A Problem with Georgism
Henry George and his modern followers propose an LVT, a land value tax, a tax on the site value of land equal to what the rent on the land would be in the absence of any improvements. From an economic standpoint, the chief attraction of the LVT is that, since it is taxing something in perfectly inelastic supply, taxing it does not lead to any inefficient economic decisions. The site value does not depend on any decisions made by its owner, so a tax on it does not distort his decisions, unlike a tax on income or produced goods.
I believe I have discovered an error in that argument, an inefficient incentive produced by a Georgist LVT. Suppose there are two adjacent plots of land, one suitable for apartment buildings, one for a shopping center. Further assume that, due to administrative diseconomies of scale, the two plots will be worth more with different owners, would be owned by different people if there were no LVT.
I buy and develop one, you buy and develop the other. My conveniently nearby shopping center raises the rent you can charge for your apartments hence the site value of the land under them, so your LVT goes up. Your nearby apartments raise the rent I can charge tenants of my shopping center, hence the site value of the land under it, so my LVT goes up.
If, however, I bought both plots and developed them the increase in income from both plots would be income from improvements — so the LVT would not go up. Hence it may be in my interest to buy both even though they would be more productive, tax aside, with separate owners.
More generally, the LVT is an incentive for inefficient integration of land holdings, makes a company town more profitable than a bunch of separately owned plots even if, in the absence of an LVT, it would be less profitable.