Great article and points out a way to sell LVT politically: "We want to cut taxes on your buildings, (even if we want to maintain taxes on the land they are built on)"
Maybe that is what you "want" to do, but all you "can" do is subtract the estimated depreciated value of the building) from the total property value and raise rates to collect the same revenue.
I’m not so sure that switching to land value from property tax speeds up development. Yes, you tax something you get “less” of it. But just like LVT means less land VALUE not less LAND, property tax can mean less DENSITY but not less QUANTITY of new homes or buildings per period.
My views are here. I’m interested to hear your thoughts on it.
Thanks, Cameron. Your article is interesting, well-written, and carrying a lot to unpack. I think we are moving in the same direction, and rather than fully unpacking your article, I want to focus on the conclusion: "Focussing on swapping two good taxes that are incident on land seems like a strange priority to me." By which you mean, why should we care about switching property taxes to land taxes.
Overall, I reiterate the point in this article, the building tax is bad.
I believe at the core your modeling assumes the total dollar amount of capital that goes to building is fixed. I do not hold this assumption. By taxing building less, you'd have 25% more capital going to building. That'd be true of our urban cores and our rural areas.
Imagine two worlds: a building tax world or a land tax world. If a suburban family stumbled upon $200,000 to spend on building a house, what would happen in either world?
In building tax world, they would build $100,000 of building because they spend $50k on land and the NPV of the building tax is $50,000.
In land tax world, they would spend $150k on building because they spend $0 on land and the NPV of the land tax is $50k.
Both yield $50k in tax, from different sources. One yields more building, one yields less.
I have more I can say, but I want to start there because it's possible that I am missing your main point about why the building tax is fine.
I think you understand my point, and I totally get your example.
I agree that there is a density effect of taxing buildings, since the marginal cost of higher density includes a tax liability. At any given market price, a property tax results in slightly lower optimal housing density (which is different from the quantity of homes built per period). So yes, less building DENSITY at a given market price at a location, but not necessarily less building QUANTITY across the market per period (which is regulated by the intertemporal trade-offs of property owners).
Here's where I think we differ.
Your example has a $200k market value of a home given a $50k NPV of future taxes, wherever these taxes come from.
It can also be true that a $100k construction size is optimal at this location under both tax regimes, meaning the land value is $50k under both and the NPV of the tax is also $50k (even though the land tas is a higher rate on the $50k base and the property tax is a lower rate on the $150k base).
Why is this not be the outcome? Why is land not worth $50k in your land tax example case, as land prices should adjust today to all future taxes?
First, I want to point out three things implied by the shared believe that there would be more density.
1. If we switched today from property to land value tax, this means that we'd get more development, since we'd get more infill and buildings wouldn't disappear. This is a net positive. This point is a bit mute since I believe you and I are talking more about long term impacts.
2. infill development has benefits, including for local fiscal health and environmental reasons. This means that there is reason to argue for decreasing building taxes which may refute the conclusion of your article. Beyond those, Capital and land are complementary goods; they enhance each other's productivity. Forcing them into suboptimal combinations, via the building tax, creates a system-wide drag. The building tax punishes the use of capital in our most productive locations, the urban cores where network effects and agglomeration economies are strongest. The capital gets displaced outwards, but it is deployed less productively. This misallocation of capital is deadweight loss. We don't just get a different geographic pattern of housing. We get a pattern that delivers less total value to society.
3. Similarly, via your model, if full capitalization of the building tax occurs into land value, this means we can double the cities tax revenue through land value taxes (in the above example, $100k NPV of tax on land) without any economic distortion. This is a big deal! We can have double the services and amenities in our cities.
If I understand you correctly, these above points all fit under your economic model and belief and justify the effort to end the building tax.
The rest of the conversation becomes theoretical economics, of which I admit that the results are not clear and would welcome further conversations.
The guiding question is: does decreasing the building tax, on its own, lead long-term to more net building, particularly housing units? Or, if we never taxed buildings, would we have more building today?
