Land creates an economic rent every year---most visible when you actually rent out the land, but also occurring as opportunity costs for owner occupiers. That rent is produced basically by people bidding up for the right to use the land, but not by anything the landowner does.
(Things the landowner does, like putting a nice house on top of the land are explicitly excluded from a land tax.)
The idea is that you can tax that (imputed) rent without any economic loss---since the landowner doesn't do anything for it, there's nothing to discourage with a high tax.
In principle, one could try to tax 100% of the rent. In practice figuring out the exact rent that accrues due to the land is hard---especially for owner occupied places.
But, we have a good proxy: the value of the land is (the market's best guess of) the net present value of all future income from the land.
So as a proxy, you tax x% of the value of the land every year.
If land appreciates in value over time, the tax rises proportionally. But unlike a capital gains tax, one pays the tax on the entire value of the land, not just the gains since the time you bought.
Of course, a tax on the land changes the sum of the future income streams. And thus changes the value of the land, which changes the absolute value of the tax payment. Fortunately, solving that equation isn't too hard.
In the case of constant interest rates, constant tax rates, constant annual rent:
a: annual rent
V: value of the property
i: interest rate (per year)
r: land tax rate (per year)
a = i * V + r * V
Reordering gives us the impact of land tax rates on price:
V = a / (r + i)
effective tax rate on the annual rent:
(r*V) / a = r / (r + i)
That's an increasing function of r, but it never reaches 100% (unless mortgage interest rates drop to 0%)
So for your example, people buying a house and later just flipping it, would accrue land tax while holding the property, and would be able to pocket any difference in price tax free. (Ie if one could buy and sell on the same day, there would be almost no tax to pay on any gain.) Of course, the land tax itself would blunt a sharp appreciation of the property somewhat.
Not a lot of the above description of the impact of taxes on land prices was specific to a land tax.
A property tax has similar effects. A land tax just excludes houses and other things on top of the property from taxation.
This in nothing even specific to a tax directly on the property. If for some reason you had a property where any shop on top of it would be excluded from VAT, the value of the property would go up. And if for some reason VAT would be doubled on retail in that area, the value of the property would drop.
Because any drop in taxation on other economic activity will lead to higher land prices, people have high hopes that if the government can tap into land prices as a source of revenue, they will be able to reduce these other taxes without loss of revenue (but gains in economic efficiency).
(Things the landowner does, like putting a nice house on top of the land are explicitly excluded from a land tax.)
The idea is that you can tax that (imputed) rent without any economic loss---since the landowner doesn't do anything for it, there's nothing to discourage with a high tax.
In principle, one could try to tax 100% of the rent. In practice figuring out the exact rent that accrues due to the land is hard---especially for owner occupied places.
But, we have a good proxy: the value of the land is (the market's best guess of) the net present value of all future income from the land.
So as a proxy, you tax x% of the value of the land every year.
If land appreciates in value over time, the tax rises proportionally. But unlike a capital gains tax, one pays the tax on the entire value of the land, not just the gains since the time you bought.
Of course, a tax on the land changes the sum of the future income streams. And thus changes the value of the land, which changes the absolute value of the tax payment. Fortunately, solving that equation isn't too hard.
In the case of constant interest rates, constant tax rates, constant annual rent:
a: annual rent V: value of the property i: interest rate (per year) r: land tax rate (per year)
a = i * V + r * V
Reordering gives us the impact of land tax rates on price:
V = a / (r + i)
effective tax rate on the annual rent:
(r*V) / a = r / (r + i)
That's an increasing function of r, but it never reaches 100% (unless mortgage interest rates drop to 0%)
So for your example, people buying a house and later just flipping it, would accrue land tax while holding the property, and would be able to pocket any difference in price tax free. (Ie if one could buy and sell on the same day, there would be almost no tax to pay on any gain.) Of course, the land tax itself would blunt a sharp appreciation of the property somewhat.
Not a lot of the above description of the impact of taxes on land prices was specific to a land tax.
A property tax has similar effects. A land tax just excludes houses and other things on top of the property from taxation.
This in nothing even specific to a tax directly on the property. If for some reason you had a property where any shop on top of it would be excluded from VAT, the value of the property would go up. And if for some reason VAT would be doubled on retail in that area, the value of the property would drop.
Because any drop in taxation on other economic activity will lead to higher land prices, people have high hopes that if the government can tap into land prices as a source of revenue, they will be able to reduce these other taxes without loss of revenue (but gains in economic efficiency).
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