The failure of the land value tax
worksinprogress.co
worksinprogress.co
This line in particular stuck out to me: "What’s more, in line with Georgist theory, the tax was supposed to credit owners for improvements they made to the land"
I think we're talking about different LVT systems here. The current property tax system takes land improvements into account (and charges you more for them). My understanding is that LVT should be a flat tax on acreage (different tax rates for different areas of course) that doesn't care about what is on it.
This article is attacking a very different LVT than the one I know.
It's true that calculating the unimproved value is difficult. There is no obvious "ground truth" except in rare cases where the improved value has been destroyed and the owner will need to rebuild for some reason. And while there are probably enough such cases to get an estimate of the average in a large city, just taxing against the average would be distortionary (a burden to those with a below average plot, eg distant from metro stations or other amenities) . And to make a more detailed estimate makes the process subject to political maneuvering.
All George is saying is that that money should be going to the city (or other controlling locality) instead of the previous owner, because it's the city that created the value in the first place.
On the linked article, the tax seems to be .5% up to a given value, then 1.5% above that (fairly hefty, imo), but excludes rented properties - which pay tax on the rent.
This danish case study seems to me a better case study for the LVT: why does it raise so little?
I think you typo'd there, with initial 'P' intended to be 'C'
Paul Graham writes about the illusion here: https://paulgraham.com/wtax.html (wealth taxes and land taxes have close similarities). Maybe needs more attention to inflation or capital gains. Discuss here: https://news.ycombinator.com/item?id=43357851
The argument about empty land remaining undeveloped seems rather vacuous when you think that empty land already has a holding cost [either (1) mortgage interest or (2) opportunity cost ≈investment_market_beta]. And city property taxes in New Zealand are low percent already.
Land ownership is zero sum so that makes it wildly different from equity (although many people think of capital as zero sum too).
This is impossible.
So it always fails.
I love markets, everyone loves markets. But markets only approach efficiency on a unit basis when there is a liquid market for fungible goods. Otherwise you can get aggregate pricing signals, but really no information about a specific item.
Often 99-year leases (e.g., Hong Kong to the UK).
In practice, the tenant can typically break the lease with minimal consequence as the landlord (the government) can generally find new tenants, and diversifies risk over many landholdings.
Edit: I should add that the simplest way to handle this is to attach the debt used for building to the land instead of the land-owner. That way there is no loss for auctioning off the land after building.
You wouldn't pay. The building would be financed by debt and the debt would be attached to the land. You'd only pay the interest on that debt for as long as you maintain the lease on the land.
> Why wouldn't this world's Blackrock swoop in the instant a profitable lease comes up for auction?
Two reasons: Firstly, Blackrock could hypothetically do this in real life but they don't because they don't have the money. And secondly, from an ideological perspective they would have no motivation to. You are still thinking in terms of "owning land" and the idea that it's better to own more land. Under the new system, you can't own land, only rent it. Hence you want to minimise the amount of land you are leasing. If Blackrock gets the lease, they will lose money on the down payment, then lose money on the rent unless they can find something productive to do with the land. Any business they set up won't be competitive as they'll be paying more in rent than the surrounding businesses. Overpaying on rent is a strictly money-losing affair.
Let me outline this simple hypothetical
I lease a plot of land with a parking lot on it. I spend a year of my time building a quadplex on it, financed by a loan, and get tenants in. After all my expenses, I am making 10k a month in profit! Next year rolls around, tell me what stops Blackrock from taking the lease by offering the value of the lease+9.5k per month and making their money in quantity? Down payment doesn't matter because they have so much more in assets than me that they can make use of a plot of land that generates less profit than I need to live on.
The LVT solution to this is valuing the unimproved land. I.e. if someone were to buldose the buildings and infrastructure actually on the land, how much would it cost to rent it.
This works fine on a lot-by-lot basis, we tend to know the value of land in cities. It starts falling when you buy a large amount of land. The value of land in Manhattan is very high obviously. Remove the empire state building and that plot is still worth a lot of money.
The value of that lot is the surrounding infrastructure - transport, power, proximity of people, etc.
If one company owned the entire island as a single lot though, the unimproved land would be very low. If two companies owned the land, the unimproved value suddenly balloons.
Lease durations are important here; if you're like England and have 99 year leases instead of freeholds or something, then that's great, it's basically ownership, but you get no unit pricing signal until the next 99 year renewal rolls around.
