Killer Arguments Against LVT, Not (185)

In part 184, we examined Murray Rothbard's bizarre claim that "A 100% tax on rent would cause the capital value of all land to fall promptly to zero. Since owners could not obtain any net rent, the sites would become valueless on the market."

The first claim is probably true, but his conclusion is clearly nonsense.

As I explained, there is no real difference (in the short or medium term) between renting a site (whether that's from a private owner or from a branch of the government); buying an LVT-free site with an interest-only mortgage (whether the loan is from a private bank or from the government); or buying a site subject to LVT for a nominal amount. The annual cash expense will be much the same in all three cases. So the 'market' is entirely unaffected and the value of the site is unaffected, it would just be measured slightly differently.

The Fat Bigot, who is a barrister and thus conditioned to only ever look at one side of the equation, regardless of the evidence stacked against his case or his client, waded in with this:

Of course it would make a difference, in fact it would make two massive differences.... Were he to rent/pay LVT on part the overwhelming likelihood is that the end of the ten-year period will result in a massive increase in cash terms just to maintain the real value to the recipient.

This is a typical Home-Owner-Ist arguing strategy - refuse to address the topic in hand and just hare off in completely another direction, ideally ending up with an unsubstantiated sob story about a potential "massive increase" in the tax bill. But it looks to me as if he hared off in the wrong direction. There can only be a "massive increase" in the tax bill if the value of that site on the market had increased massively. So he, possibly inadvertently, agreed that Rothbard's claim is nonsense.

Now let's look at those very emotive words "massive increase", shall we?

A few hard facts:

i. Ignoring price bubbles (which are exacerbated by low interest rates and restricted supply), house prices depend largely on local rent levels, which in turn depend on local wage levels.

ii. House prices and rents also depend (in the absence of overt subsidies such as Housing Benefit) largely on on the amount that working younger people (who are more likely to be tenants or first time buyers) are willing and able to pay.

iii. So in the medium or long term, we would expect houses and rents to be just about affordable for younger people.

iv. Further, younger people tend to earn less than the middle aged (especially in white collar but to some extend also in blue collar jobs) and are more likely to have young children which reduces their earning capacity further (mothers at home, and the mother's pay gap) and imposes large fixed costs on them.

v. As it happens, house prices and rents tend to rise ever so slightly faster than wages in a growing economy (maybe one per cent more every year, which also exacerbates bubbles as people try to pre-empt future increases) but LVT rates would always be limited by the spare financial capacity of younger people (lower earnings, higher fixed costs).

So the claim that a purchaser can afford the rent, interest-only mortgage or LVT today (by definition, or else he'd have bought somewhere cheaper), but the "overwhelming likelihood [of a] massive increase" in LVT on that site means he won't be able to afford it in future, is quite clearly hokum as well.

And nobody said that we would always and forever have to charge LVT at 100% of site rental values anyway, if LVT is 90% to start with, after ten years the rate could be allowed to fall to 80% and it would still collect the same amount of revenue (adjusted for inflation and wages growth). In political terms it's just a question of whether it's better for a majority to benefit from a higher Citizen's Income or for a minority to benefit from a reduced LVT rate (cheerfully ignoring the fact that most governments love wasting and stealing tax receipts).