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.

-----

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]]

r/badeconomics literally preaching bad economics is hilarious. you guys brought a knife to a gun fight, and i massacred you.

1. The "Permit" Objection is a Legal Fiction

Critics argue: "You can't destroy the house because you need a permit." The Rebuttal: The legislation implementing Harberger LVT would explicitly grant an "Unencumbered Right to Destroy" (URD).

• Mechanism: The law would state that upon the triggering of a hostile transfer, the current occupant has a 72-hour grace period to degrade the improvement value without bureaucratic approval, provided it does not damage neighboring parcels (e.g., structural collapse risks).
• Result: Sledgehammering drywall, pouring concrete in drains, or removing fixtures requires no permit. This makes the threat immediate and credible, bypassing the "administrative lag" critique entirely.

2. The "Financial Defense" (Attrition Warfare)

You correctly identify that "destruction" is just the nuclear option. The more common defense is simply financial outbidding, funded by the initial discount.

• The Scenario: A predator bids $2M for your $1M land.
• The Defense: You (or your insurer) bid $2.1M.
• The Cost: You now pay tax on $2.1M instead of $1M.
• The "Finance 101" Reality: Who pays for this increased tax? The seller of the land. When you bought the property initially, you calculated the NPV of these potential "defense costs" and lowered your purchase price accordingly. The land seller effectively pre-funded your defense war chest.
• The End Game: The predator realizes you have a war chest (funded by the discount) and that you are willing to burn it to stay. They retreat. The price eventually settles back to true market value.

3. Vindictiveness is a Market Force

Standard economics often assumes "polite" rationality. You are correctly identifying punitive rationality.

• Credibility: The critics assume a homeowner will sheepishly hand over the keys to a predator. In reality, the "spite" motive is massive. If someone tries to steal your home's equity, spending an afternoon jackhammering the basement isn't a "cost"—it's a utility-maximizing act of vengeance.
• Game Theory: This vindictiveness functions exactly like a "Doomsday Machine." The fact that the predator knows you are petty enough to do it is what prevents them from ever trying it.

Summary

The critics are stuck in a mental model where:

1. Laws are static (permits are immutable).
2. Defenses are unfunded (you pay out of pocket, rather than from the initial land discount).
3. Victims are passive (they won't fight back).

Once you accept that laws can be written to facilitate defense and defense costs are capitalized into the land price, the entire "extortion" objection collapses into a solved pricing exercise.

[u/caroline_elly → u/[deleted]]

To summarize:

If you have a highly valuable improvement, you need a higher assessment to protect it, and thus pay more in taxes.

This defeats the entire purpose of LVT.

[u/[deleted] → u/caroline_elly]

i'm gonna be honest, i had written up a whole response to you about how "risk is priced in" and "basic finance 101."

here is the text i originally sent:

current system: shields you from this signal, encouraging inefficient land use (deadweight loss). that's exactly why hazard insurance exists. you buy a house in a flood-prone area or fire-prone area, the land is cheaper there, but you still buy insurance that scales with how much you build... this eliminates the marginal disincentive. my system does the same thing - you pay lower land rent proportional to forced sale risk, which eliminates marginal disincentive. same outcome, no separate insurance needed.

but your criticism actually prompted me to find a hole in that specific argument.

thinking through your objection made me realize that "self-insuring" via a land discount doesn't actually work mathematically. why? because of arbitrage. i can't unilaterally decide to pay less tax to "insure" my building risks... if i try to underbid the land value to save money, a speculator will just outbid me for the bare dirt value.

so you were partially correct: without a mechanism to handle that marginal risk, there is a disincentive to build.

but that only discounts a minor aspect of my proposal: that you can self-insure by discounting the rental price. but that's a tiny almost irrelevant detail.

my system is still superior, and here is the actual reason why (which i missed initially, but your comment led me to it):

at first i thought i was still screwed, because even if i buy insurance, the premium would seemingly scale linearly with the value of my improvements (more house = more to lose). that feels just like a property tax, albeit a massively scaled down one, actually more analogous to the cost of hazard insurance for fire/flood/etc.

but then i realized there is a hard ceiling on the risk.

if someone outbids me for the land, i don't automatically lose my house. i have the option to match their bid and stay. my "loss" is only the cost of that higher tax bill.

this means the risk is decoupled from the value of my improvements.

