Maybe property taxes are nearly as good as land value taxes, so swapping them for each other won't change as much as we think. Oh, and land prices will rise too!
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):
I see what you are saying. I think the issue with this analysis is that the neighbours vacant land derives its value not from current land rent, but from the land rent when it gets used for housing. So its land value must always be the same as that of existing homes. It is like a financial derivative as I explain here https://www.fresheconomicthinking.com/p/why-upzoning-has-a-value
I think you’re assuming that demand for housing is perfectly elastic. But if there are only two blocks of land in a city, one improved and one unimproved, then investors will know that building on the unimproved block will lead to lower house prices, which will require a higher land tax rate to maintain revenue equality. In equilibrium, both property and land prices would fall. It’s just how upzoning one block in a city will cause that block’s price to rise, but if all blocks up upzoned, land prices will on average fall.
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.
> If the same total tax revenue is sustained, but the base is shifted from property value to land value, then land values will rise, not fall.
This is correct and is a basic illustration of a revenue-neutral tax-shift leading to higher capitalisation through ATCOR (All Taxes Come Out of Rent).
> Less tax revenue from developed homes will increase home values. An increase in home values, without any change to development/construction costs, means an increase in land values by the same amount, and hence by a greater proportion (as we saw earlier).
I can't see how you came to this conclusion—and this paragraph seems to be the main caveat behind the article. It seems this section is implying that the value of both land and improvements rise and fall together at the same rate, and shouldn't diverge at all. I think you've made a mistake here.
Edit: are you including land into "home values"? I figured you was just referring to improvements, but maybe I'm mistaken.
Put another way. When the sum of land and improvements rises or falls the incident of that is the land if construction cost of improvement Is unchanged
Real estate prices need not rise with land taxes. The tax is not the source of the price level, the structure for mortgage credit is the source, which ultimately boils down to government policy. (Governments could, if it served some public purpose and was democratically desirable, make home housing entirely free. It is a political choice.)
Also, land tax is simple to implement, hard to evade. That's the rationale, so if the same rationale applies to another form of taxation that would also drive demand for the otherwise worthless currency so would also be a valid a policy option.
By "entirely free" I mean in terms of home owner buying. Not in terms of real resources. But public housing construction would be an add to the non-government sector money supply, so a good thing. It would be a loss of labour and materials from the private sector. That's a political choice to be made.
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.
I see what you are saying. I think the issue with this analysis is that the neighbours vacant land derives its value not from current land rent, but from the land rent when it gets used for housing. So its land value must always be the same as that of existing homes. It is like a financial derivative as I explain here https://www.fresheconomicthinking.com/p/why-upzoning-has-a-value
I think you’re assuming that demand for housing is perfectly elastic. But if there are only two blocks of land in a city, one improved and one unimproved, then investors will know that building on the unimproved block will lead to lower house prices, which will require a higher land tax rate to maintain revenue equality. In equilibrium, both property and land prices would fall. It’s just how upzoning one block in a city will cause that block’s price to rise, but if all blocks up upzoned, land prices will on average fall.
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.
> If the same total tax revenue is sustained, but the base is shifted from property value to land value, then land values will rise, not fall.
This is correct and is a basic illustration of a revenue-neutral tax-shift leading to higher capitalisation through ATCOR (All Taxes Come Out of Rent).
> Less tax revenue from developed homes will increase home values. An increase in home values, without any change to development/construction costs, means an increase in land values by the same amount, and hence by a greater proportion (as we saw earlier).
I can't see how you came to this conclusion—and this paragraph seems to be the main caveat behind the article. It seems this section is implying that the value of both land and improvements rise and fall together at the same rate, and shouldn't diverge at all. I think you've made a mistake here.
Edit: are you including land into "home values"? I figured you was just referring to improvements, but maybe I'm mistaken.
I am including land. It is not construction value.
Put another way. When the sum of land and improvements rises or falls the incident of that is the land if construction cost of improvement Is unchanged
We must see with HG’s new clear vision and
beware of entering a ridiculous debate amongst the deaf & blind.
It doesn’t matter whether the value of sites [including resources]
rises or falls after implementation of Site Revenue [‘SR’].
[In fact these values will rise as less monetary value is being sucked out by rentiers].
Due to its beneficial effects on employment, industry, equality, governance etc.
it is better that the SR be collected and thrown in the sea
than not be collected at all.
SR is the collection by government of the annual rental value of sites privately occupied
as the sole source of public finance – all taxes on earnings & transactions are ditched.
There is no actual payment of rent – sites remain in private ownership & and not nationalized.
The ‘rental value’ is assessed by trained valuers observing site transfer prices.
There is a lot of equivalence between site-values within similar attributes,
and to value of improvements is ignored or deducted,
so accurate equivalences can be efficiently extrapolated.
The rights to extract renewable & non-renewable resources
should be granted for set terms only by public tender or auction.
The grant should require at least four separate bidding elements –
(i) upfront success fee
(ii) minimal annual payment (to be geared to cpi),
(iii) minimal royalty per volume / quality
(iv) adjustment of royalty to global value of that commodity.
If a party loses rights at end-of-term auction, the new winner
must pay the loser the depreciated value of on-site infrastructure & machinery.
Thus, the test of proper SR being collected is that sites transfer for NIL
(to persons willing to shoulder the annual SR payments() (plus the value of improvements).
Whatever amount is raised, this is the total income available to government.
Deficit-financing & bond sales should be politically unacceptable (except in war).
Land on the margins, farmland etc. would be controlled or protected by zoning.
Future urban zonings may attract a higher SR, but upon rezoning to urban that SR would increase.
David Spain.
? Did I miss something? A land tax could go on unimproved land. To tax speculation. That’s one sort of positive land tax. We could have more.
Real estate prices need not rise with land taxes. The tax is not the source of the price level, the structure for mortgage credit is the source, which ultimately boils down to government policy. (Governments could, if it served some public purpose and was democratically desirable, make home housing entirely free. It is a political choice.)
Also, land tax is simple to implement, hard to evade. That's the rationale, so if the same rationale applies to another form of taxation that would also drive demand for the otherwise worthless currency so would also be a valid a policy option.
By "entirely free" I mean in terms of home owner buying. Not in terms of real resources. But public housing construction would be an add to the non-government sector money supply, so a good thing. It would be a loss of labour and materials from the private sector. That's a political choice to be made.