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.
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.
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.