(I suspect that residential property ownership and use will also break the math here a bit, where the primary purpose of the purchase is not as a money-making investment, but instead as a place to live, so competition for that will also push up the floor of land prices.)
You're still gonna potentially need a lot of tax revenue for stuff like advanced healthcare assistance, so in terms of flattening out cost of living why not just go with a straight wealth tax?
So that was assuming that "construction costs" includes the opportunity cost of any existing use of the property. Obviously for a vacant lot this is negligible. But even for e.g. an existing single family home, the value of one unit of housing isn't much of a loss when you're replacing it with 50 units on the same land. But you're right that this could be non-negligible.
And this is another place where zoning is a bane, because you have a place that has a bunch of single family homes and reaches saturation (no more empty lots) so you have to start building taller buildings. That means land values start to go up, which means developers have the incentive to start rationing land. No sense in building five 4-story buildings when you can build one 20-story building for roughly the same total construction cost and a fifth of the land cost. Except that 20-story buildings are prohibited by zoning, and by the time they're allowed you're already thick with 10-story buildings whose opportunity cost of replacement is much higher. High enough to justify replacing them with 50-story buildings, except that zoning still prohibits those. Restrictive zoning sucks.
> I suspect that residential property ownership and use will also break the math here a bit, where the primary purpose of the purchase is not as a money-making investment, but instead as a place to live, so competition for that will also push up the floor of land prices.
Not really. If you can build a high rise condominium tower and sell units for $50,000, who is going to pay $400,000 for the same number of square feet from a detached single family home two blocks away? Most people would take the $350,000 profit, move into the condo and sell their existing home to the developer to make into more condos.
> You're still gonna potentially need a lot of tax revenue for stuff like advanced healthcare assistance
A lot of these costs really do go down significantly with rents. Hospitals for reasons of emergency response time have to be located in high density areas and take up a lot of real estate. Those costs fall. The cost of living in the area declines, which allows the hospital to attract workers without paying such high wages. Everything gets less expensive, even healthcare.
> so in terms of flattening out cost of living why not just go with a straight wealth tax?
Wealth taxes are crazy inefficient. You have a company which is trying to invest all its profits into R&D, which is what we want, and here comes the government to say that's not a deduction. You have a company which is just scraping by in an efficient competitive industry with high capital costs and low consumer prices, owes the same in taxes as those guys who monopolize healthcare products and raise the price 10,000%; goes out of business and causes the industry to consolidate and raise prices. You have a company which is still owned by the founder, who understands the industry and cares about the customers, but now has to sell shares to pay the tax and control of the company falls to MBAs focused on quarterly profits.
It's basically an attack on efficient capital-intensive businesses with low margins in favor of bloated monopolistic rent-seeking businesses that can produce yields in excess of the wealth tax rate.
Plus, perverse incentive to move wealth into anything the wealth tax doesn't count, or capital flight into other jurisdictions. And promotes consumption over savings for the middle class, increasing wealth inequality (higher shift from savings to consumption for the working class than the rich) and financial vulnerability to e.g. job loss, which suppresses wages by making it harder to quit or hold out for a better offer when unemployed.
The correct way to deal with r > g is to do nearly the opposite of this -- give every regulatory and tax advantage to upstarts, efficient competitors and small businesses so they can unseat incumbents and create new wealth not in the hands of old money, only to be themselves defeated in the next generation if they don't stay lean and competitive. There is no Mark Zuckerberg if there is no single social network with a billion users under the control of a single company, no Steve Ballmer or Bill Gates without the Windows desktop monopoly. They'll fall to competition, not taxes.
But if you really need tax revenue, try taxing rents. Promotes home ownership.
While there are many spots where this may make sense, I'm sure glad this hasn't been a universal approach. There are many neighborhoods with wonderful centuries-old homes, these are often the most desirable areas to life because the areas have character. Not everything has to be constantly torn up to build cheap apartments.
> Most people would take the $350,000 profit, move into the condo and sell their existing home to the developer to make into more condos.
