Taken from here:
Another criticism is that a land value tax forces people to devote land to its most productive use in order to be able to afford the tax, even if they want to use it for a less productive use. For example, a private park in the middle of a city may generate negligible return, and others may want to buy it to build a factory or offices on it. If a Land Value Tax was implemented, the park owner would have to be prepared to pay the costs of leaving the park undeveloped and might be unable to do so.
This all glosses over the fact that using land as gardens round houses is, in most cases, the most productive use of that land - a couple of hundred square yards of farmland has a rental value of about £10, but people are prepared to pay far more than that to have a nice garden, i.e. the enjoyment they get from having a nice garden is worth far more to them than the food that could be grown on it (they may indeed to choose to grow their own food in their own 'Victory' garden). Conversely, if a site is near a goods marshalling yard, it would be ideal for industrial units, but nobody would want to live there. Anyways...
1) Dealing with this specific case, let's consider this real life example. Those little parks are, basically, jointly owned by the people who own the surrounding blocks of flats. Part of what you pay for when you buy or rent a flat is your 'share' of the garden, so the value of that relatively exclusive access has a direct impact on the value of the flat.
2) In this real life example, "... private communal gardens in the borough [are] normally managed by committees and funded by an extra levy on council tax." which seems fair enough on a cost-share basis (though why they would get the council involved is a mystery to me).
3) So, if we exempted the green area from LVT, this would boost the value of the flats with private access, thus boosting their value and thus increasing the LVT collected from the flats, which would come to much the same thing as not exempting it. It's the same people paying the same tax on the same overall value.
4) Now, ask yourself, would a majority of residents, who effectively control or own that private park choose to sell it off to have a factory or office block built? Well of course not - if that private park didn't enhance the value of the flats then it would never have been established in the first place.
5) Or imagine somebody with a house in a valuable inner city location with a huge garden (unlikely, but theoretically possible). Why would introducing LVT make it more likely that the garden is sold off (notwithstanding that this could be blocked by normal planning rules)? Whether or not there were LVT, the next purchaser of that house is likely to have a high income and will be paying vast amounts of money for the house and garden as a package. Whether he takes on a vast mortgage (and pays no LVT) or takes on a smaller mortgage (and pays more LVT) does not make any difference to him.
6) But like most objections to LVT, these are very extreme examples plucked out of the air with no real relevance to the bulk of the population. I find it easier to look at a system with LVT as if everybody were renting*. If everybody rented, would there be more efficient use of available housing? Well of course - as your household grows, you rent somewhere bigger, and when the kids leave home, you'd rent somewhere smaller again. Void periods would be much shorter, and so on. Unlike with a house price bubble, nobody would be desperate to rent the biggest property they can possibly afford in the hope of making capital gains, as there wouldn't be any capital gains to be made.
* For clarification, please note that, unlike the Home-Owner-Ists, I am in favour of more people being able to afford to buy (if they so wish, and most do), rather than being 'forced' to rent. See previous post. This is just an example.
Wednesday, 10 March 2010
Killer arguments against LVT, not (30)
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19 comments:
You are discussing things way above my head, partly because I came in in the middle of the conversation so to speak. However something occurred to me that may or may not be relevant if I have got the wrong end of the stick; one of the main attractions of ownership is that purchasing a house when you are younger when you come to retirement assuming the mortgage is paid off you are not lumbered with rent.
A, agreed... but
1. The overall long-run return on housing as an investment is the same as investing in productive stuff (like shares or your own education).
2. Higher LVT does not hurt the purchaser as he has lower mortgage payments.
3. Higher LVT (and lower income tax) benefits the purchaser as he pays less income tax.
4. Ergo, the purchaser has more money to save up over his lifetime to invest in productive stuff. Instead of paying off a £200,000 mortgage, he pays off a £100,000 mortgage and builds up £100,000 in extra retirement funds to pay LVT during retirement.
5. Similarly, there's no harm in increasing old age pensions out of the LVT revenues (i.e. there would be redistribution from pensioners in large houses to those in smaller houses). Nobody would become homeless (and in practice, in countries which have such taxes, there's no problem with old age pensioners living on the street).
A couple of points which I idly throw into the mix.Someone (perhaps even me*) might well have mentioned them before, so you've probably answered them already.
You may think it a good thing to discourage home ownership (OK, not the same as home-ownerism but a higher tax on property will discourage property holding; won’t it? And you mention everyone renting). But someone has to own the land, in the sense of holding title in it. This seems likely to provide government, which already owns huge amounts of land and property with an excuse to pick up a lot more on the cheap. Not a good thing, surely, especially as it would further condition the property market.
