Thursday, 18 June 2009

Adam Smith & subsidies for broadband

Anti-Citizen One quoted from Adam Smith recently:

As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the labourer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them. He must then pay for the licence to gather them; and must give up to the landlord a portion of what his labour either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land

... and asked Was Adam Smith a Georgist? (as I replied in the comments, on the facts, no, he wasn't). Paul Lockett, also in the comments, reproduces Adam Smith's famous quote explaining why Land Value Tax is the least-bad and fairest tax.

But let's move on to today. The government, in its cack-handed fashion has decided it should subsidise the expansion of the broadband network by slapping a £6 annual tax on every landline, which is rather bizarre.

We know that the revenues-per-household that a broadband provider can charge are fairly fixed, but the cost per household of digging up the pavements and setting up all the boxes are inversely proportional to the population density of the area being cabled. So for a broadband provider, the calculation is simple - they just cable the most densely populated areas and ignore the rural areas, which is exactly what has happened so far.

In the more densely populated areas, the provider makes super-profits, because it can charge £20 a month per user for an amortised cost of £10; in outer urban areas, the provider makes no super-profit because the amortised cost is equal to the revenues; and there's no point in digging up roads in areas where there is the odd farmhouse or hamlet miles apart.

And who owns the pavements? It's the local council on behalf of society in general. So the local council in a densely populated area is perfectly within its rights to charge the provider £9 per household for the privilege of digging up pavements - the provider still makes a profit, and households still get broadband - everybody's happy. Whether you see this as the local council charging 'rent' for the use of pavements or collecting 'tax' on the value of its pavements is moot - rents and taxes are much the same thing, really.

A council in an outer urban area can't charge anything of course, but hey, at least those areas get broadband.

Before we move on to very-outer urban areas, we have to consider the consumer surplus - we know that people, on the whole, will pay slightly more to live in a home that has broadband than in one that doesn't. This consumer surplus accrues to the landlord or the home-owner (especially when he comes to sell) - to paraphrase the opening quote, instead of Adam Smith's labourer paying the landowner a licence to gather fruit, the tenant is paying the landlord a licence to be able to access broadband.

So there can't be much harm in increasing the Council Tax (the nearest thing we have to Land Value Tax*) slightly in areas with broadband. The broadband access increases the land value and LVT depresses it in equal and opposite measure (and as we know, such a tax is borne by the landlord/vendor and cannot be passed on to the tenant/purchaser).

Finally, we get to very-outer urban and not-so-sparsely populated rural areas. For the broadband provider, there is no profit to be made in digging up the pavements and laying the cables; but on the other hand, the local council (who controls the pavements and sets Council Tax) knows that it would be able to charge an extra £x per month in Council Tax per home if they had broadband access.

So surely, the ideal source of tax to subsidise the expansion of the broadband network would of course be the extra Council Tax that the local council in the very-outer urban areas etc. could collect? That way there are no windfall gains and losses and there is the closest possible match between those who pay and those who benefit - unlike a random tax on telephone landlines, size 11 shoes or fish'n'chip suppers or anything else.

Or have I missed something?

* Actually, Business Rates are even more like LVT - as broadband access increases rental values, this will flow through into slightly higher valuations next time around, but this is a very slow process.


neil craig said...

Since the rate support grant covers about 80% of council spending that would simply invovle cutting the RSG by say £8 in urban areas.

On the other hand I have propsed elswehere that the RSG should be set at a flat rate (prob about £2,000 per person) & let the cheap councils charge zero council tax & the expensive ones look for new jobs.

James Higham said...

A good example of this is North Wales, with no cables, no broadband, nothing. Now they'll have it all, courtesy of the city dweller, minus the chavs, violence, pollution etc.

Lola said...

Of course you haven't missed anything. Economics are not what New Labour does. It does 'buy votes' aka 'redistribution. This is, as someone above pointed out, a way of keeping more oiks doing nothing in comfort in Wales. They'll be able to add sport and free porn to their daytime viewing at everyone elses expense.

The whole £6 idea is as barmy as Brown.

Mark Wadsworth said...

NC, agreed, cutting the RSG is the logical next step (rather than just allowing councils to spend even more money). If you strip out education and crap, councils spend about £1,000 per person on average.

dearieme said...

"they just cable the most densely populated areas and ignore the rural areas, which is exactly what has happened so far." Just like gas suppliers.

Craig said...

I say let them sign up for satellite and be done with it.

Alfred T Mahan said...

Yet another tax. Why on earth can't Labour ever do something without taking money? Surely the simplest solution is to make all investment in fibre optic cable 100% tax deductible. Period. For everyone. In the year of expenditure.

Providers would fall over themselves to lay cable; consumers would pay a reduced installation fee and get a tax rebate to boot. Granted, rural areas (like mine) would suck on the hind teat but we'd get there before long and it'd be no worse than the £6 arrangement.

It might be a good way to stimulate the economy too - all the tax break would have to be spent in the UK rather than on imports.