Killer Arguments Against LVT, Not (99)

There was an informative but otherwise bizarre article about Hong Kong in the FT* explaining that Georgism doesn't work because it, er, works far too well...

"The government’s habit of racking up annual surpluses means it has accrued fiscal reserves of HK$592bn, equivalent to 23 months’ expenditure or 34 per cent of gross domestic product. Why, asks Ms Loh, is it so allergic to increasing recurring expenditure? Could it not spend even a fraction of the money on cleaning up the city’s pollution by introducing greener buses, or improving the wholly inadequate care provided to elderly and disabled people? (1)

There are reasons why the government is reluctant to lift recurring expenditure. The Basic Law, Hong Kong’s mini-constitution, mandates a balanced budget. The government has also stuck to a “golden rule” of keeping expenditure below 20 per cent of GDP,(2) a level this year’s budget is in danger of breaching narrowly.

But the debate is clouded. The culprit is the policy on land, the allocation and commercialisation of which makes Hong Kong’s economy go round. It also creates huge distortions and opacities, making it hard to talk sensibly about levels of tax and expenditure. (3)

The land system is a legacy of British colonialism. London wanted Hong Kong to be self-financing. So the colonial authorities raised money by leasing land, an apparently free source of revenue (4) that persists to this day. The state hives off chunks of land in plots so large that only the biggest developers can bid for it (5). Developers also pay the government an upfront premium in return for permission to convert its use, say from agriculture to commercial, a hey-presto transformation that releases more value.

Civic Exchange estimates no less than 45 per cent of government revenue comes from land, including land premiums, property rates and taxes on property developers’ handsome profits. Hemlock, the nom de plume of a business writer with close connections to Hong Kong’s tycoons, compares the property cartel that benefits from this arrangement to “feudal lords granted the right to gather tax from the peasants”. The tax in question is rent. (6) Hong Kong’s is the highest in the world. According to DTZ, the property consultancy, the cost of office space in central Hong Kong pips that of even central London, Tokyo and Zurich.

Spiriting cash from land creates distortions. The top rate of income tax, at just 17 per cent, is legendarily low. (7) But it turns out to be precisely that: a legend. Taxes are extracted, invisibly, via rent. (8) There are also disguised expenditures. Take the MTR Corporation, which runs Hong Kong’s underground train system and airport express line. Such is the extent of the land holdings granted to it that some call MTR a property company with a train running through it. (9) Land allocations require no legislative oversight. Nor are they accounted for as expenditure. By this means, Hong Kong has conjured a cheap and gleaming transport system seemingly out of nothing. (10)

There are physical distortions, too. One is that half of Hong Kong’s citizens are herded into cramped government flats. Paying commercial rent or buying an apartment is quite beyond the reach of poor or even middle-class families, leaving them dependent on subsidised housing.

Hong Kong has become a construction state. Money raised from property premiums is allocated to a special account that can only be spent on infrastructure, guaranteeing a building frenzy in perpetuity. (11) So the government, perversely, has an incentive to reclaim land on which to build. That is why so much of Victoria Harbour, once one of the world’s most beautiful waterways, has disappeared under concrete. If similar policies were pursued in New York and London, the Hudson and Thames rivers would be long gone. (12)

The system is in need of overhaul. (13) But there is little chance of that. The property tycoons who benefit are deeply entrenched in Hong Kong’s undemocratic political system. (14)

1) Agreed. Government surpluses are almost as bad as government deficits, get the money spent on things which benefit people generally, income tax cuts, Citizen's Income or Pension etc; whereby for some reason income tax cuts count as a reduction in revenue but a Citizen's Income counts as an increase in expenditure. They are of course very similar in practice, i.e. the income tax cuts could take the form of doubling the personal allowance. Bearing in mind that a higher personal allowance is similar to a Citizen's Income, is that a tax cut or increased spending?

2) Who dreamed that up? If the aim is to have a balanced budget and to spend no more than 20% of GDP, then surely the aim must be to raise 20% of GDP in tax?

3) And the land market in the UK is not massively distorted? Productive activity is taxed to death and land or home ownership is simultaneously rationed, indirectly subsidised and lightly taxed, has he not heard of our house price/credit bubble and ensuing recession? It's ironic that the author himself singularly fails to "talk sensibly about levels of tax and expenditure".

4) It's not 'apparently free', it is free, despite having huge value. The only question is, who should benefit from that value uplift - the people who get the land/planning permission off the government (as in the UK) or should it be split between those people and citizens generally (as in HK) or should it mainly go back to the citizens (as in full-on Georgism)?

5) So what? The UK government grants planning permission to larger landowners like Barratts, who then build lots of little houses and sell them to individual families; it could just as well sell smaller plots to local builders or single plots to self-builders. Remember that HK is approx. the size, population and income level of Greater London, so the idea of selling off quarter acre plots to self-builders who want to grow their own vegetables is a non-starter.

6) Correct. Land rents are exactly like tax except they are collected by landlords, mortgage lenders or vendors; but without the government to run things, these people would collect nothing. So if we add rents to taxes in HK to counter the claim that it is a low tax economy, then we can add on rents to taxes in the UK to illustrate that two-thirds of GDP go in taxes (if you include annual public sector deficit as a future tax).

7) Ah... low income tax is a 'distortion'? Is income tax itself not a 'distortion'?

8) See (6), in HK, about 12% of GDP is collected in quasi-Land Value Tax and about 12% in income tax; the total value of rent is (wild guess) thirty per cent of GDP, leaving the landowners/developers with 18% of GDP. In the UK the figures are 4%; 34% and twenty per cent, leaving landowners with 16%. So what's the big difference?

9) See also Metroland. Railway companies never make much money, it's the owners of land round the stations who make money. In HK, the railway company owns the land round the stations, and in the UK it's, er, somebody else, who didn't even pay for the railway to be built.

10) See 4). It's not 'seemingly out of nothing', somebody went out and paid for the holes to be dug, the tracks to be laid etc. The fact that it wasn't the government paying for it doesn't mean it was 'out of nothing'.

11) Here he complains about a building boom, but in the previous paragraph he complains that housing etc is too expensive, i.e. by implication that there's not enough of it. Can he make up his mind, plz?

12) As luck would have it, less than ten per cent of the UK by surface area is developed so we don't have that problem. In any event, we have planning laws to prevent people from building where wholly inappropriate.

13) Phasing out income tax and doubling taxes on land might be a good place to start, seeing as he complains that the landowners are still making too much money (they probably are, to be honest). And if this works and there are still surpluses, then start paying out a Citizen's Income: you can simply account for this as negative tax or tax rebates (rather than expenditure) if you want to appear to be a low tax/low spending economy (see example in 1) above).

14) Unlike in the UK where the Home-Owner-Ists are 'deeply embedded in the political system', eh?

* H/t Charles Bazlinton.