The cost of property may slowly kill Silicon Valley – but a Land Value Tax might give it new life

“One thing I’ve been thinking about as a venture capitalist in Silicon Valley is the vast majority of the capital I give to the companies is just going to landlords. It’s going to commercial real estate and even more to urban slumlords of one sort or another. And that’s an odd thing to be doing as a venture capitalist. That’s so disproportionate…”

Thiel is a free market libertarian – he’s got no problem with people getting rich through their own efforts. Indeed, he’s not exactly poor himself.

However, the landlords of Silicon Valley and its environs aren’t primarily benefiting from their own efforts. Land values in and around San Francisco haven’t reached ridiculous levels because of what landowners have done, but because of what others have done – above all the innovators and entrepreneurs of the tech industry.

It is the geographical concentration of talent, knowledge, investors and supporting infrastructure that makes particular locations so attractive to incomers – the San Francisco area being a classic example:

“Back in 2005, Thiel was asked during a panel discussion at Stanford University where the next Google (GOOGL) might emerge.

“At the time, Thiel answered that he thought there was a 50% chance that the next Google would be within a 5-mile radius of that room. Unbeknownst to him, that company was Facebook (FB), which was just 1.8 miles away and a company he had invested in early.”

Now, Thiel thinks that the high cost of living is helping to drive innovators and entrepreneurs out of the area – therefore making it less likely that the next big thing will happen locally. Rent extraction doesn’t just suck value out of what local economies have already achieved, it also inhibits the ability of those economies to reinvent themselves – i.e. it is a force for stagnation.

But is there anything to be done about it? Like any limited resource, space in a sought-after location needs to be allocated somehow. Assuming we don’t want a centrally-planned state system in which the state gets to decide who works where, there seems little alternative to the property price mechanism.

What can be done however, is to levy a windfall tax on surging rental values. Properly structured, a Land Value Tax would automatically fulfil this function.

Such a tax would be paid by the landlord not the tenant. It couldn’t be ‘passed on’ to the tenant in the form of higher rent, because rent levels would already be at whatever the market can bear. The tax would therefore he paid out of the landlord’s income and by making land ownership less profitable should have a calming effect on property prices – and ultimately rent levels.

Furthermore, the revenue from the tax could be used to fund the regeneration of other parts of the country (or even the same city) – thus increasing the supply of suitable space for business.

Alternatively, the revenue could simply be used to cut other business taxes, in particular employment taxes – thereby shifting the burden of taxation from job creators and on to rentiers.

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Peter Franklin is Associate Editor of UnHerd. He was previously a policy advisor and speechwriter on environmental and social issues.

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