Most people seems like a stretch. I'd imagine most people who have opted into a house have zero interest in going back to a condo.
The other way of looking at this is imputed rent, the amount of money that somebody would be willing to pay to rent out their own home. Well, in theory it would be that amount. In high-demand areas, homeowners' actual imputed rent is higher than they would be willing to pay, because the act of buying property and paying low taxes let's then live in their place for far less than somebody else would pay for the same privilege. Which is how opportunity get hoarded, and how rentiers take over local governance structures.
I'm not sure that's not what happens regardless, except for the two things preventing it right now.
The first is the existing property tax. If increasing the size of the building on your property increases your property tax, you have to recover that in addition to the construction cost from rents or it isn't worth it.
The second is, of course, zoning. Even if it would be cost effective to build a 20 story building on your lot, you can't do it if it's prohibited by law. If you can't build upwards then you have to build outwards, which requires land, which transfers the scarcity of land into a scarcity of housing and prevents rents from falling to the construction cost.
And you need to fix that for LVT to do what you want it to do. Otherwise the artificial housing scarcity persists and the money just goes to the government instead of the landlord, and gives the government a direct rather than indirect incentive to maintain (or increase) housing scarcity through restrictive zoning.
For example, instead of a cap on a neighborhood of three stories, the cap could be 33% more than the tallest structure in the adjacent two blocks. Or 50% more than the median height of the adjacent two blocks. Or maybe the max or min of those two values. The key would be to have it be not subject to delayed political approval, but rather responsive to what's going on in the neighborhood.
The other thing that's necessary is something like the Greek polikatikia model where the owner of a house can easily have a larger structure built and get a new place in the larger structure:
https://www.bloomberg.com/news/features/2020-07-15/the-desig...
I was just thinking about this a little more and I think this is actually quite bad.
Because rents falling to construction costs is relativistic. Suppose it costs a given amount to build a 20 story building and you can recover at least that much in net present value from it in rent. Then you're going to do it if it's permitted and you have an empty lot. But not if you have an existing 10 story building. Then it would have to generate double the construction cost in rents, because you're getting half that amount of rent from the status quo.
Which means that to minimize that inefficiency, you don't want to be replacing 10 story buildings with 20 story buildings. What you want is to be replacing 4 story buildings with 20 story buildings. Because then you only have to beat the construction cost by 20%. Which doesn't work well if you have to wait until the median building is 10 stories tall before you can build a 20 story building.
But it's not completely wrong if you use different numbers. Say, have three classes of zoning. One allows buildings up to 4 stories, the next buildings up to 20 stories, the last unlimited. You automatically transition from the first to the second when the median building height reaches 3 stories, and from the second to the third when it reaches 6 stories.
The part I believe more strongly in is decoupling the political process from geographic-specific height restrictions. We need to have a political process to derive the general rules for automatically allowing increased density, but any specific site should not have special rules except perhaps for geographic or environmental reasons, and that should be decided at the same time as the general zoning rules.
The real error in California and most of the US has been to downzone everything to current structure levels, then only allow additional building through a political process of granting exceptions. This leads to massive corruption (see LA's city council, for example), as well as increased land speculation.
Heavily incentivizing new construction.
Because that's what LVT would do. If you pay the same, high, tax no matter what then you might as well build skyscrapers until rents fall below the construction cost.
At which point the "land value" would trend asymptotically to zero because rents would equal construction costs and the value of the land is only what you can collect from it as rent.
It kind of implies that LVT wouldn't generate a lot of revenue if it was implemented faithfully, because land values would crash and with it the "tax base."
But in that environment you don't need that much tax revenue. How much social assistance is necessary if an apartment is $100/month and overall cost of living is correspondingly lower because all local businesses are paying similar rents and it's that much easier to start a small business?
Which implies that you could get to the same, good, place by heavily incentivizing construction/densification on its own, and in general doing everything possible to reduce market rate rents.
Though "stop taxing the building component of real property" is perhaps still a necessary component of that, at which point the argument is maybe only over whether LVT should be the tax we use instead of property tax vs. the tax we use to the exclusion of all others.