The Schöntrup Tax: A Market-Based Revolution in Land Economics

10 min readMay 21, 2025

Reimagining property ownership through continuous market discovery

Pronounced /ˈʃɜːrntruːp/ (SHURN-troop)

For over a century, economists have grappled with the challenge of fairly taxing land while encouraging productive use. From Henry George’s single tax movement to modern Harberger taxation proposals, each system has attempted to solve the fundamental problem: how do we capture community-created land value without stifling development or creating administrative burdens?

While land value taxation (LVT) itself solves the deadweight loss problem — the supply of land is perfectly inelastic, so taxing it doesn’t reduce the quantity of land — implementation has always stumbled on a critical issue: how do we accurately determine land values? Government assessors are expensive, potentially biased, and create ongoing disputes and compliance costs.

The Schöntrup Tax offers a novel solution: it’s essentially a Harberger tax applied specifically to land values rather than total property values. This harnesses continuous market discovery to determine land values while allowing flexible, subjective valuation of improvements. However, as we’ll explore, this mechanism faces fundamental theoretical challenges that reveal deep problems with land value taxation itself.

The Mechanism

The system operates through dual account holdings and competitive bidding:

Account Structure Every property owner maintains two dollar-denominated accounts with the government:

Land Value Account: Inflation-adjusted, represents their assessment of pure land worth
Improvements Account: Any assets, represents their valuation of buildings and improvements

The Bidding Process

All bidders (including current owner) compete with their land value accounts
Top two land value bidders become finalists
Current owner chooses which finalist to sell to based on improvements offers
Winner’s improvements account transfers to current owner
Winner’s land value account becomes their ongoing LVT obligation with the government

Ownership Transfer Upon sale:

New owner’s land account becomes their inflation-adjusted government account (LVT base)
Former owner receives winner’s improvements account plus their original land account balance back
System resets with new baseline values

Why This Approach

Perfect Price Discovery Unlike traditional taxation systems that rely on periodic assessments, the Schöntrup Tax creates continuous market-based price discovery. Land values reflect what people are actually willing to commit in ongoing payments, backed by real money and competitive pressure.

Administrative Efficiency The government’s role is purely administrative — holding accounts and executing transfers when sales occur. No assessments, appeals, or valuation disputes. The market determines all values through revealed preferences.

Development Neutrality Traditional property taxes actively discourage development by taxing improvements — every building upgrade increases your tax bill. The Schöntrup Tax removes this anti-development bias by taxing only land values, not improvements. This eliminates the deadweight loss created when taxes on Pareto improvements reduce the quantity of improvements. Landowners already have natural profit-maximizing incentives; the system simply stops penalizing them for acting on those incentives.

The Fundamental Challenge: A Crystal Clear Example

To understand why the Schöntrup Tax represents a significant advance despite its limitations, we need to first grasp the fundamental mathematical problem that plagues all land value taxation attempts.

The Setup: Three Simple Numbers That Don’t Add Up

Alice owns a property and values it as:

Land: $400k
House: $600k
Total: $1M

Bob wants to buy the property and values it as:

Land: $1.1M (he’ll build apartments)
House: $0 (he’ll demolish it)
Total: $1.1M

The LVT Goal: Tax only land value, not improvements

Bob should pay Alice $600k for improvements
Bob should pay government $1.1M/year in land rent
Total Bob pays: $600k + $1.1M/year

The Mathematical Problem: Bob is only willing to pay $1.1M total (one-time), not $600k + $1.1M/year. The numbers literally don’t add up.

Why This Breaks LVT:

If Bob pays market price ($1.1M total), Alice gets underpaid for improvements she values at $600k
If Alice must be fairly compensated ($600k), Bob can only pay $500k/year in land rent
But this undertaxes the land value ($1.1M) that LVT theory says should be captured

The Impossibility: You cannot simultaneously achieve:

Efficient allocation (property goes to Bob who values it more)
Fair compensation (Alice gets $600k for improvements)
Full land value capture (government gets $1.1M/year)

The math requires $1.7M total ($600k + $1.1M) from someone willing to pay only $1.1M.

This Isn’t About Assessment — It’s About Mathematics

Your economist friend’s confusion (“The government assesses your property. It doesn’t care what you think your house is worth”) misses the point entirely. This isn’t an assessment problem — it’s a mathematical impossibility.

Even if government could perfectly assess every value:

Alice’s improvement value: $600k
Bob’s land valuation: $1.1M
Bob’s total willingness to pay: $1.1M

The math still doesn’t work. Perfect information doesn’t create money that doesn’t exist.

Why Traditional Responses Fail

“You made a bad investment” — No, Alice made a perfectly rational investment in improvements worth $600k to her. The problem isn’t bad investment, it’s that LVT forces her to sell improvements for less than their value to her.

“Just sell to developers” — Bob IS the developer, and he values the house at $0. Alice can’t get fair compensation because the buyer doesn’t value what she built.

