Land Value Tax - Land Value Tax Incentives

Land Value Tax Incentives

As a model of how Land Value Taxation affects incentives, take for example a vacant lot in the center of a vibrant and growing city. Any landowner that must pay a tax for such a lot will perceive holding it vacant as a financial liability instead of an investment that passively rises in value.

A Land Value Tax does not increase the purchasing price of land. Tax incidence rests completely upon landlords. This is to say that landlords can not collectively raise the overall market price of land as a result of the tax.

One reason is that buyers will not pay for the anticipated appreciation of land since such appreciation is taxed away. From the seller's perspective, land costs more to continuously maintain ownership of. Thus, Land Value Taxation gives buyers increased leverage over sellers.

Similarly, the selling price of anything that is fixed in supply will not increase if it is taxed. Since there is, for all intents and purposes, a fixed supply of land, a land value tax is paid by the land owner.

Furthermore, unlike taxing goods that carry higher purchasing prices as a result of higher production costs, land does not increase in price when taxed. This is because land simply exists. It is not produced by individual land owners.

For these same reasons, a land value tax is also not passed on to tenants as higher rent. Landlords are impelled to make land available to tenants as a means of generating the funds required to pay the Land Value Tax. Relatively speaking, landlords compete with other landlords for tenants instead of tenants competing with each other for space.

Land Value Taxation creates an impetus to either use a site for an income generating purpose, such as apartments, store fronts, office space, etc or to sell part or all of the site. Of course, anyone who purchases the land will be faced with the same incentive, which is to use it or lose it.

The Land Value Tax paid per surface area is high in locations with high land values, especially cities. In vibrant cities, under use of land in the form of buildings which are underused, short, or even derelict are generally speaking converted to more intensive uses. Of course vacant or ground-level parking lots are also generally converted to building space and parking structures.

Such incentives result in an increase in the supply of space for living, working, recreation, etc. Assuming constant demand, an increase in supply of constructed space, ie substitutes for land, decrease the rent paid for such space.

This is especially relevant since land value taxes are often used to replace taxes on buildings, among other taxes. Of course, taxes on buildings restrict the supply of building space. A revenue neutral shift from buildings to land increases the supply of building space more than a land value tax alone.

In a city, infill of poorly utilized space effectively combats sprawl,allowing people to live closer to the city centre for the same cost.

Taxing land reduces the incentive for tax evasion. Multi-national corporations for instance can not take land with them overseas. Land values are considered public information unlike income, sales, etc. GIS maps provide a means to easily compare taxes paid on land values. Such transparency reduces landowners' ability to evade the tax.