The idea is to encourage people to use land more efficiently. Sure, you can buy a 2-acre plot and put a single-family home on it, but you're going to pay handsomely for the privilege. If you put a duplex on that lot and sell the second unit, your tax burden gets cut in half. Or put a 10-unit condo building on it and each owner only has to pay a tenth of the total.

If you also tax the improvements to the land, you discourage people from building denser housing on it, because the tax itself goes up the more you build.