Tim W falls into the trap of making up his mind and then selectively applying economic theories to justify his position. See if you can spot the figure which he deliberately omits:
Imagine, just as an example, that we replaced all [Housing Benefit] with social housing...
We can either subsidise private rents by £21 billion via HB or we can subsidise social rents by £21 billion by not charging market rents. Either way, it’s still £700 per taxpayer: yes, in one people have to cough up, in the other they’re just made poorer without realising it but the economic cost is the same. As are the people who have to carry that economic cost.
It might be true that social housing is in some manner “better” than subsidising private housing. I don’t happen to think so but you might, fair enough. But I have a very strong feeling that much of the support for social housing comes from some weird belief that it is either free or cheaper. Which it simply ain’t."
Correct! You've spotted it. Well done! Notional cost accounting is just like ordinary financial accounting - for every debit there is a credit. He mentions the notional cost (which he refers to as economic cost) of allowing people to occupy social housing at below market rents but he misses off the notional income.
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In case you didn't spot it, allow me to give a simple example:
Mr A and Mr B both have sons who attend the local university. Mr A's house is small, and Son A has noisy younger brothers and sisters, so Mr A (being a generous soul) pays £90 a week rent for Son A to live elsewhere (but Son A has to pay his share of the bills of £10 a week). Mr B's house is big and Son B stays at home in a room which Mr B could sub-let for £100, but Mr B (also being a generous soul) allows his son to stay there for £10 a week, enough to cover his share of the bills.
Mr A has a cash cost of £90. This is analogous to the Housing Benefit paid to 'private' landlords.
Mr B has no cash cost (quite clearly) but he has a notional cost of £90 (the rent he forgoes by undercharging his son rent or not chucking him out and sub-letting for £100 - which is clearly also an 'economic subsidy' to Son A) but Mr B also has the notional income, which he chooses in this example to spend on his son. This is analogous to having social tenants who pay little or no net rent.
To finish off the analogy, imagine that Mr A bumps into a builder who can do a sound-insulated loft conversion for £15,000 which will add £20,000 to the value of Mr A's house and in which Son A would be happy to live. Mr A could save himself the actual cash cost of £90 and allow his son to stay living at home for £10 a week bills. This is akin to allowing more social housing to be built (taking Mr A as taxpayer and local council rolled into one).
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And here's the long explanation:
1. Let's ignore the two-thirds of Housing Benefit that is paid to local councils or Housing Associations (social housing) - because that is a completely made up figure; it is merely a transfer between government departments (the DWP's expense is the local council's income) and does not cost the taxpayer one red cent, neither in cash terms nor in notional terms.
2. The actual cash cost of providing social housing is quite low and is largely covered by the rents that some social tenants pay; the notional interest cost of the bricks and mortar is covered by the notional capital gains on the finished buildings; and the council can get land at very low cost (it does not have to pay for planning permission as it can give itself planning for free).
3. Let us instead focus on the one third of HB that is paid to 'private' landlords. If the income taxpayer has to pay 'private' landlords £7 billion to house people, that is a real cash cost of £7 billion. What if councils built enough housing for all these people for low net rents instead? It would save £7 billion cash expenditure a year, which could be passed on the income taxpayer as a tax cut (or spent more sensibly, whatever). I don't think that Tim W disputes this.
4. And let us imagine that the market rents for this social housing would be £8 billion, but the tenants can only afford to pay £1 billion (enough to cover cash running costs). The council could demand £8 billion and allow another branch of government, the DWP to pay £7 billion in HB - but to simplify the model even more, we'll assume that councils just charge people what they can afford to cut down on paperwork and hassle.
5. For simplicity's sake, we will also assume that social housing belongs to the taxpayer, but is administered by local councils. So the council is letting out your property for less than market rent, and Tim W says that there is a notional loss to the owner and an economic subsidy to the tenant. Which there is. And the value of that economic subsidy to the tenant is worth £7 billion; and so has an economic cost of £7 billion to the taxpayer; absolutely no dispute there either.
6. But... for every notional expense there is some notional income. And that notional income is the £7 billion that the taxpayer is 'earning' from the social housing and 'giving back' to the tenants. Of course in cash terms he is neither earning it nor giving it back, that is why we refer to this as 'notional income' and 'notional costs'.
