An Approach to Land Value Taxation

post by harsimony · 2022-06-17T15:53:30.158Z · LW · GW · 12 comments

This is a link post for https://harsimony.wordpress.com/2021/09/25/an-approach-to-land-value-taxation/

Contents

  1. Introduction
  2. Proposal
  3. Problems
  4. Politics
  5. Conclusion
  Notes
None
12 comments

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 [LW · GW]. 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

1. For an engaging look at Henry George’s views on land value taxation, see this book review of Progress and Poverty.

2. 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.

3. A prediction market on land values would significantly reduce the uncertainties in the true value of a piece of land.

4. 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.

5. Though, amendments which raise the value of the land and cannot be removed can be considered part of the land itself.

6. 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.

7. 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.

8. The aggregate value of a state’s land is a plausible measure of national wellbeing which can be used in a futarchy.

9. Admittedly, this is the reason I got interested in land value taxation in the first place.

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