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.
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.
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.
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.
This is an interesting question. In particular it relates to other questions such as who should collect the tax (local or national). But I don't think it invalidates the theoretical or practical advantages of land value tax or makes it distortive.
It depends how the assessment is done. Imagine a large area owned by one person which can be split into a number of smaller plots, each with a building on it. What's the total land value. The total land value will include the benefits of one building within the large area on another plot. So the land value of each plot is the value of the land if you burnt down just the building standing on it but kept the other buildings.
So actually there are more than one definition of 'unimproved' depending on the scale on what we are speaking. The total value of the unimproved land on which London stands (after a very large bomb destroyed all of London) is less than the sum of the values of the individual unimproved plots (after small reversible bombs destroying each building individually).
Defining the land value as the property value minus the rebuild cost of the buildings seems to get round most of these problems.
@BKay has good points. Other ideas:
A) No, the fact that somebody else's actions change the value of your land does not have to do with taxes. This would be true in a taxless environment too. If your neighbor builds a beautiful park, your land becomes more valuable, if he builds a sulfur emitting factory, presumably then your land becomes less valuable.
B) You are right, that yes, if your building changes the value of your own land, then yes, even LTV taxes are going to decrease your incentives to build. The only alternative would be to have a value of land for taxes that is independent of the market value of land. You could do it, I suppose, with a formula based say on the type of soil, the water availability, the view, the average temperature, etc, i.e. qualities intrinsic to the land itself.
C) When people talk about LTV not affecting incentives they mean that the taxes are not calculated based on what you build, but solely on the value society places on that piece of land. Typically taxes are based on land plus meters of construction, which pushes people to avoid construction to avoid taxes... which some people believe pushes us to have urban sprawl. Of course if you own
D) The example you mention assumes that the value of land would be different if you own it that if your neighbor owned it. It's possible that under some particular tax regime the city does not update the value of land until a property is sold, in which case, yes, single ownership before construction minimizes taxes. However, many tax assessments are continually adjusted with estimates of the value of land, regardless of ownership or change of ownership.
While it's true that the value of the land is based (largely) on the improvements made to surrounding land, this value remains the same regardless of who owns the land. Selling it to your neighbor would not diminish its value vis-a-vis proximity the improvements already made on your neighbor's land.
I think what you're really pointing out is the difficulty involved in assessing the unimproved value of land. In many cases, the value that (e.g.) Georgists would attribute to the land itself is instead counted as part of the capital improvements. For instance, note that houses in expensive locations (such as the San Francisco Bay Area) are often assessed at significantly more than identical houses in other, less expensive areas. This is, of course, complete nonsense. Houses aren't actually more valuable simply because they sit on valuable land. It's the land that is more valuable — but there are enough vested interests (real estate agents, tax policy, etc.) that they have managed to distort the assessment process in their favor.
Addendum: note also that the unimproved value of the land will itself increase in virtue of improvements made to the land. I think perhaps this more directly addresses your point — it's not just the improvements on the surrounding land, but on the very same land on which those improvements are made. Disentangling that value from the value of the capital improvements themselves is, clearly, also a difficult problem of assessment.
