Killer Arguments Against LVT, Not (119)

Let's turn to the second item on the list at Appraiser10.com:

Perverse Incentives

Since an LVT increases the value of improvements and penalizes dispersed land use, it could create strong incentives toward high intensity land use. (1) For example, in large cities a pure LVT may not have adequate provision for open spaces in a densely populated city. (2) Any parkland in a city would have an economic value higher than its usage as a park, leading to parks being removed and the city losing out in the process due to lack of open spaces.(3)

A land tax may lead to dynamic economic inefficiencies by distorting timing decisions with regards to development. (4) A land tax might induce an owner to develop a vacant land parcel earlier than he might otherwise (rather than extract delayed income streams), even though instances could arise where latter the decision to delay development yields a higher net present value in the absence of the tax. (5) So, although a current market value land tax reduces incentives for speculation, it may lead to sub optimal decisions favoring improvements solely for the sake of placing non-taxable value on the parcel. (6)

1) That's A Good Thing, not A Bad Thing. I'm no worshipper of The Hallowed Green Belt or anything, but all things being equal, it is far better all round if we use already developed land in urban areas as efficiently as possible, rather than having lots of unused and under-used sites, and building new satellite villages on farm land further out of town instead.

2) Most parks and playgrounds are owned by local councils, and there's not much point in them paying LVT to themselves, so these would just be exempt. Similarly, some parks are actually privately owned, but subject to restrictive covenants. The market value of such land (to the owner) is to all intents and purposes zero, so the tax would be zero as well.

3) Nonsense. The optimum use of land in urban areas might be (say) forty per cent privately occupied residential; twenty per cent industrial/commercial/retail; twenty per cent roads and pavements; and twenty per cent parks and playgrounds.

No council in its right mind would sell off the roads and pavements for private development as the value of the existing sixty per cent developed land would plummet to zero, being inaccessible. The same applies to parks and playgrounds - the rental value of residential land is much higher if there's a park or playground nearby, there'd be no point selling off half the parks if the rental value of surrounding residential land fell by more than twenty per cent as total LVT receipts would then fall.

4) The biggest distortion is people who keep urban sites out of use for decades, paying no tax whatsoever in the interim. For example, round my way, there's a plot of land for sale with planning permission for a four-bed house which is on the market for half a million pounds - it only has value because all the other plots have been developed and all the infrastructure (which 'everybody else' has paid for) is in place. Ask yourself - what if everybody tried the same strategy? - then nothing would ever get developed as there is a first-mover disadvantage.

5) Nope. LVT would be fixed and payable whether the site is developed or not, so it is a 'sunk cost' and does not affect decision making one way or the other. All it does is convert the notional interest rate cost of holding a valuable site out of use into an actual cash cost.

6) The economic harm caused by land speculation far outweighs any disadvantage from developing sites too early. Think about sky scrapers in the middle of towns; the original building on that site may have been a mud hut, which was replaced by a cottage; which was replaced by a two-storey brick building; which was replaced by a five-storey building; which was then replaced by a skyscraper.

The amortised cost of the bricks and mortar is surprisingly low, and surely building progressively larger buildings on the same plot over the centuries has led to a more efficient use of that site than if the original Norman duke and his heirs had decided to sit back and wait for hundreds of years on the off chance that a major town ends up being built in that area and that somebody one day works out how to build sky scrapers.