Land value tax
A land value tax is a levy on the value of land without regard to buildings, personal property and other improvements upon it. Some economists favor LVT, arguing it does not cause economic inefficiency, and helps reduce economic inequality. A land value tax is a progressive tax, in that the tax burden falls on land owners, because land ownership is correlated with wealth and income. The land value tax has been referred to as "the perfect tax" and the economic efficiency of a land value tax has been accepted since the eighteenth century. Economists since Adam Smith and David Ricardo have advocated this tax because it does not hurt economic activity, and encourages development without subsidies.
LVT is associated with Henry George, whose ideology became known as Georgism. George argued that taxing the land value is the most logical source of public revenue because the supply of land is fixed and because public infrastructure improvements would be reflected in increased land values.
A low-rate land value tax is currently implemented throughout Denmark, Estonia, Lithuania, Russia, Singapore, and Taiwan; it has also been applied to lesser extents in parts of Australia, Germany, Mexico, and the United States.
Terminology
It is also known as a location value tax , a point valuation tax, a site valuation tax, split rate tax, or a site-value rating.Economic properties
Efficiency
Most taxes distort economic decisions and discourage beneficial economic activity. For example, property taxes discourage construction, maintenance, and repair because taxes increase with improvements. LVT is not based on how land is used. Because the supply of land is essentially fixed, land rents depend on what tenants are prepared to pay, rather than on landlord expenses. Thus, if landlords passed LVT on to tenants, they might move or rent smaller spaces before absorbing increased rent.The land's occupants benefit from improvements surrounding a site. Such improvements shift tenants' aggregate demand curve to the right. Landlords benefit from price competition among tenants; the only direct effect of LVT in this case is to reduce the amount of social benefit that is privately captured as land price by titleholders.
LVT is said to be justified for economic reasons because it does not deter production, distort markets, or otherwise create deadweight loss. Land value tax can even have negative deadweight loss, particularly when land use improves. Economist William Vickrey believed that:
LVT's efficiency has been observed in practice. Fred Foldvary stated that LVT discourages speculative land holding because the tax reflects changes in land value, encouraging landowners to develop or sell vacant/underused plots in high demand. Foldvary claimed that LVT increases investment in dilapidated inner city areas because improvements don't cause tax increases. This in turn reduces the incentive to build on remote sites and so reduces urban sprawl. For example, Harrisburg, Pennsylvania's LVT has operated since 1975. This policy was credited by mayor Stephen R. Reed with reducing the number of vacant downtown structures from around 4,200 in 1982 to fewer than 500.
LVT is arguably an ecotax because it discourages the waste of prime locations, which are a finite resource. Many urban planners claim that LVT is an effective method to promote transit-oriented development.
Real estate values
The value of land reflects the value it can provide over time. This value can be measured by the ground rent that a piece of land receives on the market. The present value of ground-rent is the basis for land prices. A land value tax will reduce the ground rent received by the landlord, and thus will decrease the price of land, holding all else constant. The rent charged for land may also decrease as a result of efficiency gains if speculators stop hoarding unused land.Real estate bubbles direct savings towards rent-seeking activities rather than other investments and can contribute to recessions. Advocates claim that LVT reduces the speculative element in land pricing, thereby leaving more money for productive capital investment.
At sufficiently high levels, LVT would cause real estate prices to fall by taxing away land rents that would otherwise become 'capitalized' into the price of real estate. It also encourages landowners to sell or develop locations that they are not using. This might cause some landowners, especially pure landowners, to resist high land value tax rates. Landowners often possess significant political influence, which may help explain the limited spread of land value taxes so far.
Tax incidence
A land value tax has progressive tax effects, in that it is paid by the owners of valuable land who tend to be the rich, and since the amount of land is fixed, the tax burden cannot be passed on as higher rents or lower wages to tenants, consumers, or workers.The pass-through rate of taxation, or the fraction of the tax borne by buyers in a market, is given by:
Where is the slope of the supply curve to producer prices, and is the slope of the demand curve to consumer prices. They are closely related, though not always identical, to price elasticities.
Since land is perfectly inelastically supplied, then:
Practical issues
Assessment/appraisal
Levying an LVT requires an assessment and a title register. In a 1796 United States Supreme Court opinion, Justice William Paterson said that leaving the valuation process up to assessors would cause bureaucratic complexities, as well as non-uniform procedures. Murray Rothbard later raised similar concerns, claiming that no government can fairly assess value, which can be determined only by a free market.Compared to modern property tax assessments, land valuations involve fewer variables and have smoother gradients than valuations that include improvements. This is due to variation of building design and quality. Modern statistical techniques have improved the process; in the 1960s and 1970s, multivariate analysis was introduced as an assessment tool. Usually, such a valuation process begins with a measurement of the most and least valuable land within the taxation area. A few sites of intermediate value are then identified and used as "landmark" values. Other values are interpolated between the landmark values. The data is then collated in a database, "smoothed" and mapped using a geographic information system. Thus, even if the initial valuation is difficult, once the system is in use, successive valuations become easier.
Revenue
In the context of LVT as a single tax, some have argued that LVT alone cannot raise enough tax revenue. However, the presence of other taxes can reduce land values and hence the revenue that can be raised from them. The Physiocrats argued that all other taxes ultimately come at the expense of land rental values. Most modern LVT systems function alongside other taxes and thus only reduce their impact without removing them. Land taxes that are higher than the rental surplus would result in land abandonment.LVT impracticalities
In some countries, LVT is impractical because of uncertainty regarding land titles and tenure. For instance, a parcel of grazing land may be communally owned by village inhabitants and administered by village elders. The land in question would need to be held in a trust or similar body for taxation purposes. If the government cannot accurately define ownership boundaries and ascertain the proper owners, it cannot know from whom to collect the tax. Clear titles are absent in many developing countries. In African countries with imperfect land registration, boundaries may be poorly surveyed, and the owner can be unknown.Incentives
Speculation
The owner of a vacant lot in a thriving city must still pay a tax and would rationally perceive the property as a financial liability, encouraging them to put the land to use in order to cover the tax. LVT removes financial incentives to hold unused land solely for price appreciation, making more land available for productive uses. Land value tax creates an incentive to convert these sites to more intensive private uses or into public purposes.Incidence
The selling price of a good that is fixed in supply, such as land, does not change if it is taxed. By contrast, the price of manufactured goods can rise in response to increased taxes, because the higher cost reduces the number of units that suppliers are willing to sell at the original price. The price increase is how the maker passes along some part of the tax to consumers. However, if the revenue from LVT is used to reduce other taxes or to provide valuable public investment, it can cause land prices to rise as a result of higher productivity, by more than the amount that LVT removed.Land tax incidence rests completely upon landlords, although business sectors that provide services to landlords are indirectly impacted. In some economies, 80 percent of bank lending finances real estate, with a large portion of that for land. Reduced demand for land speculation might reduce the amount of circulating bank credit.
While landowners are unlikely to be able to charge higher rents to compensate for LVT, removing other taxes may increase rents, as this may affect the demand for land.