The two downsides I'm aware of are difficulty in transitioning to an LVT and difficulty in valuing the land.
Transitioning to an LVT means that landowners no longer capture land rents for themselves, which is a massive overnight loss in the value they hold. The solutions there typically tax only the difference in land value versus a baseline assessment. So if a lot is worth $100 before LVT and $105 after, the tax is calculated only on the $5 difference.
Valuing the land is tricky because the whole point of LVT is to tax only the location itself. So the value of any structures should be excluded from taxation, and even improvements in soil quality (e.g. on a farm) should be excluded. This is problematic because the market for bare land is significant less liquid than improved land, especially in suburbs and cities. So there isn't always good data on comparable land, and there isn't a way to hold a straightforward auction to value a given lot. Of course, most present systems of property taxation are subject to the exact same issue.
- There are deeper problems with valuing land. Land values in cities are directly related to approved zoning (i.e. what you are allowed to build), so the city government can rezone neighborhoods and unilaterally alter the land values the residents pay tax on. This may not agree with everyone's view of fairness.
- LVT encourages building tall and is hostile to lowrise development and unbuilt/green spaces. Those policy preferences may not be shared by everyone.
>> Of course, most present systems of property taxation are subject to the exact same issue.
This is not really true. There are constant sales of building+land in cities and estimating building+land values can reasonably be done.
In a city bare land almost never trades.So you have to extract land values from building+land sales, which is much much harder and possibly impossible to do fairly.
> - There are deeper problems with valuing land. Land values in cities are directly related to approved zoning (i.e. what you are allowed to build), so the city government can rezone neighborhoods and unilaterally alter the land values the residents pay tax on. This may not agree with everyone's view of fairness.
That's actually a feature, especially if you make sure that the authority who can do the zoning also gets the revenue (or at least shares in it). That way aligns incentives.
> - LVT encourages building tall and is hostile to lowrise development and unbuilt/green spaces. Those policy preferences may not be shared by everyone.
LVT doesn't do anything like that. The whole point of LVT is that it has no influence on land use choices: you literally pay the same LVT no matter how you use the land. It doesn't encourage or discourage anything. That's why it is economically efficient.
(However, alternative taxation schemes like income tax or capital gains tax or taxes on improvements do discourage building tall. And if you lower those taxes, people will build taller.
Btw, I think that for all its faults a conventional property tax that doesn't distinguish between land and improvements is still miles better than income tax or capital gains tax or sales tax etc.)
> In a city bare land almost never trades.So you have to extract land values from building+land sales, which is much much harder and possibly impossible to do fairly.
Often land changes hands and the new owner tears down the structure and build a new one. You can reasonably assume that the old building was valued at zero, or even negative because tearing down costs money and time. So that gives a lower limit on the price of the bare land.
>> That's actually a feature, especially if you make sure that the authority who can do the zoning also gets the revenue (or at least shares in it). That way aligns incentives.
This is only a positive if your goal is to upzone everything. If you think cities should be a mix of zoning and zoning shouldn't be driven by tax considerations, then this is very negative, since the land management department has an incentive to increase zoning and taxes.
>> LVT doesn't do anything like that. The whole point of LVT is that it has no influence on land use choices: you literally pay the same LVT no matter how you use the land.
I don't agree that's how the incentives work.
If you don't tax structures you absolutely incentivize building structures, because they earn money but pay no tax.
In a land+building tax structure, there is less incentive to build a structure because they pay tax.
If I have a lot of green space and few structures, and we convert to LVT, I will be taxed proportionally higher than before, or than my neighbor with less land and more structures. By taxing me more you are dis-incentivising my approach.
Well, I think zoning is mostly silly, and people should mostly be able to decide what they want to do with their property.
(Before zoning was a thing there were already nuisance laws that forbade opening heavy industry next to a Kindergarten. No zoning required.)
In any case, people don't build high rises in the middle of nowhere right now. They won't start (or at least not much more than under the status quo) if someone drops taxes on structures a bit.
Also keep in mind that people don't get spontaneously generated. If people cluster together to form a high density area, some other parts of the country will see lower density. Ie if you let all the people who bunch up together, bunch up together, there's more space left over for the people who prefer lower density.
> If I have a lot of green space and few structures, and we convert to LVT, I will be taxed proportionally higher than before, or than my neighbor with less land and more structures. By taxing me more you are dis-incentivising my approach.
What you are describing is purely an effect of whether you tax structures or not. It's completely independent of whether you tax the land value.
> Land values in cities are directly related to approved zoning (i.e. what you are allowed to build), so the city government can rezone neighborhoods and unilaterally alter the land values the residents pay tax on.
