I’ve heard economists champion the idea, but I’ve heard little talk about what the tradeoffs are. What are the downsides?
The two downsides I'm aware of are difficulty in transitioning to an LVT and difficulty in valuing the land.
Transitioning to an LVT means that landowners no longer capture land rents for themselves, which is a massive overnight loss in the value they hold. The solutions there typically tax only the difference in land value versus a baseline assessment. So if a lot is worth $100 before LVT and $105 after, the tax is calculated only on the $5 difference.
Valuing the land is tricky because the whole point of LVT is to tax only the location itself. So the value of any structures should be excluded from taxation, and even improvements in soil quality (e.g. on a farm) should be excluded. This is problematic because the market for bare land is significant less liquid than improved land, especially in suburbs and cities. So there isn't always good data on comparable land, and there isn't a way to hold a straightforward auction to value a given lot. Of course, most present systems of property taxation are subject to the exact same issue.
This seems by _far_ the biggest difficulty, and I find it strange that this rarely comes up in LVT discussions. Even for nominally 'liquid' land it's not clear who values it or how.
BuT rEnNoVaTiOnS. Listen, I’m not trying to give you a comprehensive answer. I’m just trying to show that it’s not by far the biggest difficulty, not in the places LVT is most impactful, such as cities with extremely high vacancies like San Francisco.
If some land developer wants to build a new arena next to your plot of land - boom you're value just skyrocketed.
If the same land developer backs out of the deal - boom your land is worth less (or is actually worthless).
Your taxes depend on exactly when the assessment was made... and even professionals cannot agree on valuation (as we're seeing in some high profile cases right now).
Even for the same plot of land two people can value it radically differently.
> extremely high vacancies like San Francisco
This is a relatively new phenomenon.
There is no objective valuation for anything really... particularly when it comes to more-or-less unique, speculative properties such as land and/or improvements.
The only reason everyone mostly agrees on, say a car's value is there's a lot of cars exactly like it that have been sold recently in whatever area you are in. Yet, every plot of land is mostly unique and has a tremendous amount of potential, debatable factors when it comes to value.
That's almost the most common discussion point in my experience..
- LVT encourages building tall and is hostile to lowrise development and unbuilt/green spaces. Those policy preferences may not be shared by everyone.
>> Of course, most present systems of property taxation are subject to the exact same issue.
This is not really true. There are constant sales of building+land in cities and estimating building+land values can reasonably be done.
In a city bare land almost never trades.So you have to extract land values from building+land sales, which is much much harder and possibly impossible to do fairly.
That's actually a feature, especially if you make sure that the authority who can do the zoning also gets the revenue (or at least shares in it). That way aligns incentives.
> - LVT encourages building tall and is hostile to lowrise development and unbuilt/green spaces. Those policy preferences may not be shared by everyone.
LVT doesn't do anything like that. The whole point of LVT is that it has no influence on land use choices: you literally pay the same LVT no matter how you use the land. It doesn't encourage or discourage anything. That's why it is economically efficient.
(However, alternative taxation schemes like income tax or capital gains tax or taxes on improvements do discourage building tall. And if you lower those taxes, people will build taller.
Btw, I think that for all its faults a conventional property tax that doesn't distinguish between land and improvements is still miles better than income tax or capital gains tax or sales tax etc.)
> In a city bare land almost never trades.So you have to extract land values from building+land sales, which is much much harder and possibly impossible to do fairly.
Often land changes hands and the new owner tears down the structure and build a new one. You can reasonably assume that the old building was valued at zero, or even negative because tearing down costs money and time. So that gives a lower limit on the price of the bare land.
This is only a positive if your goal is to upzone everything. If you think cities should be a mix of zoning and zoning shouldn't be driven by tax considerations, then this is very negative, since the land management department has an incentive to increase zoning and taxes.
>> LVT doesn't do anything like that. The whole point of LVT is that it has no influence on land use choices: you literally pay the same LVT no matter how you use the land.
I don't agree that's how the incentives work.
If you don't tax structures you absolutely incentivize building structures, because they earn money but pay no tax.
In a land+building tax structure, there is less incentive to build a structure because they pay tax.