Practically speaking, from a Georgist perspective, ths isn't even useful because it doesn't convey anything about the unimproved value. What if you make improvements to the land, like build a house or something? Do you have to knock it down when you leave? Is the government the only entity that can build houses?
What do you do when Elon Musk decides he doesn't like you and outbids you on every parcel you try to get a lease on?
On turnover, it's interesting to note that real-estate mobility has fallen markedly in the United States in recent decades. Whereas ~20% of individuals moved in any given year from 1948 through the early 1970s, that figure has fallen to about 7% in the 2020s:
<https://paulkedrosky.com/americans-are-less-mobile-than-ever...>
That translates to a move every 5 years to roughly every 15 years, or three times the residency.
Ironically, among the factors contributing to this is being "stuck" by a mortgage, e.g., a house that's under water (more owed than the unit can be sold for), particularly in states without non-recourse ("walkaway") lending laws. This isn't the only factor, but it does contribute.
Removing private land ownership might well improve this situation.
What does he do when he runs out of money for the down payments? Rich people can already price people out of industries in our existing economic system.
> then that's great, it's basically ownership
The entire point is to get rid of ownership, but there is no need to renew the lease at all. Just increase it based on increases in surrounding leases. Then allow the value to be negotiated down through voluntary renewal.
> What if you make improvements to the land, like build a house or something? Do you have to knock it down when you leave? Is the government the only entity that can build houses?
You build the house with debt, the debt stays with the land. If you leave, then the person who comes in after you has to pay for the construction of the house.
everything gets messy as soon as you start improving the land, because the improvements are not easily removed from the land. if the state owns the land but i own the skyscraper i built on it, what happens to my skyscraper when the state auctions my lease off to somebody else? the whole point of a land value tax is that the value of land changes after things have been built on it (and around it), and you need to capture that change in value.
TL;DR the lender loses money iff the value of the building is less than the money they loaned to build it (true in any system).
> whats to stop someone from taking out a huge loan and paying their own construction company to do the work at a premium?
That's called embezzling. Are you familiar with corporate law? The "limited liability" in "limited liability company" refers to the fact that the owners of a company are not liable for the debts owed by said company. One can, in principal, take out a large loan on behalf of a company you own, pay it to yourself as salary, then declare the company insolvent and pocket the cash. Laws exists to prevent this and could be extended to fraud under the new system.
This just is not necessarily true, and more importantly runs into the issue that now lenders will not lend to people and land that they believe cannot be be positively valued for the entire term of the debt. In real life if you buy a home on a 30 year mortgage, the lender does not need to care much if it could be less valuable in 20 years, only that it retains enough value to be worth the rest of the loan if it needs to be seized.
As for embezzlement, go try to get a loan as a new LLC without assets, or revenue, or personal collateral. The reality is that under your proposed system, no bank would ever take the risk of loaning money to a plot of land. Forget fraud and embezzlement, there's zero mechanism for preventing flat out bad management from ruining a plot over and over again if you don't attach debts to people.
i don't know that i'm even necessarily against this idea, but it's a long ways from just being a land value tax at this point.
In NZ we pay property rates based on a combination of land and improvement value. It's been this way for a very long time. Removing the improvement portion and focusing only on the land value portion can only be a simplification - not a complication.
Official estimates of land value are common in many jurisdictions and nothing new.
Two problems though. One is that this is very anti-Georgeist; the main idea with the school of thought is that you should not be penalized for improving the land; you do not want counter-incentives to land improvement, because that's a net negative for neighbors and for society.
The other is that this process is very very very bureaucratic and corruptible. I can see for myself how this manifests in places I've lived because the estimated value for tax purposes is so wildly different than the actual sale price of real estate. I can't speak to NZ specifically as to how much of a problem this is and how it is addressed, but I'm going to go out on a limb and offer the hypothesis that it is poorly addressed and there is a big divergence between the estimates and the sale prices for real estate. Prove me wrong!
I received my notice from the land valuer general yesterday (for unimproved land value).
Looking at building costs for my area and what other houses are going for in the street, the valuation looks spot-on.
See for example https://landvaluetaxguide.com/new-zealand-experience/
"In a general observation Keall states;
Wherever Land Value Rating applies it has been adopted by poll of ratepayers, representing a lot of work and profound social concern. Wherever Capital or Annual Value Rating applies it has been imposed by Government or Councils, contrary to the express wishes of the ratepayers in almost every case.15
With certain exceptions16 local LVT, assessed through the LV system, was preferred where democratic choice was allowed, but this choice was removed in1988 by the Labour government, which revoked the democratic polls that had kept the local LVT in place for more than 130 years."
