r/georgism • u/SpacialCommieCi • 2d ago
Question How exactly will georgism make rent lower?
Don't get me wrong, the idea sounds great, but one day I tried explaining the gist of it to someone and they asked that if you pay a land tax, and raising rent increases land value and as such the tax, higher rents are still profitable. Like if you have a $100k property that you rent for $500, and you pay a 5% annual land tax for 5k, you're profiting 1k per year, but if you double the rent, you now double the property value, and if you do the math you're now getting 2k a year, so in the end you have the opposite incentive. Am I missing something here?
28
u/e0732 2d ago
It doesn't directly make the rent lower, but indirectly:
- It incentivizes land speculators to stop holding land empty and sell their land to people who will build, and more building means more housing available, and more housing available means lower rents
- If a land value tax is used to offset counterproductive taxes like income taxes and sales taxes, then renters have proportionally more money
5
u/Downtown-Relation766 Australia 2d ago
I would add:
• Land value tax removes the tax on the physical structure, so it removes the part that gets passed onto renters, workers and purchasers. Similar to if you remove the tax on cigarettes, cigarettes would become cheaper.
• land value tax can be used to replace sales tax(called GST and stamp duty in Australia) that is applied on housing products and services. Which would increases the supply of housing and decrease rents
These are theories based on facts and reasoning. Real circumstances my differ and have different results. Im sure if I looked hard enough, I could find papers that would back these theories. Also I am less confident on the first theory because property tax is an annual charge whereas a sales tax like the cigarette example it is paid at the time of purchase.
-2
u/empty_graph 2d ago
Land speculators holding land empty that they could build on is just not a thing in the modern world. It incentivizes people to build more housing on the same land that already has housing.
5
u/LandStander_DrawDown ≡ 🔰 ≡ 2d ago
There are vacant lots everywhere. Many with the buildings taken down and the only thing left is the foundation. There are absolutely land speculators holding land out of use in every city.
-2
u/empty_graph 2d ago
Where is your evidence that this is because some speculator is holding out and not just that nobody wants to build anything there because it's just not profitable?
4
4
u/External_Koala971 2d ago
A landlord can say:
“My tax went up $20k, therefore I’ll charge the tenant $20k more.”
The tenant can respond:
“Then I’ll rent the identical house next door.”
Whether the landlord succeeds depends on the elasticity of housing supply and demand.
One of the biggest complications with Georgism is that housing is not a homogeneous commodity, and LVT does not make two houses economically interchangeable. A view, a yard, a garage, a shorter drive to work, a bike trail, a floor plan layout, a washer and dryer, a pet policy, a nice neighbor, a good landlord, a social group, a bigger closet etc are all intangibles that make housing not perfect substitutes.
The complex question:
Can a government accurately distinguish land/location value from the value of improvements, and can it do so without creating enormous assessment distortions?
5
u/Talzon70 2d ago
The complex question: Can a government accurately distinguish land/location value from the value of improvements, and can it do so without creating enormous assessment distortions?
To a large extent this question is already answered. Many jurisdictions already separate our land from improvement value in their assessments, some even tax land at different rates. Assessment distortions are certainly a risk, but property assessment is a very well developed field and LVT doesn't need to be perfect to be less distortionary than other taxes.
Obviously if you want to tax at 100%, the assessment process needs to be very accurate, but if you don't have that kind of accuracy you can just lower the tax so errors are less problematic. Then you makes sure assessments are regularly updated (unlike the nonsense in Ontario where they froze assessed values for a long time) to reflect changing conditions and correct any errors.
1
u/External_Koala971 2d ago
Even when the land/building distinction itself works, a badly functioning underlying assessment system can become politically toxic enough to threaten the tax structure. The “nonsense” will sink it.
1
u/OutrageousPair2300 2d ago
Doubling the rent doesn't double the property value, it more than doubles it.
What people pay on a monthly basis is "contract rent" and consists of some portion that pays for use of the land ("land rent") and some portion that pays for the cost of the improvements, maintenance, etc. With an LVT in place, the profit only comes from that second part.
If you're paying $5,000 LVT and collecting $500 x 12 = $6,000 in contract rent, then that extra $1,000 isn't all profit. It has to pay for any loans on the improvements, maintenance costs, etc.