If I have a lot of green space and few structures, and we convert to LVT, I will be taxed proportionally higher than before, or than my neighbor with less land and more structures. By taxing me more you are dis-incentivising my approach.
(Before zoning was a thing there were already nuisance laws that forbade opening heavy industry next to a Kindergarten. No zoning required.)
In any case, people don't build high rises in the middle of nowhere right now. They won't start (or at least not much more than under the status quo) if someone drops taxes on structures a bit.
Also keep in mind that people don't get spontaneously generated. If people cluster together to form a high density area, some other parts of the country will see lower density. Ie if you let all the people who bunch up together, bunch up together, there's more space left over for the people who prefer lower density.
> If I have a lot of green space and few structures, and we convert to LVT, I will be taxed proportionally higher than before, or than my neighbor with less land and more structures. By taxing me more you are dis-incentivising my approach.
What you are describing is purely an effect of whether you tax structures or not. It's completely independent of whether you tax the land value.
Cities were already able to rezone neighbourhoods and unilaterally alter the values of residents' land (also just through everyday building - if they build a transit station in one neighbourhood and a sewage treatment plant in another, that alters everyone's property values), and this was already a very corruptible process. In theory LVT should improve it a little since now the city has an incentive to increase everyone's land value as much as possible.
> LVT encourages building tall and is hostile to lowrise development and unbuilt/green spaces.
Yes and no - it encourages making valuable use of expensive land, and moving less valuable uses onto cheap land, but it's agnostic about what that "valuable" is. If people prefer - that is, will pay more to use - lowrise buildings or green spaces, then that's what LVT will deliver.
It's rather easy to value the land: Have the owner decide what it's worth, then they pay a tax as a percentage of that valuation.
Now, obviously given that system everyone's going to value their land at $0.
To adjust for that land owners must be obligated to sell their land to anyone willing to buy it at the declared valuation.
Such a mechanism doesn't only keep the current owners honest, but leads to more accurate price discovery, as the land might have a higher "real" valuation than the current owner is aware of.
> It also defeats the object of land ownership[...]
So no, most people could keep land they'd like to keep in practice.
The entire notion of any sort of property tax is also predicated on the idea that individual land ownership is a tradeoff between the interest of the individual and society at large.
Indeed, and I like this concept, I don't think we should ever "own" land in the same way as I own, say, my phone. All we ever do is borrow it from society (or even nature).
However, some aspects of land ownership are a net positive for society at large. In particular, the incentive to look after it better if it's really yours until you sell it or you die. With this in mind I like some proposals I've heard whereby unpaid land value tax can be accrued to be paid at death or on sale. That way the stewardship aspect of ownership is reinforced without the freeloading on land value increases.
Returning to the valuation question. I think you're assuming an efficient market when it clearly isn't one. It would be like having to reapply for your own job, except it's rebidding for your own house. Not a kind thing to do to anyone.
What's more, even if you pay more than you ought to, you'll never feel secure in your home, knowing that at any time you may be forced to sell.
In economic terms what you're arguing is that investment efficiency should always outweigh allocative efficiency.
> pay [...] much more than your neighbor, who objectively speaking may have a lot of equal value.
All land is unique, so I don't think adjacent land of equal value exists. The difference may be trivial, or it may be substantial.
But yes, it's all a tradeoff. Some might prefer a centralized government authority decreeing a given value, others might prefer market-based price discovery.
I'm not trying to convince you or anyone else either way, just pointing out that fair price discovery for a self-assessment LVT isn't an unsolved problem.
I don't understand how this relates. My point would stand even if the neighboring lots were slightly different in value.
> just pointing out that fair price discovery for a self-assessment LVT isn't an unsolved problem.
Yeah okay I'll give you that. It's just that we can't ignore how tax policy must match a society's values in a democratic society, else it'll be voted out. I'm saying this probably wouldn't work out since voters put value on the idea that at least some people will be able to get a good enough job to afford to bring up their kids in a stable home.
I'm agreeing with you (along with the "heartstrings" comment) that all land is going to have both objective and intangible value, e.g. the view, and that someone grew up in that house.
But I think you're imagining that any intangible interests in the land are going to favor the incumbent.
I think for residential lots that's probably more true than not on average.
