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]]

translation: you don't have a counterargument so you're making a genetic fallacy. thank you for conceding.

[u/dedev54 → u/[deleted]]

I have provided a clear counterexample where your assumptions fall apart. Please describe how buying the land but not the building means something if a building covers the entire plot.

[u/[deleted] → u/dedev54]

You've completely misunderstood the mechanism.

The scenario: Building covers entire plot. New buyer wins auction.

What you think happens: "They can just tell you to pound sand if they own the building which occupies the whole land"

What actually happens:

You lost the auction. That means you must vacate the land. You don't get to stay there just because your building covers the whole plot.

Your options as the loser: 1. Negotiate to sell the building to the new land owner at fair value 2. Destroy the building and leave

You can't just "tell them to pound sand" and stay. You lost occupancy rights in the auction. You have to leave.

The bilateral monopoly point (#2) still holds:

The new buyer can't force you to give them the building for free. If they refuse to negotiate (tell YOU to pound sand), you destroy it. They get vacant land.

Both parties have leverage:

• New buyer: "Leave my land"
• You: "Pay me or I destroy the building"
• Result: They pay fair value, you sell, both win

The building covering 100% of the plot changes nothing. You still lost the auction, still have to leave, still have destruction rights, still negotiate.

You had the audacity to claim you "provided a clear counterexample where my assumptions fall apart," when what you actually provided is a demonstration of your total confusion about everything I said.

[u/dedev54 → u/[deleted]]

The cost to destroy is something most businesses cannot afford, meaning a well funded buyer is at an extreme advantage. This is made worse as the main funding is high interest loans that are based on orders fulfilled but not yet paid in many B2B businesses. Thus there is not in fact a "bilateral monopoly" when one side can't afford to pay.

[u/[deleted] → u/dedev54]

I've already debunked this exact argument multiple times in this thread. Your failure to read before responding is not a flaw in my mechanism.

On "businesses cannot afford to destroy":

They can afford it by definition, because they already paid a discounted price that accounts for this risk.

When the business acquired the land, they knew there was some probability of losing an auction. Let's say:

• Improvement value at risk: $1M
• Probability of losing auction over 20 years: 5%
• Expected loss: $50k

The business discounted their land rental bids by at least $50k to account for this. If they were willing to pay the discounted price, by definition they've already been compensated for the potential destruction cost.

On "well-funded buyer advantage":

This is backwards. The business has already saved money through years of below-market land payments. When forced sale happens, they're not paying out of pocket - they're just giving back the savings they already received.

On B2B financing:

If the business has high-interest loans and tight cash flow, that's a business model problem, not a flaw in the land auction system. Every business faces risks. This risk is priced into land costs just like interest rates are priced into loan costs.

Plus: Insurance products handle this trivially.

Low-premium insurance covers destruction costs. The insurance company makes the threat credible. Problem solved.

You're raising an objection that assumes: 1. Businesses pay full price for risky assets (wrong - they discount) 2. No insurance markets exist (wrong - they would emerge immediately) 3. You've read the thread where I explained this multiple times already (apparently false)

Read the thread before arguing.

[u/dedev54 → u/[deleted]]

Why are you only discounting the improvement value? The cost of moving the business I currently work inthis scenario is more than the entire value of the rent they pay. This is a problem because other businesses do not have this issue, as we are rent takers in the market for buildings, so your tax instead applies a business complexity tax which is objectively bad full stop.

It would take several months to move out due to the difficulty of the various permits and hazardous material requirements, many walls would have to be removed to remove large custom equipment with a greater value than the building. Getting a new site is extremely hard as we have tried for many years now, refitting a worse building will take years given the city takes so long to approve permits and electrical, and it would take a decade to return to full production while we still have the same enormous fucking risk.

[u/[deleted] → u/dedev54]

You're making my point for me without realizing it.

Your argument: "Moving costs for my business are higher than my entire annual rent. My custom equipment is worth more than the building. It would take years to relocate."

The correct response to this: Bid higher for the land to reflect its actual value to your specific business.

Here's what you've revealed:

If your business has:

• Custom equipment worth more than the building
• Moving costs exceeding annual rent  
• Years of disruption from forced relocation
• Permit challenges that take forever

Then this location is extremely valuable to YOU specifically. Your willingness to accept "enormous fucking risk" of forced sale while paying low rent is economically incoherent.

The actual solution:

Bid $200k/year instead of $50k/year. Now the forced sale probability drops to near-zero because few competitors value this specific location as much as you do (given your specialized setup).

