That is still a tax on capital and like to cause a lot of social issues. Property taxes tend to drive people out of their homes and out of business too easily. Plus then you taxing inflationary effects probably more than anything else.
Real estate for example is very inflation sensitive and your tax bill would be all over the place if you taxed the capital gain on that. Then what do you do when the land falls in value? Do you really think the government would give a rebate? And then when it rises again, hopefully they wouldn't tax it again (the basis for the last taxation should have been raised), but I wouldn't put it past legislators grabbing for money by saying you can only back back 5 years or something to determine the tax basis.
I think annual land value taxes are efficient at resource allocation but unacceptably punitive on owners. You should not be penalized or motivated to sell simply because a 3rd party can get a higher return.
Similarly, value gains from land appreciation are taxed at the time of sale. IF I pay annual taxes on land appreciation, I should be exempt from taxes at the point of sale, otherwise I am paying for that appreciation twice.
If you really don't like the idea of that happening, you can always self-declare a higher value. Then, not only is it less likley someone chooses your land to buy, but also if it does happen you get more compensation. But then you'll also have to pay matching higher property taxes.
If the value of my land goes down, the amount I pay in taxes goes down too :)
That being said, I always look to get the best value for my dollars, and the way folks run government around here, it is rarely worth it to feed the beast anymore than I have to.
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).
There is brilliant way to solve it so that value and market-value meet. Keep the land always in market.
It's called Common Ownership Self-Assessed Tax (COST).
Land owner would self-assess the value of assets they possess, pay a tax on that value. The owner would be required to sell the asset to anyone willing to purchase them at this self-assessed price.
If you value the land high for any reason and want to keep it, you must self-assess the value higher than anyone is willing to pay for it and pay tax for it. If value it too low, someone might buy it.
Put a land value tax in place, and then the incentive to hold property for speculation goes away, in favour of selling it to people who can use it productively.
But why the insistence on taxing land at it's full value while ignoring what's on the land? High taxes on just the land force me to sell and to improve the property. High taxes on just the house can force me to not improve. Neither seems ideal. What would be ideal to me is a good balance that rewards improvements without punishing those who don't want improvements. Especially if the owner lives there.
If the government were to start taxing people on the value of their assets you can be quite sure that within a year or so most rich people would have their assets in a form that makes it much harder to value them.
But there's a problem also for ordinary people, who have most of their assets in the form of their house. In the UK land isn't valued annually.* Unless your house is very similar to a nearby one that was sold recently, nobody really knows what it's worth. Speculation concerning what development might be permitted in the future can have a big influence on the value. It would be scary if some bureaucrat's guess were to significantly affect one's annual tax bill. And it would be expensive for everyone if that resulted in disputes going to court.
* Local taxation is based on the "rateable value" of property, but this is inaccurate, banded, often out-of-date, and only a small part of a typical family's total outgoings.
Who isn't paying taxes on their land value? Maybe there are some states that do not, but every year I pay a pretty large tax bill based on the value of my land/house.
Even better, just aggressively tax owners based on the land value. This requires them to either eat high costs for their speculation, or use it for income-producing purposes (someplace to live or someplace to work).
Yup, tax sounds problematic. Another way would be to declare all land common property and rent any piece of it out to the highest bidder. The market solves the problem of pegging it to a value.
Btw, I would _not_ charge a transaction tax. Charge them every year for holding the property. (Eg charge whoever holds the property on New Year, the market will do the rest.)
Here's one idea. Effective land tax drives the sale price to 0, so it may be better to make taxes absolute, not relative to value. When someone wants to give up land because the taxes are too high, they just tell the city government. From that point, the tax goes down over time until someone decides to take the land at the current (absolute) tax rate. The old owner still pays the tax and can use the land in the meantime.
Even if you capture 100% of the increase in land value with land rents, that's only been about 5%-10% per year in hot markets. And even as you're taking out loans for last year, there's additional increases you can borrow more money from. So people that truly don't care about profiting from their land can handle it pretty much indefinitely.
However, once you can no longer gain money from speculating on its increase in value, that also means that there's going to be a ton more land available for increased use. The coercive effect of a land value tax is balanced by the a reduction in people speculating.
Absolutely. The current system allows individuals or companies to hold onto a piece of land indefinitely with no downsides, why would you ever sell it?
Property tax is the only way to level the playing field for everyone. If you want to hold land, you have to pay yearly for it based on it's value.
So you get to decide your tax each year but if you save yourself too much someone else will grab the excess value.
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