6 ms·

> The author hints at the political problem of adopting a land tax near the end: But there are practical problems with a land tax — perhaps the largest of which

> The author hints at the political problem of adopting a land tax near the end: But there are practical problems with a land tax — perhaps the largest of which is that by its very nature it hits the well-connected rich hardest. So we may very well never see this regulation brought up or passed given the current, money-greased machinations of the political machine. That isn't the actual problem. Its the problem the author imagines. The real problem with land [and property taxes] is the fact it tends to flow into the cost of rent and homeownership. Everyone in this country is impacted, it is just a question of degree. Similarly, the vast majority sees an item in their basket of purchases goes up by $X and gets angry. Case in point: The gasoline tax. The vast majority of economists thinks it should go up to cover infrastructure but there is no political will to do so precisely because of how angry it makes their constituents. People are far less rational than you think they are and if their entire tax burden was shifted into the rent for their house, they'd flip the fuck out.

roymurdock 11y ago
Good point, the author never discusses what percentage of a tax increase would simply be passed on to the renters of the property. Since demand for these units is so inelastic, it would probably be near 100%. What to do then? Subsidize construction? Force higher densities?
- fweespeech 11y ago
  I have no idea how to solve it other than to educate people so they understand "Okay, I paid $X in taxes this year, now that we switched to land taxes, I pay that $X in rent and my landlord pays the government." The problem is, in practice, this hasn't really worked.
- thrownaway2424 11y ago
  That's not how it would work. The rents are already at the maximum that the market will bear, and will not increase. A rent tax would simply divert some of that money from the landlord to the local authority.
  - roymurdock 11y ago
    This makes sense in a free market where housing is a perfectly fungible, liquid good. In reality, housing/rent is very sticky. If my landlord had his taxes raised, he would simply raise my rent by a corresponding amount. And I would pay, because it would be too much of an issue for me to put my life on hold while I find another place to live. Nobody is paying 100% of their income as rent - there is always room to squeeze more margin out of renters.
    - srtjstjsj 11y ago
      Why doesn't your landlord squeeze more margin now? Because your landlord is already charging the most they can convince you to pay.
      - roymurdock 11y ago
        Why aren't you demanding a raise now? Because you're not a perfectly rational being participating in a perfect labor market.
- spangry 11y ago
  You wouldn't need to force higher densities as it would naturally occur for high-value inner-city land. If the government taxes your economic land rents, it increases the opportunity cost of using high value land in unproductive ways.
  - roymurdock 11y ago
    LVT doesn't affect the supply side. Cities would need to reform zoning laws and deregulate building codes that specify maximum density. The housing market is far from a self-regulating, equilibrium-seeking free market. It is very heavily regulated. Landlords would love to increase SF density so they could pack more people in while extracting NY-level rents. They can't because it's currently illegal.
    - spangry 11y ago
      Although I agree it doesn't result in increased supply of land, an LVT results in more efficient allocation of existing supply, which is economically equivalent to an increase in supply holding allocative efficiency constant. And I 100% agree on land-market regulations. It seems to be a similar story in most first-world economies: regulations are artificially constraining land supply, and also causing inefficient use of existing land.
- nwah1 11y ago
  A tax on improvements is always passed on to renters, but a tax on the unimproved value of land cannot be passed on, because the land rent is a pure economic rent. "A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground." – Adam Smith, Wealth of Nations "A tax on rent would affect rent only; it would fall wholly on landlords, and could not be shifted to any class of consumers. The landlord could not raise his rent, because he would leave unaltered the difference between the produce obtained from the least productive land in cultivation, and that obtained from land of every quality." – David Ricardo, On the Principles of Political Economy and Taxation
  - roymurdock 11y ago
    Again, both of these classical economists are assuming perfect markets and non-sticky rent. In a perfectly rational world where prices are constantly updated as the landlord and tenant are perfectly rational beings who evaluate how much the land is worth to them on a minute-by-minute basis, then yes this theory holds. In a world where there are significant search and movement frictions, where subsidized housing exists, where landlords and their tenants have relationships beyond renter/rentee, where a home/building has value beyond its ability to be slept in, these theories will not hold. My hypothesis is that if an LVT was levied in SF, rent would go up by at least 50% of the value of the LVT as a direct effect of the tax.
air 11y ago