7. So with social housing, the taxpayer (as ultimate landlord) has notional income of £7 billion and a notional expense of £7 billion; the net notional cost is in fact zero, which conveniently is exactly the same as the actual cash cost. But... with HB payments to 'private' landlords the taxpayer has a cash expense of £7 billion and no corresponding rental income (neither cash rental income nor notional rental income to pay it.
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Anybody who disputes that social housing is better value for the income tax payer than HB for 'private' landlords is merely putting blind politics above the interests of the income taxpayer; whereas I would put always the interests of the income taxpayer above politics. In fact, looking after the interests of the income taxpayer IS my politics, to the extent I have any at all. Which is one of the reasons that I virulently oppose the payment of HB to private landlords and support the construction of more social housing generally.
And anybody who thinks it's a good idea to sell off council housing at undervalue and then rent it back from 'private' landlords for above market value wants his or her head examining.
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To respond to the inevitable dumb ass comments:
1. Yes, I know that social housing is full of single mums and Somali asylum seekers. Completely separate topics. In the first example, let's imagine that Sons A and B are the 'deserving poor' to whom Mr A and Mr B have some moral or political obligation.
2. Of course councils should charge open market value for the more desirable social housing and relegate lower income people to the less nice stuff. But with an increase in the amount of social housing and hence lower rents in the private sector, rents at the margin will fall dramatically, so even the lowest income will be able to afford market rents.
3. Yes, I am a land value taxer. The state is best funded by maximising its income from rents or ground rents; the best form of rationing is price rationing and people ought to pay for what they get (see 2). Land Value Tax is in and of itself good for the income taxpayer as it allows taxes on incomes and production to be reduced.
Here endeth.
Local Council Efficiency
3 hours ago
14 comments:
Also, if low income people are just giving all their income to the state as rent they have nothing to spend in the rest of the economy.
Right-wingers like TW usually claim that people giving all their money to the government 'takes money out' of the economy don't they?
"But... for every notional expense there is some notional income. And that notional income is the £7 billion that the taxpayer is 'earning' from the social housing and 'giving back' to the tenants."
Nope, sorry. I simply don't see it.
Or rather I do, in a sense: that notional income is still a transfer from taxpayers to social housing residents. Which is my point.
Doesn't matter whether it's a cash cost or income foregone, it's still a transfer of income.
Really, Mark, you haven't an earhly of seeing your beloved tax adopted unless there is the mother-and-father of a great sovereign financial catastrophe.
Oh.
SL, good point.
TW: "Doesn't matter whether it's a cash cost or income foregone, it's still a transfer of income."
I never disputed that. But from the point of view of the taxpayer far better to:
a) generate additional notional income by building more social housing and then to forego it, than it is to
b) pay HB to private landlords out of cold hard cash.
In scenario a) the taxpayer is in notional terms and in cash terms £7 billion better off.
D, exactly. Apparently some government bod's dismissed the idea of LVT because they said it would destroy the financial system. Didn't the financial system just destroy itself, largely because there is NO LVT?
I never disputed that. But from the point of view of the taxpayer far better to:
a) generate additional notional income by building more social housing and then to forego it, than it is to
b) pay HB to private landlords out of cold hard cash.
This does raise the question of further options though:
c) build lots and lots of housing, then rent out at market rates.
d) build lots and lots and lots of housing and rent out to all who need it, at below market rents (but still above costs).
under c) the state is better off by £7 billion (and the former HB claimants end up living in tents, or somesuch).
On the other hand, d) would drive down the cost of renting, making it more affordable for HB claimants without requiring them to be given vast amounts of cash. Government would make some money (although less than in c), if they did it right they'd make more than in a) or b).
Long term, the government could drive down house prices and buy up more and more property. By charging a bit more than it costs to maintain the properties, they'd make some money and we'd have no more housing bubbles.
If you took it to extremes, you could end up with the govt owning all propoerty, charging running costs + a certain percentage and using this income to reduce all other taxes - LVT in all but name :-)
"And anybody who thinks it's a good idea to sell off council housing at undervalue and then rent it back from 'private' landlords for above market value wants his or her head examining."
or is a Tory. It may be a bad idea economically, but it's a damn good one politically for those of a more right-wing persuasion.