But we can easily come up with examples where a prospective buyer has a stronger intangible interest.
E.g. maybe you own it, and don't really care about the land or house per-se, but it saves you 1 minute on your commute v.s. the next lot.
Whereas I used to live there, and was forced to sell the house during the last recession. I've got a deep emotional connection to the lot and house, and my dog's buried in the backyard.
I'd like to buy the house back. You don't want to sell.
Does my interest outweigh yours? Maybe, maybe not.
All I'm saying is that a self-assessed LVT with an auction mechanism (see https://news.ycombinator.com/item?id=37909570) will enable both of us to set a price on those intangibles.
I agree that probably nobody's willing to try this out any time soon, for what it's worth the authors of "Radical Markets" suggest phasing in such a system by starting with commercial lots (and perhaps it would never go beyond that).
https://press.princeton.edu/books/hardcover/9780691177502/ra...
That can already happen right now with conventional property taxes..
If Warren Buffett wants to increase the value of my land, he can bid up all the surrounding plots, and make bids for my land. Any sane assessment method will see that the value of my land has increased, and will increase my property tax or LVT, and I'll have to pay or face the consequences.
(In the self-assessment case, you can give people the right to refuse to sell, if they are willing to eg back-pay the difference of LVT to the higher price for the last year or so. So people can opt to pay the tax instead of moving out.
To be extra fancy, give the would-be-buyer 1% of the extra tax take to incentivise people hunting for undervalued homes and to compensate for the buyer having had to secure funding.)
Someone who has more of a fear for can put up her self-declared land value. They'll pay a bit more in recurring tax, but would get a significant windfall, if their fear were to come to pass: Yes, there might be some psychological downsides to moving, but getting a extra few million dollars (or whatever) has psychological upsides, too.
E.g. let's say you live in a neighborhood where everyone's paying a premium for fanatic views. Except your house is the only one that doesn't have that view.
Even in such an obviously unfair scenario the government is likely to stick to some assessment that's going to be unfair, e.g. some mean sale value of the N lots adjacent to yours.
Btw, none of the problems here are specific to LVT. You see exactly the same problems in conventional property taxes: if your land is suddenly worth a lot more, your tax bill goes up.
Essentially, you want to force asset owners to write an at-the-money call option against their assets, and then adding insult to injury by not paying them an offsetting risk premium. I don't know how any moral person could be a proponent of the kinds of abuse and profitable exploitation of average people this proposal would trivially enable.
Yes, you would be forcing people to write a call option. It doesn't have to be at-the-money. Owners just pick a price that they'd be happy to sell at. Not some mystical 'fair market value' that would ruin them.
Of course, land owners would want to keep their tax bill low, so picking the right price to declare is a trade-off.
> [...] and then adding insult to injury by not paying them an offsetting risk premium.
Please be more careful in your reasoning! You are right that the call option is worth a premium. But that obligation to write the call option comes with ownership of the land, so we can just treat it as another (small) tax on the land. The market price of the land adjusts so that the yearly benefit from owning the land is pretty close to the yearly cost of capital plus sum of all taxes.
To simplify: the option premium is automatically offset by lower LVT payments.
> I don't know how any moral person could be a proponent of the kinds of abuse and profitable exploitation of average people this proposal would trivially enable.
Please elaborate. But please refrain from assuming that landowners are morons.
In particular the book by Glen Weyl mentioned in that article describes how it could work in more detail, and in a way that address the concerns you have.
A relevant except from that book (which I've got a Kindle copy of):
> For any tax rate below the turnover rate, the possessor will always set a price above the amount she is willing to accept[43]. When the tax rate is zero, the possessor is free to set any price she wishes at no cost and thus would set the monopoly price. When the tax rate equals the turnover rate, she has to reveal her true value. For intermediate tax rates, she will still be discouraged by the tax from setting a very high price, but she will not have a full incentive to report her exact value. Instead, she will set a price intermediate between her true value and the monopoly price that she expects a buyer to be willing to pay. As the tax rises from zero to the turnover rate, the price she quotes will gradually fall from the monopoly price to her true value.
