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LVT is "a tax on the unimproved value of land", and "in theory, it does not distort decision making". But if I own land then improvements such as buildings on my neighbour's land can easily increase the value of mine.

It seems like the total LVT payable would therefore be reduced if I sold my land to my neighbour and they paid tax on the entire estate at the value it would have had not been improved. This seems like a major distortion of decision making.

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3 Answers 3

Some people strongly disagree that LVT is not distortionary:

George was right that other taxes may have stronger disincentives, but some economists now recognize that the single land tax is not innocent, either. Site values are created, not intrinsic. Why else would land in Tokyo be worth so much more than land in Mississippi? A tax on the value of a site is really a tax on productive potential, which is a result of improvements to land in the area. Henry George’s proposed tax on one piece of land is, in effect, based on the improvements made to the neighboring land.

And what if you are your “neighbor”? What if you buy a large expanse of land and raise the value of one portion of it by improving the surrounding land. Then you are taxed based on your improvements. This is not far-fetched. It is precisely what the Disney Corporation did in Florida. Disney bought up large amounts of land around the area where it planned to build Disney World, and then made this surrounding land more valuable by building Disney World. Had George’s single tax on land been in existence, Disney might never have made the investment. So even a tax on unimproved land can reduce incentives. ... Zachary Gochenour and Bryan Caplan have pointed out that while the surface value of land is more apparent, especially for farming purposes, many lands have hidden natural resources, such as gold, water, and oil. These resources require investment on the part of owners to discover and produce. “Information about the land can be considered an improvement in its own right.” To tax the entire, or even a large, value of the mineral resources would create enormous disincentives for exploration and production

The Concise Encyclopedia of Economics: Henry George (1839-1897 )

To answer this more definitively we'd need to take a stand on how we think the tax assessor would measure unimproved value. We could then ask if combined plots would distort this measure. I read the quote above as saying that the assessor looks at the sale prices of undeveloped lots in the area. But the value of these lots is necessarily higher due to the improvements of others (or even your own). Combining plots, to the extent that it makes big, valuable projects possible, distorts this measure but in the wrong direction. Some other method that tried to strip out the indirect value of your own improvements on the unimproved value of your own land but left in the increase in value of the improvements of others would bias towards combining properties.

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This suggests that the answer to the question is 'no', because the unimproved value of each 'piece' of land is calculated separately, rather than calculating the unimproved value of an entire estate owned by one person. I wonder how land is split into pieces for this purpose, either in theoretical or practical implementations of LVT? –  bdsl Jan 25 at 14:17
I tried to respond in the body of my answer. –  BKay Jan 26 at 0:42

The Economist column that the OP linked to makes an elementary mistake: it says

"Land value taxation is so beloved of economists because, in theory, it does not distort decision making. Suppose a land value tax of one per cent on land value is introduced tomorrow. There can be no supply response: there would still be as much land as there is today."

Bold letters my emphasis. Who on earth would ever equate the economic concept of Supply with the meaning of the word availability? Especially for goods that are not transformations of other goods and so embody a very tangible opportunity cost if left unsold (plus the unavoidable depreciation)?

Sure, if I produce cars, I want my cars to be sold, and if a tax is imposed on them, even if I have to fully absorb the tax. I may change my behavior in the future, but right now I want to see my inventory sold.

But it is by no accident that, globally, Accounting Standards prescribe that no depreciation is calculated for unimproved land (and if it is improved, then a portion of the value attributed to the landfield per se remains non-depreciated). This reflects the actual fact that the value of the land itself is purely a matter of surrounding circumstances.

But the Supply of Unimproved Land can be much more easily reduced if prices fall, in the sense that the land stops being for sale.

What such a tax can also do is to provide a "negative" incentive to sell, in order not to continue paying the tax. So in any case the tax will tend to affect the Supply of land :some landowners will withdraw their land from the market, even if this means bearing the tax, because they may figure that they can wait so that land prices rise again to an overall gain, while some others will be induced to sell the land they did not have up for sale prior to the tax, in order to not be burdened with the tax.

On the other hand, Milton Friedman's "least bad tax" quote (from the same link) is a true economist's thinking: weigh the pros and the cons, try to give the world a clearer picture to help them decide.

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This doesn't seem to answer the question. –  bdsl Jan 25 at 14:18
@bdsl What question? The one in the title, or the one in the body of the question? In the title, you ask about "land mergers". In the body of the question you discuss more generally "distortions on decision making". I chose to answer the second. –  Alecos Papadopoulos Jan 25 at 16:08
The one in the title. There isn't a question in the body, but in the body I was using a landowner selling to their landowning neighbour as an example of a merger of land ownership. –  bdsl Jan 25 at 21:19

Caplan and Gochenour use the term land in the physical sense, rather than the economic sense. Their argument therefore only amounts to one long straw man. The "unimproved" value of land doesn't only included physical improvements, but all Capital. Including all sunk costs, like search and discovery.

Land is, by definition all that is not produced. Therefore any charge upon it that doesn't reduce it's selling price to below zero cannot cause a deadweight loss. Shared land rent a) makes everyone an equal share landlord b) all occupiers tenants. Land is then only occupied by capitalists who can put land to it's most productive use and are prepared to out bid all others for exclusive rights.

We therefore eliminate a set of deadweight losses associated with current owner occupation(monopoly).

As land is by definition unreproducible, exclusive use of productive land puts a burden on the rest of the community. The value of this negative externality is measured by the market it's rental value i.e the highest amount someone else would pay for exclusive occupation.

Compensation paid for negative externalities aligns incentives. They do not distort them.

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I don't think this answers the question or addresses the scenario I described of a landowner considering selling land to their neighbour whose land has been improved. –  bdsl Jan 27 at 13:16

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