Housing Benefit Fun

An article in The Telegraph* gives us two more or less completely opposite points of view on what the likely impact of introducing a cap on the amount that can be claimed in Housing Benefit will be:

1. The traditional, static approach from Shelter:

Figures from the Valuation Office Agency, obtained by campaign group Shelter, show that households in area [sic] in the country will be affected by the cuts, which will be introduced in two stages, in April and October next year...

Campbell Robb, chief executive of Shelter, said ... “The increased rental costs people will have to now find each month will force the poorest and most vulnerable in our society to leave the homes and communities and migrate to areas with the cheapest housing. Many people will be forced to cut back on essentials like food and electricity, or take on extra debt, just to make ends meet. Despite trying everything they can to stay afloat, some will be pushed over the edge into a spiral of debt, eviction and homelessness.”

2. The more realistic, dynamic approach:

Private landlords are facing having to slash rents if they want to keep their tenants because of large reductions in housing benefit...

Chris Norris, policy manager for the National Landlords Association, said: “Landlords will have to look at their profit and loss and decide how much they can afford to cut their rents by. If they are not going to do that, they will have to seek non-housing benefit tenants or sell up.”

It is of course the second approach which is correct.
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The Golden Rule is that subsidies do not make things cheaper, they make them more expensive (the questions are, who benefits and who pays?). Basic economic theory says that if something is in fixed supply and demand is price elastic, then a subsidy to consumers merely pushes up the equilibrium price they are prepared to pay; and if the subsidy is paid directly to the suppliers, they will pocket the lot and the consumer does not benefit at all.

In the instant case, Housing Benefit merely sets a floor underneath rents that recipients and non-recipients alike have to pay, so it is actually the Lib Dem chap quoted at the end of the article who nails it - a reduction in Housing Benefit will actually benefit lower-paid non-recipients, even if recipients end up moving into cheaper housing (it's a straight swap between these two groups; landlords as a whole will lose out and taxpayers as a whole will gain).
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That all seems uncontroversial enough. I trust that any fair-minded right winger who places the interests of the taxpayer above those of private landlords; or who places the interest of low-paid tenants above those of benefit claimants will be nodding along in agreement.

But thinking on - aren't subsidies the opposite of taxes? We'd expect a tax on something to have the equal and opposite effect of a subsidy on that something. We see that a subsidy to rents is 'passed on' to tenants in the form of higher rents, and that a reduction in the subsidy is largely borne by landlords.

So how can it be argued that a tax on rents would also be 'passed on' to tenants in the form of higher rents? Once a subsidy is reduced to nil (and rents settle down to a new, lower equilibrium level), introducing or increasing a tax on rents would (surely) not affect the new equilibrium rent that a tenant pays (that being the open market rent) - it would only reduce the landlord's net income in the same way as a reduction in the subsidy reduced his net income, without making tenants, as a whole, any worse off (the current recipient's loss is the low-paid non-recipient's gain, as the Lib Dem chap points out).

It is quite likely that landlords are not happy with their new, lower net income, but - and this is where the NLA spokesman is probably wrong - why would they sell up? House prices will surely adjust down to reflect the new, lower rents, so the basic return on money invested (rents divided by the value of the house) will stay much the same.
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Of course, we already have a tax on a landlord's rents, called income tax, and a covert extra tax on more recent buy-to-let landlords called "massive mortgage repayments to the bank" and I don't indulge in landlord-bashing.

What I am alluding to is the impact of Land Value Tax, of course. It is alleged that such a tax would have some awful knock-on effects, but what would be the benefits of introducing a Land Value Subsidy? Wouldn't house prices just go up at the expense of the taxpayer generally and at the expense of future purchasers? They wouldn't just have to pay for the house, they would have to pay for the net present value of the future subsidy stream as well (which they will of course be paying for with their own income tax).

* Via Robin Smith.