Killer Arguments Against LVT, Not (101)

A commenter using the alias Radical Change did a fine summary of why replacing as many taxes as possible with LVT would sort out a lot of problems (e.g. house price bubbles) over at The Guardian, which earned the usual economically illiterate response (spotter's badge: DNAse):

I think the best system on land would be no taxes so that the market simply allocates resources in the most efficient way (1). But then we'd have to finance it. (2)

Having taxes also leads to an allocation of resources, but with the distorting feature of a tax (3). In your case:

- LVT would quite possibly push up the price of new developments, thereby cost the FTB more - you don't expect the developer just to eat it up, do you? (4) If it does nothing to price or supply, then why bother? (5) People don't sit on land for the sake of it, it's usually because there's no economic use for it. (6) If they could make money from it, they would (or someone else would). (7)

- the reduction of other taxes (SDRT, VAT, etc) would simply displace demand (8) and drive up prices in a natural reaction to making housing costs cheaper.(9) Before long prices would return to where they were before, (10) except property developers would be taking the excess profits you've created. (11)

It's difficult to know where to start with nonsense like that, but here goes...

1) Does he seriously think that land and buildings in the UK are currently being put to their most efficient use? And it is impossible to have land 'ownership' without taxes: rental income from land is a kind of tax, which is currently collected and/or enjoyed privately by the registered land 'owner' from time to time. Remember: land 'ownership' is impossible without a stable society prepared to recognise it and a government prepared to protect it.

2) Finance what? The tax or the cost of buying or renting land?

3) See (1). Everybody effectively already pays this tax ('ground rents'). If you are a tenant, you pay it to the landlord as part of the rent; if you have a mortgage, you pay it to the bank; if you are an owner-occupier who's paid off his mortgage, you are simultaneously earning and consuming, i.e. spending, the value of those land rents on yourself (you could, for example, rent out your house and rent yourself somewhere smaller or move abroad). This transaction is invisible but very real, and because the government in its infinite wisdom decides to tax incomes (i.e. wealth creation) rather than ground rents, the government then collects a similar amount in taxes on your income to the amount of ground rents you are earning/consuming.

4) Nope. The developer won't "sit on it", but the windfall gain made by the owner of the land when planning permission is granted will make a smaller windfall gain (see example in footnote*). It may well be that the developer already owns the land at the time planning is granted, so counts it as part of his development profits, but actually it's quite a different kind of income. I say to all my property developer clients that they make 80% of their profit with 20% of the risk by getting planning; building the buildings is the expensive, risky and stressful bit (so far they have all agreed with me).

And LVT in isolation can't possibly 'push up house prices' (see footnote again*). It may well be that scrapping taxes on incomes pushes them up, or the fact that the government or the council will be motivated to spend money in such a way as to make the UK or your town a more desirable place to live pushes them up (rents would probably double, but as most people's disposable incomes would double, that's not a problem).

Think about it: the price of new houses and second-hand houses are broadly in line with each other. Whatever restrictions or taxes you apply to new houses have the same impact on second-hand houses. Strict planning laws push up the prices of all houses; if LVT pushed up the price of new houses, then it would also push up the prices of second-hand houses, so why aren't the Home-Owner-Ists cheering for it?

5) It wouldn't be too difficult to tweak the variables of a full-on Georgist system (relaxing planning restrictions, the LVT rate, the amount spent on Citizen's Dividend and the amount spent on repaying public sector debt) so that the buying house prices went up or down or stayed the same. But if nothing happened to price or supply, then this is surely A Good Thing? A wholly non-distortionary tax!

6) Woah! People "sit on land" in the hope of making windfall capital gains (largely tax-free in the case of owner-occupiers). Tales abound of vast new cities being built in PR China where all the flats are snapped up by "investors" and left vacant, because they think they can make more more in capital gains by leaving the flats empty than they can in income by renting them out (so far, they have been right).

7) See (6). The gimmick with LVT is that instead of leaving those flats vacant, the only people who would buy those flats in China would be people who actually want to live there or who want to rent them out.

8) Displace demand from where to where? How can a tax-free productive economy be seen as misallocation of resources? Very few people buy food, televisions or cars just to put them in storage in the hope that the price will go up, you just buy what you need, want and can afford.

9) Can he make up his mind - would LVT push housing costs up or down?

10) Ah... he's changed his mind yet again.

11) Surely nobody minds the developer making a profit from the actual construction? What he might be referring to is the windfall planning gain, which is easy to tax away by e.g. auctioning off planning permission or simply hiking the tax rate so that the market value of building plots falls from £55,000 to plus/minus nothing? In a Georgist world, the developer has to pay nothing up front for the land, he just pays the LVT during the construction period, which would probably be about the same as all the PAYE and corporation tax he currently pays.
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* We have something in the UK called "Business Rates" on commercial premises (which is pretty close to LVT) and we observe that:

1. Commercial premises only cost half as much to buy per square foot as does residential (you make a massive windfall gain if you can get planning to convert from commercial to residential). The higher tax (BR compared to Council Tax) pushes the price down, not up.

2. Offices and factories and shops still get built, despite the tax (and despite the best efforts of the NIMBYs).

3. When Labour started phasing out empty premises exemptions, occupancy rates went up (which is hardly surprising, if you tax something you get less of it, so if you tax empty premises, they magically turn into occupied ones).