Governments make tax law according to liquidity, not morality. This is why they like income and sales taxes, because there is cash they can easily claim a part of. And it’s why poll taxes have always been unpopular. It’s not strictly an argument against LVT, but it is an argument against the likelihood of its being introduced.
*I should probably keep out of this argument anyway as every time I try to get my head around it the world turns purple and my brain runs out of my ears.
CI, I was using renting as an example.
It appears that most people like homeownership (in fact, I like homeownership personally as well) which is why all my policies are geared up to increasing the spread of homeownership, as opposed to the Home-Owner-Ists who want to concentrate land- and homeownership into ever fewer hands (see previous post).
I'm against poll taxes, but LVT is not a poll tax. If you would rather pay less then just move to a smaller house or a cheaper area or sub-let a room or two and split the LVT bill. And if you fancy living somewhere big and posh and you can afford it, then you are of course free to do so.
This still doesn't answer the question of what value is and this is my main objection. The only way to measure it is when a transaction is made. I know you have previously said that the council could make an offer and work it out depending on whether the offer is accepted or if a higher one is, etc.
However, if LVT were levied on the value of the property when it was bought, or what you insure it for or some other valuation metric that you agree to, I would be a lot more comfortable. To say to someone this is what I value your home at, so you have to leave because you value it differently is absurd and goes against the principles of voluntary exchange.
EKTWP, since 2005 prices have gone up and down to where they started. In that period, about a fifth of all privately-owned homes have been bought and sold.
All that is recorded by HM Land Registry, as well as plot sizes. That gives us plenty of raw data to feed into the calculations for each postcode sector to give a reasonably accurate starting figure.
And the initial percentage need not be high - let's say 0.78% like in Northern Ireland (to enable us to replace Council Tax, IHT and SDLT, let's say). Then we gradually nudge up the rate and reduce other taxes.
Further, you overlook the workings of the free market. If the tax were set 'too high' for any area (relative to comparable areas) then sure, people who stay put might be 'overpaying' by a couple of hundred quid.
But some people would have sold anyway, so when next year people buy a property there, they will obviously offer a lower purchase price, so the tax would automatically adjust down (relative to comparable areas) and vice versa.
The upshot of all this is that people will actually gravitate towards the areas where the tax is perceived to be high (because the capital outlay and the risk of further price falls is lower) rather than away from them.
EKTWP, by the way, the insurance value is quite different to total value.
The total value = land value plus bricks and mortar. If we take insurance/rebuild as an [inflated] proxy for bricks and mortar value, then you have to deduct insurance value [minus discount] from total value to arrive at land value.
The houses I bought in the 1990s cost rather less than £100,000 but the [inflated] insurance/rebuild value in each case was over £100,000, so at the time, land values in that area must have been more or less nothing.
Mark, I was just trying to think of a way of defining value that you had agreed to. An example I was thinking of was a house that you bought 70 years ago for £100, but you now insure for £100,000.
The HM Registry idea is good, but it still assigns a value to your house that you haven't explicitly agreed to. In your example I would argue that it is not a free market, because, as you say, people are basing their decisions in part on what the rate of tax is! It's like saying people buying houses too big for themselves in order to maximise their capital gain is a natural product of the free market because first houses are capital gains tax exempt.
P.S. My word verification is pantiwiff. I dont know what it is, but it sounds interesting....
EKTWP, of course 'market value' is a defined term, there's no great science behind it. By definition, half of people will think it too high and half will think it too low. And by simply 'not selling' you are in fact tacitly agreeing to the market value.
Your CGT example is fair enough, but the fact that some things are subject to CGT and others are exempt leads to distortions, which fuel bubbles which are bad for everybody.
LVT will dampen bubbles, which is good for everybody. Whether you call 'dampening boom and bust cycle' a distortion is up to you.
You haven't really answered the philosophical point of why I should be forced to use my land in a way I do not want to (or pay a tax based on an activity I am not actually involved in) because of some theoretical perfect efficient land usage model.
LVT is kind of socialist, because it puts the rights of the collective (what society decides would be the highest earning use of a piece of land) above the rights of the owner to decide freely what he wants to do with it. And having to consider how one is going to pay a large LVT bill based on a potential usage does not in my mind lead to a free choice for the owner.
Its a 'use the land as we say' or sell up choice. Neither of which allow much room for freedom of the individual.
Mark, you might be tacitly agreeing to the value by not selling in theory, but how many people want to move house 8 times a year because the "market value" is changing. I know that the tax paid might change only a small amount, but this, to my mind, isn't something over which people have control. Some people may be happy to pay tax on the back of the "value" of something which changes and is subject to other people's opinions, but I'm not happy with that. If you say to me you bought this land for £Y so your tax will be £Y x Z% every year, then great, I'm happy. You could then even work out the PV of the tax and pay it off in one go if you were so inclined....