I think we need to think about the urban model. In both the property tax and land tax world, land values are highest in the urban core and then surface out until we reach the point where the produce of the natural land has more ROI than building.
Both worlds have the same small tax on the farmland. So, both worlds have a filtering out from some large land value (larger land value in the land tax world) to the same floor. At the edge of the city, then, the developer in both world asks: “does developing on this land have higher ROI than the berries it produces otherwise.”
The NPV of the land tax in both worlds at the edge of the city would be the same. In the property tax world, the developer must consider the building tax. In the land tax world, the developer only needs to think about demand. And demand for housing units increases as costs decrease, the developer will find ROI.
All of this to say is I believe your model assumes the land value of developed land (the total amount of value in the land where buildings exist) is fixed between the building tax and land tax world. You just contend that we shift the land value of developed land to infill. If today an urban core has $100 million of land in its urban core, that same urban core would be smaller but still have $100 million of land in its urban core if we developed the urban core without a building tax.
I contend this is true AND more. We also have more overall land value of developed land because building becomes 1.2x marginally better ROI which means its 1.2x marginally better ROI than the berries produced by land.
Hopefully this pushes the conversation along and I'm not missing something obvious.
Years ago I watched a 30 minute documentary that argued raising taxes on vacant land would force more building construction. It's premise was "Use it or lose it."
They are either going to cut property taxes or sales taxes. Sales taxes put a lot of money in the pocket of tourists in Florida, which is a pretty dumb way to waste the surplus.
Is there "undeveloped" land that would be developed if FL switched from taxing (property) to taxing (property minus the depreciated estimated cost of the building on that property)?
I mean technically they’re improving already existing land (just land that happens to be underwater). It’s a bit of a special case, but there’s actually similar policies to building exemption that could be deployed to encourage and incentivize infill of “water parcels”
Good way to think of it: land as set of coordinates, not soil. Tax the "land" rent of coastal waters' area, and the market decides whether they should be polders or fisheries.
If metric engineering https://orionsarm.com/eg-topic/45bbfb49a5fc7 ever becomes practical, we'll need to rethink some of those assumptions about "sets of coordinates" being fixed, but that strikes me as a very good problem to have.
Though my other example amusingly implies that a person who supports space colonization should oppose LVT: the worse the problems described here are, the stronger the economic case for getting more land in space!
I mean extraterrestrial space is just ultimately another frontier; nice work if you can get it! And I certainly think one should incentivize improving extraterrestrial space to make it, among other things, habitable
Question. If this LVT works, wouldn't the price of housing come down? If so, would some buy up the less expensive housing and rent it at what the market will bear? - thus generating more unearned income?
There is a serious problem with American LVT practice. It should be on rental value, not on selling price, which is a derivative value and a volatile one at that. Also, selling price is diminished by the capitalisation of the tax actually paid, at a rate of about 20 times the tax. It is like sawing oneself off a log.
That said, the assessment is made on the assumption that the land is at the optimum permitted use. The landowner therefore has an incentive to develop to the optimum use. Leaving land vacant or under used becomes a cost.
The TV set analogy works quite well if you take into account the programs you watch on it and the electricity it consumes, which don't come free. Land is worthless if the infrastructure support is stopped.
I think the key here is to recognize that the consumer pays for the electricity, and the consumer pays for the TV channels whether through streaming or ads.
The TV does not get taxed every year, and the building does. The building tax may be one of the strangest taxes we have in that sense. Spend money one year, and be taxed on that amount of money every single year thereafter.
There's a thought. Since TV broadcasts are generally paid for by advertising, cities should eliminate property tax and instead require billboards to be built on the side of every home and collect the money from the advertising!
The terrifying thing is that I could totally see that happen.
Great article and points out a way to sell LVT politically: "We want to cut taxes on your buildings, (even if we want to maintain taxes on the land they are built on)"
Maybe that is what you "want" to do, but all you "can" do is subtract the estimated depreciated value of the building) from the total property value and raise rates to collect the same revenue.
