.

        I just saw that Kurt posted saying that “No examples? You mean like Gochenour and Caplan’s paper? It’s not
        empirical, but it does develop a model for why decisions could be
        harmed.”  Wow, a model for why, as he asserts, “In the long-run, land taxes disincentivize land ownership and development.”  Of course, models need to be subject to empirical verification, kind of like when the LTCM economic models were shown to be disastrously wrong in 1998.  But apparently not you or Kurt are bothered to demand an empirical investigation of Zac’s model, even though there are numerous examples of jurisdictions that use or have used site value revenue as a significant or primary source (Australia, Hong Kong, PA cities, New Hampshire, late 50s Denmark, post-war Japan, etc.).  I won’t hold my breath waiting either.  Maybe Zac’s next big project is to provide us with a thorough statistical analysis, but given that he couldn’t be bothered to provide one link to any empirical study that even slightly bolstered his model’s assertion leads me to believe he has no such study.  I, however, do have one:

        http://www.oecd.org/officialdocuments/displaydocumentpdf/?cote=ECO/WKP%282008%2928&doclanguage=en

        From the abstract: “This paper investigates the design of tax structures to promote economic growth. It suggests a “tax and growth” ranking of taxes, confirming results from earlier literature but providing a more detailed
        disaggregation of taxes. Corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxes.  Recurrent taxes on immovable property appear to have the least
        impact.”  Hmm… recurrent taxes on immovable property, say, like LAND!

        I will address the “Search-Theoretic Critique” of Gochenour and Caplan in another post, just so you’re happy that I dealt with the arguments of a non-empirical model, which is apparently more important to you than Zac providing empirical verification of his “Search-Theoretic Critique.”

        • http://profiles.google.com/entelechy77 Kurt Horner

          Well, that’s better than nothing. It’s entirely possible that property is under-taxed relative to other features of the economy and that the mix needs to be re-balanced. It is important to note that the authors of that report state that the degree of effect is likely overstated. More importantly, the Geolib conclusion that land taxes are the only good taxes (or even the best type of tax) is too far of a leap. Demonstrating that land is under-taxed relative to other factors does not mean that therefore we should over-tax it.

          Also, the Pennsylvania case seems like a really good candidate for a more small scale study where the number of confounding variable problems is reduced. Odd that Geolibs rely only on anecdote when it comes to specific examples.

      • http://www.facebook.com/people/Dan-Sullivan/1408883609 Dan Sullivan

         A “magazine opinion column”? You’re kidding, right? It was a well researched four-page *Fortune* article, featured on the magazine cover, written by Fortune’s real estate editor and chocked full of statistics that Fortune independently vetted.

        I saw lots of citations here that, on following them, links to papers that do not uphold property in land in primitive societies after all, but only property in improvements. One even points out that land tenure (not fee-simple ownership) attached to “fields and SECOND GROWTH forests.” (Emphasis added.) What people owned in these primitive societies was the improvements, not the land itself. Obviously, they had a superior claim to land they had improved, but there is far more to land ownership than a conditionally superior claim.

        I also included Thomas Jefferson’s observation that the American Indians in his area respected property in labor-produced goods but not in land, noting that an Indian enjoyed exclusive land tenure in lands he had cultivated, but only for as long as they were under cultivation.

        Marx obliterated the distinction between land and capital, and the anti-Marxist reactionaries who swamped the libertarian movement followed Marx in this regard, nay-saying Marx at a superficial level and thereby adopting his underlying confusions. A look at the original *Freeman*, or at the compilation *Liberty and the Great Libertarians* shows what the philosophy was like before this reactionary shift to the right.

        One of the great libertarians was Albert Jay Nock, and you may find several examples of the prevailing libertarian views in his writings:

        http://savingcommunities.org/docs/nock.albert/

  • Logan Boettcher

    “The long run effects of land tax increase are similar.
    In the short-run, folks continue as they have. But now, thinking of or
    searching for new uses for land earns below the normal rate of return. Sure,
    the empty lot might be perfect for a mall, but why bother finding out? Once you
    build the mall and prove it can be a success, the value of the land itself
    will increase. But you had the idea, did the research, and took all the risk,
    how do you get compensated for that? The same could be said for a large
    exploratory drilling project. In the long-run, land taxes disincentivize land
    ownership and development.”

