What is really difficult about this is that the Home-Owner-Ist coalition will often make two entirely self-contradictory claims. For today's episode let's look at two such claims:
a) Higher taxes on land values would depress property prices (which is correct and A Good Thing, in my book), and
b) Landlords or vendors would merely 'pass on' such taxes to the poor unwitting tenant or purchaser (which is arrant nonsense).
Similarly, the Home-Owner-Ists claim that:
a) Land Value Tax would be wildly unpopular (which is unfortunately correct; the good news is that it would only have the slightest chance of catching on if a shedload of other taxes were replaced such that there were far more winners than losers), and
b) Those evil politicians would simply slap LVT on top of other taxes (which again, is arrant nonsense, see (a)).
Simon68 advanced both these over at HPC yesterday:
I believe if UK is going to impose LVT it will be on top of existing council tax. So, landlord will pass on such tax to occupiers who are already paying council tax and ground rent.
*sigh*
Most of us start our 'housing careers' by renting. Let's imagine you find a job and go to the letting agent who offers you a a choice between a flat in Block A or a flat in Block B. The two flats and the two blocks are physically identical, they are on the same side of the same road and separated only by a strip of grass. The letting agent tells you that the rent for Flat A is £1,000 a month (inclusive of Council Tax).
Q: What do you think the rent (inclusive of Council Tax) is for Flat B?
A: £1,000.
You do a bit of digging and find out that the council tax on Flat A is £100 a month, so the rent is £900. It turns out that Council B messed up badly and lost a lot of money with Icelandic banks, which they recoup by increasing the Council Tax on the flats in Block B to £150 per month. Apart from that, the level of services offered by either council are identical.
Q: What do you think the rent (exclusive of Council Tax) is for Flat B?
A: £850.
You move in to Flat A and happily pay the inclusive rent of £1,000. The leaseholds of a flat in that block and a flat in block B come up for sale - the leases are of identical length and have exactly the same service charge and you're thinking of buying.
Q: Assuming that the flat in block A is on for sale for a fair price of £180,000 (200 months' rent), and you expect the monthly Council Tax to stay at £100 and £150 respectively, what do you think a fair price for flat B is?
A: £170,000.
You dig even further, and it turns out that the leases both have nine hundred years remaining, but differ in one important respect: the owner of a flat in block A only has to pay £1 a year in ground rent (which the freeholder never bothers to collect), but the owner of a flat in block B has to pay £2,500 a year (and the freeholder makes sure it is paid on time).
Q: Assuming £180,000 to be a fair price for flat A, and applying a discount rate or interest rate of five percent, what is a fair price for flat B?
A: £120,000.
I could go on, but hopefully you get the drift. Unless I've miscalculated something, you will notice that the vendor or landlord cannot 'pass on' a single penny of his additional costs. In case you wonder why this is the case, it is because rents are dictated by demand (primarily local wage levels). Supply is severely restricted, so the demand and supply curves (in most parts of the UK, at least) cross far above the cost curve. A landlord's costs simply have nothing to do with the rent he can charge or the amount for which he can sell a property.
At the other end of the scale, imagine flat C in a run-down area which is expensive to insure (higher crime rate); which was badly built and has massive regular repair costs; with a landlord who foolishly locked himself in to a punitive interest rate; a local council which has very high Council Tax (let's say £200 a month for the flat concerned). All these costs amount to £800 per month, but wage levels are only half as high as the other area you were thinking about (see example A and B above). It is impractical to commute from one area to another.
Q: What do you think is the maximum rent is that the landlord can charge? £800 or £500?
A: £500.
*/sigh*
Here endeth.
Wednesday 16 June 2010
Killer arguments against LVT, not (48)
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9 comments:
You do make a persuasive argument; and you are gradually convincing me. However, it would be much easier to be persuaded if you didn't put up your ornery "*not*" and "*sigh*" everywhere. However...
My main problem with your argument has always been your discarding of point (b), which you call "arrant nonsense". It seems to be based on the idea that landlords, tenants and homebuyers are rational and act in the best economically-motivated way. As counter, I would offer the evidence that house prices are stupidly high and have been rising and rising forever with no sign that anyone has any sense. Buyers seem willing to pay any amount, and owners seem unwilling to ever accept anything other than a huge profit. Bizarrely, this makes them both correct (until the bubble bursts of course).
Why then would these irrational fools suddenly behave sensibly when it comes to council tax and rents?
Here's an alternative scenario:
Flats A and B are identical. Flat A is on the market to be rented for 1000 pcm; flat B is for 1050 pcm. Tenant A arrives; "I should like a flat -- Flat A seems cheaper; I shall have that one". The supply of flats has now been reduced, so the higher price for flat B is now justified. When Tenant B arrives, flat B is all there is, so that's what they pay.