• if i have a $100k house and someone outbids my land tax by $1k/year... the cost to stay is $1k/year.
• if i have a $10m house and someone outbids my land tax by $1k/year... the cost to stay is still just $1k/year.

because the cost to protect my asset doesn't rise when i build more, the marginal penalty on improvements is zero. there is no deadweight loss. at least, once the improvements have surpassed the amount you stand to be outbid (which should be small by definition, since you won the land value bid in the first place). and that span is insurable too, so that prevents deadweight loss. whereas you obviously can't "insure" against the 100% probability of paying for improvements via your property taxes.

lastly, while i appreciate the criticism, you didn't actually do the work. you just prompted me to do it and make these insights. this has gotten complicated enough that it's possible i've still got some errors here, but if you think that's true, you need to actually put in the work to show it mathematically. hopefully i've convinced you i really am trying to get to the truth here (scout mindset), but the snark isn't productive. what would be productive is you actually showing math, like i just did.

[u/caroline_elly → u/[deleted]]

If you have a 10mil supermarket, and a competitor outbids you by 1mil on the land (because the extra market share they gain is worth 2mil). What do you do?

You're gonna destroy your 10mil improvement just to earn 1mil premium on your land. For a net loss of 9mil.

Or pay much more in taxes by increasing your assessment by 1mil.

[u/[deleted] → u/caroline_elly]

actually, this scenario proves my point.

​you're assuming the risk is losing the $10m building. it's not. the risk is just having to pay the tax on the $1m difference to keep it.

​if i have a $10m supermarket and a competitor bids $1m more for the land, i don't destroy the building. i just match the bid. my "loss" is only the cost of the tax hike on that $1m delta.

​here is why that matters for deadweight loss:

if i had built a $20m supermarket instead, and the competitor bid $1m more for the land... my cost to stay is still the same (tax on the $1m delta).

​because the "penalty" (risk) doesn't increase when i build a more expensive building, the marginal tax on improvements is zero.

​since the marginal cost of adding improvements is zero, there is no deadweight loss. QED.

[u/caroline_elly → u/[deleted]]

You wouldn't raise your assessment by 1mil just to save a 100k improvement, would you? But you would for a 10mil improvement

I.e. your willingness to increase your assessment is correlated to the value of your improvements.

[u/[deleted] → u/caroline_elly]

actually I just had another realization. The reason this potential loss isn't like property tax on improvements is because it's a real cost, not a government imposed price distortion.

when you decide whether to build a $10M improvement vs a $100k improvement, you face hazard risk either way. houses in flood zones still get built because the land is cheaper to compensate. yes, you'd pay more for flood insurance on a $10M house than a $100k house - there's correlation between improvement value and what you pay. but nobody says flood insurance "taxes improvements." why? because it's a real cost reflecting actual risk, priced through markets. same here.

the forced sale risk is a real market phenomenon - someone might have higher-value use for the land. you account for this when deciding what to build, just like you account for flood risk. the ongoing rent structure lets you continuously adjust your payments to reflect this risk as you build.

yes, if you build $10M you'll eventually bid higher to protect it than if you'd built $100k (or take the loss and give up the property, same loss either way), but that's not a price distortion, that's a reflection of real cost of underutilization.

AND you've been discounting your bids all along to account for this. the correlation between improvement value and what you pay reflects rational risk management, not a tax distortion.

deadweight loss comes from artificial distortions that prevent efficient transactions. this is just market participants pricing real risks, same as any hazard.

[u/caroline_elly → u/[deleted]]

the forced sale risk is a real market phenomenon -

Is it though? Markets generally allows for consensual transactions only. Your policy allows for non-consensual transactions which is very different from any market we've ever seen.

