1. Introduction
Land value taxes (LVT’s) are an attractive approach to public finance. The basic idea is that owners of land should be taxed on the value of the unamended land (i.e. the value of the empty lot) since this value is driven primarily by the economic activity nearby and not by the owner themselves [1].
LVT’s are one of the few taxes which are generally believed to increase efficiency rather than harm it. On top of this, they can fund a large fraction of government spending, replacing less efficient taxes. Because of their nice properties, LVT’s are the only tax that I know of which comes with its own economic ideology.
So, why haven’t we implemented them [2]? There are two major issues. First, it’s hard to determine exactly how much a piece of land is worth without its amendments. Second, existing homeowners strongly oppose higher property taxes and have significant political clout.
2. Proposal
Here, I want to offer a simple approach to help catalyze the transition to a land value tax.
The key insight comes from trying to solve the valuation problem to the exclusion of everything else. If we only cared about proper land valuations, what would we do?
In this extreme case, we could require people to tear down their house before selling the land. More specifically, we could require that people remove all amendments (buildings, trees, crops and so on) before putting their land on the market. That way, the price the it sells for is determined solely by the value of the empty lot.
Of course, doing this would be extremely inefficient. Destroying property each time a piece of land is sold would be wasteful and greatly increase transaction costs.
However, the kernel of the idea can be salvaged. Rather than requiring that people actually sell an empty lot, why not require that they sell the land separately from the amendments? For example, the law could require that all land be publicly auctioned separate from the house itself. Once the land is sold, the owner can sell the amendments separately. Now, the buyer is only taxed on the value they paid for the land itself, not the amendments.
3. Problems
There are a couple potential issues with this approach.
First, buyers and sellers might collude to lower the apparent auction prices for a piece of land. However, other bidders can thwart this by offering a slightly higher amount.
Second, bidders have an incentive to undermine the value of the land, while owners have an incentive to inflate it [3]. Fortunately, the public listing of nearby land values limits this behavior.
Third, requiring two separate sales of land and property raises overall transaction costs.
Fourth, since land values typically rise over time, homeowners may face an incentive to stay in one place in order to retain a low tax rate [4].
Fifth, once the land is sold, the homeowner can charge a higher price for the house, since the buyer would otherwise need to build a new one. Note that the buyer of the house can subsequently overcharge a similar amount when they sell it, so the distortion roughly cancels out. This has the effect of raising property (but not land) values.
Several of these issues are quite similar to those created by a property tax today, which suggests that they will not be a practical concern.
Though this law will provide more accurate land values, the price the land sells for in auction will still differ from the true value of the land for several reasons. For one, owners will typically wait for favorable market conditions to sell. On top of this, the person who wins the auction is likely to have the most inflated value of the land. In addition, some amendments to the land will be too expensive for the owner to remove, raising the auction bids [5]. Counteracting these factors, the expectation of taxation and the auction design itself can both lead bidders to under-report their valuations.
It remains to be seen how much these issues distort land values, though I expect the magnitude of the effects to be small. Because it is unclear how these factors balance out, I believe a low land tax rate is justified since it is better to over-reward improvements to land than to over-penalize them [6].
4. Politics
So this may be a feasible way to approximate land values, but how do we tackle the political issue? Currently, homeowners (and aspiring homeowners) strongly oppose further taxation on property and consistently turn out to vote.
However, this system can be used to significantly lower homeowners tax bills. This can be done by using land values rather than property values when computing property taxes while leaving local property tax rates unchanged. Since property values are much higher than land values, this lowers homeowners property tax bill while making the taxation itself more efficient [7].
Switching to a LVT this way seems politically feasible. On top of the smaller tax bill, the unfairness of penalizing owners for their efforts to improve their homes would likely resonate with voters. Once the tax system is in place, large reductions in less efficient taxes can be exchanged for small increases in the land value tax rate.
5. Conclusion
There are several downstream benefits to this law. Public data on land values can help states assess their economic health [8], land values can be incorporated into wf-DAC’s for public goods provision, and the independent sale of homes will create a huge market for moveable houses. These and other benefits are particularly valuable for competitive governance systems like the Archipelago [9].