That 43rd footnote in particular further addresses your exact concern (the mentioned "COST" stands for "common ownership self-assessed tax"):
> 43.: This fact helps allay two potential objections to a COST: that possessors may wish to “sabotage” the appeal of their goods to others to avoid their interest in taking the good, and that predatory outsiders may maliciously take goods just to harm a possessor. Notice that neither of these are possible if possessors always set prices above the minimum they would be willing to accept, because in this case the possessor is happy when her possessions are taken: she still profits, just not as much as if she set a monopoly price. Thus “predation” will be nearly as welcome as would be the “predation” of someone offering you out of the blue an extravagant sum for your home and you would never wish to sabotage your possessions as this would reduce the chance of such an exceptional opportunity. Only individuals who fraudulently report extremely low values and try to dramatically sabotage their goods would be open to predation, but so they should, and such individuals are likely to be caught by others before too much sabotage is possible.
If the government turns on an LVT, do you trust them to turn off other forms of funding? Or do you think they're just going to decide that their income went up?
I kind of trust them, but I don't have very high confidence that they won't decide that they "need" the extra money, maybe just for some "emergency" situation...
You can see that dynamic on the border between Switzerland and Germany: Swiss income taxes are a lot lower, so their property prices are higher. (You can probably see similar things happening on some borders between American states?)
Without an LVT, those higher property prices only benefit the land owner. With an LVT, the government gets some incentive to lower those taxes.
> If the government turns on an LVT, do you trust them to turn off other forms of funding? Or do you think they're just going to decide that their income went up?
I guess it depends. Governments have an incentive to get themselves more budget, but taxes also aren't just ratcheting up all the time. Eg the US still has lower income taxes than most of Europe. And tax rates also change over time.
If you don't allow deferment of the tax, pensioners might have to move unwillingly (low income that may not cover the tax). Most proposals allow deferment for retirees until sale of the property, though, so it's kinda a non-issue.
In general, if your circumstances change unexpectedly then you might be unable to pay the tax and thus lose ownership of your property. This already is the case for renters, but it does mean a somewhat reduced sense of security for home owners too. Mind you, this is already the case for any existing property tax or council rates, which exist in many/most places, so it's also kinda a non-issue.
Ah more carve outs for boomers. I knew it had to be in there somewhere.
(However, it might still be a vote winner. Voters aren't exactly the brightest.)
We’re so addicted to spending that anything that leads to generational wealth is fair game for governments to loot?
It came from renters and first time home owners putting money into the housing market.
Your grandma is doing the looting.
Now public spenders think she owes them what she spent her life building.
A much better option would be to target the wealth inequality that is driving a lot of these problems (e.g. by ensuring basic needs like medical care, encouraging unionization, etc.). However, there isn't the political will to do that.
If she lives in the middle of a city, then yes her taxes may increase.
I'd love to build my own house, but it's practically impossible for my generation because of the policies those older generations have voted for.
> and lives on a fixed income. Should she be forced to sell (assuming she couldn’t afford LVT)
Yes. There aren't enough places for the rest of us to live, at least not anywhere where there's work, so those of us who are doing something productive (i.e. not lucky enough to be paid a "fixed income" out of other people's taxes) should get priority. If the older generation doesn't like it, they should make it legal to build more housing so that there's enough for everyone.
> for an investment she took all the risk to develop?
Part of the point of LVT is that it mitigates the risk. If the place where she built it becomes popular, she doesn't just get to trouser all the gains. But if the place where she built it becomes unpopular, her taxes drop.
The gentrification situation is similar: if someone is living in a single-family home in an area that is filling up with apartments, they're using the land much less efficiently than a replacement structure would. As land values slowly increase, the owner would be prompted to eventually sell to someone who would put it to higher value use. You could have some speed bumps in the policy to make sure this doesn't happen too fast, but if you stop it entirely you're just giving up on productive land use.
It's worth noting that property taxes have the same dynamic, since they also incorporate land value in them. The difference though is that _property taxes discourage development_, which contributes to higher rents. Land value taxes do not have this problem; a world where we suddenly swap to LVTs is a world with many more buildings and much lower average rents.
It's no coincidence that people who support LVTs are typically YIMBYs -- we want to reform urban planning and land use to make it easier to build things.
