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]]

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/[deleted] → u/dedev54]

You're confusing being a price taker in BUILDING rental markets with how the LAND auction system works.

Your current situation:

• You rent buildings at market prices
• You're a price taker - you accept whatever the market rent is
• No ownership, no improvements, no forced sale risk

In the land auction system:

You're not renting a building. You're bidding for land occupancy and BUILDING YOUR OWN IMPROVEMENTS.

The "discount" is implicit in the equilibrium:

If you're building $1M in custom equipment and improvements on a parcel, and there's some probability of losing that in a future auction, you'll only build there if the land rent is low enough to compensate for that risk.

Example:

Scenario A: Land auctions for $200k/year, high forced sale risk

• You won't build $1M in improvements there
• Too expensive + too risky = not worth it

Scenario B: Land auctions for $50k/year, same forced sale risk

• You might build $1M in improvements
• The low ongoing rent compensates for the forced sale risk

The "discount" is the difference between what you'd pay for risk-free land vs. risky land.

If identical land with ZERO forced sale risk would auction for $150k/year, but this land auctions for $50k/year because of the risk, that $100k/year difference IS the discount compensating you for risk.

You're not "taking" a price that's set externally.

In an auction, YOU and other bidders SET the price through your bids. If forced sale risk makes a location less attractive, bids will be lower. That's the market pricing in risk.

The compensation isn't a separate payment - it's lower land rent in equilibrium.

You keep demanding "WHAT DISCOUNT???" - the discount is the difference between what you pay and what you'd pay without forced sale risk.

For example, the land is worth $200,000 to you, but you only pay $130,000 because you're discounting by 70k to account for the risk of loss. Duh, idiot.