One fairly ludicrous claim which people make is that "Landlords will just add the tax to the rents, so tenants would end up worse off". I accept that those who believe this nonsense will never be convinced, and that there are others who realise it is not true, but for the benefit of the waverers, let's look at one of the main influences on local house prices (which are merely a multiple of rents) which is local earnings.
1. We know, because others have done the regression for us, that average earnings increase by about five per cent every time the size of a population centre doubles, and logic says that if average wages in Small Town A are £20,000 and people can earn £30,000 by doing similar (or more specialised) jobs in Large Town B, they will be happy to migrate to Town B provided always that rents in Town B are no more than £10,000 (minus tax thereon) a year higher than in Town A*.
2. The actual correlation between local average earnings and house prices in England** looks like this:
3. The coefficient of correlation is 0.75 (the other 25% of is explained by other factors, like having nice scenery, which is why house prices in Cornwall and Devon are nigh unaffordable for people on average local wages), and the line of best fit is:
House price = [average earnings minus £6,750] x 10.53
4. So wages in Town A are £20,000 and houses cost £140,000; wages in Town B are £30,000 and houses cost £245,000, the extra cost of renting or buying in Town B is about £5,265 a year more (assuming 5% interest rate), which is the additional amount that average earners in Town B have to spend after deducting PAYE etc from that extra £10,000. This means that it is very difficult to increase your disposable income by moving to a better paid job elsewhere in the country, because you lose most of it in higher rent.
5. So we can safely say that if all taxes on income were scrapped, gross rental values in Town B would be about £10,000 higher than in Town A, and the LVT on an average house in Town B would be (say) £8,000 a year more than in Town A.
6. A landlord in Town B cannot merrily add that £8,000 to the rent that people are prepared to pay to live in Town B rather than Town A - if the rent + LVT in Town B is £18,000 a year more than in Town B, people will leave Town B in droves and move back to Town A. The whole thing will level off so that the total rent payable in Town B is £10,000 more than in Town A; the landlord in Town B will only get to keep £2,000 of the higher incomes/rental values, and not nearly all of it, as under present rules.
Just sayin', is all.
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* Landowners have a monopoly/cartel, that means their income cannot be competed away, but it does not mean that they can charge what they like, they can only charge what the market will bear. So in this scenario, landlords in Town B can also charge up to £10,000 (minus whatever tax is deducted from that income) more than in Town A but no more than that.
An analogy might be the school bully - he can't steal more than your lunch money. If you bring 50p a day, he can take 50p; if you bring £2 he will take £2. The amount of money he can take depends entirely on how much money there is sloshing around and not on the value of his 'services' or his stronger bargaining position. If you stop bringing £2 to school and just bring 50p, he cannot demand £2 from you "because that's what you paid yesterday", he can take the 50p and that is the end of that. And if a really evil teacher then exercises superior force, makes the bully empty his pockets and keeps it for himself, the bully can't go back to his victims and collect more money to cover his overheads, can he?
** Sources:
1. Average price for a semi detached house in each local authority area from the BBC
2. Mean gross annual pay from Table 8.7a from the NSO
3. I then bunged the two data sets into a spreadsheet, deleted local authorities for which I had earnings but not house price (or vice versa) and did a couple of X-Y scatter charts, click to enlarge:
What have we wrought in the UK?
8 hours ago
7 comments:
"A landlord in Town B cannot merrily add that £8,000 to the rent that people are prepared to pay to live in Town B rather than Town A - if the rent + LVT in Town B is £18,000 a year more than in Town B, people will leave Town B in droves and move back to Town A."
What about the owner-occupiers? They will be in the same position as the landlords (of course, because they are effectively renting to themselves), but they will have to pass on all the LVT to their "tenants". This will make living in Town A a much more attractive proposition for them, which will bring down the prices in Town B and hence the LVT until the landlords in town B, although getting less rent, will be getting their full 5% and the tenants will be paying all the LVT.
B, in a full-on 100% LVT world, the buying/selling prices of houses would never exceed rebuild costs, and the net rent (after LVT) which a landlord can earn would end up at 5% to 10% of the value of the bricks and mortar.
But there is little advantage in moving from B to A while you are still working, there is only an advantage once you have retired.
I like the school bully analogy
:-)
So we can safely say that if all taxes on income were scrapped, gross rental values in Town B would be about £10,000 higher than in Town B.
Typo - second "Town B".
I like the school bully analogy too - particularly apt.
QP, ta.
AKH, oops I have amended. Also ta.
In short higher wages just compensate for higher rents (higher because of demand and scarcity). And this is new news?
I do see how LVT would compensate for this, but that is not the only overriding attraction of LVT. IMHO the huge simplification that would ensue from the introduction of LVT in place of pretty well all other taxes is as equally important.
L: "In short higher wages just compensate for higher rents (higher because of demand and scarcity). And this is new news?"
That's only part two of the equation.
Part one is that more productive areas -> higher wages (more specialisation) -> higher rents/prices.
Part two, then, to attract the run-of-the-mill trained but non specialised people (teachers, bus drivers etc), employers have to pay higher wages to compensate them for higher rents/prices.
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