Good explanation of the reasons to tax land. Return community-created value to the community that created it.
Well written and very thought provoking!!
I’m not so sure that switching to land value from property tax speeds up development. Yes, you tax something you get “less” of it. But just like LVT means less land VALUE not less LAND, property tax can mean less DENSITY but not less QUANTITY of new homes or buildings per period.
My views are here. I’m interested to hear your thoughts on it.
https://www.fresheconomicthinking.com/p/was-henry-george-wrong-about-land
Thanks, Cameron. Your article is interesting, well-written, and carrying a lot to unpack. I think we are moving in the same direction, and rather than fully unpacking your article, I want to focus on the conclusion: "Focussing on swapping two good taxes that are incident on land seems like a strange priority to me." By which you mean, why should we care about switching property taxes to land taxes.
Overall, I reiterate the point in this article, the building tax is bad.
I believe at the core your modeling assumes the total dollar amount of capital that goes to building is fixed. I do not hold this assumption. By taxing building less, you'd have 25% more capital going to building. That'd be true of our urban cores and our rural areas.
Imagine two worlds: a building tax world or a land tax world. If a suburban family stumbled upon $200,000 to spend on building a house, what would happen in either world?
In building tax world, they would build $100,000 of building because they spend $50k on land and the NPV of the building tax is $50,000.
In land tax world, they would spend $150k on building because they spend $0 on land and the NPV of the land tax is $50k.
Both yield $50k in tax, from different sources. One yields more building, one yields less.
I have more I can say, but I want to start there because it's possible that I am missing your main point about why the building tax is fine.
Great response Greg.
I think you understand my point, and I totally get your example.
I agree that there is a density effect of taxing buildings, since the marginal cost of higher density includes a tax liability. At any given market price, a property tax results in slightly lower optimal housing density (which is different from the quantity of homes built per period). So yes, less building DENSITY at a given market price at a location, but not necessarily less building QUANTITY across the market per period (which is regulated by the intertemporal trade-offs of property owners).
Here's where I think we differ.
Your example has a $200k market value of a home given a $50k NPV of future taxes, wherever these taxes come from.
It can also be true that a $100k construction size is optimal at this location under both tax regimes, meaning the land value is $50k under both and the NPV of the tax is also $50k (even though the land tas is a higher rate on the $50k base and the property tax is a lower rate on the $150k base).
Why is this not be the outcome? Why is land not worth $50k in your land tax example case, as land prices should adjust today to all future taxes?
Does this make sense?
I believe I am following.
First, I want to point out three things implied by the shared believe that there would be more density.
1. If we switched today from property to land value tax, this means that we'd get more development, since we'd get more infill and buildings wouldn't disappear. This is a net positive. This point is a bit mute since I believe you and I are talking more about long term impacts.
2. infill development has benefits, including for local fiscal health and environmental reasons. This means that there is reason to argue for decreasing building taxes which may refute the conclusion of your article. Beyond those, Capital and land are complementary goods; they enhance each other's productivity. Forcing them into suboptimal combinations, via the building tax, creates a system-wide drag. The building tax punishes the use of capital in our most productive locations, the urban cores where network effects and agglomeration economies are strongest. The capital gets displaced outwards, but it is deployed less productively. This misallocation of capital is deadweight loss. We don't just get a different geographic pattern of housing. We get a pattern that delivers less total value to society.
3. Similarly, via your model, if full capitalization of the building tax occurs into land value, this means we can double the cities tax revenue through land value taxes (in the above example, $100k NPV of tax on land) without any economic distortion. This is a big deal! We can have double the services and amenities in our cities.
If I understand you correctly, these above points all fit under your economic model and belief and justify the effort to end the building tax.
The rest of the conversation becomes theoretical economics, of which I admit that the results are not clear and would welcome further conversations.