    This is the crux of Gochenour & Caplan’s “Search-Theoretic
    Critique” against LVT, that other people supposedly free ride off of
    others search costs, and that free-riding serves as a disincentive to
    development.  Sure, spend all that money researching what’s best to build
    at site X, I’ll just swoop in and drive up the rent once it proves to be successful. 
    There is one problem with this critique: it’s kind of wrong.  And by kind
    of, I mean dead wrong.

    Let’s say that there is a piece of bare land available for bid, and actor X has
    spent some nonzero funds researching the best use of the land, and he
    determines it to be a mall, and let’s assume this is the best use for the
    site.  At the auction, he sees Y and Z, who have not done any research
    into the best use of the site.  Tell me, what should Y and Z put in as
    bids?  Having done no research, they would have no idea what to bid, so
    what bid could they rationally put in?  They could just guess, but who
    would rationally do such a thing, given that they have no idea what the highest
    and best use of the land would be (remember, they were attempting to free
    ride).  Let’s look at the scenarios:

     

    1.  Free riders blindly guess a bid larger than what X
    would have paid.  In that case, the free rider who “wins” the
    land has no idea how to use it and I’m sure X will not share his
    information.  Not only that, but there is no improvement that the free
    rider can build that recoups the lost income due to the overbidding.

     

    2.  Free riders again blindly guess, but with a bid
    lower than what X would have paid, and X outbids them.  X gets to pocket
    the rent savings as compensation for his search costs at the expense of the
    free riders who tried to get a free pass.

     

    3.  Free riders blindly guess, but manage to drive the
    bid up to the point X was going to pay (or very close to it).  If X wins
    the bid, he pays exactly what he was willing to pay.  If the free rider
    wins, once again, without any research, he has a piece of land with no idea
    what to build on it that would justify the rent payment.

     

    Zac seems interested in Scenario 2 and 3 and what happens
    after X wins.  The free riders see that X is building a mall and will wait
    for some unspecified period of time to see if it is a success.  But how
    long do they have to wait?  And when the time comes for swooping in and
    taking the successful mall, are they sure that the mall will still be a
    success?  Remember, according to Zac’s model, free riders are expected to
    free ride, so they have incurred no search costs to determine if the mall is
    truly successful at any point in time, or if the mall will continue to be
    successful, or if there is something that could be more successful at the site
    either in the future when they determine the mall to be a success, or in
    the future after they take control of the mall.  Supposedly, these
    intentionally clueless free riders will somehow have the wherewithal to
    expertly time the hostile takeover of the mall without incurring any search
    costs, which are apparently necessary for rational economic calculation.  I cannot see how it is possible for someone
    to free ride on another’s search costs without themselves incurring search
    costs, because search costs are necessary to determine if and when the current
    use is a success and if it will continue to be a success.

    Concerning the assertion that it is bad for the mall owner
    if the land value increases after the mall is proven to be successful is laughably
    inaccurate.  In the mall example, the original
    bid put forth by X is based on some assessment of future profits.  If future profits are in line with the
    original estimate, then the original land value should remain the same.  But if future profits are higher than
    originally estimated, then land value could go up, depending on if others
    recognize the success of the mall (after incurring unavoidable search costs, as
    per the previous paragraph).  But this is
    not bad for the mall owner to have to pay a larger rent, because he would be
    paying more than originally thought after he was receiving more than he originally
    forecasted.

    As for how the mall owner gets compensated for taking all
    the risk and incurring the search costs, here’s a clue: revenues.  Search costs, marketing costs, borrowing
    costs for the building, land rent, etc., all have to be paid by the business
    revenues.  Zac seems to think that search
    costs are something special that can be paid for only by privatizing land value,
    but it’s just a normal cost of setting up a business, and so follows the normal
    routine of paying costs with revenues.

  • http://profiles.google.com/prakash.chandrashekar Prakash Chandrashekar

    Mr Zachary,

    Your point about defecting, etc. is applicable to any kind of change of taxation system, even your own suggested externalities based system. If the change is sudden, there will be as much of a capital flight as in a change to a georgist system, if it is not handled carefully. Also, most georgists you speak to will speak of a tax-shift, not a tax increase, and most of them speak of gradual tax shifts.

    The long term result of a georgist tax regime will not be people losing motivation to find new uses for land. There will be a scramble among businesses to seek the lowest land value locations from which they can operate. But there is a natural lower limit to that when human beings run businesses, since humans want to live in communities and functional communities translate into a certain minimum land value. There will be a tendency to make relatively long lasting, highly mobile real capital. If the tax of an area increases beyond the ability of the business to support the same, the business will simply pack up with its buildings and leave. Today we might find the thought of entire skyscrapers moving around absurd, but tomorrow, it may not be that much.