An LVT gives no such incentives. LVT is explicitly agnostic about how the land is being used. You pay the same, no matter how the land is being used. That's why it's economically efficient.
However, a conventional property tax (and also income tax and capital gains tax etc) disincentivise developing. An LVT can help raise enough revenue to be able to lower or eliminate those other taxes, and thus indirectly help remove disincentives to developing.
So under property taxes, the parking lot owner can afford to wait and have the lot sit empty; under an LVT, they have an incentive to develop.
The LVT has no influence on building.
If you draw a two-by-two matrix where the columns are property tax yes/no and the rows are LVT yes/no, you will find that the rows have no influence at all, and it's all about which column you are in.
maybe this would encourage them to actually pay attention to the plight of their neighbors instead of the "fuck you, I've got mine" NIMBY attitudes they so regularly take.
> If you don't allow deferment of the tax, pensioners might have to move unwillingly (low income that may not cover the tax). Most proposals allow deferment for retirees until sale of the property, though, so it's kinda a non-issue.
Otherwise, banks can do that kind of deferral for you with something called a reverse mortgage.
You can always provide an exception though, for a primary residence where the increase in taxes would be burdensome on the owner's income.
On the flipside, I bet there are locales where the buildings have a lot of improvements with multi-story dwellings and the land tax could be worse.
The article goes into detail about why this tentatively works for Detroit where the majority of tax bills will decrease.
the whole point of an LVT is to aknowledge that land is a valuable resource to the community at large, and using it ineffectively is a harm to the community and should be discouraged through taxation. every exception you make not only removes the incentive, but then creates an incentive to not change the usage of that land to something more beneficial, because the people who've received the exception don't want to give it up.
Or they just time shift it until the person receiving the exception moves away and the property goes to someone without the exception.
Sounds a bit silly.
You could give people a UBI equivalent to the median's persons LVT tax take (or first quartile from the bottom etc). That way the poorer people get a net payment from the LVT system. And you don't need to sniff in people's personal lives to determine which residence is their primary residence (if any) nor what would be burdensome.
Technology changes, too, will make some houses obsolete; older roof technology, plumbing, HVAC, inefficient systems, too little insulation and no space for more.
Houses that are obsolete for their location will sell as teardowns. In that situation, the land value is measured by the selling price plus the cost of removing the old house from the site. Assessors can work with those figures very well. Connect the dots from one to the next to the next, and the land value map shapes up.
Examples include conservation projects and urban farms, but the big one is empty-nesters ageing in place (while the city has grown around them).
If you've seen the start of the movie Up you'll recall that Mr. Carl Fredrickson owns a detached home which now has apartment towers going up on all sides. As a widower his house holds extreme sentimental value to him; he isn't selling. Under an optimal land tax regime, he'd be paying quite a bit of land tax reflecting the increased desirability of his location, and would potentially be forced to sell up as a result.
Until you realize the reality writ large: The current tax scheme enables drives supply down and value endlessly up. So much so that most homeowners end up selling for more than the total lifetime cost of ownership. So the old man from 'Up' would be able to sell and recoup a lifetime of housing costs. Personal homeownership is just abstract landlording in that way.
We have a myth in the western world that we own our homes. You can argue it's a natural right, but that won't matter to the government if you don't pay your taxes. So ownership is a social construct, just like copyright; we've decided as a society that it's most beneficial to let people "own" land. But the current system has, by destroying housing supply, increased housing costs by double (in HCOL areas) over what they would be if supply met demand. So renters and first time homeowners are subsidizing homeowners in a huge way. As a result, people are putting off having kids, or not having them at all, and taking a job they hate just to exist. It's abstract, but it's still feudalism; land owners extracting value from land merely from holding the social contract to it.
So no, my empathy does not extend to sympathy for Mr. Carl Fredrickson. I'll save it for the people laboring to pay his fair share.
I do have sympathy, it's a understandable position for someone to be in, but I'm not sure that Up in specific is the best analogy?
The increase in land value over 30 or 40 years has gifted them with lots of home equity (far more than their principle payments on their mortgage). That's enough funds to downsize from 3 or 4 bedrooms on a 10,000 or 20,000 sf lot to a very fine single-level apartment or condo in a building close to the center of things, a home they can take care of, feel safe in, and perhaps even have services to cater to their current needs, just as the nearness to schools and jobs catered to their needs 30 or 40 years ago.