The guiding question is: does decreasing the building tax, on its own, lead long-term to more net building, particularly housing units? Or, if we never taxed buildings, would we have more building today?
I think we need to think about the urban model. In both the property tax and land tax world, land values are highest in the urban core and then surface out until we reach the point where the produce of the natural land has more ROI than building.
Both worlds have the same small tax on the farmland. So, both worlds have a filtering out from some large land value (larger land value in the land tax world) to the same floor. At the edge of the city, then, the developer in both world asks: “does developing on this land have higher ROI than the berries it produces otherwise.”
The NPV of the land tax in both worlds at the edge of the city would be the same. In the property tax world, the developer must consider the building tax. In the land tax world, the developer only needs to think about demand. And demand for housing units increases as costs decrease, the developer will find ROI.
All of this to say is I believe your model assumes the land value of developed land (the total amount of value in the land where buildings exist) is fixed between the building tax and land tax world. You just contend that we shift the land value of developed land to infill. If today an urban core has $100 million of land in its urban core, that same urban core would be smaller but still have $100 million of land in its urban core if we developed the urban core without a building tax.
I contend this is true AND more. We also have more overall land value of developed land because building becomes 1.2x marginally better ROI which means its 1.2x marginally better ROI than the berries produced by land.
Hopefully this pushes the conversation along and I'm not missing something obvious.
Years ago I watched a 30 minute documentary that argued raising taxes on vacant land would force more building construction. It's premise was "Use it or lose it."
They are either going to cut property taxes or sales taxes. Sales taxes put a lot of money in the pocket of tourists in Florida, which is a pretty dumb way to waste the surplus.
Where is the juice?
Is there "undeveloped" land that would be developed if FL switched from taxing (property) to taxing (property minus the depreciated estimated cost of the building on that property)?
"Nobody makes land"
*Amused Dutch noises*
Also: Far drive the sons of Terra, out rides the thundering jet.
I mean technically they’re improving already existing land (just land that happens to be underwater). It’s a bit of a special case, but there’s actually similar policies to building exemption that could be deployed to encourage and incentivize infill of “water parcels”
Good way to think of it: land as set of coordinates, not soil. Tax the "land" rent of coastal waters' area, and the market decides whether they should be polders or fisheries.
If metric engineering https://orionsarm.com/eg-topic/45bbfb49a5fc7 ever becomes practical, we'll need to rethink some of those assumptions about "sets of coordinates" being fixed, but that strikes me as a very good problem to have.
Though my other example amusingly implies that a person who supports space colonization should oppose LVT: the worse the problems described here are, the stronger the economic case for getting more land in space!
I mean extraterrestrial space is just ultimately another frontier; nice work if you can get it! And I certainly think one should incentivize improving extraterrestrial space to make it, among other things, habitable
Question. If this LVT works, wouldn't the price of housing come down? If so, would some buy up the less expensive housing and rent it at what the market will bear? - thus generating more unearned income?
There is a serious problem with American LVT practice. It should be on rental value, not on selling price, which is a derivative value and a volatile one at that. Also, selling price is diminished by the capitalisation of the tax actually paid, at a rate of about 20 times the tax. It is like sawing oneself off a log.
That said, the assessment is made on the assumption that the land is at the optimum permitted use. The landowner therefore has an incentive to develop to the optimum use. Leaving land vacant or under used becomes a cost.
The TV set analogy works quite well if you take into account the programs you watch on it and the electricity it consumes, which don't come free. Land is worthless if the infrastructure support is stopped.
I think the key here is to recognize that the consumer pays for the electricity, and the consumer pays for the TV channels whether through streaming or ads.
The TV does not get taxed every year, and the building does. The building tax may be one of the strangest taxes we have in that sense. Spend money one year, and be taxed on that amount of money every single year thereafter.
There's a thought. Since TV broadcasts are generally paid for by advertising, cities should eliminate property tax and instead require billboards to be built on the side of every home and collect the money from the advertising!
The terrifying thing is that I could totally see that happen.