Modeling the Price Reaction to the Implementation of a Land Value Tax
A Common Wealth Canada model of how land prices fall when an LVT is introduced — showing the depth of the shock is governed mainly by the rollout speed, not by elasticity or induced growth.
Summary
This 2024 study by Jack Jol for Common Wealth Canada builds a mathematical model of how land prices adjust when a land value tax is announced and phased in. It is an applied treatment of tax capitalization — the principle that a tax on land rent is capitalised into a lower land price — aimed at helping policymakers design the transition.
The Model
Land value in any year is derived from the previous value, the expected change under the tax-rollout schedule, the land's cap rate, and the expected holding period. Speculative inflation and post-tax induced market effects are deliberately excluded. Defaults: 75% captured value (the tax ultimately claims three-quarters of land rent), a 4.5% cap rate (with 2.6% for housing), and 4% baseline annual land-value growth absent the tax.
Key Findings
- Rollout speed dominates. An immediate (0-year) imposition causes an abrupt ~75% land-price drop, followed by strong recovery; a slow 40-year linear rollout (~2.5%/yr toward 75%) stabilises price near its starting value through the transition but yields weaker long-run appreciation.
- Revenue rises as prices fall — collected tax and land value move inversely as the rollout proceeds.
- Elasticity and induced growth matter little. Demand-elasticity effects are "very small" relative to the rollout schedule and cap-rate assumptions; induced-growth effects are real but unpredictable.
Conclusion
LVT produces a predictable price response governed by the relationship between taxation and capitalised land returns, so the transition timeline is the key policy lever for managing the wealth shock to existing owners. The authors caution that holding cap rates constant and averaging urban/rural land are simplifications requiring regional calibration.
See Also
- Common Wealth Canada · Tax Capitalization · Objection: LVT's transition wealth shock · Land Value Tax
Sources
- Jack Jol (2024), "Modeling the Price Reaction to the Implementation of a Land Value Tax," Common Wealth Canada. Research note