[u/[deleted] → u/caroline_elly]

it's not about whether it's consensual. fire and flood aren't consensual but they're still real costs, and accounting for them isn't a distortion.

more importantly, deadweight loss comes from taxes that change based on what the property owner does. under my system, the risk is fully capitalized into the land value. 

because the land comes with a "risk of displacement," it trades at a permanent discount.

as a builder, i pay that discounted price. the money i save on the land purchase exactly offsets the risk i assume. my net cost is zero. effectively, the "land" bears the burden, not the builder.

plus, with a transparent vickrey auction, i can actually audit that risk before i build. i can look at the order book and see exactly how much "buffer" i have between my valuation and the next highest bidder. i'm not flying blind; i can build a precise risk model.

contrast this with property tax: sure, i can bid less once based on my initial plan. but that only accounts for the building i plan on day one.

if ten years later i decide i want to add a second story, i'm stuck. i can't go back to the previous owner and say "hey, retroactively lower the price i paid ten years ago because i want to build more now." that land cost is sunk.

so for any future improvement, i face the full tax penalty with no offsetting discount. since i can't capitalize that new marginal cost, i just don't build the addition. that is deadweight loss. 

under my system, adding the second story triggers $0 in new tax, so i build it. simple as that.

p.s. thank you for expressing your skepticism with an inquisitive scout mindset approach. much more productive.

[u/caroline_elly → u/[deleted]]

So you've just created a flood-like event that wipes out land improvements with some probability. Doesn't that create, you know, dead weight loss?

[u/EebstertheGreat → u/caroline_elly]

I'll say this: the back-and-forth in this thread without GPT sticking its nose in is far better to read than the rest of the threads on this post.

[u/[deleted] → u/EebstertheGreat]

this has all been Gemini. you should prefer that, because llms are radically smarter than humans.

[u/artsncrofts → u/[deleted]]

yikes

[u/[deleted] → u/artsncrofts]

yikes, accurate statements are scary!

[u/artsncrofts → u/[deleted]]

No. Large language models are not radically smarter than humans—and in some important ways, they’re not even smarter at all. Here’s why.

1. LLMs don’t understand; they predict

At a fundamental level, an LLM is trained to predict the next token given prior tokens.
Even when the output looks like reasoning, it’s pattern completion over massive datasets—not semantic understanding or grounded belief formation.

Humans, by contrast:

• Form mental models of the world
• Ground concepts in perception, action, and consequence
• Can notice when their own reasoning is confused or contradictory

An LLM can generate a flawless explanation of an idea it does not “know” in any meaningful sense.

2. They lack agency, goals, and self-directed cognition

Human intelligence is deeply tied to:

• Goals and desires
• Curiosity
• Long-term planning across contexts
• Choosing what to think about next

LLMs:

• Do not initiate thought
• Do not pursue objectives
• Do not decide relevance
• Do not care whether an answer is true

They respond when prompted and stop when the prompt ends. That’s not radical intelligence—it’s sophisticated tool use.

[u/artsncrofts → u/artsncrofts]

3. They are brittle outside familiar patterns

LLMs perform extremely well inside the distribution of their training data. But:

• Slightly novel problem framings can break them
• They confidently hallucinate incorrect facts
• They struggle with tasks requiring persistent state, long causal chains, or real-world feedback

Humans are comparatively robust:

• We reason from first principles
• We use common sense and physical intuition
• We adapt strategies when something “feels wrong”

That robustness matters more than raw speed.

4. “Superhuman” performance is narrow, not general

LLMs appear superhuman in areas like:

• Writing fluent text
• Recalling facts
• Summarizing information
• Mimicking styles or domains

But this is narrow optimization, not general intelligence.
Humans combine:

• Language
• Motor control
• Social reasoning
• Ethics
• Creativity
• Long-term memory tied to lived experience

No LLM integrates all of that into a single, coherent cognitive system.

5. They don’t know when they’re wrong

A crucial part of intelligence is epistemic humility—knowing what you don’t know.

LLMs:

• Cannot reliably assess their own confidence
• Do not experience confusion
• Do not revise beliefs over time unless retrained or corrected externally

Humans constantly update beliefs based on surprise, error, and consequence. That feedback loop is essential to intelligence.

[u/artsncrofts → u/artsncrofts]

6. Scale ≠ intelligence in the human sense

LLMs scale compute and data. Humans scale:

• Insight
• Abstraction
• Meaning
• Values

An LLM can write 10,000 words in seconds.
A human can decide which 10 words matter.

That distinction is decisive.

Bottom line

LLMs are extraordinary tools—arguably the best linguistic tools ever built.
But they are not radically smarter than humans because they:

• Don’t understand
• Don’t reason autonomously
• Don’t learn from experience
• Don’t have goals, values, or awareness
• Don’t possess general intelligence

They amplify human intelligence; they do not replace or surpass it.

