Why can't the Land-Value Tax (in some cases) be passed on to tenants?

Question

According to https://en.wikipedia.org/wiki/Land_value_tax:

Because the supply of land is essentially fixed, land rents depend on what tenants are prepared to pay,

That doesn't make any sense. If more people want to live in a particular place, rents will increase.

rather than on landlord expenses, preventing landlords from passing LVT to tenants.

Only if there's somewhere else that tenants want to be, that also has lower rents. The real estate boom in San Francisco shows that when people with lots of money really want to live in a particular place, rents rise.

Thus, what stops the Land-Value Tax be passed on to tenants (in the situation where demand outstrips supply, and the government decides to increase the LVT)?

Answer 1

Because the supply of land is essentially fixed, land rents depend on what tenants are prepared to pay,

That doesn't make any sense. If more people want to live in a particular place, rents will increase.

And if rents increase, then obviously tenants are prepared to pay more. If they aren't willing to pay increased rents, then they don't really want to live there more than another place. I.e. your statement is entirely consistent with the statement that you are criticizing.

rather than on landlord expenses, preventing landlords from passing LVT to tenants.

Only if there's somewhere else that tenants want to be, that also has lower rents. The real estate boom in San Francisco shows that when people with lots of money really want to live in a particular place, rents rise.

I think you missed the point here. Presumably landlords are already charging what the market will bear. How does a Land Value Tax (LVT) change what the market will bear? As it's a tax on landlords, obviously it has no direct effect on tenants. The tenants are not prepared to pay more rent as a result of the LVT.

If rents will go up by \$100 a month without an LVT and \$100 a month with an LVT, then landlords can't pass the LVT to tenants. That's true even if the \$100 is enough to pay the LVT. Without the LVT, the landlord would have raised the rent and kept all of the money (minus income taxes, etc.). With the LVT, the landlord pays the LVT and may still have to pay more income taxes (depending on the deductibility of the LVT).

The only way that an LVT can influence rents from the landlord side is if it causes the number of units available for rent to either increase or decrease. In the long term, that happens. Landowners can choose to build more or fewer units on their land. But in the immediate term, the number of units is fixed. A landowner can't take a single family home and instantaneously convert it into a hundred-unit apartment building, even if there is sufficient land to support that. Thus the LVT does not change unit availability or the rent that tenants are willing to pay.

Now, it is possible that the LVT enables spending that tenants find valuable. And that spending causes demand and therefore rents to increase. But that spending would be just as valuable to the tenants if it were financed by a different tax with less impact on landowners. Of course, tenants might be negatively impacted by that tax, e.g. if they pay it. But those effects are aside from the impact of an LVT on landlords.

The LVT itself does not increase rents in the short term. It may increase rents in the long term if it drives away landowners by making some places economically infeasible to rent. But that assumes that landlord profits are less than the LVT. Or landowners may choose not to expand the number of units in the long term. Or the LVT may finance a benefit that increases the value of the units to tenants.

So the landlord can only pass on the LVT if tenants benefit from the spending financed by the LVT, shifting the demand curve such that tenants will pay more. So the more that the LVT finances benefits for tenants, the better able the landlord will be to pass on the LVT.

If those things don't happen, the landlord can't pass on the LVT. The landlord can only get the regular market rent. That may be an increasing market rent, but the increase is not due to the LVT. It's only determined by movement in the tenants' demand curve, which is not directly impacted by the LVT.

Answer 2

There's the theory, and there's the reality. Let's say there's an across-the-board rent tax of \$100 per property.

The theory is that if landlords could just arbitrarily increase rent by \$100, they would've done it already. They haven't, therefore they can't.

The reality is that if every landlord in the city increases rent by \$100 at the same time and with the same excuse, and if the inconvenience of moving out of the entire city outweighs the burden of paying an extra \$100 in rent each month, then (most) people will pay the \$100 and the landlords will have successfully passed off the tax to their tenants.

Over the long term, and across large scales, things will tend to even out such that landlords do end up paying for it -- the \$100 extra they get now will just cut into future increases they could've otherwise made. But in the nitty gritty, dirty reality of people not being willing to move simply because their landlords are trying to get away with passing off the tax, the tenants can end up (at least temporarily) footing the bill regardless.

