Killer arguments against LVT, not (52 b)

Today's FT includes four further responses to Martin Wolf's fine article of last week, one agreeing, one that misses the point (and does not explain why taxing incomes is better than taxing land values); one sarcastic and one disagreeing:

Sir, History teaches two lessons that argue against Martin Wolf's proposal to increase taxes on property in order to reduce taxes on labour (Why we must halt the land cycle, July 9). (1)

First, much of the gain from land price rises is solely produced by inflation (2). Second, reducing the benefits of property ownership – or taxing it heavily – leads to neglect (3).

Mr Wolf need only compare the £1m ($2m) present value that he assumes for the land on which his house sits with the salary that a television presenter can command today compared with 1984. In both cases, supply and demand have been affected by other economic forces (4), but a large part of Mr Wolf's "gain" results from depreciation of the currency. (5)

At the same time, many areas of Britain have been blighted by the failure to maintain property from which the yield, either to a local council or to private landlords, has been inadequate. (6)

Higher taxes on property can be unfair when the state takes part of the illusory money gain that does not represent an increase in real wealth.(7) Society as a whole is hurt if tax on future increases in value leads owners to allow the already decrepit housing stock of the UK to deteriorate further.(8)

A. Edward Gottesman, Gottesman Jones & Partners, London EC4, UK.

1) History also teaches us a big fat lesson every eighteen to twenty years, when the land price/credit bubbles pop.

2) Partly, but not solely. In any event, so what? In the long run, land prices go up ever so slightly faster than wages, but both increase with inflation as well. So you might as well argue that income tax on wages or profits is a tax on inflation (and with income tax on interest, it most certainly is), that's neither an argument for or against taxing land values rather than incomes.

3) He presents no evidence to support this, and in fact the reverse is true. As long as land values are lightly taxed or not at all, they tend to rise disproportionately quickly and so the potential capital gains become a far more important factor than actual rental income that can be earned from developing the site and keeping the buildings in good repair. That is why there are so many property 'investors' who buy land or buildings and leave them standing vacant, extreme examples being Battersea Power Station (acquired 1993 for £80 million, sold 2006 for £400 million) or the blocks of empty flats in PR China (see end of this article).

4) Martin Wolf explained what those 'economic forces' are - lax banking regulation (and implicit government-backing), light taxation of land and, in the UK, the state-enforced lack of additional supply. Those are things in which the government plays a major role. Private TV stations can pay their 'stars' as much as they like, what business is that of anybody apart from their shareholders?

5) See (2).

6) See (3). And what is 'yield', exactly? It is income divided by money invested. The income, i.e. rents, is a fairly fixed figure which the landlord can, to some extent, influence by keeping his buildings in good condition, vetting tenants properly and so on, minus the tax. Remember that income tax is double taxation of rents (the tenant pays out of post-tax income and the landlord pays income tax again) so shifting from income tax to Land Value Tax wouldn't particularly affect landlords net rental income in £-s-d.

The money invested is merely a function of what landlords are prepared to invest in order to earn that net income. So if we had LVT and property prices halved, the yield would in fact double.

The important point here is that property owners would have no incentive to leave properties vacant and sites undeveloped in the hope of making a capital gain, and would have every incentive to maximise their rental income. The rental income, above and beyond any flat-rate LVT payable, would of course be income tax free. So his second 'historic lesson' is founded in neither fact nor logic.

7) Is he arguing against a tax on capital values (a) or on rental values (b)?

a) A tax on capital values (which I think we are agreed are largely 'illusory', i.e. prone to bubbles) would have the admirable effect of dampening or indeed preventing bubbles. It might raise no revenue whatsoever, but so what? It's done the job it was intended to do. (see also DBC Reed's Sentinel Tax)

b) A tax on rental values is a tax on something stable and real. The capital value of the land on which Martin Wolf's house stands has gone up ten-fold in the last quarter of a century, but the rental value will have increased roughly in line with wages, i.e. increased three- or four-fold. The flip side of this is that the income yield has fallen by two thirds (i.e. from a 9% annual return on money invested to a 3% return), see (6).

8) Repetition, see (6). Further, as Martin Wolf explained, a large part of the reason for this decrepit-ness is the fact that new development is stifled and hampered at every turn, so people end up spending a small fortune doing up old houses when it would in many cases be cheaper to knock 'em all down and start again from scratch (which is not to say that I don't like old houses, of course).

The biggest issue politically with LVT is of course the taxation of imputed rents of owner-occupiers. But seeing as LVT would reduce people's income tax and the amount they have to pay (up front) for the land, would this not free up a lot more money for keeping your house or flat in tip-top condition?

Here endeth.