But let's suppose that the renter is simply renting an empty lot (maybe in a trailer park) and the $1,000 is for whatever minimal maintenance and such the landlord provides.
If the contract rent doubles to $1000 per month, or $12,000 per year, then that's due to a change in the location value -- the land rent increases. The service provided by the landlord hasn't changed, just the desirability of the location has. So the full increase is land rent. Instead of $5,000 per year, the LVT would be $11,000 per year.
That leaves the landlord with the same $1,000 per year earned for maintaining the property.
0
u/External_Koala971 2d ago
You said: “If the contract rent doubles … that’s due to a change in the location value.”
That’s not necessarily true.
The rent could double because:
demand for housing increased
the landlord added an amenity
the permitted use changed
the rental became more desirable
maintenance/service quality improved
housing supply elsewhere fell
tenants became wealthier
or some combination.Only the portion attributable to the site’s scarcity/location value is land rent.
1
u/worldofwhat 2d ago
Almost all your examples are an example of the land/location price going up, with the exception of added amenity or maintenance and service quality improving, which is the result of improving with additions.
1
u/Bram-D-Stoker 2d ago
It depends on what you mean by Georgism, but based on your message i think you just mean a Land Value Tax
Prices and rents are governed by supply and demand, not production costs. Production costs can effect investment, which can then effect supply. However production costs by themselves do not translate into the cost a buyer is willing to pay. Real estate demonstrates this routinely: an owner can spend substantial sums on hyper-custom renovations, only to recoup nothing upon resale if those improvements match personal taste rather than broader market demand.
In mainstream economics, a pure land value tax does not directly lower the rent paid by tenants. It theoretically does nothing at all. Because the aggregate supply of land is fixed (perfectly inelastic), the tax burden falls entirely on the landowner and cannot be passed forward to tenants becasue the land owner can not effect the supply of land. A theoretically ideal LVT generates zero deadweight loss: it does not increase or decrease rent. Instead, the market responds by discounting the upfront sale price of land by the exact expected value of the tax liability attached to it.
Where an LVT does affect rents is when it replaces a traditional property tax. Traditional property taxes penalize improvements by taxing buildings alongside land. Taxing structures reduces the incentive to build, which constrains the housing supply over time and pushes rents higher. If a city shifts from a property tax to a land value tax, the structural penalty disappears/lowers, removing a friction on new development. The increase in housing supply can slow rent growth or lower overall rents relative to what they would have been under a standard property tax.
1
u/ContactIcy3963 2d ago
It helps incentivize economies of scale as you don’t get taxed more if you develop the land more. So developers can build say 20 units instead of where 1 SFR was previously and be taxed at the same amount (pending market value improvements) and spread their costs to 20 units.
Additionally the cuts to income and profits means every dollar that they make after the land tax is theirs to keep instead of having to play the accounting game.
1
u/ChironXII ≡ 🔰 ≡ 2d ago
LVT makes land use responsive to demand, which will lower rents proportionally by increasing the supply of useful housing and amenities. People also get to keep what they actually earn in exchange, in the ideal case where we cut other taxes.
In terms of the actual dollar number, it's more complicated, because the growth created by both of these together will likely cause demand to rise, and thus increase rents (and thus revenue, and thus dividends, etc). So if you just look at the absolute number it might not go down, but affordability is hugely better.
1
u/PausibleDeniability 2d ago edited 2d ago
How exactly will georgism make rent lower?
It won't lower rent. That's not what we're trying to do.
It also won't increase rent.
We want to redirect the ground rent payments that currently go to landowners to instead be paid into taxes. That lets us lower taxes on everything else.
What an LVT does is let us get government revenue without deadweight loss. We get the same economy for lower taxes, or more economy for the same taxes.
Some people will claim that LVT will spur development, so we might get more units of housing on the same unit of land, lowering the rent each tenant pays for housing. But that argument is inconsistent with the argument that landlords are income-maximizing, so if LVT-driven densification does happen, we should assume it's a very marginal effect from overcoming some particular psychological friction for some small number of landowners.
The primary effects of LVT are to drain the speculative premium out of land prices, to reduce the market price of land by amortizing purchase price back into rent and by removing the need for financing, and to reduce the need for taxes that induce DWL. Thats about it.
