From today's LondonPaper:
Wrong. The UK has run experiments with reducing Business Rates (for example, exemptions for vacant buildings, or blanket exemptions for 'deprived' areas), and all that happened was that rents or property values adjusted upwards. The simplest and best way to fix this unintended consequence of Business Rates is to scrap the element that relates to the value of the building - whether occupied or vacant - and just tax the bare site value.
All site owners have a notional or actual interest cost relating to the capital value of the site. A tax on the site value would depress the notional cost by the amount of the tax; in some cases actual costs would go up, in some cases they would go down, but as economic decisions are based on notional rather than actual costs, a tax on site values would not impede rational decision making. In other words, each site owner would develop his site to the fullest extent.
The other, even more fundamental point, is that Business Rates are levied and collected locally, but pooled nationally and then redistributed. As a local politician, Boris can make London a more attractive place for businesses - by sorting out things within his remit like transport and policing; if Business Rates (or Site Value Rating) could be collected and spent locally, then there'd be a much better incentive for him to do his job properly, and there would be an automatic cost-benefit analysis to all his decisions.
Here endeth.
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21 comments:
I bet he doesn't know about this. Fancy telling him?
This is like Shylock asking for a pound of flesh.
In Scotland busines rates are collected by Holyrood & they are being brought down, though not enough. In general if we want a growing economy double taxation on wealth producers is a bad thing.
I would, however, prefer to see corporation tax cut first.
The particular problem Boris hangs it on - buildings being demolished to dave rates - doesn't seem to me to be much of a problem. Any buildings for which that is a worthwhile saving are probably better being replaced anyway.
The issue is really one of principle. In the past, the business rate has always been a tax on occupation - it's based on the value to the ratepayer of being able to occupy the property. In fact one of the old tests for rates liability was "actual occupation."
The abolition of the empty rate relief effectively undermines this, 3 hundred year old, principle. It penalises ownership no matter what. With the usual "unintended consequence" results, as you might expect. Currently I have, for instance, a client looking to demolish an (inherited) mid-C19 cottage/outbuilding, on the grounds that he can't raise the finance to restore it right now and can't afford the rates in the interim. Neil Craig evidently thinks this is a worthwhile saving - I'd say it's the country's loss, in the long run.
"It penalises ownership no matter what."
Precisely. The whole point about LVT is it penalises people for not using productive land & thus keeps it in use to the benefit of the whole economy.
I'll take your example head on - Britain is full of Victorian houses which are all getting listed, turning some cities into museums rather than places to live.
This is indeed a question of what value we place on the past & I will grant that had it been a 18thC house I would probably agree with you.
NC, I don't want to see double taxation on wealth producers either (VAT being by far the worst double taxation, not corporation tax).
Building, owning and maintaining buildings is important to wealth creation, the rental income is subject to income/corporation tax, fair enough. Which is why the value of buildings should be excluded from Business Rates.
But simply owning land is not producing wealth, which is why the best thing that we can do with Business Rates is scrap the element that relates to the building and just tax the value of the site (being in fixed supply, a tax on site values does not reduce the amount of sites available).
HW, which sort of answers your question. Site Value Rating (on the land not the buildings element) is a tax based on the value to the site owner of owning that site, in the same way as the actual or notional interest cost reflects the value to the owner of owning that site.
In other words, there would no incentive to demolish that cottage; and no disincentive to get tenants in (there'd be no loss of empty property relief for doing so, which is a form of double tax on rental income).
Hilary Wade,
We've got more than enough heritage properties for people to visit as it is.
Mark, thanks for that. I don't know much about LVT except that it might provide regular annual work for valuers. Obviously this would be A Good Thing.
NC - I wasn't meaning to get into personal aesthetics; my feeling is that if a bit of the built environment that has survived booms, crashes, 2 world wars and the execrescences of the 60's finally gets knocked down as a side-effect of a bankrupt administration trying to scrape up a bit of extra tax revenue (and failing) it's a shame. If you disagree with me here, I can't really persuade you, though I would implore you never to try for a job in architecture.
As I've explained, the property has no value to the ratepayer at present, or he'd occupy it. Security issues prevent subletting. The lack of available finance indicates that as things stand, it has no perceived future value to a lender. Should circumstances alter, then if the property survived, finance might become available for refurbishment, assuming this hadn't already been handed over to the Revenue already as empty rates that is.
