Bayard, who is not totally anti-LVT, came up with this one:
"... what I see as a genuine problem with LVT [is] the other side of the "free rider" effect so often highlighted on this blog (e.g. railway company spends millions of pounds opening a new station and everyone in the vicinity benefits from the increased land value without having to do a thing).
This happened in a town near me, where a run-down market town was transformed over a few years into a thriving, happening place by the efforts of a group of shopkeepers and other traders. They invested their time and money and suffered reduced profits to build the place up and, for a while, reaped the reward. Then, of course, rents in the town started to rise and so business rates went up, and much or all of the increased profit disappeared in the higher rates.
Or, to take a more extreme example, on many landed estates in the C18th and C19th, it was not worth the tenants doing anything to improve their farms, as the resulting increase in revenue would be entirely clawed back by the landlord in increased rent. "
To understand why this isn't a 'genuine problem', you have to:
a) be able to distinguish truly earned income (from running in or working in a business) from land rental income. It is then a case of matching the costs of running a business with the costs of owning land, and
b) be aware of market forces and the effect of competition.
1. The C18th and C19th landed estates issue is easily dealt with, of course there was little or no incentive for tenant farmers to improve their farms, but that is because they were expected to bear the costs of improving the land out of their earned income, while the extra income from the improvements was collected by land owners. In a free market, it would be the land owners who pay for the improvements and recoup the cost by charging higher rents, in the same way as most landlords are happy to pay for decoration and repairs to the housing they own as long as the extra rent they can collect it more than covers the cost.
2. If all the shopkeepers in Bayard's example were tenants, then the same logic applies. It is quite probable that the extra rents and Business Rates soaked up most of (call it two-thirds of) the extra profits they could earn, but for an owner-occupier shopkeeper, the extra Business Rates is only about a third of that two-thirds, so they were still massively ahead of the game; part of their extra profits were truly earned and part were simply because they happened to own land in an area where 'everybody else' is paying for improvements.
3. Then we have to remember the impact of free-market competition:
i. Let's assume that there are ten hairdressers in the area, all open 9-5 six days a week and there is demand for a hundred thousand hair cuts a year, so that's 4.0 hair cuts per shop per hour during normal opening times or 10,000 hair cuts per shop (2,500 hours x 4). And let's call it £10 per hair cut.
ii. Now, maybe one hairdresser is keen to earn a bit extra and opens an hour earlier and stays open an hour later to snaffle the early morning and late evening trade and his gamble pays off. The average number of hair cuts per hour now falls to 3.9, our entrepreneur does an extra 2,000 hair cuts a year (3,100 x 3.9 minus 2,500 x 4.0) and earns an extra £20,000 and all the other hair dressers notice that they are now only doing 9,750 hair cuts a year (2,500 x 3.9), suffering a loss of income of £2,200 each (figures rounded).
iii. If the other hair dressers are just as keen, then they will all extend their opening hours accordingly, until they recapture that lost income, and they will keep extending their opening hours as long as the extra income is sufficient to pay their earned income or wages for being in the shop (whether actually cutting hair or just waiting for customers). If they all open an hour earlier and stay open an hour later, then on average they end up doing 3.22 hair cuts an hour and they all end up doing 10,000 hair cuts a year (3,100 x 3.22) and earning the same amount of money. Who gains from all this competition - the customer, of course.
iv. Clearly, there is an upper limit; there is no point opening at five o'clock in the morning or staying open until midnight, because very few people want to have their hair cut at such an inconvenient time. But the fact that competition only helps the individual hairdresser in the short run and benefits the customer in the long run - when gains are competed away - is the whole argument in favour of free competition.
4. The same applies to collective efforts done to improve the whole area, whether this is paid for by the shopkeepers or the local council doesn't matter. If one high street becomes relatively more attractive, then sure, the people on that street will earn extra income, part of which is earned (supplying goods and services) and part of which is unearned (the fact that their premises are now in a more favourable location).
5. For sure, a full-on LVT would soak up the bulk of the unearned element, and the earned element would be entirely untaxed (under full-on LVT there is no income tax or VAT), but does this discourage groups of shopkeepers from getting together to improve their area? No, of course not - because the extra LVT is still a lot less than the overall extra income!
6. Furthermore, by and large, one high street's gain is another high street's loss. Shopkeepers in the unimproved areas will see that their takings and profits fall, and so the rental value and hence LVT bills also fall, but because the fall in LVT is less than the fall in takings and profits, they end up worse off. So what is their best strategy? It is of course to try and improve their area to recapture some of that lost trade.