Cities were already able to rezone neighbourhoods and unilaterally alter the values of residents' land (also just through everyday building - if they build a transit station in one neighbourhood and a sewage treatment plant in another, that alters everyone's property values), and this was already a very corruptible process. In theory LVT should improve it a little since now the city has an incentive to increase everyone's land value as much as possible.
> LVT encourages building tall and is hostile to lowrise development and unbuilt/green spaces.
Yes and no - it encourages making valuable use of expensive land, and moving less valuable uses onto cheap land, but it's agnostic about what that "valuable" is. If people prefer - that is, will pay more to use - lowrise buildings or green spaces, then that's what LVT will deliver.
It's rather easy to value the land: Have the owner decide what it's worth, then they pay a tax as a percentage of that valuation.
Now, obviously given that system everyone's going to value their land at $0.
To adjust for that land owners must be obligated to sell their land to anyone willing to buy it at the declared valuation.
Such a mechanism doesn't only keep the current owners honest, but leads to more accurate price discovery, as the land might have a higher "real" valuation than the current owner is aware of.
I don't love this idea, and I suspect many others wouldn't either. If you raised your family in a house and have lived there for decades, it has intangible value to you, but not others. Yet because of this value, you must pay potentially much much more than your neighbor, who objectively speaking may have a lot of equal value.
What's more, even if you pay more than you ought to, you'll never feel secure in your home, knowing that at any time you may be forced to sell.
You can pull on those heartstrings in either direction, as it were.
In economic terms what you're arguing is that investment efficiency should always outweigh allocative efficiency.
> pay [...] much more than your neighbor, who objectively speaking may have a lot of equal value.
All land is unique, so I don't think adjacent land of equal value exists. The difference may be trivial, or it may be substantial.
But yes, it's all a tradeoff. Some might prefer a centralized government authority decreeing a given value, others might prefer market-based price discovery.
I'm not trying to convince you or anyone else either way, just pointing out that fair price discovery for a self-assessment LVT isn't an unsolved problem.
> All land is unique, so I don't think adjacent land of equal value exists. The difference may be trivial, or it may be substantial.
I don't understand how this relates. My point would stand even if the neighboring lots were slightly different in value.
> just pointing out that fair price discovery for a self-assessment LVT isn't an unsolved problem.
Yeah okay I'll give you that. It's just that we can't ignore how tax policy must match a society's values in a democratic society, else it'll be voted out. I'm saying this probably wouldn't work out since voters put value on the idea that at least some people will be able to get a good enough job to afford to bring up their kids in a stable home.
I'm agreeing with you (along with the "heartstrings" comment) that all land is going to have both objective and intangible value, e.g. the view, and that someone grew up in that house.
But I think you're imagining that any intangible interests in the land are going to favor the incumbent.
I think for residential lots that's probably more true than not on average.
But we can easily come up with examples where a prospective buyer has a stronger intangible interest.
E.g. maybe you own it, and don't really care about the land or house per-se, but it saves you 1 minute on your commute v.s. the next lot.
Whereas I used to live there, and was forced to sell the house during the last recession. I've got a deep emotional connection to the lot and house, and my dog's buried in the backyard.
I'd like to buy the house back. You don't want to sell.
Does my interest outweigh yours? Maybe, maybe not.
All I'm saying is that a self-assessed LVT with an auction mechanism (see https://news.ycombinator.com/item?id=37909570) will enable both of us to set a price on those intangibles.
I agree that probably nobody's willing to try this out any time soon, for what it's worth the authors of "Radical Markets" suggest phasing in such a system by starting with commercial lots (and perhaps it would never go beyond that).
Indeed, and the mechanism for adjusting any unfairness in assessment you encounter there is always going to be more byzantine than a fair self-assessment, and probably impossible in practice.
E.g. let's say you live in a neighborhood where everyone's paying a premium for fanatic views. Except your house is the only one that doesn't have that view.
Even in such an obviously unfair scenario the government is likely to stick to some assessment that's going to be unfair, e.g. some mean sale value of the N lots adjacent to yours.
Also with land value tax without the proposed land valuation method. The difference is how in one case you're never secure in your home even if you can afford your theoretically fairly assigned tax bill. There is always someone out there rich enough to uproot a family from their home, even if you're otherwise financially secure.
Your weird scenario can happen with most other assessment scenarios either.
If Warren Buffett wants to increase the value of my land, he can bid up all the surrounding plots, and make bids for my land. Any sane assessment method will see that the value of my land has increased, and will increase my property tax or LVT, and I'll have to pay or face the consequences.
(In the self-assessment case, you can give people the right to refuse to sell, if they are willing to eg back-pay the difference of LVT to the higher price for the last year or so. So people can opt to pay the tax instead of moving out.
To be extra fancy, give the would-be-buyer 1% of the extra tax take to incentivise people hunting for undervalued homes and to compensate for the buyer having had to secure funding.)
