Education vouchers (2)

As regular or occasional readers of this 'blog may be aware, some of my main hobby-horses are:
a) education vouchers;
b) recapturing power from Brussels and returning as much responsibility to local councils (bypassing Whitehall entirely);
c) scrapping VAT and Employer's National Insurance and introducing a flat tax with a generous personal allowance; and
c) replacing existing property-related tax with Land Value Tax.
I'll try and draw these threads together in this post.

As any fule kno, the way we measure value and the way we keep score in a free-market economy is £-s-d. We also know that people respond to incentives - if central gummint sets loads of meaningless targets, then armies of box-tickers will be created to produce the forms to prove that those targets have been met, which leads to all sorts of unintended consequences. If the only target were £-s-d, then at least we're all playing by the same rules.

There's also politics to deal with. The large-state socialists will hate the idea of education vouchers, as it means relinquishing control (and money, and lots of remunerative quango chairmanships for party hacks) to the private sector. Similarly, the Tories are a front-organisation for the land-owners (home-owners are just pawns in this game) so they hate the idea of Land Value Tax ("Wot!? A tax on unearned wealth? How dare you!"). A scrupulously honest small-government government would deal with this with three simple rules:

Rule 1. We will disband the DfES and simply give each local council £7,000 for every school-age child living in the area (total spend approx. £70 billion p.a.). It will be up to local councils to decide, by trial and error, what is the 'correct' amount of the education voucher.

Rule 2. We will scrap all existing property taxes and replace them with Land Value Tax (bung in Business Rates and we're looking at about £60 billion p.a.) to be collected by local councils and retained to cover their own expenditure (if there has to be redistribution between richer and poorer areas, it is up to the Local Government Association to decide a formula, not central government).

Rule 3. We will phase out the £70 billion education grant over the next seven years. Councils will have to make up the shortfall by spending more wisely. That £70 billion is conveniently just about enough to make up for the revenue shortfall to central government from scrapping VAT etc, once you take dynamic effects into account.

NB - current local government-controlled tax-funded expenditure is about £130 billion.

Right. As we know, Land Value Tax is the best form of local taxation because it puts the onus on councils to spend money on things that add value (see Lyons report, para 7.68). We also know that houses in the catchment area of a good State school are worth up to £200,000 more than those outside it.

For sure, this is an extreme case, let's assume that £100,000 is a fair extra price to pay. In cash terms, what is the value of a good state school? Let's assume you've got two kids, and private school fees would cost you £10,000-plus p.a. So if you're paying 6% interest on an additional mortgage of £100,000, that costs you £6,000 p.a., so you are still ahead of the game. Flipping back to the 'break-even table', let's assume that Local Borough Council A takes Rules 1 to 3 to heart and plans ahead and decides to offer local residents schools vouchers of £6,000 each. As long as 30% of the children in the area take up the vouchers and move into private schools, the deal is cost-neutral from the point of view of the council.

Now ... consider parents of young children choosing between buying a house in Local Borough A (which offers schools vouchers of £6,000) and Local Borough B (which is behind the curve and does not offer vouchers), how much more are they prepared to spend on buying a house in local borough A, bearing in mind that their housing costs consist of mortgage plus Land Value Tax? Logic says, they're prepared to shoulder an extra £6,000 (same as in real life) only this time, that extra £6,000 is split 50/50 between extra mortgage costs and Land Value Tax. In other words, the nominal house price is only £50,000 higher, rather than £100,000 higher, than in Borough B.

But the extra £3,000 LVT that the newcomers are prepared to pay will paid by all 70,000 households in that borough (=£210 million), which will compensate the council for the pending loss of schools grant of 30,000 school-age children x £7,000 (=£210 million)!

So the optimum trade-off will be reached fairly quickly. And that is what free markets are about - the trade off between income and expenditure; between cost and value - the fact that the optimum is reached where value exceeds costs, but the fact that any excess will be competed away (in this case by neighbouring councils).