I am not the first to propose solutions to this problem and I imagine that practical implementation of any land value tax system will involve hard tradeoffs between political feasibility, economic efficiency, and legal complexity. But the first step towards experimenting with different schemes is a simple, popular change which can shake up our stagnant approach to distributing land.
Notes
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For an engaging look at Henry George’s views on land value taxation, see this book review of Progress and Poverty.
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While property taxes are superficially similar to a LVT, they are much more inefficient because they also tax owners for the amount they improve the land.
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A prediction market on land values would significantly reduce the uncertainties in the true value of a piece of land.
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One solution to this involves requiring homeowners to re-buy their land every few years, which would result in something very similar to Glen Weyl’s COST system. This would be politically unpopular. Instead, states could use a fixed, annual increase in land taxes.
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Though, amendments which raise the value of the land and cannot be removed can be considered part of the land itself.
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Search considerations also argue in favor of a relatively low tax (See Caplan’s “A search theoretic critique of Georgism”). Note that this proposal sidesteps the issues raised in this critique, by leaving owners with the value of resources (and new uses) they discover on the land (since it only taxes the amount they bought it for). Note that this approach still aligns homeowners with local public goods provision and the local economy, since these things increase future sale price. There is a tradeoff between fully taxing land value and ensuring that citizens benefit from local growth.
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Since a homeowner cannot lower their property tax bill until the land value is determined by auction, this law would induce a one-time increase in the sale of land.
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The aggregate value of a state’s land is a plausible measure of national wellbeing which can be used in a futarchy.
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Admittedly, this is the reason I got interested in land value taxation in the first place.
If you have two different sales, you have to consider the possibility that one or the other doesn’t go through, or goes through to a different buyer, and so you will end up with many cases where you have separate owners of the land and improvements persisting for long periods of time. To seriously consider this idea, it is absolutely necessary to work out what happens in such a scenario.
So the question becomes: what rights does ownership of the land alone provide? Whatever it is, it can’t have value proportional to the value of the improvements. So in particular it can’t include the power to require the improvements to be modified or torn down or prevent their use, or anything else like that. Perhaps they can charge rents to the improvement owner, but that rent should probably only be equal to the LVT so that doesn’t seem to be worth anything, just offsetting a liability.
Furthermore, improvements mean more than just buildings. They also include things like clearing unwanted trees and weeds, removing boulders, landscaping, paving, driveways and roads, adding wiring and plumbing, fences, ponds and dams, even planting lawn or garden or fruit trees or farm crops.
It seems odd to have someone who owns the land, but someone else owns the dirt and grass that was improved from the original rocky scrub. At least odd enough to have some explanation of what this would mean in legal and economic terms.
These are good points! I should have clarified more, but this is the way I think it would work: once ownership of the land has been transferred, the house-owner is responsible for either selling the house to the new land-owner, or removing it from the land. Just like if I parked my car in your driveway, you have a right to have me remove it.
Since the land-owner probably wants the house and the house-owner doesn’t want to pay the cost to remove it, the land-owner will usually buy the house as well (possibly at a distorted price). Like you said, the land-owner might just have the house-owner rent the space from them proportional to the value of the empty land.
The amendments part is the most interesting. If I add an amendment to my land that I can’t/won’t remove after selling, it’s almost as if it is part of the land itself. The nice thing is that, under this system, the land owner gets paid the amount they improved the land (because the selling price will be higher). Under normal Georgism, this improvement in land value would be taxed (this is the essence of Bryan Caplan’s critique of land value tax).
So I would want all of the things you mentioned to be included in the land value (though other people might differ on this).
Ah, I think I see. Unlike a Georgist system it seems that you do want the improvements to be included in the value of the land, and taxed accordingly.
This does weaken the main benefit of a Georgist tax: that the thing being taxed is infinitely inelastic in supply and so has no deadweight losses. This system will have deadweight losses since it reduces incentive to produce improvements in proportion to the taxes levied. In the limiting case where the taxes are equal to the economic value, it will be a nearly perfect disincentive to making improvements.
Suppose I could buy some very cheap land, clear trees and scrub, remove rocks, construct a dam, fertilize the soil and so on, such that on the open market I could now lease it to a farmer at $50,000/year instead of nearly nothing. Due to the greatly improved property value, my land taxes would be increased to $50,000/year.