Meanwhile, young families, particularly those with only one earner, must drive further and further to qualify for a mortgage. They drive not just on their home-hunting trip, but twice a day to commute to jobs close to those family-size homes and well established schools.
And if they do manage to afford a home in those older more central locations, they are paying (in California) multiples of what their neighbors are paying in property tax. Those neighbors raised their kids in a time when people of all ages were contributing to the costs of the schools. Today, the young families pay lots, while the comfortable older ones play little.
And from an environmental POV, having those workers commuting 30 or 40 miles each way each days isn't such a great deal for the environment, or for their quality of life, or for the time they can spend with their children.
About (2): LVT has no incentives or disincentives for how you use your land. It's entirely up to you, your tax is the same no matter what you do with the land. That's why an LVT is economically efficient: it doesn't mess with market allocation or land use.
Why would green space be reduced? If green space is the best use of a given plot of land right now, an LVT doesn't change any of the incentives nor opportunity costs at all. (Also keep in mind that many green spaces are zoned exclusively as such. LVT doesn't influence zoning.)
LVT concentrates development efficiently. It would actually increase green space, since people wouldn’t have to develop sprawling exurbs to escape high rents (too little housing) in the city center. So no, LVT would produce significant quality of life improvements over what we have now.
Not in valuable parts of cities it wouldn't. The direct effect of LVT is higher cost of land and lower cost of buildings, thus incentivising more building and less bare land/green space.
From https://www.washingtonexaminer.com/the-short-life-of-pennsyl....
It's a "local" downside, but if you subscribe to the land tax idea, it's part of the process. These same people could just build "up" on their property, instead. But they want to cut grass.
FTA:
> The bigger immediate benefit, though, comes from reducing taxes on most [Detroit] residents. The city argues that 97% of homeowners will get a tax cut. Lower tax rates on improvements ought to encourage people to invest in properties
In order to compensate, tax on land is increased, so the relatively poorer homeowner who owns land with a relatively worthless house sees little benefit but in fact a tax increase, as the taxes that we’re previously being paid by the mansion owners fall onto them.
Can you explain more? I don't see it.
If a place already has high property taxes, and they are currently assessed on the land and the improvements then improved land in an area will receive a relative "tax reduction" compared to a full encompasing property tax. This means it is beneficial to improve land (the opposite of urban sprawl). The more the improvements the more the gains. Or thought another way improvements are "tax free" so it's easier to gain profit from improvements and is incentiviced.
If the location has low or no property taxes, then LVT will introduce a tax to the area and usually the plan is for this this tax is replace / offset other forms of tax (ex sales taxes). So enterprise would be taxed less and the land would be taxed instead. So again doing more commercial activity compared to a similarly sized lot doing less would be rewarded.
I'm not seeing any method that benefits sprawl for LVT compared to property taxes.
Imagine you are considering to start a small manufactory, say for artisanal socks. You can purchase land anywhere, since the bank will lend to you at a cheap rate backed by the land as collateral. You consider two options; option 1 is in a dense urban area, close to your workers and walkable with lots of public transit. The land is expensive due to nearby amenities. Option 2 is some exurbian land that is accessible via commute. The land is cheap. Assume without LVT that option 1 is preferred because it provides a better lifestyle for your workers. Now add LVT; the tax rate on the urban land is set based on rents, so the fact that a bank would lend cheaply against good collateral no longer matters; you cannot afford the land because local rents are too high.
It’s just a thought experiment to demonstrate a simple principle; society gets less of whatever is taxed.
But even if you did use your example above. Imagine as well there is someone else trying to open a fancy large bookstore containing as well hangouts like cafe, a bar and lecture halls for reading and book discussion. Their main draw is foot traffic and to be a neighborhood lounge where people will stroll by and stop in to pass some time about a subject they like.