Should it be refurbished, it would have value and this would be measureable from the first day of its occupation as rent. This value would then be taxed in full as occupied rates, and there would also, as Mark implies, be the taxes on rental income & capital value quite separately. My question, therefore, is, if you're defending the empty rate, what, exactly are you taxing? Where's the benefit to the taxpayer? This is not a troll question. I'm serious.
(just saw the last comment) - it's not exactly a heritage property, but it is well built with solid walls & good ceiling heights & frankly nowadays these things are in short supply.
HW, with proper Land Value Tax (or Site Value Rating) the buildings themselves are entirely exempt, whether occupied, vacant, derelict or non-existent.
As a middle-of-the-road Land Value Taxer, I see LVT as an ideal replacement tax for all existing property or wealth-related taxes (C Tax, Business Rates, Stamp Duty, Inheritance Tax, capital gains tax, TV licence fee etc etc).
Agreed, establishing values would require a certain modest amount of bureaucracy but a small fraction of the enforcement costs of the taxes it could and should replace.
I don't think NC is defending rates on vacant buildings; AFAIAA, he prefers a tax on bare site values only. It's up to the owner what to build on it.
The main benefit to the economy of LVT is that it keeps land prices low and stable - no more booms and busts!
And as a flat taxer, I don't see what's wrong with taxing rental income at the same flat rate as everything else (the lower the better, obviously).
MW - ah, right, I was reacting to NC's remarks about warehouses being better off demolished, which sounded like a defence of the empty rate as a sort of penalty to bring about the New Jerusalem - not a tax philosophy with a great track record.
Has LVT been implemented anywhere, do you know? It would be interesting to study the effect. I can't help feeling I've heard the "end to boom & bust" promise somewhere before though ...
HW, there are and have been various forms of LVT or SVR in different countries in different guises* over the years.
The longest period of low and stable house prices in the UK coincided with a period in which we had Schedule A taxation and Domestic Rates (from the 1920s to the 1960s). Once they got rid of those [rather crude forms of LVT] we've had one property bubble after another.
* Sark and Hong Kong for example, still have a feudal sort of land system where you pay something approaching market rent in tax each year, which is why they have NIL and LOW income/corporation tax rates respectively.
" I would implore you never to try for a job in architecture"
Indeed Hilary. I accept I would not fit in.
Architecture in Britain is a morass of political correctness, sustainibabbitry & a general pandering to the tastes of Prince Chuck & "environmentally concerned" local councillors with their hands out. Richard Rogers is probably the world's greatest architect & he has to do most of his work abroad.
As regards your bit about the value of buildings after they have ben refurbished. That is happening - Britain is full of Victorian warehouses which have been gutted inside & turned into cramped & relatively windowless yuppy flats. While we disagree on the aesthetics of that there is no room for debate on the financial aspect. In virtually all these cases more, more spacious & more valuable new flats could have been built on the property for less cost than working round the original structure. The net financial value of the original property is therefore negative in the same way that a 20 year old reel to reel would cost more to fix than to get a new DVD player.
The degree of backwardness in the building industry is difficult to overestimate, for exactly the reasons being discussed.
NC - okay - you've emphasised your preferred aesthetic. You like modern flats. Whether or not developers actually build, or demolish, what you, personally, would like to see is a matter of finance (if modern flats are more valuable on the open market, the scheme will be more attractive to investors)and local politics (is planning permission available, i.e. do other voters share your tastes?)
But it ought not to arise out of a consequence of punitive rating taxation - that's my point.
HW, LVT, if properly implemented is not punitive. That is half the whole point. An LVT based on capital values acts like a higher interest rate and so depresses capital values.
Ergo, if you buy the land (or the finished flat in NC's example), your (share of) LVT merely reduces the interest that you have to pay to the bank by an equal and opposite amount.
For a purchaser it is win-win - total purchase costs the same, but other taxes can be reduced or scrapped. For home-owners it is break-even. For land speculators LVT is a bit of a bummer, but as you can see from the last ten years, house price bubbles are A Bad Thing.