Part is a land value tax for my land, and part is a wealth tax on unrealized gains.
X = Unimproved land value
A = How much it would cost to build the building
B = Improved land value
A+X = B, solve for X, you get X = B-A.
We can measure A based on the building's floorplan and labor costs for similar size houses.
We can measure B using the same methods we currently use for figuring out land value for tax purposes (or if you don't like those, whatever improved method you might have in mind, e.g. last fair market sale price plus inflation rate since last sale date).
You might argue that "the cost of a thing doesn't represent its true value" but I'd classify that as a separate debate. Tax codes are generally written as if costs actually do represent value. E.g. a company's value according to its accounting books is often quite different than its market cap, but we generally tax companies based on their accounting books. (Even market cap has its downsides as a measure of value. My personal conclusion is that the notion of "value" itself gets awfully fuzzy, heuristic and imprecise outside of tautological corner cases like "1g of gold is worth 1g of gold".)
Although, there's no reason unimproved land value can't be negative, the land just needs to be burdensome.
Good point on the value of unimproved land being negative, I was thinking of a different edge case. In the situation of "burdensome" land, maybe it does make sense for there to be negative value land with an associated tax credit if the owner is compelled to do something to remediate?
Building value can be negative, if the costs of renovation or demolition would be greater than the value of the land.
But building value could also be positive, but less than the cost of construction. Basically "It works fine and it's worth something, but if you built it today, the value you could sell it for wouldn't cover the costs."
Basically you need to design a formula for a requirement something like: "We need to proportion the improved land value between the building and the unimproved land. The building 'should get' 10% - 90% of the value. We start with cost, if that's near the middle of the range we accept it, but toward the ends of the range we modulate it (either with hard cutoffs or softer asymptotic blending)."
Then you need a separate case for where the building is negative value. In that case you could probably get by with an inspection and cost estimates for renovation / demolition.
You could also discount a building based on its age, say 1% per year up to 70%. This represents the fact that Joe's house would cost $200k to build today, but if you did that you'd get a house that's 0 years old. Joe's actual house is 60 years old, so to guesstimate the value of that 60-year-old house we take $200k and subtract 60% to get $80k. (The 30% minimum represents the fact that even a centuries-old house in good repair has some value.) Again, after the discounting you'd apply modulation to make sure it's 10% - 90% of the total value.
You do have a lot of price signals about the value of nearby private property, and you can also estimate the price of public land (parks and major roads) by using data from across the whole country to determine how much people want to live close to, say, a park. Then come up with some formula to aggregate that into a single value for each land.
I would hope that someone does this at least as a theoretical exercise to see what the estimated values would be, and whether we can find a formula that is reasonable for almost all properties.
[1] I am talking about residential and retail properties. Not farm or mining type land.
[2] Close/far in both the topological and the geometric sense.
1. Property Tax Systems Already Differentiate Land and Improvements
Nearly all property tax systems already distinguish between land and structures. While not perfect, assessors routinely estimate land values separately using standard appraisal techniques, such as sales comparisons, income capitalization, and residual valuation.
Many jurisdictions with split-rate taxation (e.g., Pittsburgh, Harrisburg) have successfully implemented higher land taxes without insurmountable assessment issues.
2. Market Transactions Provide Usable Data
While land parcels are not perfectly fungible, land is frequently bought and sold. Vacant land transactions, teardown sales, and comparable properties provide pricing signals that allow for reasonable estimates.
Even when improvements are present, sales can still reveal land values through statistical analysis. Techniques like hedonic regression and Computer-Assisted Mass Appraisal (CAMA) leverage large datasets to isolate land value.
3. Land Value Is Already Implicit in Market Prices
The value of land manifests in rental and purchase prices. Two identical buildings in different locations will sell or rent for different prices, with the difference attributable to land value.
Land residual analysis (subtracting improvement value from total value) is a well-established method used by appraisers and economists.
4. Perfect Accuracy Is Not Required
No tax system relies on perfectly precise assessments. Income taxes, sales taxes, and corporate taxes all involve estimation and compliance issues, yet they function well enough for governments worldwide.
Even if some inaccuracies exist, a Land Value Tax (LVT) still improves economic efficiency by discouraging land speculation and incentivizing productive land use.