I don't see that as a fair comparison. The number of people who are rich enough to buy a particular home for more than the hypothetical actual value is orders of magnitude greater than the number of people who can afford to buy up all the lots around a home at a premium and affect its property value. As a result, the perceived threat to the homeowner is substantially different. I also think you're ignoring the psychological costs of this. It doesn't actually have to happen, just the potential that it could happen would be a real fear for many people. Moving is one of the most stressful events in people's lives, much less unplanned moving. There's also empirical data showing negative outcomes for children.
If that kind of fear is a problem for people, it will just be reflected in lower market prices for land.
Someone who has more of a fear for can put up her self-declared land value. They'll pay a bit more in recurring tax, but would get a significant windfall, if their fear were to come to pass: Yes, there might be some psychological downsides to moving, but getting a extra few million dollars (or whatever) has psychological upsides, too.
I'm from the younger generation who's been economically forced to move every couple of years because the older generation made it too hard to build houses. So I'll shed few tears for boomers being forced to move once after 20 or 30 years.
House prices don't change at the drop of a hat. If gentle changes in taxation are too much for a person, they might just have purchased a house they couldn't afford in the first place.
Given the friction (inconvenience) in having to move house/business etc, that hardly seems fair. It also defeats the object of land ownership if you can be kicked off it at any time.
You can trivially structure such a tax in such a way that going through a "forced sale" is going to be very lucrative (edit: elaborated in a sibling comment: https://news.ycombinator.com/item?id=37909570).
> It also defeats the object of land ownership[...]
So no, most people could keep land they'd like to keep in practice.
The entire notion of any sort of property tax is also predicated on the idea that individual land ownership is a tradeoff between the interest of the individual and society at large.
> The entire notion of any sort of property tax is also predicated on the idea that individual land ownership is a tradeoff between the interest of the individual and society at large.
Indeed, and I like this concept, I don't think we should ever "own" land in the same way as I own, say, my phone. All we ever do is borrow it from society (or even nature).
However, some aspects of land ownership are a net positive for society at large. In particular, the incentive to look after it better if it's really yours until you sell it or you die. With this in mind I like some proposals I've heard whereby unpaid land value tax can be accrued to be paid at death or on sale. That way the stewardship aspect of ownership is reinforced without the freeloading on land value increases.
Returning to the valuation question. I think you're assuming an efficient market when it clearly isn't one. It would be like having to reapply for your own job, except it's rebidding for your own house. Not a kind thing to do to anyone.
This does not pass basic scrutiny unless the plan is to ruin average homeowners that valued their assets at fair market value.
Essentially, you want to force asset owners to write an at-the-money call option against their assets, and then adding insult to injury by not paying them an offsetting risk premium. I don't know how any moral person could be a proponent of the kinds of abuse and profitable exploitation of average people this proposal would trivially enable.
Yes, you would be forcing people to write a call option. It doesn't have to be at-the-money. Owners just pick a price that they'd be happy to sell at. Not some mystical 'fair market value' that would ruin them.
Of course, land owners would want to keep their tax bill low, so picking the right price to declare is a trade-off.
> [...] and then adding insult to injury by not paying them an offsetting risk premium.
Please be more careful in your reasoning! You are right that the call option is worth a premium. But that obligation to write the call option comes with ownership of the land, so we can just treat it as another (small) tax on the land. The market price of the land adjusts so that the yearly benefit from owning the land is pretty close to the yearly cost of capital plus sum of all taxes.
To simplify: the option premium is automatically offset by lower LVT payments.
> I don't know how any moral person could be a proponent of the kinds of abuse and profitable exploitation of average people this proposal would trivially enable.
Please elaborate. But please refrain from assuming that landowners are morons.
In particular the book by Glen Weyl mentioned in that article describes how it could work in more detail, and in a way that address the concerns you have.
A relevant except from that book (which I've got a Kindle copy of):
> For any tax rate below the turnover rate, the possessor will always set a price above the amount she is willing to accept[43]. When the tax rate is zero, the possessor is free to set any price she wishes at no cost and thus would set the monopoly price. When the tax rate equals the turnover rate, she has to reveal her true value. For intermediate tax rates, she will still be discouraged by the tax from setting a very high price, but she will not have a full incentive to report her exact value. Instead, she will set a price intermediate between her true value and the monopoly price that she expects a buyer to be willing to pay. As the tax rises from zero to the turnover rate, the price she quotes will gradually fall from the monopoly price to her true value.
