Laffer Curve of LVT Part 2

Prof Nicolaus Tideman kindly e-mailed me his thoughts on the matter.

“The answer is “it depends.”

I assume that we are talking about a tax on the rental value of land, not on the selling price, so that a tax of 100% would collect all of the rent.

If the economy had no durable immobile improvements, and people were completely mobile, then as soon as the tax exceeded 100%, everyone would leave and the economy would disappear.

To the extent that there are durable, immobile improvements and people are mobile, the disappearance of the economy will be slowed.

If there are immobile improvements that last indefinitely, the excess tax will confiscate some or all of their value. If there is any vacant land in the community, no one will ever want to use it.

If there are no durable immobile improvements but people are unable to leave, there will be no equilibrium. Whatever the situation, people will find that they are better off using less land, and the rent of land will go up and up on whatever land is used, as people try to economize more and more on land.

One of the lessons of this analysis is that if a community wants to collect as much of the rent of land as possible, it will be important to have a mechanism by which the required payment is lowered to what someone is willing to pay whenever land is unused because no one is willing to pay the assigned taxes. It will also be important to give potential investors and residents assurance that the administrative procedures are intended to seek to ensure that they will never be expected to pay more than 100% of the rent.”          


So as with other factors, there is a short and long term laffer curve. A landlord may decide to put his rent up by over market value. In the short term his tenants may pay it rather than being homeless. But in the long term, that property will become vacant and the landlord receive no rent. In the case of LVT the State is the Uber-Landlord. 

In which case the long term laffer curve for LVT drops off like a cliff after 100% of the rental value of land has been collected.

Point three is the effect of sending land values negative, which would happen in the short term.

Point four shows the effect on the margin of production. We know that a 100% LVT produces optimally dense cities. A 200% would lead under consumption of land.

Conclusion. From a public finance point of view, a hybrid Poll Tax/LVT seems optimum, insofar as it would stop migration to marginal locations that would harm the economy. It just so happens the Council Tax fits the bill nicely, and with a few modifications could be the perfect tax structure.