5. Technological Advances Improve Assessment Accuracy
Geographic Information Systems (GIS), machine learning models, and mass appraisal techniques are making land assessment more precise.
Many cities and countries, including Denmark, Estonia, and parts of Pennsylvania, have successfully implemented LVT systems.
6. The Alternative Is Worse
Even if land assessments involve some degree of uncertainty, it’s still preferable to the distortions created by property taxes on buildings, which discourage construction and improvements.
Current property tax systems often undervalue land, leading to inefficiencies and speculative hoarding.
Conclusion:
The claim that it is “impossible” to determine unimproved land value is empirically false. While perfect precision is unattainable, the same is true of all tax assessments. Practical methods exist to estimate land value with sufficient accuracy, and jurisdictions that have implemented LVT-like systems have demonstrated their feasibility.
The real question is not whether it can be done at all, but whether the benefits of LVT outweigh any challenges in assessment—historical evidence suggests they do.
It sounds rife for yucks. Imagine making a megarich person mad online and they buy your house out from under you. So you move to another one. They do it again, and again, putting you in the delightful position of playing chicken with their vindictiveness and your ability to pay your own property taxes.
Moving is colossally inconvenient, and extra horrible when you're forced to do it.
Can't imagine local supermarkets being able to endure the inevitable bidding war on their properties from walmarazon.
It's true that determining the value of the unimproved land is not an exact science, but that is true of real estate appraisal in general.
Achievable rents would be one of the factors among others that one would use to calculate the value of a building.
This is impossible."
1) my property tax includes 2 line items, land and improvements. So clearly not impossible.
2) it's also irrelevant. (Land value) tax just has to be plausible and reasonably consistent. Property taxes are contested all the time and are based upon interpolations and extrapolations of recent sales when possible. All that is required is that the taxing authority comes up with something that the owner pays.
Then the wide adoption of technology like the automobile (which made it possible for many to simply commute to and from the city instead of be there all the time) eroded the political necessity to tackle difficult urban land issues for decades. "Drive until you can afford to live" only gets you so far though and we're hitting the limits of that in many places now.
Notably in https://labouraffairs.com/2022/07/08/churchill-arguing-for-a...
gets into a bit more detail:
"With that in mind a 4,000 strong land valuation workforce was recruited. It was on the basis of that valuation that the tax was to be calculated on subsequent sales of land. However, from the start the collection of the new tax was confounded by problems. It took time to embark on a national land valuation programme. In the meantime, many local Tory councils proved to be unsympathetic and obstructive and tax judgments and valuations were regularly challenged by landlords in the courts. This meant that by 1914 only £612,787 had been collected. The war further complicated the land valuation programme as well as sales in land and then after the end of the war the Conservative-dominated post-war Coalition Government delivered the coup de grace to land taxation when all traces were removed from the statute book."
None of this is actually remotely relevant to a modern day property tax system that focuses on land, but it just goes to show the intellectual dishonest framing of the author.
Notably, Australia had a different experience:
https://cooperative-individualism.org/dwyer-terence_taxation...
(p.276) The cost of compliance and of administration of a land value tax system may be comparable to or better than an income tax or property tax system. An income tax has a cost of collection of around 1 percent of revenues (Australian Taxation Office 1979: Table “Cost of Collection of Taxes Administered by Taxation Office”). By contrast, the cost of collecting the Australian Commonwealth Land Tax of 1910 was 1.25 percent (Scheftel 1916: 86). This was a federal tax from 1910 to 1952, comparable in scope to a national income tax. However, it should be noted: (a) The total cost of administration in 1910 was 3.5 percent, but that included the nonrecurring cost of setting up the land value tax system (Scheftel 1916: 86, 88). (b) The Australian federal land tax was on a progressive, not proportional, basis, which made its administration more complex and costly than a uniform ad valorem tax would have been (Bird 1960: 392).
The average tax rate of 1.2 percent took about 25 percent of the income from landownership (assuming an interest rate of 5 percent and no land appreciation). With a higher tax rate and fewer loopholes for tax avoidance, the costs of collection and administration would have been a smaller percentage of total revenues."
If you charge 3,000$ an acre, assuming everyone could pay it (big assumption), you'd be able to eliminate income tax and turn the budget deficit into a surplus of $290 billion with no changes to spending. Nice!
The real number would be higher for reasons I glossed over like the fact >25% of the acreage in the US is probably unproductive for the purposes of an LVT (national parks, the plot your city hall sits on, etc.)