They also want use of the same land, and for them the downtown location will also benefit their employees but critically it is also extremely important for their expected customers. For them, they would profit more from their location downtown and wouldn't likely be able to stay in business in the exurban location. So they would be willing to pay more for that dense urban location because it largely benefits the greater economic activity and better use of the locaiton - they would correctly outbid the manufacturer who can open a manufacturing plant just about anywhere and only marginally benefits from being in the dense urban location.
So in result if the LVT means less manufacturing in downtown (where it really isn't needed), and more businesses can operate where they benefit from the density then that's a plus for society and LVT working as is should.
And even all of tht said, neither of these are really the main examples to show the true benefit of LVT.
Property tax creates its own distortions, just like all taxes. But it is less distortive since going back to the example of a manufactury or a bookstore, no matter where they locate the property tax changes less than a land value tax, meaning the decision on where to locate is based on efficiency rather than taxes.
There is a single lot in the urban core. There are two proposed businesses vying for the lot. The first is an empty parking lot, the second is a two story parking garage. Under a property tax, the second group would be taxed for the improvements of building the above ground garage they would be taxed on economic activity - that is a bad disincentive for society. Under an LVT they would not be taxed for improving the property, there would be 0 marginal tax on economic improvement of the land. Now where it may not have been profitable previously to add the garage it now is. That is what you want. You have a market for this property, and it is now beneficial to be sold to the buyer with plans for the best economic use of the property.
A second example. Imaging a single city block split into lots. The city changes from a property tax to a LVT. The amount of money they collect from this block stays the same - but to change they will reduce the taxes on improved lots and raise the taxes on unimproved lots. Now those who improve their lots are no longer subsidising the free riders who are sitting on unimproved lots. Again you are supporting beneficial economic improvements and their activty instead of penalizing it via a property tax.
The case you are thinking of, you are using the phrase "marginal" but you are not applying marginal reasoning. Marginal implies a small change with all else being equal. You cannot apply marginal analysis to land as land is not substitutible - there is not "margin" between being in a dense urban center and in the exurbs.
There can be more buyers for a single plot of land. Enough buyers that they can be though of as substitutible. There are not more sellers for a single plot of land - you can't create more land, or produce more land with those characteristics of that dense urban center. Marginal analysis from the perspective of the buyer fails here and that's the mistake.
> no matter where they locate the property tax changes less than a land value tax, meaning the decision on where to locate is based on efficiency rather than taxes.
Again this is thinking that second order effects are first order. The first order effect here is the price of the property. The price of the property in the urban center will at least 2x-3x the price of that same property in the exurbs. It will dwarf any differnece in method of taxes. Even if LVT were 3x the property tax most property taxes are roughly 1% of the purchase price per year. Price not tax is the dominant factor and the reason why that comparison you made isn't valid. Within a price band yes tax will impact decision making, across price bands price obviously dominates. And tax dominating within a priceband is a good thing because we have now changed the policy to no longer tax economic improvements to land - so the tax policy is actually better. It's improving behavior at the margin.
Then why do realtors do showings for multiple locations? It’s because the locations are substitutable, with buyers balancing price and amenities. Land is substitutable.
> confusing second and first order
Prices are a second order effect, not a first order effect (unless there’s price fixing). LVT makes land with amenities relatively less attractive, which lowers demand. Lower demand then moves the price, but the quantity demanded will still be lower since the demand curve has shifted down. This causes an exodus from urban centers to the periphery.
>property taxes disincentivize development
True. Assuming constant revenue, a move from property to land value tax would create a relative migration from city cores to a highly developed exurbia. If the LVT was high enough, we’d get single plot high rises with multistory garages only accessible by freeway surrounded by untouched nature reserves.
At this point it appears you're just ignoring basic economics price sensitivity. Lowering overall taxes on a lot will not cause a migration from that lot.
I mean you can just keep repeating that phrase, but it doesn't then make it true. If you continue your argument that eliminating a tax on economic activity in an area will reduce the amount of activity in that area then there likely is little left for us to discuss.
Perhaps if all the shop owners got together as a cartel they would face the incentives you talk about. But not for individual owners.
Also, LVT does not change the total yearly cost of some land. It obviously doesn't change rents; and even for land owners it doesn't change the recurring costs: the sum of cost of capital for the value of the land plus all taxes is the same with LVT or without. (Basically, the market will prince the LVT burden into market prices of land. Imagine a city where some plots of land have to pay LVT and some don't: the total cost of ownership for comparable plots would be the same independent of whether they are LVT plots or not. Same for renting plots.)
