Property value escalation either means that the actual structure becomes more valuable (something that very rarely, if ever happens), or that the ground underneath becomes more valuable.
The land becoming more valuable (up to $X) is equivalent to saying that the market price on the unimproved land is now worth $X-- this is the amount of money any landowner can expect to collect on this land, given the proper amount of improvements upon it.
Since there is no marginal cost in the unimproved land, the entire return to this land is pure Economic Rent. The LVT would tax the full Economic Rent of the land (which is essentially equivalent to an annuity on $X, for land worth $X.)
Why wouldn't the landlord pass on the LVT to tenants? Competition, essentially. Land would only be desirable to be held by people well-equipped to build (and gain the return on) the proper improvements. These landowners would have an advantage over a landowner who does not make the proper improvements, and competition would drive the market rate of rent towards the marginal cost of improvements.
That aside, your tax on the unimproved economic rent makes some sense.
What of increases in cost of rents or property values?
In general, increases in the cost of land rents are an important signal that more should be built on this land; it's a bummer for current residents, but it's important that this demand is satisfied.
I believe financial instruments should help: an insurance policy taken by landowners against a rise in land value should dampen the blow. (This is somewhat related to the housing markets championed by Case/Shiller)
But in general, it would probably lead to a bigger change, that is that the property with the greatest risk (land) would likely tend to be owned by those best equipped to deal with this risk. More people would prefer to be renters (what's the advantage of landownership, anyway, other than the investment potential that the LVT would relieve?)
The only assets that would apply would be:
* Intellectual property (patents and copyrights). This would be a problem, but only to an extent-- there isn't such an inelastic demand on the return of IP as there is on housing stock. * Picassos, etc. This, while true, isn't especially relevant.
Is there something you're getting at that I'm missing here?
