Okay, hold on, I believe the thinking is a bit confused here.
Suppose someone holds unimproved land before any tax has been implemented, so the fixed cost of holding land is zero.
- Why has the landowner not invested in improved land up to this point? It would be because the marginal cost of building that investment is greater is greater than the marginal revenue of that investment.
- Why has the landowner not sold this unimproved land yet? Because the current utility provided by the land, plus the option value of holding the land and selling it later, exceeds the current price for the land.
Now suppose a property tax is changed into a land value tax, so there is now a fixed cost of holding the unimproved land.
- The landowner could still face the same marginal cost and revenue schedules for investment, so the tax does not offer any extra incentive to invest.
- The landowner may be induced to sell this land, because the fixed cost of holding the land is subtracted from the current utility provided by the land. The problem is to whom? The added tax does crowd out people who derive utility from the land alone, but it also could crowd out people who want to buy the land and invest in it, since now there's an added fixed cost to their investment.
So the question is a matter of price elasticities of demand; if the demand for unimproved land is more elastic than the demand for land from capitalists who use land, the surplus of land will be sold to the capitalists, and vice versa.
This doesn't exclude a very simple strategy the state can do: buy up the surplus of land themselves at a competitive price. How much this strategy digs into tax revenues depends on the ratio of improved land to unimproved land.
This also has nothing to do with the "efficiency" of a land value tax in the usual sense. A land tax is efficient because it is a tax on a fixed factor of production, so a firm cannot substitute away from usage of the land, therefore creating less land than the market equilibrium and producing "deadweight loss."
This also has nothing to do with general equilibrium effects, where the loss of the property tax induces more investment in property on the margin. In a supply and demand framework, this leads to a fall in the price of property, so the downward pressure of demand for land from capitalists is amplified even further.
The confusion in this passage arises out of the confusion between the utility of land in itself and the utility of land as a factor of production.