“Pay the tax and keep the house” — If government charges $1.1M/year land rent (based on Bob’s valuation), Alice is forced out despite valuing the property at $1M total. She can’t afford to pay more for land than she thinks it’s worth.

The Deadweight Loss Reappears

This forced under-compensation for improvements creates exactly the deadweight loss LVT was supposed to eliminate. If Alice fears losing improvement value when selling, she won’t invest in improvements — defeating the entire purpose.

The Schöntrup Solution

The Schöntrup Tax doesn’t solve this mathematical impossibility, but it handles it better than alternatives by:

Using market mechanisms instead of assessment guesswork
Allowing Alice to choose between competing improvement offers
Creating competitive pressure for fair improvement compensation
Accepting that some edge cases will be imperfect rather than pretending perfect solutions exist

Gaming and Manipulation: The Value Allocation Problem

The mechanism faces sophisticated gaming attempts that expose fundamental design challenges.

The Total Value Gaming Strategy Bidders could attempt to put their entire property valuation into land value accounts to guarantee winning:

Scenario: Property worth $1M total

Honest Bidder A: $400k land + $600k improvements
Gaming Bidder B: $1M land + $0 improvements

Bidder B wins despite potentially valuing land lower, because they structured their bid to dominate the land value ranking.

The Market Response However, the system contains natural corrections:

If Bidder B truly values land at only $400k, they’re committing to massive ongoing overpayment
Current owner can recruit competing bidders: “Offer $401k land + $599k improvements instead”
Both parties benefit from honest splits rather than wasteful land value inflation

The Coordination Problem Yet sophisticated coordination could still break the system:

Multiple colluding bidders all bid $1M land + $0 improvements
Current owner forced to choose among $0 improvement offers
Legitimate bidders (A’s $600k improvements offer) get excluded from competition

The Existential Question This reveals a deeper issue: if multiple legitimate bidders genuinely prefer to structure bids as “all land value,” then the market is revealing that improvements have zero value to willing buyers. The mechanism isn’t broken — it’s working correctly, but the result seems unfair to current owners who invested in improvements.

Comparison to Alternatives

Traditional Property Taxation

Advantages: Familiar, captures some land value
Disadvantages: Taxes improvements (deadweight loss), requires assessments, disputes, gaming
Assessment burden: Expensive, biased, contentious

Pure Harberger Taxation

Advantages: Market-based pricing, eliminates assessment
Disadvantages: Taxes improvements equally with land, forced sales based on total value
Development impact: Discourages improvements through taxation

Government Land Value Assessment

Advantages: Could theoretically separate land from improvements
Disadvantages: Requires omniscient assessors, politically contentious, expensive
Practical reality: Assessment quality varies wildly, appeals consume resources

Status Quo (No LVT)

Advantages: Simple, familiar
Disadvantages: Community-created land value captured privately, inefficient tax base
Missed opportunity: Foregoes deadweight-loss-free revenue source

The Pragmatic Case: Why This May Still Be Optimal

Despite its theoretical challenges, the Schöntrup Tax may represent the best available compromise for several reasons:

Market-Based Foundation The mechanism relies on genuine market discovery rather than government guessing. Even with gaming possibilities, market forces provide more accurate pricing than bureaucratic assessment.

Performance on Average While extreme gaming scenarios are possible, they likely represent edge cases. In typical situations with reasonable competition and normal value distributions, the system should perform well.

Improvement Taxation Minimization Unlike pure Harberger taxes or property taxes, the system creates strong incentives to compete on improvements offers rather than rolling improvement value into ongoing tax obligations. This preserves the key LVT benefit of not discouraging development.

Dynamic Efficiency Properties flow continuously toward highest-value users through ongoing market pressure, rather than being locked in by assessment cycles or owner inertia.

Elimination of Assessment Infrastructure Removing the entire assessment bureaucracy — with its costs, biases, and political battles — may outweigh the theoretical inefficiencies the market-based system introduces.

Theoretical Impossibility of Perfect LVT Our analysis suggests that perfectly separating land and improvement values may be theoretically impossible due to their bundled nature. If perfect LVT is unachievable, a market-based approximation may be superior to assessment-based approximations.

Addressing the “Impossibility” Critique

Recent analysis has argued that land value taxation may be theoretically impossible due to the “bundled value problem” — the idea that land and improvements cannot be meaningfully separated because their values are interdependent and subjective. This critique deserves serious consideration.

The Bundled Value Argument The critique uses an “orange juice and milk” analogy: when you force-bundle goods with different appeal to different buyers, you cannot extract full value from both components. Similarly, when Developer Mike values land at $900k but improvements at only $100k, while Owner Sarah values land at $400k but improvements at $600k, there’s no way to satisfy both valuations from a $1M total property value.

The Measurement Problem
The critique argues that there’s no way to determine subjective improvement valuations without creating gaming incentives — any self-reporting system will be manipulated to minimize tax obligations.