"The real problem with land [and property taxes] is the fact it tends to flow into the cost of rent and homeownership." The price of property and rent in popular places will be what the market will bear. So with tax, the rent would stay the same. Price of apartments would go down, because buyers need to pay the tax, so they cannot afford as much. Apartments in space efficient towers would be grow in value relatively, because they don't need to pay so much tax, so there would be incentive to build more densely. This means more apartments and cheaper prices.
- fweespeech 11y ago
  > The price of property and rent in popular places will be what the market will bear. So with tax, the rent would stay the same. Price of apartments would go down, because buyers need to pay the tax, so they cannot afford as much. You are ignoring that capital flows to the most efficient RoI it can find. If rents remained the same, the RoI would drop [due to the tax increase] and it would lead to land abandonment. Land abandonment is one of the largest practical issues with a land value tax. Increasing housing density isn't efficient when the practical value of the land is low. Yes, it'd be great in SF. But what about Athens, GA? It'd be a terrible idea there. Building upwards isn't free, either. Yes, its popular with a certain class of economist who makes certain assumptions but the real world behavior of landlords isn't what you think it is. ------ Let us say, for the sake of argument, that you are correct. $800 rent, tax burden increased by $600 a year. So everyone unloads their real estate holdings because they are no longer profitable. Prices of land plummet as its abandoned as unprofitable, reducing tax revenue. If you build alot of high density housing, you need less land, so as such housing finishes...everywhere that is "far" from the new high density area drops in value again. The cycle repeats until the new normal is stable. You've suddenly restructured every major city in the affected area. However, you've created so much abandoned land that is converted to farming that your tax revenues have dropped. So you have to raise taxes, the cycle repeats.
  - tormeh 11y ago
    A land tax depends on the value of the land. In areas without congestion, the value of land is low, so the land tax will be low and thus there will be no problem.
spangry 11y ago
"The real problem with land [and property taxes] is the fact it tends to flow into the cost of rent and homeownership." That's simply not true in the case of rent payments to landlords if we're talking about a land-value tax (i.e. taxing a proportion of the unimproved value of land). Land-supply is effectively fixed in the short-run (and pretty damn inelastic in the long-run thanks to over-regulation, zoning etc.). Therefore, tenant rents are determined solely by what the demand-side of the market will bear, meaning landlords can't pass LVT on (so they bear the economic incidence of the tax). Just to clarify terminology, by land-value tax (LVT), I mean taxing the proportion of unimproved land value that represents capitalisation of future economic rents (unearned profits) from land. It's plausible a LVT would actually decrease rents paid by tenants, as it would increase the elasticity of dwelling supply in the long-run (land-owners would have stronger incentives to use land more productively). A properly designed LVT only taxes economic-rents (unearned profits) that currently accrue to private land-owners: if the local council builds a park near some land, the increased amenity for the surrounding area translates to increased economic rents, as the increased amenity is captured in the form of increased unimproved land values. As for home-owners (existing land-owners), theoretically if people are unable to move houses then LVT would increase the cost of home-ownership: directly from increased tax and indirectly from decreased value of their land holding (as future economic rents from land is capitalised into land values). However, this is an unlikely scenario. More likely, the revenue raised from LVT would hopefully be used to cover reductions in property transfer taxes (i.e. ad valorem/stamp-duty taxes), which have absurd efficiency costs. This would reduce the cost of home-ownership overall. People would pay less transfer tax over their lifetime, and property and land prices would fall due to increased allocative efficiency: reduced transaction taxes mean more efficient allocation of existing housing and land stock, as the tax disincentive to reallocate is reduced or eliminated. Also, under an LVT existing land would also be used more efficiently (e.g. medium-high density inner-city dwellings) as there would be higher opportunity costs of using high-value land unproductively (e.g. building a 1 bedroom shack on a big plot of land in the CBD). In my opinion, the real problem is that these dynamics aren't immediately evident, are difficult to explain, and it's very easy to (mistakenly) conflate legal incidence with economic incidence of taxation. It's interesting you bring up gasoline taxes as this is the classic example: the Carter administration attempted to increase gas tax and hand the revenue back out through tax-cuts. It didn't happen because many thought it was simply taking with one hand and giving with the other. In actual fact, given the aim was to reduce US oil consumption, it was pretty sound policy. Even though people would have ended up with the same amount of money (neutral income effect), gasoline consumption would have been reduced due to substitution effects: gas would have become relatively more expensive in comparison to every other consumption possibility, meaning people would substitute away.

