The concept is that you are taxing the land so it would be used for the best value. If I have a parking lot in Toronto, I'm being taxed for the lot. The same-sized lot beside me, with a great building and lots of residences, is being charged a much higher rate.
What Smith was suggesting was that you tax the lot, not the improvement. Milton Friedman said the exact same thing. The best tax, he said, was.... The “least bad tax”—those were his actual words—was a land value tax, for that reason. It encouraged construction. The current system discourages it.