Why the Schöntrup Tax May Still Be Optimal However, this theoretical impossibility argument may prove too much. It essentially argues that because perfect LVT is impossible, we shouldn’t attempt market-based approximations. But this overlooks several key points:

Market-Based vs. Assessment-Based Approximations If perfect LVT is indeed impossible, we face a choice between different imperfect approaches:

Government assessment (expensive, biased, politically contentious)
Market-based mechanisms (imperfect but responsive to actual preferences)

The Schöntrup Tax represents the latter approach. Yes, the system can be gamed in edge cases — the scenario where multiple bidders coordinate to bid $1M land + $0 improvements can indeed leave current owners uncompensated for improvements they value highly.

But consider the alternatives:

Traditional property taxes discourage all improvements equally
Pure Harberger taxes would force sales based on total property value, ignoring improvement investments entirely
Government assessment requires bureaucrats to guess at values they cannot possibly know

Performance in Typical Cases The extreme gaming scenario (multiple coordinated bidders all valuing improvements at zero) likely represents an edge case. In typical situations:

Bidders will have different land/improvement valuations
Competition for owner selection will drive up improvement offers
The system will approximate efficient outcomes reasonably well

The Allocation Insight Importantly, the Schöntrup Tax doesn’t promise to allocate property to whoever values it most in total — it allocates to whoever values the land most. This is actually the correct criterion for land value taxation purposes. If the goal is to ensure land goes to its most productive use from a social perspective, then allocating based on land valuation makes sense.

Dynamic Efficiency Even imperfect, the system creates continuous pressure for efficient land use through ongoing market discovery. Properties don’t get locked in by assessment cycles or bureaucratic inertia.

The Perfect as Enemy of Good The theoretical impossibility critique risks making the perfect the enemy of good. If we abandon all attempts at land value taxation because perfect implementation is impossible, we lose significant potential efficiency gains and continue relying on worse alternatives.

Empirical Question Ultimately, whether the Schöntrup Tax represents a good solution is an empirical question: How often do the extreme gaming scenarios occur? How much efficiency gain does market-based price discovery provide compared to assessment-based systems? How much deadweight loss is eliminated by not taxing improvements?

These questions can only be answered through experimentation and implementation, not theoretical analysis alone.

Implementation and Transition

Should this mechanism be adopted, implementation would require:

Gradual Rollout

Begin with commercial properties or new developments
Expand to residential areas as experience develops
Allow parallel systems during transition periods

Account Management

Inflation-adjusted government accounts to ensure fairness
Clear rules for account transfers and ownership changes
Integration with existing property law frameworks

Parameter Calibration

Time periods for matching competing bids
Minimum bid increments to prevent harassment
Treatment of existing mortgages and liens

Conclusion: The Best Available Imperfect Solution

The Schöntrup Tax emerges from a sophisticated analysis of both the theoretical challenges and practical constraints facing land value taxation. While it cannot achieve the theoretical ideal of perfect LVT, it may represent the best available approach for several reasons:

Acknowledging Theoretical Limits Recent economic analysis suggests that perfect land value taxation may be theoretically impossible due to the bundled nature of property value and the inability to observe subjective valuations without gaming. If this critique is correct, then all land value taxation represents approximations rather than ideal implementations.

Superior Approximation Given that perfect LVT is likely impossible, the question becomes: which imperfect approach performs best? The Schöntrup Tax offers several advantages over alternatives:

Market-based price discovery rather than bureaucratic guessing
Continuous adjustment rather than periodic reassessment
Minimal improvement taxation compared to property taxes or pure Harberger mechanisms
Elimination of assessment infrastructure with its costs and biases

Pragmatic Trade-offs Yes, the system can be gamed in edge cases. Yes, some current owners may receive inadequate compensation for improvements they value highly. But these costs must be weighed against:

The deadweight losses from taxing improvements under current systems
The assessment costs and disputes under government valuation
The efficiency losses from properties remaining with lower-value users
The revenue losses from avoiding efficient taxation entirely

The Empirical Test Whether the Schöntrup Tax represents a superior solution is ultimately an empirical question that requires real-world testing. The theoretical analysis suggests it could outperform alternatives, but only implementation will reveal whether the benefits outweigh the costs in practice.

A Framework for Progress Even if the specific mechanism requires refinement, the Schöntrup Tax provides a framework for thinking about market-based approaches to land value capture. It demonstrates that sophisticated auction mechanisms can address some of the fundamental challenges in land economics, even if they cannot solve them perfectly.

The future of land value taxation may lie not in abandoning the project due to theoretical impossibility, but in embracing market-based approximations that perform better than realistic alternatives. The Schöntrup Tax represents one such attempt — imperfect but potentially transformative.

In economics, as in engineering, the best solution is often not the theoretically perfect one, but the practically implementable one that performs better than existing alternatives. The Schöntrup Tax offers such a solution: a market-based mechanism for land value capture that acknowledges its limitations while potentially delivering significant improvements over current approaches.

The choice is not between perfect and imperfect systems, but between different types of imperfection. The Schöntrup Tax may represent the most promising imperfection available.