roymurdock 11y ago

Good point, the author never discusses what percentage of a tax increase would simply be passed on to the renters of the property. Since demand for these units is so inelastic, it would probably be near 100%. What to do then? Subsidize construction? Force higher densities?

fweespeech 11y ago
I have no idea how to solve it other than to educate people so they understand "Okay, I paid $X in taxes this year, now that we switched to land taxes, I pay that $X in rent and my landlord pays the government." The problem is, in practice, this hasn't really worked.
thrownaway2424 11y ago
That's not how it would work. The rents are already at the maximum that the market will bear, and will not increase. A rent tax would simply divert some of that money from the landlord to the local authority.
- roymurdock 11y ago
  This makes sense in a free market where housing is a perfectly fungible, liquid good. In reality, housing/rent is very sticky. If my landlord had his taxes raised, he would simply raise my rent by a corresponding amount. And I would pay, because it would be too much of an issue for me to put my life on hold while I find another place to live. Nobody is paying 100% of their income as rent - there is always room to squeeze more margin out of renters.
  - srtjstjsj 11y ago
    Why doesn't your landlord squeeze more margin now? Because your landlord is already charging the most they can convince you to pay.
    - roymurdock 11y ago
      Why aren't you demanding a raise now? Because you're not a perfectly rational being participating in a perfect labor market.
spangry 11y ago
You wouldn't need to force higher densities as it would naturally occur for high-value inner-city land. If the government taxes your economic land rents, it increases the opportunity cost of using high value land in unproductive ways.
- roymurdock 11y ago
  LVT doesn't affect the supply side. Cities would need to reform zoning laws and deregulate building codes that specify maximum density. The housing market is far from a self-regulating, equilibrium-seeking free market. It is very heavily regulated. Landlords would love to increase SF density so they could pack more people in while extracting NY-level rents. They can't because it's currently illegal.
  - spangry 11y ago
    Although I agree it doesn't result in increased supply of land, an LVT results in more efficient allocation of existing supply, which is economically equivalent to an increase in supply holding allocative efficiency constant. And I 100% agree on land-market regulations. It seems to be a similar story in most first-world economies: regulations are artificially constraining land supply, and also causing inefficient use of existing land.
nwah1 11y ago
A tax on improvements is always passed on to renters, but a tax on the unimproved value of land cannot be passed on, because the land rent is a pure economic rent. "A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground." – Adam Smith, Wealth of Nations "A tax on rent would affect rent only; it would fall wholly on landlords, and could not be shifted to any class of consumers. The landlord could not raise his rent, because he would leave unaltered the difference between the produce obtained from the least productive land in cultivation, and that obtained from land of every quality." – David Ricardo, On the Principles of Political Economy and Taxation
- roymurdock 11y ago
  Again, both of these classical economists are assuming perfect markets and non-sticky rent. In a perfectly rational world where prices are constantly updated as the landlord and tenant are perfectly rational beings who evaluate how much the land is worth to them on a minute-by-minute basis, then yes this theory holds. In a world where there are significant search and movement frictions, where subsidized housing exists, where landlords and their tenants have relationships beyond renter/rentee, where a home/building has value beyond its ability to be slept in, these theories will not hold. My hypothesis is that if an LVT was levied in SF, rent would go up by at least 50% of the value of the LVT as a direct effect of the tax.

air 11y ago

"The real problem with land [and property taxes] is the fact it tends to flow into the cost of rent and homeownership." The price of property and rent in popular places will be what the market will bear. So with tax, the rent would stay the same. Price of apartments would go down, because buyers need to pay the tax, so they cannot afford as much. Apartments in space efficient towers would be grow in value relatively, because they don't need to pay so much tax, so there would be incentive to build more densely. This means more apartments and cheaper prices.

