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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

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.

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.