PS, you might disagree with NC on aesthetics but he knows a lot about planning permission and land values and so on.
I kind of feel this is a turning into a triangular argument where none of the sides actually meet. Aargh! I wish I hadn't brought in the architecture angle now, it was only meant to add artistic verisimilitude, but it seems to have sent at least one branch of this thread off at a total angle. Okay. Right. I don't care about the architecture angle - well, obviously on a personal level I do - but, in terms of personal freedom, if Neil owned an old warehouse and wanted to knock it down, redevelop, risk his own money etc, he'd be perfectly entitled to do so. It's his warehouse. He can add as much value as he likes. It's his property. I'm happy to accept he'd know about the planning side.
What I'm criticising is the current situation (please note not LVT) where his freedom to do this in the future is being constrained by having to pay for something which is effectively valueless in the present, because our idiot government needs the money. Maybe LVT would address that issue. I don't know. I'm not arguing with that! I'm arguing with his assertion that buildings being demolished to save rates isn't a problem. It's a problem as far as the liberty of the owner is concerned. I hope this is clear now.
HW, "his freedom to do this in the future is being constrained by having to pay for something which is effectively valueless in the present"
On that point we are all three agreed. There should be no tax on the capital or notional rental value of buildings and improvements.
No the owner does have the liberty to keep the building up it is just that he should have to pay more taxes on it. It is the same as us having the liberty to take a high paying job (if one is offered :-)) but that liberty is constrained by having to pay more taxes on it.
If your client literally can't afford to repair the building then, if keeping the building there was so important to him (from your 1st post it seems it isn't) he could sell the land making a condition that the new owner restored it.
Of course that would greatly reduce the price he would get for it but that old buildings may have such a negative value is the point I have been making.
But Neil, if you & MW are in agreement about the LVT thing, then, under your mutually preferred system, presumably the owner would not be paying any more taxes on the building than if it were an undeveloped site - if I've understood MW correctly?
Let me get this straight. Rates is bad and business rates is bad becuase they tax the wrong things in the wrong way. In regards to business rates the charge to the business is based on its occupancy of a premises, whether it owns or leases it. If you wanted to raise tax locally on businesses you should do it directly. If you do tax premises it is the land value you should tax as the owner of the land has done nothing to make it valuable, as such, and it is in finite supply - for all practical purposes.
Is then LVT a form of tax on a putative rent for the land? Or is a tax on the value of the land. As these two figures are related is it both? So, if one owns some land that has no yield how does one pay the tax?
On the subject of local taxation of businesses I have always had trouble with this, as for truly local businesses it is double taxation. Take me. I am a partnership and I pay income tax. If I am taxed again for local taxes that is extra tax that one of my employees does not pay. Why should I pay it all? On top of which companies (and governments) are just convenient admin fictions by which we organise our lives. All economies are just people and things. So taxing companies locally is again a form of double taxation. Trouble with that is how do local communities effectively tax international businesses?
HW, I hope NC replies to that.
L, If you do tax premises it is the land value you should tax as the owner of the land has done nothing to make it valuable, as such, and it is in finite supply - for all practical purposes.
Exactly.
Is then LVT a form of tax on a putative rent for the land? Or is a tax on the value of the land. As these two figures are related is it both?
It comes to the same thing.
So, if one owns some land that has no yield how does one pay the tax?
Either you are happy to pay for the use value (i.e. you live there) or you sell it. If its use value is low, then the tax is low. Possibly a few pence a year.
So taxing companies locally is again a form of double taxation.
No it's not. The tax does not reduce business profits (involving risk, money, hard work etc), it taxes the unearned extra money that a site owner makes by virtue of owning a particular site. And it makes it cheaper to buy a site (as I explained above).
Trouble with that is how do local communities effectively tax international businesses?
Via LVT!
You got me there Hilary. In the debate on keeping up old buildings I had wandered from the point. I do indeed go for LVT as a fair ultimate end (though I would probably get there rather more slowly than Mark since if we moved quickly it would be disasterous for every farmer).
However, you are right, under LVT there would be no saving in only knocking down the building (except probably liability insurance). However LVT gives an incentive to quickly rebuild, indeed that is much of its purpose, & that is easier if there is no restraint on knocking down.
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