fweespeech 11y ago
> The price of property and rent in popular places will be what the market will bear. So with tax, the rent would stay the same. Price of apartments would go down, because buyers need to pay the tax, so they cannot afford as much. You are ignoring that capital flows to the most efficient RoI it can find. If rents remained the same, the RoI would drop [due to the tax increase] and it would lead to land abandonment. Land abandonment is one of the largest practical issues with a land value tax. Increasing housing density isn't efficient when the practical value of the land is low. Yes, it'd be great in SF. But what about Athens, GA? It'd be a terrible idea there. Building upwards isn't free, either. Yes, its popular with a certain class of economist who makes certain assumptions but the real world behavior of landlords isn't what you think it is. ------ Let us say, for the sake of argument, that you are correct. $800 rent, tax burden increased by $600 a year. So everyone unloads their real estate holdings because they are no longer profitable. Prices of land plummet as its abandoned as unprofitable, reducing tax revenue. If you build alot of high density housing, you need less land, so as such housing finishes...everywhere that is "far" from the new high density area drops in value again. The cycle repeats until the new normal is stable. You've suddenly restructured every major city in the affected area. However, you've created so much abandoned land that is converted to farming that your tax revenues have dropped. So you have to raise taxes, the cycle repeats.
- tormeh 11y ago
  A land tax depends on the value of the land. In areas without congestion, the value of land is low, so the land tax will be low and thus there will be no problem.

spangry 11y ago

"The real problem with land [and property taxes] is the fact it tends to flow into the cost of rent and homeownership." That's simply not true in the case of rent payments to landlords if we're talking about a land-value tax (i.e. taxing a proportion of the unimproved value of land). Land-supply is effectively fixed in the short-run (and pretty damn inelastic in the long-run thanks to over-regulation, zoning etc.). Therefore, tenant rents are determined solely by what the demand-side of the market will bear, meaning landlords can't pass LVT on (so they bear the economic incidence of the tax). Just to clarify terminology, by land-value tax (LVT), I mean taxing the proportion of unimproved land value that represents capitalisation of future economic rents (unearned profits) from land. It's plausible a LVT would actually decrease rents paid by tenants, as it would increase the elasticity of dwelling supply in the long-run (land-owners would have stronger incentives to use land more productively). A properly designed LVT only taxes economic-rents (unearned profits) that currently accrue to private land-owners: if the local council builds a park near some land, the increased amenity for the surrounding area translates to increased economic rents, as the increased amenity is captured in the form of increased unimproved land values. As for home-owners (existing land-owners), theoretically if people are unable to move houses then LVT would increase the cost of home-ownership: directly from increased tax and indirectly from decreased value of their land holding (as future economic rents from land is capitalised into land values). However, this is an unlikely scenario. More likely, the revenue raised from LVT would hopefully be used to cover reductions in property transfer taxes (i.e. ad valorem/stamp-duty taxes), which have absurd efficiency costs. This would reduce the cost of home-ownership overall. People would pay less transfer tax over their lifetime, and property and land prices would fall due to increased allocative efficiency: reduced transaction taxes mean more efficient allocation of existing housing and land stock, as the tax disincentive to reallocate is reduced or eliminated. Also, under an LVT existing land would also be used more efficiently (e.g. medium-high density inner-city dwellings) as there would be higher opportunity costs of using high-value land unproductively (e.g. building a 1 bedroom shack on a big plot of land in the CBD). In my opinion, the real problem is that these dynamics aren't immediately evident, are difficult to explain, and it's very easy to (mistakenly) conflate legal incidence with economic incidence of taxation. It's interesting you bring up gasoline taxes as this is the classic example: the Carter administration attempted to increase gas tax and hand the revenue back out through tax-cuts. It didn't happen because many thought it was simply taking with one hand and giving with the other. In actual fact, given the aim was to reduce US oil consumption, it was pretty sound policy. Even though people would have ended up with the same amount of money (neutral income effect), gasoline consumption would have been reduced due to substitution effects: gas would have become relatively more expensive in comparison to every other consumption possibility, meaning people would substitute away.