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.
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.
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.