7. With the hairdressers in example 3, they all extend their opening hours and end up with the same income as if they'd formed a cartel and restricted opening hours and customers end up with a better deal, as they can pop in before work or after work etc. it would be the same with the shopkeepers in an unimproved area near the improved area; the only way to claw back that trade is to do the same improvements, which boosts their income at the expense of all other areas (including the already improved one).
8. Sooner or later (hopefully) most or all areas will become improved and the incomes and rents will settle down to the old level - but we'll end up with much nicer high streets, longer opening hours etc etc. Or perhaps, once most areas are improved, they will end up snaffling all the trade that was formerly spread over a wider area, so they are using land more efficiently and the last couple of areas become marginal for shops and so we can use these for housing or something else.
9. I suspect that shopkeepers seldom make co-ordinated collective efforts to improve their area (there would still be a free rider problem - the minority of shopkeepers or owners of vacant premises who do not contribute will still benefit), in which case the local council is in the same position as the C18th and C19th land owners from example 1 or a residential landlord. The landlord knows it's worth putting in new carpets for £500 every three years if he can get £200 a year extra rent. But he's no incentive to fit brand new Persian rugs every year at a cost of £1,000 because tenants won't pay that much extra. We end up with the optimum quality carpets in rented flats.
10. If the council can spend £x million on providing more free car parking spaces, sweeping the pavements, having more bobbies on the beat, putting up Xmas decorations, having more benches or wider pavements, getting more bus services etc, and knows that this pushes up rental values so that the extra LVT income is >£x million they will do it. But there is an upper limit to what is worth spending money on, an extra fifty parking spaces might be a no brainer, and an extra hundred might be better than fifty, but there is no point in buying up and knocking down buildings and then losing the LVT therefrom in order to provide a thousand free car parking spaces.
11. And there is also competition between councils in the same way as there is competition between hairdressers (from 3) or different groups of shopkeepers (from 8). And however you argue it, we are still far better off taxing land values rather than earned income - not least because taxes on earned income increase the cost of carrying out the improvements in the first place, i.e. those improvements are normal earned income from the point of view of the car park builders, street sweepers, policemen, Xmas decoration installers etc and if these people have to pay income tax, it pushes up the market clearing price for their services.
Sunday, 13 November 2011
Killer Arguments Against LVT, Not (175)
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20 comments:
"Or, to take a more extreme example, on many landed estates in the C18th and C19th, it was not worth the tenants doing anything to improve their farms, as the resulting increase in revenue would be entirely clawed back by the landlord in increased rent." As for tenant farmers, so it is for pubco tenants today.
"on many landed estates in the C18th and C19th, it was not worth the tenants doing anything to improve their farms": for much of the second half of the 19th century there was an agricultural depression so bad that it must have dominated any effect of unsatisfactory agricultural tenancy laws.
I always imagined George specified the unimproved value of the land in his tax to stop tenants being hit by the value of their own improvements.
Was always worried that my not so much neglected ,as publicly derided ,Sentinel Tax (I blame JS Mill :I stole the idea off him)would fall foul of a similar problem.As this taxes land only when its value goes up,people might resist local infrastructure improvements as they might put up land values and stand them in the way of the Sentinel (wince) Tax.
They would resist improvements for tax reasons and the way things go in this country ,stop them happening.
However I now tend to think that improvements happen> land values go up > people selling property get whacked with tax > land values don't go up anymore.
L, this whole pub landlord thing is incredibly tricky, as there are so many variants on the scheme. Further complicating matters is that lots of people like the idea of running their own pub, so any proper economic analysis goes out of the window.
D, maybe, but apparently during Irish potato famine, they were still exporting high value non-potato stuff to e.g. the rest of the UK. Allegedly, I wasn't there at the time.
DBC: "people might resist local infrastructure improvements as they might put up land values and stand them in the way of [higher LVT]"
Sure, but what if the local council just went ahead and improved the local schools, added extra bus stops, turned off the traffic lights etc?
The counter argument is still that if you don't want to pay a higher tax you can move to an area with worse schools, less frequent bus services, more traffic lights. And seeing as no LVT would be 100% of the extra rental value, you'd be pretty stupid to argue against £1,000 of benefit just because it only costs you £750 a year.
dearime, you're acting like the agricultural depression was an entirely separate phenomenon from the land tenancy laws, when in fact they were closely linked.
MW.
1. A good friend of lola daughter No 2 is a tenant landlady. If she improves turnover and profit, the pubco takes all the improvement.