As urban demand goes up, builders are incentivized to keep building denser ...... until equilibrium is reached.
LVT's main benefit is that it helps remove zoning confusion. It makes houses, parking, offices and factories compete on comparable financial ground. And promotes a minimum level of upzoning based on the value of the land. (Usually corresponding to demand for said land)
The proponents of this I have met are generally wanting to use it force seniors with paid off homes out of them so they can live in them instead (or often build on them, as they are property developers).
It also assumes that NIMBYism remains at the same level, which is challenging, as every new build or development nearby increases your own taxes. It would also encourage the childless to fight things like schools, as they would pay extra tax having them nearby.
California for example is partially so dysfunctional because they don't have enough conventional property taxes.
Yes, conventional property taxes disincentise building, but not more than capital gains taxes or income taxes do. And in large parts of eg California houses only cost a small fraction of the land they sit on at the moment.
In practice, land value taxes increase home ownership, so the actual displacement rate of a population might be the same or even less with LVT implemented.
> It would also encourage the childless to fight things like schools, as they would pay extra tax having them nearby.
Note that any existing property tax or council rates regime already theoretically has this effect too, but I don't really see this behaviour. It's a theoretical strategy that certain demographics could utilise, but not one that plays out in practice in any city I've ever seen.
This is the same as the existing tax system, where tax is proportional to (land value + buildings' value).
> High levels of displacement and instability.
Taxes would rise on undeveloped or underdeveloped properties, and fall on developed properties. The net effect would be an increase in total housing stock, as the relative cost of building and owning more units goes down.
> The proponents of this I have met are generally wanting to use it force seniors with paid off homes out of them so they can live in them instead (or often build on them, as they are property developers).
An LVT wouldn't have to work this way. The transition could be something like, set the LVT for each property the same as its current tax under the old system. But any future change in the value of buildings on the property don't affect its tax. This would mean seniors could continue paying the same tax they used to, while developers wouldn't get penalized for building more housing.
If you retire, or loose income, people currently pay less income taxes. You can also live frugally to cut down on sales taxes.
With LVT, taxes are detached from income and spending. Your taxes are also based on the whims of others. If your neighborhood gets trendy, you tax bill might double.
The opposite should be true because as density goes up the cost of services go down.
What's the alternative? Letting SFH leach off the current system paying less in taxes than the government spends to service them?
It doesn't make much sense for a modern service based economy. Your typical service sector worker, programmers, doctors, CEOs, would have essentially no taxes as long as they have a small geographic footprint.
Of course it sounds good to tech b
This doesn't apply to what Detroit is doing, but you could probably also take the underlying logic of land taxes (rent seeking should not be protected from taxation) and apply it to other more modern forms of property.
Stop letting low tax paying SFHing leech off the system, and we will be incentivized to build more.
The best way to keep your land value tax low is to ensure that zoning restricts its use and Light Rail never gets built.
Under a land value tax this flips, and the majority vote would go to up-zoning.
This means you want the maximum restrictions to keep the value low, for both you and your neighbors.
Less extreme, if you have a neighbourhood with plots that allow unlimited building and a few plots that only allow single family homes, the latter would be a lot cheaper.
you can put a duplex or quad-plex on a parcel and have much lower rent, but higher parcel land value.
If you are a homeowner who wants lower land value tax, you should fight tooth and nail to prevent higher density zoning,
It would be like a flat tax (in dollars, not percent) on every homeowner. Currently the top 5% of income earners pay 65% of taxes, and the bottom %50 pay %2.
Instead of this, every homeowner would pay basically the same. Bezos and Musk would pay more, but they don't own a million houses each, so it wouldn't be much more.
They want to be close to high-paying jobs? They want to be close to highly-paid homeowners? They want to be close to their own workplace? Location, location, location!
But instead of paying the previous owner, who didn't create the land value, they pay the community, year in and year out, for those services.
Makes sense to me.
Meanwhile, blue collar workers tied to living in urban centers pick up the bill.
Lvt would completely decouple income from tax burden