S, "why I should be forced to use my land in a way I do not want to"
Who said 'forced'? (well, you did, obviously). Why should the state 'force' other people to stay off your land? Why should the state 'force' the value of your home up by opening a railway nearby? Why should my landlord 'force' me to pay rent - does the house I'm renting generate income for me?Is the rent set according to my "ability to pay"?
Similarly, why should the state 'force' businesses to hand over 17.5% of their gross profits and 28% of their net profits as tax?
And what about 'market forces'?
Let's look at cars. The car industry can make one flashy sports car and sell it to a rich guy for £150,000 or it can churn out ten average family saloons for £15,000 each.
Is that efficient use of the car industry's assets? I'd guess yes, or they wouldn't do it. Is that efficient use of the rich guy's money? I'd guess yes, or else he'd spend it on something else. Would you say that average income people are 'forced' to settle for a Mondeo rather than a Ferrari?
Everybody has their own budget constraint and their own preferences. If people want to have a big house in a nice area and can afford it, one way or another they will be 'forced' to pay for it.
EKTWP, OK, going back to your insurance example, let's imagine that the insurance value were the same as market value (for simplicity).
Would any insurance company offer you a fixed insurance premium for all eternity based on that asset's value at a random point in time? I sorely doubt it.
Is insurance 'voluntary'? Well, yes it is.
But is owning land 'voluntary'? Yes of course it is. Is taking out a mortgage 'voluntary'? Yes of course it is. Land ownership is a kind of rolling contract with the state - the other party is the state, and under rules of freedom of rolling contracts, either party is allowed to vary the terms, provided the other party can opt out.
People see being a landowner or a home-owner as a kind of insurance policy but without wanting to pay the insurance premiums.
What if you have a mortgage and interest rates go up, i.e. by a random percentage of a random figure arising from a transaction at some random date in the past? And what if the reason that interest rates go up is because the state wants to dampen a house price bubble? That clobbers recent purchasers unduly and doesn't affect people who've paid off the mortgage, i.e. it clobbers those least able to pay and doesn't affect those who have the most disposable income.
And where on earth does this idea come from that people would move home eight times a year? That is pretty much a non-argument as not based in fact or logic. Not even tenants move eight times a year.
Mark, I'm not sure you understand mine or sobers's points. Until you can define the value part of Land Value Tax, it is meaningless. I am saying that the value can only be measured when you make a transaction or value (insure) it yourself. You wish to make value subject to what other people might assign to something.
As a parallel, why not have an IQ tax or a potential tax? You could be a banker, so I'm going to tax you like one.
Mortgages, interest rates, etc are all subject to change, but we know they are. What if your mortgage payment went up because someone bought a house next door for a different amount, i.e. if your mortgage was based on the value of your home, not on what you actually paid for it?
EKTWP, I understand your points perfectly well. When I was doing my Bow Group report on tax simplification a few years ago, I stumbled across this idea of Land Value Tax, and realised it had been proposed by proper serious economists like Adam Smith, David Ricardo, Milton Friedman et al.
Because of the way we are conditioned in this country (which probably goes back to the Normans) we have an inbred 'respect' for landownership (all the poachers were removed from the gene pool by being executed). So the idea seemed to me, at first, totally counter-intuitive.
But then I started thinking about it and suggested the idea here and there, and have dealt with every single objection that has been raised (at least to my own satisfaction), and quite simply, the positive effects of replacing taxes on true wealth creation (i.e. work and enterprise and output) with a tax on a pre-existing asset whose value is almost entirely down to the actions of society as a whole far outweigh any possible downsides.
Before we worry about details, please ask yourself which economy is going to do better:
a) One where everybody rents but pays no income tax or corporation tax (sure, there's a 'risk' that your rent will go up - either you are happy to pay the extra because there is now a new station near you, or a new businesses have started up, or you decide it's not worth it and rent a slightly smaller house or take in a lodger or whatever); or
b) One where you can, if you take out a huge mortgage, buy a few hundred square yards of land but there are swingeing taxes on work and enterprise etc?
As to this: "Until you can define the value part of Land Value Tax, it is meaningless."
The value part is the rental value of the land, or in my world, a small percentage of the capital value of the land (or even a small percentage of the total property value) or any combination of these.
Market value is, quite simply, market value. With things like a Bob Dylan CD, different people ascribe completely different values (some may hate him and to them it is worthless, some might be happy to buy a Japanese import CD with bonus tracks for £29.99) but if you go into different record shops, you will still find that they are usually charging the same price.
But these discrepancies are nowhere nearly as big with housing. If newcomers value a property at £x and are prepared to pay £x to buy it and £x times y% in tax, then it is fair to assume that most people who live there are also prepared to pay that much. And if they don't want to pay it they respond accordingly (buy a smaller house, move to a cheaper area, take in a lodger etc).