  • David Friedman

    It’s worth also considering the argument against the single tax offered by Ricardo, responding, I think, to Smith’s argument in favor of something along those lines. Ricardo pointed out that if the value of land was being taxed away, the price of land would depend very much on the decisions of the taxing authority–site value, after all, isn’t something immediately observable, so someone has to use some way to calculate it. Land would then tend to be owned not by those best able to exploit it but by those best able to predict, perhaps influence, the decisions of the relevant governmental authorities.

    By memory, but I think reasonably accurate.

    • RickDiMare

      I agree. The best way to give expression to Henry George’s single tax today, after over a century of income tax evolution, is to first disambiguate the 3 income taxes so that taxes on income derived property sources will get properly taxed, but also by significantly raising the capital gain tax on land transactions so that it becomes unprofitable to hold land for speculative purposes. No new taxes should be necessary.

      Also, any direct tax on land would be Constitutionally problematic, not only because the feds would be precluded from collecting the tax they assessed under the Direct Tax Clauses, but also because trying to tax the productive capacity of land before it’s actually been exploited would violate the income “realization principle:” http://en.wikipedia.org/wiki/Realization_(tax)

      • RickDiMare

        Two other problems come to mind which might allow land speculation and monopolization to continue under my recommendations above.

        First, upon the death of a natural person who has so-called ownership in land/ocean/atmospheric rights, the capital gains tax must be levied and collected, not deferred through estate planning inventions, and not be allowed to pass on to other living persons or legal persons.

        Second, since corporations can have eternal legal life, the annual incremental value of land held in corporate form will need to be taxed. Lawyers will likely demand that the corporate person be treated like a natural person under the realization principle, and therefore argue that the corporation should only be taxed on dissolution, but a tax on land held by corporate privilege should be treated like an indirect tax, just like the income tax on corporate privilege was treated as an indirect tax before the 16th Amendment was ratified.

  • RickDiMare

    “The idea of land rent as a surplus – gains beyond costs – is an economic sophism. Like other goods, there is value not only in what is produced but also in the knowledge of what to produce. In the long run, there are no “economic rents,” just return on initial endowments, effort, and luck.”

    The author confuses land rents, which should be subject to land value taxation (i.e., taxes on income derived from property sources) vs. the entrepreneur’s wage, which should be the entrepreneur’s personal property that is not subject to taxation. However, the IRS also fails to make this distinction, which is really the heart of problem.

  • Ben Jamin’

    So, what is it landowners are discovering? Basically if the market has priced the potential correctly or not.

    A man walks into a bar and overhears a conversation between two property dealers. Land in this area is a great investment, and buying now is a one way ticket to get rich. So next day he passes a vacant plot of land and enquires to the owner whether it is for sale. Happily it is, so after some negotiation the man pays $100,000 for it. Convinced he has bought a bargain, he puts it up for sale the next week. Unfortunately the best he is offered is $50,000.

    Can we say this landowner has destroyed land values, or is he just an idiot? The market always valued it at $50,000 so what was it he destroyed exactly? His bank balance or land values?

    On any given day the market, or a valuer is going to either over or under value any location. It could be by a tiny amount to a large amount.

    Can you really say that the person who paid to much is destroying land values, or the person who under paid has produced them? That’s a fairly moronic way of looking at things.

    ” Should it be valued at $x? Now, everyone knows a successful restaurant could be built here, before, no one knew.”

    Er, no. Everyone knows it is possible to run a successful restaurant. Maybe some didn’t think it was possible at all at that location. But it’s more likely that they did but didn’t like the asking price. Maybe the people who turned up at the auction were out of cash, and just couldn’t afford it.

    How does a market failure “produce” value?

    And what innovation has happened? Does everyone not know that a location is needed in order to provide retail space?

    Working out if your are paying over or under the going rate doesn’t count as innovation. Good business sense yes, but innovation, no.

    The potential value of land exists outside the efforts of the landowners. It is up to the landowners to maximise this potential. This is entirely different from saying the landowners create that potential.

    Trying to conflate a normal cost with “producing” land values is at best disingenuous, but it also smacks of something a bit nastier. Greed perhaps.

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