2. Interesting exchange in New Civil Engineer magazine letters to the editor re LVT. I'll try and get them scanned for you.
my take is that when you consider the existing UK tax system, summarised very baldly:
Income tax – various kinds of income are defined, mostly from employment, running businesses or from owning shares. Various complex rules apply to determine whether your income is taxable. There are many complicated reliefs, exemptions and allowances. For example, divers on the continental shelf are taxed differently from other divers. Strangely worded rules tell you what you can do with losses incurred. Rules on what is tax-deductible for employees differ from what is deductible by self-employed people.
National insurance – another tax on earned income with various complex rules determining what income is, but it differs from any definition for income tax. There are many complicated reliefs, exemptions and allowances. Directors of companies incur very strange rules – they have to pay NI before they know what their income will be.
Capital gains tax – tax on profits made from owning certain arbitrarily defined types of assets…eg pictures but not cars. Various complex rules apply to determine whether your gains are taxable. If you sell one of a set of antique spoons, rules will tell you how to assess the tax due. There are many complicated reliefs, exemptions and allowances.
Corporation tax – an amalgamation of income tax and capital gains tax for companies. Various complex rules apply to determine whether income and gains are taxable. There are many complicated reliefs, exemptions and allowances. Loss relief is particularly impenetrable. The rules do not necessarily overlap with those for income tax or CGT.
Inheritance tax – a tax on certain arbitrary types of asset that might be in your estate when you die. If you gave something away before you died, it might still be part of your estate for the taxman. Various complex rules apply to determine whether your estate is taxable. There are many complicated reliefs, exemptions and allowances. Most of these tend to conflict with CGT in a very tangled way.
Stamp duty – a tax paid on certain kinds of arbitrarily defined transaction – eg buying shares, houses or assigning leases.
Duty – taxes paid for buying certain arbitrary substances – petrol, spirits, tobacco…
VAT – a tax levied on the profitability of an arbitrary selection of goods and services. Various complex rules apply to determine whether the profit margin is taxable. There are many complicated reliefs, exemptions and allowances. Crucial points to consider are how to tax a packet of assorted nuts and raisins, and whether a commodity can be better deemed to be a cake or a biscuit. This will have enormous impact on the tax payable.
Rates and business rates – taxes assessed on the desirability of your property. Business rates are complicated by individual assessment of how desirable each storey of a building is.
And yet people object to the imposition of a land value tax – easily calculated, few exemptions, easily collectible. It is obviously much better to have the existing mix - and yes I missed oput landfill tax and insurance premium tax and......
L, I look forward to 2.
D, that is a very good summary indeed, are you a tax advisor or just interested in the topic?
I am an accountant (not a tax specialist) and maddened by the needless and stupid complexity of the tax system. It encourages complex avoidance schemes and achieves nothing, apart from employment for tax accountants and lawyers...
D, ta for prompt response.
"part were simply because they happened to own land in an area where 'everybody else' is paying for improvements."
Well in my scenario, a fair chunk of "everyone else" isn't paying for improvements, whereas the landowner in question is. It would be more accurate to say "part were simply because they happened to own land in an area where they and a few others had paid for improvements." OK, there are the free riders for whom the above quote is accurate, but we're not talking about them.
B, sure, there's a sliding scale between one shopkeeper doing something for his own benefit (where he doesn't necessarily get all his money back) and one hundred per cent of shopkeepers co-operating to do something for everybody's benefit (where they all get more back than they paid in).
In the first case, any extra income is earned, in the latter case, a small part is earned and most of the extra gain is unearned.
Either way, with full-on LVT, the earned part is not taxed and only the unearned part is taxed, whether it's one shopkeeper, some shopkeepers, most shopkeepers or all shopkeepers who take part.
and all you commentators, how much is your opinion on these matters swayed by the weird tax rules you all prefer?
On reflection, I reckon that this problem of your own efforts leading to a larger tax bill will just have to be filed under the "Downside to LVT". It's not a very big file, there's only this and the fact that you can more easily end up with a big tax bill and not have the wherewithal to pay it, which is not much to set against the upside, especially when you look at the upside/downside of our existing taxation regime.
D, you can guess my answer to that. And I am a posh tax advisor.
B: "this problem of your own efforts leading to a larger tax bill will just have to be filed under the "Downside to LVT"."
Well, under current rules, all efforts which lead to higher incomes lead to a larger tax bill, so I'm not sure I see the relevance. And don't forget that under current tax rules, different kinds of income have different tax rates, applied more or less at random.
