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Land value taxes are so popular, yet so rare

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  • Land value taxes are so popular, yet so rare

    HOW should you tax wealthy homeowners? Britain's opposition Labour party thinks it has an answer: an annual mansion tax on homes worth over £2m. Meanwhile the Scottish government plans to reform taxes on house sales. Yet in the discussion over property taxes a favourite proposal of economists—a tax on the unimproved value of land—has been absent from the debate. Throughout history, economists have advocated such a tax. Adam Smith said "nothing [could] be more reasonable". Milton Friedman said it was "least bad tax". Yet there are only a handful of real-world examples of land value taxes (LVT). Why are they so popular yet so rare?

    When thinking about any tax, economists focus on how it affects decision-making. Income tax reduces the incentive to work. Corporation tax reduces the incentive to invest. Stamp duty deters some marginal house sales. Such prevention of mutually beneficial transactions is generally considered bad (though the deterrence of actions which hurt third parties—such as pollution—is an exception). Distributional effects also matter, although are often ignored on the assumption that any redistribution can happen through separate mechanisms.

    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. Neither would consumers’ preferences change, as land would be no more useful, either. So if the market for land is competitive, no transactions would be deterred or encouraged. All that changes is the price, which falls until it exactly offsets the discounted cost of paying the tax forever. The buyer assumes the burden of paying the tax, so all things considered is no better or worse off. Landlords are unable to pass the tax on to tenants, because the supply and demand of rented land is unchanged too. Furthermore, if LVTs replaced property taxes, incentives against improving homes and developing land would be removed. Yet LVT would continue to account for "undeserved" gains landowners make on the investment of others, such as the government improving nearby transport links (this feature of the tax appealed to Winston Churchill).

    But if LVTs are so great, why are they so rare? One explanation is that it is too difficult to value land separately from what sits on it. There is not much of a market, for example, for undeveloped land in central London. However, some think this can be overcome. The 2010 Mirrlees Review of British taxation argued that bean-counters could compare the price of similar buildings in different locations, for instance. In any case, the efficiency of the tax does not depend on accurate valuations. The bigger barrier is political. LVTs would impose concentrated costs on today’s landowners, who face a new tax bill and a reduced sale price. The benefit, by contrast, is spread equally over today’s population and future generations. This problem is unlikely to be overcome. Economists will continue to advocate LVTs, and politicians will continue to ignore them.

    What are people's take on LVT?

    I have read comments that suggested that agrarian economies would benefit from LVT. Has anyone got a take on that? Are there any notable LVT's worldwide?

  • #2
    Germany has Grundsteuer, which taxes ownership of land property including buildings on it by value as the sole remaining property tax in Germany (other property taxes were abandoned in 1997).

    Per se the calculation is fairly straightforward - housing being valued based on the amount you can earn by renting it out, other buildings based on interior room, other property based on size specific to usage. Multiply by various standard factors and the local tax rate. It's the details of the calculation that really, really screw this up for you. It's considered complicated by Germans in that sense, and that's coming from the country that has the most comprehensive tax law in the world.

    Calculation pretty much differentiates between where the property is located and how it is used - with quirks such as using population numbers of 1933 (!) for differentiation or differentiating between buildings based on whether they were built before or after March 31st 1924. The value of a property in the calculation meanwhile is not its current book value, but a socalled Standard Value that is based on its worth on January 1st 1964 in West Germany and January 1st 1935 in East Germany. The standard value is based - for housing - on what you could have earned renting it out in 1935, and for other buildings on how much it would have cost to build that in 1935. Originally this Standard Value for each property was meant to be adapted every six years, which was abandoned due to the amount of bureaucracy involved in the West German 1964 adaption (the only one that occured, due to the war).

    There's multiple initiatives to overhaul it btw.
    Last edited by kato; 09 Jan 17,, 21:15.


    • #3
      Here in the US state of Massachusetts, the land is valued separately and included in the property tax assessment.


      example of one that an acquaintance recently bought for $615k :

      Zillow real estate listing:

      Property Shark tax info:

      3 Pheasant Way
      Pittsfield MA 01201-9123


      Square footage

      Year built






      Half bathrooms

      Tax year

      Tax amount

      Land value

      Building value

      Total value
      Last edited by JRT; 10 Jan 17,, 00:50.