Who loses? Well, Ted Turner big time. Many large farms probably wouldn't be thrilled. I don't feel _that_ bad for Ted but the farm thing might be concerning.
I also think retirees/lower middle class rural folks would get absolutely shafted. Imagine this being instituted the year you retire. You've been paying 30% income taxes all your life, you move out to a dirt cheap 10 acre plot in the Missouri wilderness, and you _still_ have to pay 30,000$ a year. Your property taxes would have been about 200$ the year prior. Ouch.
This would force a lot of rural poor onto smaller plots. I do not imagine this would be popular with them. So maybe you weight the price more towards the urban areas? Possibly could work. A big buff to van life arbitrage I guess lmao.
The general idea is that two plots of land in the middle of a city, one with a sky scraper, and its neighbor, a bare parking lot, are taxed the same. You don't pay more for development.
This general scheme makes intuitive sense. It prevents speculation, and encourages development (if your parking lot costs the same in taxes as the sky scraper, you might as well get some more rent from it and make it more productive.
It's nice from a "libertarian" perspective as well because it doesn't force you to develop your land. It just puts incentives in the right places.
Finally, if land is taxed more uniformly, as you described, a landlord in the city, who owns their property outright, is collecting far more in revenue than one with a similar building somewhere more remote, simply because of it's location. Nothing the landlord did justifies the higher prices, it's the restaurants near by, the subways, the well employed people in need of homes that demands higher prices. Since all that value is produced by society, it makes sense to tax it and spend it on the public good. That value, is exactly the land tax.
I'm thinking of schemes like, and more sophisticated than, "I'm selling 250,000$ T-shirts, buy now and receive a free house on worthless land."
Another strategy is to make it so that if you want your land to be worth X for tax purposes, you're not allowed to refuse a good-faith offer to buy it for some multiple of X (plus the value of improvements). Although, this amounts to an expansion of the idea of eminent domain, which is politically difficult.
LVT is a dilution of what we currently understand as property rights. It would necessarily come with a lot more government oversight of what kinds of land sale agreements are legal, to prevent the kind of chicanery you mentioned. You wouldn't really "own" the land in the sense currently understood, it's more like "stewardship". You'd still own the things built on top of it though. I think this tradeoff is worth it (especially if other taxes are abolished), but it's important to admit the tradeoff exists and not everyone would like it.
Yeah. Humans are crafty though. I don't think it would take conspiratorial coordination in order for this to turn into somewhat of an arms race in prime areas. I'm imagining homeowners associations shifting prices from land value to HOA dues or some such. People putting tires and broken toilets on their lawn in front of a privacy fence. Sometimes HOA's requiring this kind of thing. People getting pissed at the nice lady who keeps trying to plant flowers everywhere. Nonsensical home renovations like putting a toilet on the ceiling or installing doors that go nowhere. People buying used syringes from diabetics so they can throw them on the street. Products that let you make your roof leak on demand. Mold markets. Just goofy humans responding to incentives.
> Another strategy is to make it so that if you want your land to be worth X for tax purposes, you're not allowed to refuse a good-faith offer to buy it for some multiple of X (plus the value of improvements)
Ah yeah this is a haymaker to the issue. Would have to let people set one exempt property or something to prevent grandma from losing her foreverhome because the neighbor's lawn toilets had made her vulnerable to a hostile takeover.
Thanks for the discussion.
Yeah probably you'd see things like this happen in some cases. It doesn't seem obviously worse to me than all the games people play to keep their incomes or profits or employee counts under various thresholds to avoid tax. Or the hundreds of other tax tricks involving charities or art or minority ownership. We're used to those things so we forget how weird and silly it all is.
The thing about land is that it's public -- you can't keep it a secret. So that makes it naturally more difficult to hide wrongdoing than when things are abstracted by accounting tricks and shell corporations. Someone can come by and just look at it.
I would need to do some deeper analysis to fully convince myself that this could be applied in such a way that it doesn't screw over retirees nor drop an economic atom bomb on every major urban area. Seems more reasonable than a lot of wild overhauls I've read about though. I like it more than the "get rid of all taxes except for sales tax" idea.
If you tried to drive the property value down to avoid taxes, your neighbors would lose their shit and report you (because most people have their "wealth"in the form of their home). It's a neat system of weird incentives.
Of course, if everyone in the neighbourhood does the same thing, the land values will rise considerably. But that's a policy success -- the tax system has collectively incentivized land owners to increase the housing supply to meet demand.