Both of the land lords are earning 900 pcm after their council tax bills are paid. When council B puts the rate up again, when landlord B passes that on to tenant B, why wouldn't the tenant pay it? Flat A is unavailable for him to move to as tenant A is happily occupying it.
LVT, payable by the freeholder, can be passed onto a tenant - in part. A big BUT...market forces come into play. If he ramps up rent it indicates he was charging below the market level. If he goes over, the tenant will move out. Market forces come into play.
Council Tax is paid by the tenant not the landlord.
I rented out a flat in London. The service charge was increased, which is rolled into the rent. The tenant was paying the max what I could charge, if I increased the rent there was a high probability he would move out. I took the hit. It does not automatically follow that any charges get passed on to the tenant.
"I believe if UK is going to impose LVT it will be on top of existing council tax. So, landlord will pass on such tax to occupiers who are already paying council tax and ground rent."
This is nonsense with the writer not thinking it through. Ground rent will almost certainly be rolled into the rent. The tenant wants one figure. Council Tax was rolled in, but the tenant now has to pay that by law.
OP, my point was that one objection to LVT (that it would depress property values) is correct (whether you think this A Good Thing or A Bad Thing is a separate debate); and the other, being the opposite contention is clearly incorrect.
Of course, there is no absolute, precise mathematical relationship, but this effect is very much observable in real life. What you miss from your last para is that either Landlord B would reduce the rent or Landlord A would increase the rent; the total rent + C Tax would tend to equalise over time.
John, more fundamentally, the tenant is already paying for the value of the location, and most tenants refuse to pay more than market value; regardless of what the landlord (or retailer) has to pay for it. To contend otherwise would be to imply that no business ever makes losses as they could always put up their prices.
You are showing touching naivity in thinking that any govt (as advised by our wonderful Civil Service) would a) introduce a single tax to replace many others that did not raise more revenue than before and b) make themselves reliant on a form of taxation that is very difficult to raise revenue from by stealth.
Income tax (and all the others you would abolish) is easy to fiddle around with - there's nil rate bands, different rates, allowances etc that can all be mucked around with and no-one really notices. LVT would be obvious. X% headline rate times value. Only way to increase revenue is a) increase values by improving the state of the nation (long term and far to complicated for politicians) b) increase headline rate (politically unpopular).
So no politician is going to bind him or her self like that. Just not going to happen.
Then of course there's the Poll Tax effect - those worse off will make 10 times more fuss than those better off, so even if 2/3rds are better off, you can bet your bottom dollar the 1/3rd will kick up an almighty stink. Which is political kryptonite.
LVT is easy and cheap to collect as land cannot move or be taken off-shore.
LVT was introduced in Denmark from 1957-60. From 1957 to 1960, the following improvements took place:
* The big deficit on her balance of payments was turned into a surplus.
* Denmark's total debts abroad amounting to 1,600 million kr. were
reduced to one quarter of this, about 400 million kr.
* The rate of interest, and hence mortgage levels went down.
* Unemployment was soon replaced by almost full employment, together
with considerable increases in production and wages.
* Inflation was brought to a standstill. All wage increases were real wage increases, the highest ever in Denmark.
* No other taxes were levied during this period. (except one)
* The time was free of strikes. Industrial production went up 32%,
investment rose 135%
* Savings increased immensely, as once again it became profitable to
accumulate savings.
After three years in power, Denmark had no foreign debt, no inflation
and an unemployment level of 1%, considered full employment. So why is this not continuing?
Because the economy rose due to LVT, demand for land increased raising values slightly. However once a society settles after LVT land prices will fall, as speculators are largely out of the market.
True Geoism aims to get speculators out of all natural resources - which are community owned. A totally free market will emerge not subject to privileges.
It seems the Property entitlements argument is this.
We want everyone to have a house.
We want houses to be unaffordable.
S, you're good at this. You've outlined very succinctly what the arguments against it are... from the point of view of politicians. But these are, from the point of view of nearly everybody else, arguments in favour.
J, agreed. All quite startling.
AC1, that's Home-Owner-Ism in a nutshell.
And that is the crucial point - we are run by politicians, and a civil service that is not going to undermine its own power base/revenue sources.
No civil servant is going to recommend to his/her minister that they introduce LVT because it would undermine the very nature of govt today. IE it might make them live within their means, and stop bothering us. Which means less civil servants and less power for politicians.
And no politician will ever try to do it off his/her own bat, because they would either change their mind when confronted with the consequences, or be faced down by the vested interests.
Short of a revolution, or a catastrophic economic collapse (which is still very possible), no one is going to try to introduce LVT.
S, again, I completely agree with you on the facts, but my thinking is, if LVT sets a cap on govt spending (while rendering large chunks of it unnecessary) that is A Good Thing.
Admittedly, the last time we seriously tried it (the Liberals in 1909), the vested interests went and started World War One just to distract people's attention and smash the working classes to bits, but hey, if that's the worst they can throw at us...
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