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ahmed's avatar

I think the model is confusing development costs (and the associated usufruct revenue and depreciation costs involved which all has to be factored in and modelled properly) vs land which has its own perpetual economic rent coming out of it.

A better way to model this is to say that land is the PV of the economic rent produced by the land. So the question is how that economic rent is split between the owner and government.

In your model it says $45,000 yearly rent using this figure as economic rent we can reframe the example given (between your house and your vacant neighbours land):

1. Before tax change:

1. Government share (tax) = $18750

2. Owners share of Economic rent = 45000- 18750 = $26,250

2. After tax change:

1. Gov share = $12250

2. Owners share = $32,750

Your neighbours vacant land:

1. Before tax change:

1. Government share = $5750

2. Owner share = 45000 - 5750 = $39,250

2. After tax change:

1. Gov share = $12250

2. Owner share = $32,750

So your property the land price will increase because you are getting more share of the economic rent after the tax change.

But this is not true for your neighbour, his land price will DROP because less money on the table for them after the tax change.

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Radu Parvulescu's avatar

If I may recommend another topic for a future article: the potential effects of extra land value tax on non-residential land values, and hence on the political economy of zoning regimes. Here’s what I mean.

Under the current state of affairs, farmland at the periphery of urban areas trades at a premium on an expectation that this farmland may get rezoned to residential use in the future. This premium often makes land costs unaffordable for farmers, and gives developers an incentive to try and corrupt the zoning process to have their particular plots rezoned, and get a windfall (you have written on this a lot elsewhere). Similar considerations apply to industrial or public use (ex. schools, roads) zoning.

I don’t have much intuition of what would happen to the current dynamic if we swapped building taxes for higher LVT, or just increased LVT to ex. decrease income taxes. On the one hand it would encourage density, perhaps lowering peripheral land values (a key point when Gerogists talk about LVT reducing urban sprawl). On the other hand, land values may increase generally, as you write above, further crowding out non-housing use and further incentivizing development corruption.

Making sure industry, agriculture, and public use are not driven out by housing is a hot topic. Would be very useful to have analysis on this re: LVT effects.

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