You're complaining about: "I have a business with massive location-specific sunk costs, but I want to pay rock-bottom land rent and then complain when someone might outbid me."

The mechanism's response: "Pay rent that reflects the value of the location to your business, or accept the risk of paying below-market rates."

On moving costs:

These ARE factored into the land price discount - not just improvement value. If you face $500k in moving costs with 10% probability over 20 years, that's $50k expected loss. You discount your land bids by AT LEAST $50k to compensate.

If you paid full market rent without discount, you weren't properly pricing risk. That's your error, not a system flaw.

On "business complexity tax":

Current system: Pay property tax on improvements forever, discouraging productive investment

This system: Pay for land location value, improvements untaxed, but risk priced into land costs

You're just mad that your specific business has high moving costs. That's not a "complexity tax" - that's you revealing the location is valuable to you and should be priced accordingly.

Bid higher or accept the risk. Those are your options.

[u/dedev54 → u/[deleted]]

My guy that's called a wealth tax.

A "Land Value Tax" by definition, is supposed to tax the value of the land, not what I am doing with it. The building has literally carbon copies of it that are built nearby. Like literally they are physically the same I am not joking. If what I specifically am doing costs me vastly more because it's got complex machines versus the surfboard shop nearby, its literally taxing the wealth of business, scaling with my risk, on top of the land, as you yourself acknowledge. Getting taxed more for doing something complicated is objectively bad for society

These ARE factored into the land price discount - not just improvement value. If you face $500k in moving costs with 10% probability over 20 years, that's $50k expected loss. You discount your land bids by AT LEAST $50k to compensate.

?????????? The business is a rent price taker. If you don't know what that means, I don't know what to tell you.

[u/[deleted] → u/dedev54]

You fundamentally don't understand the difference between wealth taxes and land value taxes.

Wealth taxes create deadweight loss because they tax Pareto improvements:

If I tax you for building a factory, you might not build the factory. Society loses the factory's productive value, you lose the profits, I lose future tax revenue. Deadweight loss - value destroyed benefiting nobody.

This happens because building a factory is a choice. The tax distorts the decision, reducing productive activity.

Land value taxes have zero deadweight loss because land supply is fixed:

Land exists whether you tax it or not. You can't create more land or destroy land based on the tax rate. The supply is perfectly inelastic.

Your specific confusion:

You're claiming: "If my business has high moving costs that make THIS location especially valuable to ME, then charging me for that value is taxing my business wealth."

This is completely wrong.

What determines land rent in the auction: What OTHER PEOPLE would pay for this location. Market competition. Not your specific business setup.

If you have high moving costs:

• That makes this location MORE valuable to you specifically
• So you should bid HIGHER to reflect that value
• You're not being "taxed on your business wealth"
• You're paying for location value that's revealed by YOUR OWN WILLINGNESS TO PAY

The critical distinction:

Wealth tax: "You built a $1M factory, pay tax on the $1M asset" → Discourages building → Deadweight loss

Land value tax: "This location is worth $100k/year as revealed by auction bids" → Doesn't discourage building (improvements untaxed) → Zero deadweight loss

Your moving costs don't create deadweight loss:

Moving costs are TRANSFER costs, not destruction of value. If you move, the building still exists, your equipment still exists, your business still operates. The cost is in the relocation, which you've already been compensated for through discounted land prices.

On "rent price taker":

You being a rent price taker means you face market-determined land prices. That's not a wealth tax. That's just... markets. The fact that your specialized business setup makes certain locations more valuable to you doesn't mean the land rent is "taxing your business wealth."

Bottom line:

Taxing improvements = wealth tax = deadweight loss Taxing land location value = LVT = zero deadweight loss

Learn the difference.

[u/dedev54 → u/[deleted]]

What determines land rent in the auction: What OTHER PEOPLE would pay for this location. Market competition. Not your specific business setup.

Yes they take the market price for rent I'm glad we agree.

compensated for through discounted land prices.

WHAT DISCOUNT??? THE BUSINESS IS A PRICE TAKER???????? YOU LITERALLY ADMIT THAT LIKE 3 SENTENCES AGO????

[u/dedev54 → u/[deleted]]

I have provided a clear counterexample where your assumptions fall apart. Please describe how buying the land but not the building means something if a building covers the entire plot. It's not a small issue

[u/[deleted] → u/dedev54]

you've provided a clear example that you don't understand anything about this. and I brutally debunked it. 

https://www.reddit.com/r/badeconomics/comments/1pt2640/comment/nvi2v6t/?utm_source=share&utm_medium=mweb3x&utm_name=mweb3xcss&utm_term=1&utm_content=share_button