It is a good point isn't it MW. From the point of view of an LA you are going to NEED shop assistants, bar people, fork-lift truck drivers etc.
These people need housing. Now, if you take as much rent off them as the market will bear you can hire more bureaucrats to trick them into flogging booze to kids, lecture them about health and safety of fork-lifts etc.
If you just cover your costs you can leave them money in their pockets to keep each other in jobs.
Of course, as we know the HOists would prefer that we spent the rents of the low paid decreasing their property taxes and building things that increase their land values.
Presumably the shop assistants etc could earn some extra pocket money sweeping TW's chimney and trimming his hedge?
RA, that's one of my favourite thought experiments - everyone who lives in council housing is income tax free; and businesses that trade from Crown Estates premises or other govt. owned land are VAT, NIC and Business Rates free, but in turn, they have to pay full market rent (being defined as: the highest rent that the state can possibly get from any tenant).
B, sadly yes. Tory dogma overrides the interest of the taxpayer of course.
SL, indeed. But don't go saying things like that when you're down the pub on Friday, eh?
Your analogy isn't right. Mr B might have the notional income from his bigger house. But he also has the cost of buying that bigger house in the first place.
AC, my analogy is spot on.
We are currently in the position of Mr A and Mr B is just there as a comparative.
The question is: what is the most sensible course of action for Mr A?
Well, that would depend on how much interest Mr A had to pay on borrowing £15,000, wouldn't it?
AC, Mr A has notional interest costs of (say) 5% = £750 per year, but you can minus off the £5,000 net profit on having the work done, and the fact that his house will in future appreciate by 5% of an extra £20,000 a year. The cost is so close to £nil as makes no difference.
Whatever the cost is, it is a lot less than £90 x 52 = £4,680 per year.
"The question is: what is the most sensible course of action for Mr A?"
(In the spirit of openness, I should point out that I also post as Zelazny in some places, such as on AdamCollyer's blog).
I'm not 100% sure that the analogy provided here stands up. For one thing, Mr A clearly has some duty of care to Son A, whereas I fail to see why the hard-working taxpayer should be out on a limb to support a lot of the folks who currently receive HB. I'm sure there are some deserving cases, but there are also a lot of people taking the mickey. I think welfare should be at most a safety net, and not a way of life.
I do think that the house price bubble is a big problem, and one that needs to be resolved. I also think that LVT is a nice way to resolve it, but it has flaws.
I think my preferred method would be LVT with a twist. Of course, it goes without saying that we'd have a minimal state. Defense, policing and law is about all I'd see as being strictly necessary, and there are some interesting ideas regarding the latter two that I may explore one day (for some great political ideas check out The Moon is a Harsh Mistress, by Robert Heinlein).
So we'd have a minimal state. LVT levied on the value you place on your property and a citizen's dividen paid out (so no need for a welfare state). That means you can say that the property's worth next to nothing to pay reduced tax, if you want to. But it would be possible to make a compulsory purchase against the property for twice the value you listed (so don't be too creative with your numbers).
This would encourage people to list things a little lower than they're actually perceived to be worth (and would hence help to drive down prices, over time) but at the same time not too low, or it'll be bought from you. Noone would be able to complain about the tax as they'd be setting their own level.
"But you can minus off the £5,000 net profit on having the work done"
No, you can't. That's a profit on his investment, which is in principle unrelated to his letting the room to his son. In practice, the extension might only add £10,000 to the value of his house - in that case, are you going to add that loss to the cost? Similarly, if the State builds a council house, it might cost more to buy the land and build the house than the house is worth at the end.
"His house will in future appreciate by 5% of an extra £20,000 a year". Not necessarily. That depends what happens to house prices. Not sure where the 5 percent figure came from - there's no reason why houses should go up by 5 percent p.a. just because interest rates are 5 percent. Indeed, house prices can go down as well as up. In which case, Mr A would lose more on his more valuable house.
So Mr A's decision will depend on the interest rate he pays, the increase in the value of his house that he gets by building the extension, and his view of what is likely to happen to house prices in the future.
Which means that your case that Mr A should build the extension depends on his belief in ever rising house prices.
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