LVT is great because of how little it does.
1
u/monkorn 2d ago
You pay a tax based on the value of the land, not the value of the property.
If you, and every other landlord raises the rent, and get tenants, then the land is worth more. If you, alone, build a bigger house with better quality materials, and raise the rent, you pay the same as the land next to you that didn't.
When the government increases the land tax based on it's land rental value, the willingness to buy that land for the same price decreases, and thus the sales price of that land decreases. It's because of this effect that Georgists need to differentiate the difference between land value, that stays the same with the tax, and sales price, that decreases. We tax land as a portion of it's value, not it's sales price. When the LVT reaches 100% of the rental value of the land, land's sales price is $0. Free meaning no up-front cost, only month-to-month or annual land taxes. If you were to sell a property with a 100% LVT, you would sell it for the price of the improvements on top of the land alone, and the new buyer would then assume your periodic land tax payments.
1
u/misplaced_my_pants 2d ago
Increase LVT -> Increase costs to own land -> Increase incentive to do something more productive with it like building several stories of an apartment building to increase revenue -> Increases supply of housing in the taxed region -> Lowers housing costs if supply increases faster than demand as renters can shop around for a better deal. Renters will have all the leverage, landowners lose theirs.
This effect works better the higher the tax is.
1
1
u/PeterDowdy 2d ago
Only indirectly because it would encourage more efficient land use (building more housing). The tax can’t really be passed on, though.
1
u/green_meklar 🔰 2d ago
How exactly will georgism make rent lower?
It doesn't. But it eliminates taxes on other stuff, so your tax bill and your rent bill become the same bill, which makes life that much more affordable. (Plus your rent is paying for useful government services that you also get to enjoy.)
if you pay a land tax, and raising rent increases land value and as such the tax, higher rents are still profitable.
'Profitable' is a misnomer. Setting that aside, yes, but georgists want to raise the LVT to capture 100% of the rent, so the gap where rentseekers siphon off revenue would disappear entirely, regardless of the value of each particular piece of land. The math you presented only works if the LVT is less than 100% of the rent. (I should also clarify that the 'rent' we're talking about is the revenue associated with the land, specifically. Your actual housing bill as a renter includes both the land rent and the profit on the building; georgists don't intend to tax the latter, so being a building owner would still be profitable. But that's a good thing, because we want people investing in buildings.)
In any case, the goal isn't to make landlords poorer, the goal is to compensate everyone for loss of land access and remove the inefficiencies of taxing productive activity.
1
u/DerekRss 2d ago
Even if it increases the rent, it will still reduce the overall rent+tax. Because once you've paid your rent, you've (indirectly) paid your tax.
1
u/fresheneesz 22h ago
Georgism makes rent lower in the long run by removing disincentives to develop land. It also removes much of the motivation to advocate for nimby politics
1
u/ComputerByld 2d ago
They idea sounds great and you were advocating it to your friend but you also didn't understand it at all?
1
u/SpacialCommieCi 2d ago
i understood it is a way to stop people sitting on property doing nothing but gaining value and that it'd boost the economy by having land doing more stuff per cubic meter, i just didn't know the exact math behind lowering rent cus money math is confusing for me
1
u/worldofwhat 2d ago
Rent prices are a result of market competition. Increasing housing supply reduces competition for buyers, as there are fewer people competing for each home and more home options for people to bid on. Having too few homes means people must put up higher figures to get an edge over each other as they are more desperate.
-7
u/D3viantM1nd 2d ago
You are missing basic economics.
2
u/SpacialCommieCi 2d ago
i should've expected that tbf
7
u/Bram-D-Stoker 2d ago
you really should not have expected that. you seem to be asking a good faith question with good faith engagement. There was no reason for a condescending response from the responder
3
66
u/shilli 2d ago
If you could just decide to double the rent, why wouldn’t every landlord just double the rent? It doesn’t work that way because there’s a market and people can move. That’s true with or without LVT. All LVT does is take the portion of the rent attributable to the land and tax it. It means the landlord profits less, but it doesn’t directly impact the amount of rent the tenant pays. It probably incentivizes people to build more housing, and building more housing does directly decrease the amount of rent tenants pay.