I've put that in my reply above. We need to have taxes to regress speculation which will see land prices fall and will replace much of income tax.
Have a read of the link or many other sites on LVT.
I think we also need to deal with money creation by private banks. This has been an absolute disaster since it became effectively unconstrained with the end of the gold standard. (not that I'm a gold bug).
It's the issue facing our generation, and the next. Just look at SF where land prices have made it very expensive to live there as ultimately all productivity gains flow to land prices rather than to workers.
And to the guy who replied below you need to put some effort in I'm afraid:
Every time this comes up, the answer I see trotted out is that increased land taxes will cause land prices to fall and rents will get cheaper.
I don't understand how this makes any sense, at all. If the town raises the property taxes on my rental, guess what, the rent is going to go up at least as much as the tax increase.
If you could just raise your rent tomorrow, why don't you? Will the market bear the new price or won't it? Taxes should have no effect on what renters will bear.
Rental demand is fairly inelastic though - everyone needs a roof over their head. The main force keeping prices down is competition, not the fact that landlords are being kind. If land taxes are increased, then all landlords will raise their prices, and the market will bear it - the other choice is to end up living in the street.
The advantage of the LVT is that in theory the market could bear the price increase because there will be a corresponding drop in the salary tax that most renters are paying. The idea is that the government effectively takes a large slice of the profit from rent, instead of it all going to landlords. The problem of course is that this creates a disincentive for landlords to invest in property, reducing supply, and now we go back to high prices because of market forces.
There is no simple solution to the high price of land, except by increasing supply or reducing demand. In other words, building more housing (which requires us to encourage landlords, not discourage them), or reduce the population. Just think, in a world with half the population of today, we would drastically reduce the percentage of salary devoted to housing. Not bad really.
> I don't understand how this makes any sense, at all. If the town raises the property taxes on my rental, guess what, the rent is going to go up at least as much as the tax increase.
This is only true if the rent is based on the cost of the unit in terms of purchase price and upkeep. That's true in lower cost-of-living areas, but in expensive areas, the rent is high primarily because demand is outstripping supply, not because the cost of landlording has gone up. And if rent prices are not based on cost, then an increase in cost (which is what a property tax increase is) will mostly not be passed onto renters.
I do not understand your last sentence. I am assuming that if the increases in cost were not passed onto renters, they would be absorbed by the landlords themselves, which harms the landlords' profit margins. What incentive would landlords have to willfully cut into their profit margins vs. passing the increases on to the renters?
> I am assuming that if the increases in cost were not passed onto renters, they would be absorbed by the landlords themselves, which harms the landlords' profit margins. What incentive would landlords have to willfully cut into their profit margins vs. passing the increases on to the renters?
They're not doing it willfully. They're doing it because they have no choice. Let's say the current average rent in Seattle is $1,500/month. Why $1,500, and not $2,000/month? Why are the landlords willfully cutting into their profit margins by not increasing rent? We both know the answer: because the current price is based on what the market can bear; in other words, it's based on the relationship between supply and demand. They can't arbitrarily decide to raise rents without risking losing tenants and having units go unoccupied.
Now, let's say the property tax increases a bit. Will that be passed onto the tenants? Well, can the market bear it? If no, then it won't be passed on. If yes, then why wasn't the rent increased before?
Like I said before, it's different in low cost of living areas. There, the profit margin on top of the costs is relatively small. The rents in that case aren't really based on demand, because supply in those areas tends to be very flexible, you can always make more housing to match demand. For a property tax increase in those areas, the costs will be passed onto the renters, because the primary determinant of rental prices is cost.
This doesn't add up. If rent is so much higher than purchase plus upkeep, people will borrow money and buy, safe in the knowledge that they can just become a landlord and be cash-flow positive at any time. Or investors will simply buy the cheap properties and rent them. The demand for investment properties will drive up the purchase price and parity will be reached.
This is why house prices are just as insane in Silicon Valley as rents.
He's claiming that a land tax would not be passed on to renters if instituted, because rent is being driven demand-side (what renters are willing to pay) not supply-side (cost to provide a house to people). Any attempt to increase rent would result in a lower demand by renters, meaning the market would fail to clear -- the rent would then need to be re-lowered.
But you are correct, that rent shouldn't be higher than purchase plus upkeep. In the event of a land tax, rent holds constant but upkeep increases (taxes); consequently, for the equation to hold, purchases prices (and thus land values) will fall.
And that's why this is so politically impossible to pass, even though it is considered the "least bad" tax economically. Land owners would see their assets sufficiently fall in value if a land tax were enacted.
No rents typically lag house prices significantly. Prices are set by credit. Rents by wages. You have to pay your rent from your wage. Prices are via fiat created ex nihilo by private banks.
Rents do go up when wages go up (SF) and when there is speculation they rise but it's capped by wages.
How about increasingly higher property tax rates for 2nd, 3rd, etc. properties? Also, getting rid of the CA law that sets property tax assessment value at time of purchase would help increase liquidity a lot, as it no longer makes sense to let land sit unproductively as you wait for it to appreciate.
Have a read of the link or many other sites on LVT.
I think we also need to deal with money creation by private banks. This has been an absolute disaster since it became effectively unconstrained with the end of the gold standard. (not that I'm a gold bug).
It's the issue facing our generation, and the next. Just look at SF where land prices have made it very expensive to live there as ultimately all productivity gains flow to land prices rather than to workers.
And to the guy who replied below you need to put some effort in I'm afraid:
https://en.wikipedia.org/wiki/Land_value_tax
Basically you can't pass on LVT via rent.