Sunday 7 June 2009

Crown Estates - commercial landlord or tax collector?

The UK government and all its branches - local councils, Ministry of Defence, Crown Estates and so on own a heck of a lot of land and buildings in the UK. When they are letting out surplus properties they act, by and large, like any other landlord, i.e. they charge the highest rent that they can get, which, under Ricardo's Law Of Rent, equates to all the 'super profits' that a business can generate over and above normal wages and return on capital by trading from that particular location.

I also have plenty of clients who are tenants in an office block or similar owned by one branch or other of the government, such as Crown Estates, and to them, Crown Estate is a commercial landlord like any other.

As we know, taxes on turnover, employment and profits are Bad Taxes, as they discourage economic activity. As a thought experiment, let's imagine that the government decided that all businesses who rent their premises from the State (or people who pay market value to live in housing owned by The State, i.e. not necessarily council tenants with subsidised rents) were exempt from VAT, PAYE, income tax, corporation tax and so on. The government could even take a larger area (Ministry of Defence land) and declare it to be a tax-free zone. This increases the super-profits that a business can generate (or an employee's take-home pay) so what happens to rents? They would go up of course, as a business would be happy to pay the original rent plus the bulk of the taxes it can save by relocating to tax-free premises.

Next question, if a business trading in the UK currently pays rents of £10,000 and pays taxes of £10,000 per month, how much would it be prepared to pay to trade from tax-free premises? The answer must be 'nearly £20,000'. We can look at this in another way, by comparing the variations in pre- and post-housing cost incomes across the UK. The newest article I can find is from 2003 (although there have been many more since), which concludes that higher net incomes (post tax) merely push up rents and house prices, so although there is quite a disparity in headline wages between London/South East and North East/North West England, once you take into account housing costs, there is little difference in disposable incomes, again, entirely as predicted by Ricardo. Or we can look at rents for flats in Monaco, which are astronomical of course, because all the Formula One drivers and so on are happy to pay £100,000 a month for a small flat to establish tax residence if that saves them £100,000 a month in taxes that they would have to pay if they lived elsewhere.

OK, so let's imagine you hear about these tax-free zones and decide to relocate there with business and family and take the higher rents on the chin - would you consider the money you pay to be 'rents' (because you are paying freely negotiated market value for exclusive possession to certain land and buildings) or would you consider it to be 'tax' because it is going to the government, which uses the proceeds to pay for core services that add value to the location (be it transport infrastructure, policing, street lighting, refuse collection, whatever) and spends the rest as it pleases (which any landlord is entitled to do)?

Taking the thought process to its ultimate conclusion, what would happen if by some miracle we had a completely 'libertarian' government that scrapped all the unnecessary interference in our lives (hooray!); scrapped the Welfare State, NHS, state education (sort of half-a-cheer); scrapped most taxes (hooray!); shunned Land Value Tax as 'communist' (boo!) and just funded itself with a few sneaky stealth taxes (like VAT, import duties and so on), i.e. turned back the clock a century or so?

Would tenants (businesses or households) actually end up much better off (in £-s-d)? Probably not, because every £1 of extra net income they now get (because income tax is scrapped) would be largely soaked up by higher rents. Existing landowners would make a one-off windfall gain equivalent to the NPV of future growth in the economy, of course. However hard future generations worked, all their extra income would be soaked up by higher rents and property prices.

Sure, it might be far more pleasant being exploited by landowners and landlords (at least there is an upper limit to what they can charge) than by an authoritarian government, but the difference is not as big as you might first think.

Just sayin', is all.

9 comments:

Kalvis Jansons said...

Surely it is now time to tell Mr Brown to resign, if you have not
already done so:
http://petitions.number10.gov.uk/please-go/

James Higham said...

As we know, taxes on turnover, employment and profits are Bad Taxes, as they discourage economic activity.

As the business climate has been progressively dismantled by Labour, anything 'discouraging' is really a footnote after the event.

Ed said...

I clearly need to go and read Ricardo because this makes no sense to me[1]. If we suddenly went back 100 years in terms of taxes and the size and scope of government, then clearly some people would be relatively better off and some (former government employees etc) worse off. In general though, why should anyone pay a higher rent just because they are able to? Now, one might argue that a business would want to use its new surplus cash (that was previously going on tax) to move to more advantageous premises, bidding up the cost of that rent. However, if that business is not in those premises now, and someone else is, why would they assume they could outbid the current tenants, who presumably have also benefited from the reduced taxes? Both lose by trying.

OK, if the lower taxes attract lots of new residents and businesses from abroad, then I can understand the rents going up. Otherwise, why doesn't everyone just stay where they are and refuse to pay any more rent?

[1] I work in the computer industry, so the whole obsession with property in this country makes no sense to me[2]. I expect to get twice as much real estate, for the same money, every 18 months :-)

[2] Not to mention the irrational fear of deflation.

Mark Wadsworth said...

Ed, yes, read up on Ricardo's law of rent, which is one of the few useful economics laws that predicts very accurately what happens in practice.

I could also point out that the long-run house price-to-earnings ratio is pretty stable in the UK (usually between 3.5 and 4, with regular bubble periods), so the comparison holds not just as between georgraphical regions but over time.

Clunking Fist said...

"Would tenants...actually end up much better off? Probably not, because every £1 of extra net income they now get... would be largely soaked up by higher rents."

Wouldn't the exrtra money go to health insurance premiums, income protection & unemployment insurance, school fees, road tolls, market-value transports costs (because I'd cut all subsidies like that), etc. And won't folk save more because there's no state pension anymore?

Clunking Fist said...
This comment has been removed by the author.
Clunking Fist said...

And I'm saying that folk paying all that money out privately is likely to produce more bang for their buck than having some gummint take it off them, keep half, then poorly spend what's left.

openworld said...

Your proposal for tax-free zones is interesting...but can go beyond what you've envisioned. Organizations that now consume tax revenues can swap their subsidies for stakeholding interests in the tax-free zones. In a stroke, this approach can help build new constituencies for the incentives in the tax-free zones to go beyond formal tax relief to include removal of implicit taxes (red tape, delays, and other burdens). The land rents then can rise above the levels you have envisaged. Further information on success-sharing free zone strategies of this kind are explored at www.openworld.com .

- Mark Frazier (@openworld on Twitter)

Mark Wadsworth said...

MF, thanks, but it's not a proposal so much as a thought experiment to keep the debate going.

As to "stakeholding interests", to the extent that there is a surplus, it should go to paying off the national debt and/or dishing out as a Citizen's Dividend (delete according to taste).