Answer 3

Supply response causes a change in prices, the incidence which is shared between the producer and the consumer. As land is defined as everything not supplied by human effort, thus perfectly inelastic, there is no supply response so the incidence of a LVT falls only on the landowner.

In practice the value of land is the difference in productivity/average wages between different locations. A landowner cannot therefore pass on the tax in higher prices because this will simply lead to the abandonment of valuable land to where land is valueless. As there is always marginal land, even in somewhere like the US, the LVT has no effect on rents, though it would reduce rental incomes, thus selling prices.

This is also why landlords change charge more than market rent and why a LVT cannot be levied at more that 100% of market rents.

Answer 4

The Georgist government pays the Citizen's Dividend from the land rents it collects. Thence the citizens are shielded from the increased land rents.

Answer 5

Principle of Taxation: Tax incidence/burden falls more heavily by the more inelastic party. So,

1. If supply is perfectly inelastic, then producers will bear the entire burden of the tax. (This is probably what the Wikipedia writer was thinking of.)

2. In reality, supply is rarely (never?) perfectly inelastic. So, consumers will usually also bear some burden of the tax.

3. In the case of San Francisco housing, demand is also highly inelastic. So, consumer-tenants there will probably bear a significantly greater burden of a land tax (than say in Wyoming).

(Draw the diagrams.)

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Also, as stated in my comment above, there seems to be some confusion between (a) the consequences of increased demand; and (b) the incidence of a tax.

(a) Increased demand generally leads to increased prices. Indeed, prices will increase most if supply is also perfectly inelastic. (Again, draw the diagram.) This is what OP seems to have observed in San Francisco.

However, this has nothing to do with (b), which is about the incidence of a land tax. To repeat, (1) "If supply is perfectly inelastic, then producers will bear the entire burden of the tax."

OP seems to have confused (a) and (b).

Answer 6

I want to take a slightly different approach to understanding why the tax must ultimately fall on the landlord. I think a key point is that is being missed is a time axis. A LVT is suppose a % tax on the value of land. If the value of the raw land changes than the LVT is suppose to automatically adjust. Lets say the LVT was 5%. If every landlord in San Fran simultaneously raises rent by 5% that must mean the land just got 5% more valuable everywhere in the region. In the short term landlords can pass the tax but in the next period of reassessment of Land value increases by 5% since there's been no improvement in the property. Now the Landlord can keep kicking the bucket to the Tenant but eventually the Tenant cannot pay an infinite number of increases in rent. However than the Landlord would than be left paying the the accumulated tax increases unless they could find a replacement. They will likely struggle now because there housing is now the most uncompetitively priced thing on the market. Thus they than would eat the accumulated tax burden (if not on the first tenant then the n'th one).

That's the theory as I see it. This is something to be applied over the long terms not short. However of course there are problems in the real world. The number of reassessments that have to happen for equilibrium to be found isn't easily knowable and the landlord can kick the bucket until no more give exists. So locally some tenants would suffer and see the LVT passed to them.

If the periods of reassessments are spaced at the same time length tenant contracts are assessed there would be a general inflationary effect that could shield the landlords. But as another user pointed out the LVT generated is to be used the people living there. If the land tax just went directly to renters they would be completely shielded from the LVT and it would effectively reduce margin someone could get on the land unless they did something more productive with land i.e build more units or some other venture. In my opinion this makes speculation harder and has been the tactic employed on some video games like Eve[1] and while a video game is not real level they do emulate many traits of the real would. I think if reassessment could happen faster (government definitely couldn't manage that like they do with normal property values) than tenant re-contracting than an LVT revenue could go to public works rather than people directly and still benefit a community.

[1] https://www.gamedeveloper.com/business/digital-real-estate-and-the-digital-housing-crisis

Answer 7

If the supply of land cannot change, the only thing that determines price is demand. Demand depends on what renters are willing to pay. If incomes increase, rents will increase. If products get cheaper, rents will increase.