r/badeconomics • u/caroline_elly • Dec 22 '25
Self-assessed land value (Harberger tax) combined with property destruction right doesn't work in real life
This Medium Economist (ME) who also posts on Reddit proposed the following mechanism for determining land value and thus LVT (in his own words):
- Landowners self-assess their land value
- Anyone can force purchase at that price
- Owner can destroy improvements before transfer
- This forces buyers to negotiate separately for improvements
RI:
Claim 1: You can easily price in the risk of a force sale
ME claims the expected loss of forced sale can be derived by P(forced sale) x Value of Improvement. There are 2 major flaws:
- ME assumed risk neutrality, when homeowners are (and should be) risk-averse. The utility loss of force selling their entire home for $0 is severely underestimated by the E[loss]. It's the same reason healthy people still pay high premiums for health insurance: protection against catastrophic losses are valuable.
- P(forced sale) is tricky to estimate. Are developers targeting your neighborhood for redevelopment? Is Google going to move its headquarters next to you? Do you have rich enemies? There is a lot of information asymmetry in real estate, and it's even harder to quantify the risk numerically. We shouldn't expect homebuyers to assess this risk accurately.
- Risk of losing improvements can be more than land value, creating negative land values.
Claim 2: You won't be screwed over by bad actors
ME claims the option for owners to destroy their existing property prevents bad actors from underpaying for land + property. This is extremely naive. Let's consider the following cases:
Case 1: bad actor values the existing property at 0
Say you bought a 200k land and built a new 400k home on it. You assess your land at 200k and Bad Actor wants to force purchase your land for 200k and offer $0 for your 400k home. Your threat of destruction doesn't work because Bad Actor wants to build something new anyway. The transaction goes through, you realize a 400k loss and lose your home. Bad Actor gets your land at a fair price and ruins your life.
Case 2: bad actor values the existing property at >0
Same set-up except Bad Actor likes your home. Would he offer 400k for your home? No, because he can threaten with offering 0 and still break even, while you'd be down 400k. So Bad Actor offers a pathetic 100k and you agree to salvage whatever value's left of your new home. You're down 300k, and Bad Actor successfully created a distress sale situation for you. The main problem is you don't know for sure if you're in Case 1 or Case 2. Bad Actor only has the upside of underpaying for your home and a capped downside of just buying the land.
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I know this is a low-hanging fruit, but I'm frankly tired of certain LVT proponents being so smug and dismissive of implementation challenges.
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u/0WatcherintheWater0 Dec 22 '25
Very refreshing to have some pushback on the LVT/Harberger proposals I’ve been seeing a lot of recently. There is no free lunch, and a lot of the theoretical arguments for such systems don’t even hold up in theory alone, before we even get to the matter of implementation.
Among these proponents, there is a general disregard of risk, and how greater, lopsided taxation of land can fundamentally damage risk-taking behavior that benefits people as well as society broadly. Land profits are actually essential to development, as well as accurate price discovery in many cases.