In the long run, we know that people with higher incomes will have the nicest cars, the nicest holidays and the nicest houses. The 'worst' that could happen under LVT is that the transfer of more desirable housing from low income people to higher income people would be speeded up.
"why not have an IQ tax or a potential tax?"
a) On a practical level, it would be unworkable. Clever people would simply deliberately flunk their IQ tests.
b) If a government tried that, all the high IQ people would move abroad
c) Your IQ is yours and yours alone. It was created by luck of genetics and, unlike land, the value of a high IQ is not determined by how near it is to a railway station or a good school; whether the police keep crime low; whether new developments nearby are prevented or on prevailing interest rates.
OK, but if people can flunk their IQ tests, why can't they flunk the value of their land by buying the land and the house separately?
And you still haven't, to my mind, properly answered the question of how you measure value. Fine, if you're renting, then you can measure it. What I am uncomfortable with is, say I buy my house for £1m. A few years later someone buys an identical house next door for £5m. Does my tax burden now go up by 5x?
I can see your argument about a railway being built, but presumably the free market would sort that out such that if you could get a much higher price for your house than when you bought it and you didn't value the railway before then you would sell, no?
If the government taxed successful people more than less successful people, they'd all move abroad, wouldn't they?
EKTWP:
1. "why can't they flunk the value of their land by buying the land and the house separately?"
On a purely practical level, may I refer you to Northern Ireland, where they replaced Domestic Rates in 2007 with a flat 0.78% tax on the capital value of residential properties as at 1 January 2005? They did it and it 'worked'. They appear to cap the value at £400,000 but fair enough, above that you're liable to Inheritance Tax. I personally would get rid of the cap AND get rid of Inheritance Tax, but hey.
And of course people will fudge things, so what? The % tax rate is somewhat arbitrary, so if 'official' prices are pushed below real prices, it is easier to up the % rate slightly that get involved in all sorts of arguments over values.
a) It is easier tracking down one or two million property sales a year than the turnover, profits, incomes and spending of sixty million individuals and businesses.
b) Collection rates for Council Tax or Business Rates as a % of what the take 'should' be are very high - something like 95%. Compare that to actual VAT, corp tax, income tax and PAYE receipts which are only about eighty per cent of what they 'should' be.
"say I buy my house for £1m. A few years later someone buys an identical house next door for £5m. Does my tax burden now go up by 5x?"
Yes of course.
Who would you rather be, the guy with a windfall capital gain of £4 million and a £50,000 per annum property tax, or the guy with a £5 million mortgage and a £50,000 annual property tax? It's chicken-feed to the new guy - it's no worse than a 1% interest rate hike, and if he can't afford it, why can't you?
"If the government taxed successful people more than less successful people, they'd all move abroad, wouldn't they?"
I covered this before. As a simple matter of fact, the UK has this loony 50% income tax rate on hedge fund people and practically no property taxes.
Switzerland, on the other hand, has a top income tax rate of about 40% and what is effectively a 1% property tax (a mish mash of different things, like they still have Schedule A taxation and so on).
A lot of hedge fund people migrated from the UK to Switzerland. That's a simple observable fact.
PS, property taxes are not a tax on successful people. They are a tax on property values. Properties and land cannot move abroad. Fact.
If you're arguing that this is better than what we have at the moment, then I agree. However, I more interested in discussing how you define value, which could go on forever!
I, in fact, moved back from Switzerland to London, so it got me wondering how the hell I was paying multiples of the tax I was paying before, and getting worse services. And I still had to take out private health insurance. I am still trying to work out what would be the BEST tax, not just one that is better.
The question about successful people was in reference to high IQ people, rather than about property, btw.
EKTWP: "If you're arguing that this is better than what we have at the moment, then I agree."
Thanks.
"I more interested in discussing how you define value."
I have told you how I would measure it, which will have to suffice for now.
"The question about successful people was in reference to high IQ people, rather than about property, btw."
OK, let us imagine two countries - let's call them the U and C. U has no property taxes and 50% income tax. C has 25% income tax and higher property taxes, so capital property prices are much lower in C. The total revenues in each country are much the same.
C could mean CH = Switzerland or Channel Islands or China (Taiwan).
If you were a high earner and otherwise indifferent where you lived, would you rather pay a high amount to buy a property (i.e. pay a lot of privately collected taxes up front) and then pay high income tax in future?
Or would you rather get a cheaper property now (the discount being equal to the NPV of all the future property taxes so we can ignore both sides of that equation) and pay less income tax in future, enabling you to save up a bigger retirement fund to pay your property taxes in retirement, should you decide to stay there?
In practice, we know what people prefer. And if high earners have high IQ's, it won't take them long to work out.
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