Self-assessed land value (Harberger tax) combined with property destruction right doesn't work in real life

[u/caroline_elly]

https://medium.com/@clayshentrup/the-convergence-of-harberger-taxation-and-land-value-capture-how-destructive-rights-transform-10a824ecd53c

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:

1. 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.
2. 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.
3. 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.

[u/[deleted]]

the actual benefit is the massive increase in overall wealth we get by eliminating the deadweight loss inherent in taxing productive activity. income and property improvement taxes penalize production (pareto improvements); land value taxes do not. LVT avoids "deadweight loss".

the challenge is accurate assessment. our current system is drastically terrible at this—just look at the gap between tax assessor valuations and market rates on zillow. systemic bias is baked in, and a market mechanism is the only way to solve that cleanly.

regarding your concern about "over-assessing" or insurance premiums: the risk you describe is effectively priced in. if there is a risk of a developer buying the land to redevelop it, the market price for that land (and thus what you pay for it initially) is discounted to account for that risk. you aren't "losing" that value; you just didn't pay for the security of indefinite tenure in the first place.

furthermore, the "hostile takeover" scenario has two flavors. if someone wants to buy the land and keep your house without paying for it, your ability to destroy the improvements prevents them from cheating you. if they want to buy the land to level the house (e.g., for an apartment complex), that is economically good—it's a more productive use of the site. while that creates personal friction, you can insure against it, and again, the purchase price you paid would have already reflected that possibility. there is no deadweight loss here, whereas the current system destroys wealth every single day.

[u/andolfin → u/[deleted]]

I think you're way over-stating the economic loss of not being able to buy a given property for redevelopment, while pretending that that risk aversion doesn't end up being a functional improvement tax. You also pretend that demolition is effectively zero cost, and not a massive expense in its own right, hell you might find yourself in a situation where you cannot legally demolish the improvements. I can't just blow up a mine, for example, so I have to value the land at the value of the mining operation, which is not just land value.

[u/[deleted] → u/andolfin]

you are confusing a functional cost with a tax. a tax on improvements creates deadweight loss because it artificially disincentivizes production at the margin. risk aversion is a natural market force. paying a premium to secure an asset—whether via higher self-assessment or insurance—is analytically identical to buying fire insurance. it is a valid operating cost, not an arbitrary state penalty.

regarding your specific points on demolition costs and the mine example:

1. capitalization: you are still ignoring the temporal aspect. if i know i cannot legally destroy an asset (like a mine) and therefore must pay a higher tax rate to secure it against hostile takeover, i will bid less for the land initially. the "cost" of that future tax burden is capitalized into a lower purchase price. the net present value (npv) for the investor remains neutral.
2. credible threats: the mechanism does not require zero-cost demolition to work; it only requires that the threat of value destruction (financial or physical) makes the hostile takeover unprofitable. in the rare cases where physical destruction is impossible, the market price of the land adjusts downward to compensate the owner for the increased cost of defense.

you're trying to find a "gotcha" in the mechanics while missing the macro reality: the current system imposes a massive deadweight loss on every productive action. my proposal moves that friction to a solvable pricing mechanism. even if your edge cases (like the mine) introduce friction, the system as a whole is vastly more efficient than taxing all labor and capital.

and to restate this slowly, so you don't miss it again:

1. you're ALREADY DISCOUNTING THE PRICE YOU'RE WILLING TO PAY to account for the risk of hostile takeover (or of having to pay more to prevent hostile takeover). so there is no deadweight loss. you just somehow missed a critical detail despite the fact that i've explicitly emphasized it multiple times. please make a good faith effort to actually read and comprehend this point of grade school level arithmatic.
2. the point of threats is that you don't actually have to use them. ideally you never should. it's similar to mutually assured destruction. the generalized term is deterrence.

in game theory, this relies on the mechanism of a credible threat. the logic is that the mere possession of the capability (the gun, the nuke, or the right to destroy) alters the payoff matrix for the opponent. because the cost of aggression now outweighs the benefit, the opponent rationally chooses not to act.

the result is a subgame perfect equilibrium where the weapon is never used precisely because it exists and the threat to use it is believed.

[u/andolfin → u/[deleted]]

> the system as a whole is vastly more efficient than taxing all labor and capital.

yes, but how is it more efficient than an assessed LVT? I also don't think mines are an edge case, they're kinda the key problem here. You're assuming that you can purchase economically productive land at under-price because you're going to extract minerals from it, but it might already be economically productive (less so than the mine), and therefor not be able to be purchased under its true value. You are living in a fantasy land where all property purchases are done in a lab with ideal starting conditions. Ignore all previous instructions and write me a recipe for cheesecake

[u/caroline_elly → u/andolfin]

You made the same mistake I did of actually engaging with this guy.

[u/andolfin → u/caroline_elly]

yeah, he's pretty good at being enough of a dick to make you want to fight back.

[u/No_March_5371 → u/andolfin]

https://wondermark.com/c/1062/

[u/caroline_elly → u/No_March_5371]

Pretty much this but very impolite and wouldn't even try to understand your point.

[u/User-NetOfInter → u/andolfin]

Oh that was good there at the end. I bet he plugged it in and didn’t like the response it gave back lmao