With full-on LVT, there are two tax rates, zero on earned income and a high rate on land rental income (or a tax on the value of public services you consume, or the burden you place on others, it's all the same thing).
It's easier to imagine that every owner-occupier has two 'hats'. One is his 'trader' hat and one is his 'land owner' hat, as any cost accountant will tell you.
If the shopkeepers were all tenants and somebody else, the landlord wore the 'land owner' hat, then the system is coherent. From the trader's point of view, the rent is a privately collected tax.
We can tax the two income streams (trading and rental) quite separately and at different rates (or one not at all and the other quite heavily).
I believe in taxing substance over form, why should the logic be any different because one person collects both income streams?
Finally, as we see, any increase in LVT would only be part of the extra income generated - if two-thirds of the extra income goes into higher rents and the LVT rate is 75%, then they still only pay 50% on that marginal extra income (which is no higher than what the average trader pays anyway) which is relatively easily earned.
Do any of you think there is also a moral and economic argument for taxation of non-land-wealth? If we believe that the state's primary role is protection of life and property, the protection of land rights is dwarfed by the protection of non-land property, such as investments, cash and buildings. Implicit in self-ownership is that you should be able to work and exchange without a tax-burden, but explicit is the protection of assets, which could warrant a certain charge.
Let's say land-rent and other monopoly rents are taxed at the high rate of 75-80%, and capital-rents at a low rate of 20-25% of risk-free return, ie. 1% of net assets (minus a generous dedution ofcourse). Couldn't this generate some of the same positive effects as LVT, on efficient utilisation of capital property?
-Kj
Kj, no certainly not, that's why we have insurance companies, you can choose whether to insure your stuff or not. Sure, the fire brigade looks after buildings, but that's all soaked up in land rent anyway, no point having an extra charge.
What you are suggesting is a kind of income tax, which would, by your figures raise tuppence ha'penny anyway.
The only exception is a bank asset/liability levy, where it is the government that does the insuring and where banks have a privileged legal position, that's fair enough.
Having such a tax on shares is beyond the pale, if the underlying assets is land or govt protected monopoly rent, then those get taxed at source, you can't tax them again at shareholder level.
Kj, no certainly not, that's why we have insurance companies, you can choose whether to insure your stuff or not.
We have insurance for protection against financial losses. Asset protection by way of legal recourse against fraud and theft, and the benefits of police resources (to the extent that police actually do anything, but that's also a function of worth of the property in question) are universal. Protection against war, terror etc., also universal, but it's benefits are differentiated by relative non-land wealth.
Sure, the fire brigade looks after buildings, but that's all soaked up in land rent anyway, no point having an extra charge.
Is it? In addition to what I mentioned above, does it actually create differentials in land rents? Or do you believe that it creates higher land rents in general to reflect this, out of the mere existence of the services.
which would, by your figures raise tuppence ha'penny anyway.
Maybe true. On this side of the North Sea, the wealth tax, which is progressive between 0,3 and 1,1 percent, raises around 0,8% of GDP, under the current tax-regime (post VAT, CT, NI etc., but also a lot of exemptions, including most property).
The question is how it would pan out post LVT. I assume the whole GDP increase would heavily benefit capital values of non-land assets as well.
if the underlying assets is land or govt protected monopoly rent, then those get taxed at source, you can't tax them again at shareholder level.
Ofcourse not, but other assets can.
Some commodities, f.ex. gold, are examples of property that has much of the characteristics of land; it's increase in value is non-owner created, and hoarding creates scarcity. Will such gains be apparent in LVT receipts, except for extraction sites?
I'm playing the devil's advocate here again, with arguments sourced from the left and some centre-georgists, but I do see some valid points to at least argue.
"Well, under current rules, all efforts which lead to higher incomes lead to a larger tax bill, so I'm not sure I see the relevance."
The relevance is that it is a disadvantage shared by LVT and income tax. Just because it is also a disadvantage of the current system doesn't mean that it's not a disadvantage!
Kj, everybody can make up his own rules, but I'd be against taxing (i.e. charging for) anything other than government protected monopoly rights, and certainly not incomes generally.
The next biggest asset after land and buildings is shares, but if you tax the value of shares, that's mathematically the same as taxing the income from shares, and I'm against income tax, so I'm against anything that is similar to a tax on profits generally.
B, my point was that under current rules, ALL efforts lead to higher tax bills. Under LVT, it's mainly better public services which lead to higher tax bills, or windfall gains, to which some people in some situations may have contributed a teeny tiny and irrelevant part. Call that a disadvantage if you will, but I think it's a very small one.
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