Saturday 2 October 2010

Hayek on Land Value Tax

Much quoted by Faux Libs, e.g. here:

If the factual assumptions on which [Land Value Tax] is based were correct, i.e., if it were possible to distinguish clearly between the value of 'the permanent and indestructible powers of the soil,' on the one hand (a), and, on the other, the value due to the two different kinds of improvement - that due to communal efforts (b) and that due to the efforts of the individual owner (c) - the argument for its adoption would be very strong.

1. His objection appears to hinge solely on the valuation point, and not the underlying principle.

2. There is no reason to distinguish between (a) and (b); whether these values arise because of 'God' or 'nature' or 'communal efforts' or 'the good government of the state' (TM Adam Smith) is neither here nor there and nigh impossible to unpick*; the point is that we know the total market value of (a) + (b) + (c) because HM Land Registry records selling prices.

3. He appears to accept that part of land values relates to 'communal efforts' (b), i.e. factors far above and beyond the efforts of the land 'owner' himself (c), which is broadly speaking the value of the bricks and mortar. Legal concepts aside, if value arises from 'communal efforts', is it not fair to say that in economic terms the value belongs to 'the community'?

4. The value of (c), the actual bricks and mortar is easy to establish to within a tolerable margin of error. So to arrive at (a) + (b), all we need to do is take the recorded selling price for a 'property' (i.e. land + buildings); deduct the bricks and mortar value; and divide the result by the plot size, giving us a figure for the bare land/location value per square yard. To give a more reliable figure, we can then take an average of these values for all sales in the last five or ten years in each area (such as a postcode sector or a council ward). As a final check, we can do a map showing these values and will observe that they will tend to form 'contour lines' around town centres and so on.

5. While the absolute values have gone up hugely over the last fifteen years, it is relative values that are important and not absolute ones, i.e. town centres will always be ten times as much as suburbs; and suburbs will always be fifty or a hundred times as much as farm land; or London will always be three times as much as Manchester, and Manchester will always be three times as much as Dundee (or whatever). The land value tax per square yard of land would then be set proportional to the values arrived at in 4. above.

A tax on land values would act like a much higher interest rate and would keep absolute buying and selling prices much lower and hence more stable, and in future rental values, capital selling values and the tax in each area would move very much in line. From there on in, it's just a question of keeping an eye out for areas where than land and buildings are sold for less than the value of the bricks and mortar and reducing the tax/sq yard a bit in these areas (down to zero if necessary); and if capital selling values in some areas is still noticeably higher than in surrounding areas, the tax/sq yard is increased a bit.

6. Therefore the "factual assumptions" are correct, therefore, "the arguments for its adoption [are] very strong" and from the Austrian school point of view, such a tax would tend to keep land prices low and stable and hence significantly dampen land price and credit bubbles, which are two sides of the same coin.

7. What's not to like?
* Think about houses in Village A near a beautiful beach. The houses owe part of their value to the beach. Is that beach beautiful because of 'God' or 'Nature' (or do we humans merely perceive it as beautiful because of a deep collective memory of pre-Stone Age times when humans lived near beaches and seldom ventured inland, or at least that's way Ray Mears said)? And does the beach not owe its beauty partly to the fact that the government would not allow e.g. oil drilling to take place half a mile offshore?

And what if Village B a few miles up the coast has a similar beach, but also has a railway station connecting directly to a large urban centre - where are the houses worth more, in A or B? Perhaps residential properties are worth more in A because it's more 'exclusive'; but hotels are worth more in B because it's easier for holidaymakers to get to. Is it the railway station or the beach that gives the hotels in B their extra value? Is it the lack of railway station or the beach that gives houses their extra value in B?

Is the railway itself to be classified as 'communal effort' or 'good government'? Is there a difference? etc.


Robin Smith said...

Correct. But you won't win this one. Because they don't want to do it. This logic is only for govt civil servants, politicians and their masters in the international banking dynasties, who are looking for the twisted logic for not doing it, to feed to the terrified hoi's

And they have the power. Until you take away their power, by the people un-hoi'ing themselves, it won't happen.

Come the revolution though...

Mark Wadsworth said...

RS: "Until you take away their power, by the people un-hoi'ing themselves, it won't happen."

Correct. Which is why we must miss no opportunity to remind people that 'rising house prices makes us poorer, not richer' - just ask homeowners whether they really want to have to remortgage to raise the deposit for their children to buy an overpriced house, or appeal to their dynastic ego and ask them whether they ever want to have grandchildren.

Robin Smith said...

Did just that today chatting to a PCSO on the street. She was complaining like crap about having to re-mortgage to get a home for her kid

I like your terror idea very much too. (grandchildren)

I use a much more terrifying one:

Do you not realise that your kids are waiting for you to die!