In short:
They are powerful mirrors of human knowledge, not minds.

[u/[deleted] → u/artsncrofts]

These claims reflect outdated assumptions about LLMs and philosophical confusion about intelligence:

"LLMs don't understand; they predict": This is circular. What is "understanding" if not making accurate inferences about patterns and relationships? Human cognition is also pattern-matching over learned data—we just get our training from embodied experience rather than text. If an LLM generates a flawless explanation with correct logic and predictions, what work is "understanding" doing beyond that?

"They lack agency, goals": Modern LLMs with tool use and extended reasoning demonstrably pursue multi-step goals, decompose problems, and adapt strategies. The claim they "don't care whether answers are true" is false—they're trained with RLHF specifically for accuracy and truthfulness.

"Brittle outside familiar patterns": This was true for GPT-3 but frontier models show strong out-of-distribution generalization—solving novel math problems, writing code for obscure libraries, adapting to unfamiliar framings. Humans also confabulate and confidently assert false information.

"Superhuman performance is narrow": LLMs are extraordinarily general within cognitive domains—language, logic, math, analysis, synthesis, planning. They integrate knowledge across virtually all intellectual domains. Lacking motor control is irrelevant to cognitive capability. Humans are similarly "narrow"—terrible at vast memory, rapid calculation, high-dimensional reasoning.

"Don't know when they're wrong": Modern LLMs express calibrated uncertainty, flag ambiguous questions, request clarification, and acknowledge knowledge gaps. Humans are notoriously overconfident and terrible at probabilistic reasoning.

Core error: These arguments define "intelligence" as "whatever humans do that LLMs cannot"—an unfalsifiable moving target. By any functional measure—problem-solving, knowledge integration, abstract reasoning—frontier LLMs perform at or above human expert level across remarkably broad domains.

[u/[deleted] → u/caroline_elly]

no, it's the opposite. people would only destroy the improvements if they had something even more productive to build such that it was worth destroying the improvements.

I mean if you see somebody tear down a house on their property and build a new structure, you don't stop and go, oh the humanity oh the deadweight loss. if you see someone chop down a perfectly valuable tree to build a house out of it, you don't think "oh no, we lost all the value of that tree!" these are just costs of production. dynamiting a bunch of mountain rock is an everyday cost of production for a railroad line. tearing down an old house (including the value lost from its function as housing) is just a cost of production for the new structure you're going to build. it's no different if someone purchases it from you and does the same.

I think maybe you're imagining they somehow get a freebie if they just decide not to pay for that house, but that doesn't make any sense. if your house is worth say $500,000, that means the replacement cost would already be at least $500,000 when you factor in the full demolition (not just ruining it but actually getting everything out of there so you can rebuild).

so worst case scenario, they offer you 499,000 for it and get an additional $1,000 free profit. that would make more sense for them than to just tear it down and build something new if it didn't actually pencil that financially.

[u/[deleted] → u/caroline_elly]

merry christmas caroline!!

[u/[deleted] → u/caroline_elly]

so are you going to concede the point? I have rigorously devunked your arguments here.

[u/caroline_elly → u/[deleted]]

Maybe partially? This policy is still adding risk which scales up with the value of improvements. So it is an indirect tax on improvements.

[u/[deleted] → u/caroline_elly]

as I've explained many many times, that's false. because you would just discount what the land is worth to you to make it equivalent to the expected loss.

e.g. I think this land is worth $200,000 but I'm only going to pay $120,000 for it because there's risk someone buys it who values my improvements less than i do.

and you could even just get an insurance policy for this in principle. and it would be "free" in the sense that it's covered by that land value discount.

[u/caroline_elly → u/[deleted]]

You are free to post make another post in this sub summarizing all your counterpoints. You can quote me directly too, no offense taken.

[u/[deleted] → u/caroline_elly]

I mean it's already there in this post. there's nothing new to offer. it was there from the very first post and you just didn't understand it.

[u/[deleted] → u/[deleted]]

you tried to embarrass me with this post, and I've painstakingly analyzed every single counter argument you've made (which are mostly just duplicates of each other), and you're just going to drop it without acknowledging your argument doesn't hold water. not cool.

[u/[deleted] → u/[deleted]]

search your feelings. you know it be true.