The difference is scale. If a house is a safe investment that makes a reliable 10% return on investment before tax and then you pay 1% in property tax, the remaining 9% is still an extremely attractive return so the investor appetite for housing remains unchanged by this small tax. Change the tax to 9% and you’re only left with 1% return, suddenly other investment options become much more attractive. Once the investors have left, prices can normalize around the price tolerances of people actually intending to live in the space.
This is a simplification using made up numbers, but the overall point is that the mere fact that property taxes as they currently exist (with very low rates) allow investors to run amok, that doesn’t mean that a more substantial LVT couldn’t change that.
Obviously taxing in a way that makes rentals completely non viable is probably not a perfect solution, and raising the tax dramatically all at once before prices have a chance to react could be catastrophic, but with a careful incremental approach gradually raising LVT and displacing other taxes (starting with regressive ones like sales tax) with those revenues based on observed outcomes, progress can be made to a better equilibrium where people who want to own a home to live in have better opportunities to do so, people who want to rent still have some options, people aren’t getting rich by ransoming housing at extortionate prices, and more investment capital is funneled toward productive enterprise over plots of dirt, strengthening the actual economy.
I think it’s probable that the Georgist dream of displacing all taxation with LVT may not be achievable due to diminishing returns on raising the tax as property values react, but I think moving in the direction of Georgist policy could absolutely usher in some better social outcomes
The difference is scale. If a house is a safe investment that makes a reliable 10% return on investment before tax and then you pay 1% in property tax, the remaining 9% is still an extremely attractive return so the investor appetite for housing remains unchanged by this small tax. Change the tax to 9% and you’re only left with 1% return, suddenly other investment options become much more attractive. Once the investors have left, prices can normalize around the price tolerances of people actually intending to live in the space.
This is a simplification using made up numbers, but the overall point is that the mere fact that property taxes as they currently exist (with very low rates) allow investors to run amok, that doesn’t mean that a more substantial LVT couldn’t change that.
Obviously taxing in a way that makes rentals completely non viable is probably not a perfect solution, and raising the tax dramatically all at once before prices have a chance to react could be catastrophic, but with a careful incremental approach gradually raising LVT and displacing other taxes (starting with regressive ones like sales tax) with those revenues based on observed outcomes, progress can be made to a better equilibrium where people who want to own a home to live in have better opportunities to do so, people who want to rent still have some options, people aren’t getting rich by ransoming housing at extortionate prices, and more investment capital is funneled toward productive enterprise over plots of dirt, strengthening the actual economy.
I think it’s probable that the Georgist dream of displacing all taxation with LVT may not be achievable due to diminishing returns on raising the tax as property values react, but I think moving in the direction of Georgist policy could absolutely usher in some better social outcomes