[AnthonyMouse]

> How do you think rent prices are set now? I’ll tell you, they’re generally set to maintain a given occupancy rate, which is to say, they’re set as high as the market allows.

"What the market allows" is affected by taxes.

Suppose the risk-adjusted return to investing in real estate in some area is equivalent to the overall market, and rents are currently $1000/mo. Then if new people move into the area, rents start to go up from higher demand, but that brings rents above the overall market rate of return, which makes it profitable for developers to invest money in building new buildings, which increases supply to match the increase in demand and acts to mitigate the increase in rents.

Now suppose you raise taxes on property ownership, so that to match the overall market rate of return, rents would have to be $1500/mo in order to cover all the existing costs plus the new taxes. Then nobody is building anything new until rents hit $1500/mo, because new construction isn't profitable until then. So when new people move in, there is an increase in demand but no corresponding increase in supply, and that persists until rents get above $1500/mo. By which point the renters are paying the new taxes.

Notice that this is effectively the same thing that happens when you impose restrictive zoning rules like single family zoning. They effectively act as a tax because now you have to buy a lot more land for each housing unit you want to add, so the cost of construction goes up and rents with it.

[nmhancoc]

This actually gets at one of the main criticisms land value tax (LVT) proponents have of traditional property taxes, which tax both land and buildings.

Let’s unpack your example with some rough numbers to see where the logic leads.

You assume rents are currently $1,000/month and that a new tax causes them to rise to $1,500/month to maintain the same return. That implies an added tax burden of $500/month per lot. If the lot is 10,000 sq-ft (common for single-family homes where I live), that’s about $0.05/sq-ft/month, or $0.60/sq-ft/year in land tax.

Now let’s look at whether this disincentivizes development.

Say a developer replaces that single-family home with a fourplex:

* Each unit is ~1,000 sq-ft - Construction cost is ~$270/sq-ft, so total is ~$1.08M * Required rent for a 5% return = $1,125/month per unit - The land tax ($500/month) is now split over 4 units = $125/month per unit * Total required rent = $1,250/month per unit, or $1.25/sq-ft/month

Compare that to the single-family home:

Rent = $1,500/month, also $1.25/sq-ft/month

So the developer earns the same return per square foot, and houses more people on the same land. Renters gain a cheaper overall option at the same cost per square foot. New development isn't disincentivized — it's neutral or even encouraged under a pure LVT.

Where your argument usually does apply is with regular property taxes, because those are assessed on both the land and the structure:

Single-family home is taxed on $240K (structure) + land Fourplex is taxed on $1.08M (structure) + land Per unit, that’s $270K in taxable improvements vs. $240K Unless the land is very expensive, higher-density development pays more tax per unit, even though it uses the land more efficiently. And that penalty grows with scale (e.g. high-rises).

That's the core issue LVT proponents focus on: property taxes tend to penalize building, while land value tax does not. In fact, LVT often makes better use of land more attractive by decoupling the tax burden from how much you invest in construction.

[AnthonyMouse]

> You assume rents are currently $1,000/month and that a new tax causes them to rise to $1,500/month to maintain the same return. That implies an added tax burden of $500/month per lot.

That implies an added tax burden of $500/month per unit. It's only $500/month per lot if the lot is only expected to have one unit.

> New development isn't disincentivized — it's neutral or even encouraged under a pure LVT.

You're getting this result by comparing it to existing property tax, which even more heavily disincentivizes new development.

Consider what happens if you only compare LVT to itself, i.e. to see what happens if you raise the amount of LVT by $500/lot.

If you build the fourplex, the amount of LVT increases by $500/lot or $125/unit. Now incentive to build the fourplex is lost unless the tenants are going to eat another $125/mo in rent.

And wait a minute here, under the existing property tax system the government was getting $500/mo/unit in property tax. If the typical plot is going to have a fourplex on it and the tax is expected to raise the same amount of revenue as the old property tax then it needs to be $2000/lot and thereby likewise increase the required rents by $500/mo/unit.

Where the incentive changes is that now you'll want to build not just fourplexes but highrises to try to dilute the LVT over more units. But now you've got a weird incentive: If existing rents are high enough then you want to build a highrise. But as soon as they drop below the point that building a highrise is profitable -- and highrises have a higher construction cost per unit -- you certainly don't want to build anything smaller than that, because the higher LVT per unit for smaller structures outweighs the lower construction cost per unit for smaller structures. So as soon as prevailing rents can't justify any more highrises, you get no more construction at all. Even if there are still a bunch of abandoned lots.