That 43rd footnote in particular further addresses your exact concern (the mentioned "COST" stands for "common ownership self-assessed tax"):
> 43.: This fact helps allay two potential objections to a COST: that possessors may wish to “sabotage” the appeal of their goods to others to avoid their interest in taking the good, and that predatory outsiders may maliciously take goods just to harm a possessor. Notice that neither of these are possible if possessors always set prices above the minimum they would be willing to accept, because in this case the possessor is happy when her possessions are taken: she still profits, just not as much as if she set a monopoly price. Thus “predation” will be nearly as welcome as would be the “predation” of someone offering you out of the blue an extravagant sum for your home and you would never wish to sabotage your possessions as this would reduce the chance of such an exceptional opportunity. Only individuals who fraudulently report extremely low values and try to dramatically sabotage their goods would be open to predation, but so they should, and such individuals are likely to be caught by others before too much sabotage is possible.
That’s a horrible idea - that means you value is only what you can afford to pay in taxes - effectively meaning the poor would be required to sell to the rich at below market rates if they can’t afford the taxes
Are you suggesting the rich people form a cartel? Otherwise, if there's more than one rich person they would outbid each other until market rates are reached. That's basically how market rates are defined.
Btw, none of the problems here are specific to LVT. You see exactly the same problems in conventional property taxes: if your land is suddenly worth a lot more, your tax bill goes up.
To me, the biggest downside is that the government is running this.
If the government turns on an LVT, do you trust them to turn off other forms of funding? Or do you think they're just going to decide that their income went up?
I kind of trust them, but I don't have very high confidence that they won't decide that they "need" the extra money, maybe just for some "emergency" situation...
The nice thing is that lowering other taxes automatically increases the LVT tax take via higher property prices.
You can see that dynamic on the border between Switzerland and Germany: Swiss income taxes are a lot lower, so their property prices are higher. (You can probably see similar things happening on some borders between American states?)
Without an LVT, those higher property prices only benefit the land owner. With an LVT, the government gets some incentive to lower those taxes.
> If the government turns on an LVT, do you trust them to turn off other forms of funding? Or do you think they're just going to decide that their income went up?
I guess it depends. Governments have an incentive to get themselves more budget, but taxes also aren't just ratcheting up all the time. Eg the US still has lower income taxes than most of Europe. And tax rates also change over time.
This seems by _far_ the biggest difficulty, and I find it strange that this rarely comes up in LVT discussions. Even for nominally 'liquid' land it's not clear who values it or how.
Lots of countries value land and improvements separately (e.g. New Zealand, Australia, Denmark) for council rates (property tax essentially). Here in New Zealand, there are several companies that provide valuation services to local councils (and private individuals if you want to value your property). You can dispute the valuation if you think you're being unfairly valued (usually because you want to pay less property tax).
It doesn't seem that different from what normally is done for property tax. Property tax is already generally based on land and structure (Just look at property taxes on the million dollar tiny houses on prime real estate). LVT is just removing the structure portion.
Is it? I can tell you now, I have no difficulty asserting that the value is near zero for the depreciating, crumbling houses on top of most of the land in the Mission in San Francisco. All the appreciation, which means nearly all of the sales price, of a typical home here, is the land.
BuT rEnNoVaTiOnS. Listen, I’m not trying to give you a comprehensive answer. I’m just trying to show that it’s not by far the biggest difficulty, not in the places LVT is most impactful, such as cities with extremely high vacancies like San Francisco.
The problem you're glossing over is what value should be assigned to the land.
If some land developer wants to build a new arena next to your plot of land - boom you're value just skyrocketed.
If the same land developer backs out of the deal - boom your land is worth less (or is actually worthless).
Your taxes depend on exactly when the assessment was made... and even professionals cannot agree on valuation (as we're seeing in some high profile cases right now).
Even for the same plot of land two people can value it radically differently.
Yes, and it's been long bemoaned about how people game that system and how unfair it has a tendency of being. Which was one of the points I was raising.
There is no objective valuation for anything really... particularly when it comes to more-or-less unique, speculative properties such as land and/or improvements.
The only reason everyone mostly agrees on, say a car's value is there's a lot of cars exactly like it that have been sold recently in whatever area you are in. Yet, every plot of land is mostly unique and has a tremendous amount of potential, debatable factors when it comes to value.
The two downsides I'm aware of are difficulty in transitioning to an LVT and difficulty in valuing the land.
Transitioning to an LVT means that landowners no longer capture land rents for themselves, which is a massive overnight loss in the value they hold. The solutions there typically tax only the difference in land value versus a baseline assessment. So if a lot is worth $100 before LVT and $105 after, the tax is calculated only on the $5 difference.
Valuing the land is tricky because the whole point of LVT is to tax only the location itself. So the value of any structures should be excluded from taxation, and even improvements in soil quality (e.g. on a farm) should be excluded. This is problematic because the market for bare land is significant less liquid than improved land, especially in suburbs and cities. So there isn't always good data on comparable land, and there isn't a way to hold a straightforward auction to value a given lot. Of course, most present systems of property taxation are subject to the exact same issue.