In the absence of taxes the property is worth a great deal more, but with taxes nobody will pay me anything for it because the value is balance by tax liabilities that are on net equal to the value that can be derived. So I have no incentive to make these improvements even if they would cost me very little.
If the taxes are not 100% but still a substantial portion of the increased rent value, there will be substantial but not total disincentives.
Since the taxes are based on the sale price of the empty land you bought, your taxes in this case would remain the same despite the improvements (not 50k/year). But once you sold the land, the next owner would pay 50k/year, since they paid the true price at auction.
There is an incentive to improve land, but unfortunately this plan also encourages people to hold onto land that they bought for cheap in order to avoid taxes (which lowers efficiency).
I think LVT’s have to tradeoff between:
Raising taxes to accurately reflect land values at the cost of “taxing people out of their home” (i.e. for some people, nearby economic growth will raise their land value, increase taxes, and outpace their ability to pay, forcing them to move out).
Keeping taxes relatively constant at the cost of lower economic efficiency (forcing people to move out is a key part of ensuring that land goes to the person that most values using it).
I think there is a spectrum of possible approaches that take different positions on this tradeoff, but I haven’t found one that fully satisfies me.
If a new buyer faces paying exactly as much in tax as they can earn from the land, they’re not going to offer a price commensurate with its underlying economic value. The increased future tax burden will lower the sale price, disadvantaging the previous owner and discouraging improvements.
Right. Similar to a property tax, this would discourage land improvements somewhat (though unlike a property tax, it would not discourage non-land improvements like houses).
All land value taxes do something like this. In practice, the effect is small because individual changes to land values are dwarfed by changes caused by external factors like local economic growth.
Many land value taxes are in fact based only on unimproved property value. The main problem is estimating that value, but it’s not really a very difficult problem in practice. The usual solution is to have a valuation office independent from the tax office, and subject to an appeal process where there is evidence that the valuation was incorrect.
It’s not an elegant solution, but it seems much less likely to distort incentives than including power over improvements in the land value.
in areas where land is competitive — i.e. those areas where LVT is most impactful — it’s common for developers to buy a lot, tear down an existing home, and then build a new one. consider:
lot with old home (O) → empty lot (E) → lot with new home (N)
if O → N is a value-positive transition, and it’s not possible to go there without passing through E, then both O → E and E → N ought to be value-positive. O → E is valuable because it reduces the amount of work required to reach the valuable (and more liquid) state N.
so why don’t we see more empty lots go up for sale in areas where it’s routine to redevelop lots? my guess is it’s just different types of friction coming together to create a transaction cost around selling empty lots. integrating that whole process from O → N overcomes the transaction cost, yielding more profit. maybe you can say “gosh, structure X would go great on lot Y or Z”, but you have no way of communicating “i’d pay $D for an empty lot Y or Z”, and so a meaningful market for empty lots never emerges.
but create a market for empty lots — i.e. reduce the transaction costs in that area and encourage separate specialization of O → E from E → N — and you should have much more data for calculating land values. i’m not sure how to create that market other than literally creating a marketplace and then incentivizing each side of the market to participate in your marketplace until it’s bootstrapped, i.e. the Uber approach.
If you sell the land and improvements separately, you have to accept that you’ll probably end up with different owners for the land and improvements. I believe mobile homes are usually sold with a similar system, as the land and the home are usually owned by different people. Might be interesting to study that. I don’t have any experience with that system, but the incentives seem pretty bad, e.g. if you have great improvements on the land, the land owner can increase your rent dramatically, knowing that you won’t abandon your improvements.
See my reply to JBlack’s comment for a clarification on what would happen after the land was sold and there are different owners for land an amendments. Usually, I would expect the land-owner to buy the home after the auction.
Oh interesting! I will look into that.
The strategy is interesting, one might imagine the landlord and the renter splitting the cost of some improvements, since the landlord gets higher land value and the renter gets to enjoy the improvements.
Typically (in California), there is one owner of the whole park, who charges rent based on location and amenities (eg a pool or dog walking trails) to individuals who own what me grandma calls “am immobile home”
Don’t forget to consider the NIMBYism of not wanting other people to build nice things nearby, because that would increase the value of your land, and your taxes, when you don’t need those amenities. State enforced Gentrification, in 9ther words.