Land Value Tax is one of my favorite overalls to the tax system proposed. Normal property taxes are one of those things that sounds great on paper but the actual implementation has shown us it just encourages horrible rent seeking behavior.

Isn't that how it goes? If I buy a house today for 1m dollars in CA, I pay taxes on 1m of property, regardless of the fact that the house sitting on that dirt is a bungalow probably only worth 50k itself. I thought most of a properties taxed value was from the land already.

In the case you describe, that's mostly correct; however, you would end up paying on a $2mil valuation if you built a $1mil home on the property. Under a Land Value Tax, you'd only pay taxes on the property ("ground rent"), regardless of what's built on top of it. This incentivizes productive use, rather than idle speculation. (In urban settings, where the location value of property is at a premium, the most profitable use is often a parking lot rather than residences or businesses: not because it's the greatest return, but because the improvement cost and therefore the tax increase are near-zero.)

I like the idea of a land value tax more than a property tax, but I feel like I'm missing something. If I sit on an empty lot while the city builds up around me, doesn't the unimproved value of my land still go up?

Yes, exactly. A land value tax is not actually a tax on the land but rather a tax on improvements people have made in the area around the land. Literally unimproved land has no value to tax.

It's a tax on the (arguably undeserved) gains in the market value of your land that come from other people's efforts as opposed to your own.

LVT makes no distinction between value resulting from your own efforts outside the property itself and value resulting from others' efforts. In any case, recognizing the potential in a piece of land and investing resources to secure it and hold it in reserve until that potential can best be realized (i.e. "speculation") is also effort worthy of reward.

Yes, this is why I called it "arguably" undeserved. It's not totally black and white.

The best argument against LVT that I came across was from Bryan Caplan concerning prospecting for oil; once a person finds oil and builds a well, LVT would not charge her for the well, but it would charge her for the oil. She didn't make the oil, but finding it does take effort and you don't want to disincentive that.

I still like LVT conceptually but I don't know what the best solution is for this kind of case.

Then I feel like I really must be dense. Doesn't this mean that there's still an incentive to hoard land while nearby land is improved, so that you can sell at a profit? And if that's the case, for the purpose of dissuading land hoarding and encouraging building housing how is a land value tax functionally different from a property tax? In both cases if you have an empty lot in an area that gets built up, you make a big unearned profit, right?

Let's say your neighbors build great restaurants, bowling alleys, and office parks, making your location more desirable and increasing the market value. As a result of a (high) Land Value Tax, your tax bill just went up significantly, but your earnings have not. So you are incentivized to put your property to productive use.

Of course, you could alternately just sell your now-valuable land. However, the higher the ongoing tax bill (due to the LVT) the less people will want to pay for your land. The LVT captures some or much of the value currently accruing to landlords (depending on how high it is).

High property taxes can serve a similar function. Taxing the unimproved value of the land removes a disincentive to improve the land, though. If you knock down your house and build a much better one on the same land, your property taxes would go up while LVT would not.

LVT vs property tax is not the main point, though, in my opinion. The real issue is moving from heavy reliance on income tax to heavy reliance on property tax or LVT.

I understand now; thank you for explaining this to me

It depends on the tax rates of the land-value tax. If it's equal to 100% of the excess rents, then that removes the drive to speculate on land. Any appreciation in natural rents has a one-to-one increase in your tax bill.

Granted, any LVT won't approach the 100%-of-rents rate, so it's a proportional thing.

>for the purpose of encouraging building housing how is a land value tax functionally different from a property tax?

A land-value tax is indifferent towards a single-family home and a thirty-story apartment building on identical plots of land. Property taxes aren't, they add an additional penalty on the highly-developed land.