[nmhancoc]

> That implies an added tax burden of $500/month per unit. It's only $500/month per lot if the lot is only expected to have one unit.

In the starting scenario the housing supply are single family homes, so there's one unit per lot to begin with. That it happens to be $500/unit is a coincidence of math rather than a fixed statement. Governments don't levy taxes (particularly an LVT) on a per unit basis, it's only ever on a per lot basis.

> Consider what happens if you only compare LVT to itself, i.e. to see what happens if you raise the amount of LVT by $500/lot.

The point of an LVT isn't to raise it by itself, it's to trail changes in land value.

Even if you were to arbitrarily raise it by $500/lot, the price is still more affordable for the fourplex renters than the house renters. So you should still expect less negative profit from the fourplex than the single family home. That the profit is negative will disincentivize future development, but it would also includes maintenance on the single family homes. And it'd be least bad for the fourplexes, because it's more spread out.

> And wait a minute here, under the existing property tax system the government was getting $500/mo/unit in property tax.

They were getting $500/lot, that happened to coincide with per unit but is non essential. And can't be, an LVT can only ever be charged at lot level. It's a _land_ value tax, not a unit value tax.

> If the typical plot is going to have a fourplex on it and the tax is expected to raise the same amount of revenue as the old property tax then it needs to be $2000/lot and thereby likewise increase the required rents by $500/mo/unit.

Huh? The government is overseeing a certain number of lots. Total revenue given a certain tax per lot is independent of the number of units on the lot. Also the costs, for local government, are largely per lot, in the sense that the maintenance on infrastructure dominated by lot level servicing rather than incremental uses of it. The exception to this would be schools. There's no reason to think that the tax needs to increase to be equal per uni.

> Where the incentive changes is that now you'll want to build not just fourplexes but highrises to try to dilute the LVT over more units.

This implies that the tax is not set per unit, which contradicts your previous paragraph. I happen to think this is correct, incidentally.

> So as soon as prevailing rents can't justify any more highrises, you get no more construction at all. Even if there are still a bunch of abandoned lots.

Construction is generally less discrete than you're suggesting. There's generally various buildings of various degrees of age (and various levels of depreciation) in a city at a given time. Also, most cities have a spread of land values, with land being most highly valued (and thus incentivized to be most dense) in the core and less so as you spread out.

And LVT would, rather than the discrete steps you suggest, probably look like: as it increases there's an incentive to sprawl, and as long as that population is still bringing traffic and receipts into the urban core the urban core will be incentivized to redevelop to higher density. That will bring people in from the previous sprawl, until there's additional demand at which point the sprawl either increases in density or moves further out, etc.

[chii]

> So when new people move in, there is an increase in demand

but the presumption that there will be a stream of people moving in is false. The people would just not move to a place with high rent (all else being quite equal).

So high rents will lower the incoming demand. Aka, the current rent is almost always the max the market will bear, regardless of people moving in (or out) - so you can assume it's at some sort of equilibrium.

A new tax on the land will cause the owner to obsorb it, and under that equilibrium assumption above, they will not be able to raise the rent to compensate. Unless, the new tax has an equal and opposite tax credit to renters! Who now have more money, and would be able to accept a higher rent as they've become slightly richer.

[AnthonyMouse]

> but the presumption that there will be a stream of people moving in is false. The people would just not move to a place with high rent (all else being quite equal).

People move into places where there are jobs. All else is not equal, because other places don't have those jobs. Notice that higher rents correlate with population growth. Under your theory, if rents went up, shouldn't the local population decline rather than increase?

Also notice that the overall population increases over time as a result of births and immigration, and that existing structures are occasionally damaged in various ways and have to be renovated or rebuilt. The result is that the steady-state is rents going up unless you have active investment in new housing.

> So high rents will lower the incoming demand. Aka, the current rent is almost always the max the market will bear, regardless of people moving in (or out) - so you can assume it's at some sort of equilibrium.

"What the market will bear" is supply and demand. If you add costs to supplying more housing, supply won't increase until the price matches the new costs. It changes the intersection point with the same demand curve.

> Unless, the new tax has an equal and opposite tax credit to renters! Who now have more money, and would be able to accept a higher rent as they've become slightly richer.

Your assumption is that renters can't pay higher rents. It's that they won't pay higher rents if lower rents are available, which is caused by competition between landlords and increases in supply from new construction. Take that away and people have to outbid each other for the now more constrained number of units, and then people have to pay higher rents and have it come out of their other spending, or take on more debt. Because you pay for housing or you're homeless.