One aim of the taxation of land values is of course to keep land values low and stable (no booms, no busts). The spurious objection to this is that businesses need high land values because they can use it as security for loans* and that households need high land values because it enables them to 'build up wealth'.**
Land values are a residual figure (total property value minus cost/value of bricks and mortar, which is a fairly constant figure), so simple maths says that land values rise and fall far faster than total property values. UK property values have fallen around 20% from their late 2007 peak, and Knight Frank published a report a couple of weeks ago confirming that UK land values fell by around 50% in 2008. As a property bear, I reckon property prices will fall another twenty per cent before they bottom out, which means that land values will have fallen by around three-quarters overall.
And that's what the economy is supposed to be based on? Land values, three quarters of which was pure 'bubble' value? What's the economy based on now that the bubble is bursting? Not very much, that much is clear.
* The counter-argument to this is of course that the amount that banks can lend is a function of how much spare cash people can deposit with them, which in turn is a function of how well the economy is doing. Collecting £1 in taxes on turnover or profits has significant deadweight costs and reduces total output by considerably more than £1, but collecting £1 in tax from land values has no deadweight costs as land is fixed in supply. So by shifting taxes from wealth creation to land values, the economy would do better, so banks would have more money to lend to businesses, who in turn would have less capital tied up in land values and hence considerably more cash to invest in market research, product development, training, plant and machinery, marketing and so on.
** High house prices are a negative sum game; what the owner calls 'wealth' is merely the flipside of somebody else being prepared to go heavily into debt to pay for something that has artificial scarcity. We can't all get richer by selling houses to each other at ever higher prices, but we can all get richer by investing in training and education (of ourselves or others) or in growing businesses.
The Fart of Doom
1 hour ago
8 comments:
"And that's what the economy is supposed to be based on? Land values"
Neat trick isn't it? No wonder the French and Germans hate our guts!
An economy based on Rent-seeking will fail just like an economy based on Marx's "principles" will.
"We can't all get richer by selling houses to each other at ever higher prices"
In the absence of production based economy and in a consumer society with high living standards that's all there can be. Over the last 15 years of globalisation the government have encouraged high property values to maintain the appearance of affluence (all based on debt) - that could not go on forever. Essentially, it is one giant Ponzi scheme.
Over the years of doing what I do for a living and being the son of an enlightened and thoughtful property developer I have learned to loathe, with a passion, the fascination by the English for house 'prices'. The delusion that they are getting wealthier as the prices rises is entrenched. If LVT is the answer to stopping this madness then I am up for it, in spades.
Stan, on a like for like basis, cutting taxes (and regulations and stuff) on production would encourage a production based economy, and seeing as tax revenues (however low) have to come from somewhere, why not replace taxes on production (gradually but steadily) with taxes on land values? Several birds, one stone.
L, it is the answer, it must be.
Anything that reduces the cost burden on production should be encouraged, Mark - but you have also to consider what we're up against. No matter how much we reduce it we can not compete with a nation like China which has an inexhaustible supply of labour and the money to educate and train that labour to do the jobs we do at least as good as we could for considerably less. Also, in Britain, land will retain a high value simply because of supply and demand. Although I agree with you that the value of property in recent decades has been over inflated (I think you said around 40% - I think a little more) and I agree partly with your reasoning as to why it is over inflated, there is also the pressure of demand which has been created, at least in part, by unrestrained immigration.
Stan, yes, land in the UK will retain a high rental value, and anything that enhances rental values is to be encouraged - safer streets, better transport infrastucture, lower overall tax burden, higher employment, whatever. (I suspect that mass immigration drags values down as much as push them up, that's a different topic.)
I'm talking specifically about keeping capital values low and stable, so what the purchaser loses on the LVT swing he wins back on the 'lower mortgage costs' roundabout.
@Stan
The problem is British labour is even less able to compete ,say with the Chinese,because UK wages have to be padded with a sizeable wodge just for basic accommodation.If, for the sake of argument, Brit workers paid for just the cost of the bricks and mortar and nothing for land value,they would become more employable.(This sounds like an argument for reducing UK wages,but is n't).
Labour costs are expensive for some big Tories (industrialists) because another bunch of Tories (landowners) are pushing up wages.
In the nineteenth century industrialists would have been in the Liberal Party and landowners in the Conservative but the rise of Labour has created an unstable right-wing alliance.
I have never been able to see how you can have international free trade without global LVT; some countries are handicapped by the cost of the most basic factor of production.
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