Friday 9 March 2012

Killer Arguments Against LVT, Not (201)

Let us turn to another pseudo-intellectual argument put forward by those who say that LVT is a lovely idea in principle, but say that simply imposing a flat tax per square yard on all developed land in any area (depending on local average rental values, of course), fails for the "Big Back Garden" problem.

The BBG problem is that not all residential plots are built to the same density:

- a street might have similar sized plots with small bungalows on some and two semi-detached houses squeezed onto others. They claim it would be unfair if a family in a semi-detached house only pays half as much as the family in the bungalow.

- a street might have a row of more or less identical houses but because they are between two roads which are not parallel, the gardens at one end are much longer than at the other. They claim it would be unfair to make the people with the longer gardens pay more than those with the shorter gardens.

For some reason, in these examples, the people in bungalows or with BBGs will be "Hard working pensioners struggling on a fixed income" and the people in the semi-detached house or with modest back gardens are "High earner couples", it's never clear to me why.

The BBG problem simply melts away if you remember The Golden Rule: "LVT is a tax on the rental value of each plot assuming optimum permitted use" and that local councils have guidelines on maximum permitted build densities and apply maths and logic to the situation.

1. Establishing the total rental value of all houses in each valuation area (call it a local council ward or a postocde sector, they are roughly the same size) is easy; it's just the total rental value (based on actual rents or the rents implied by selling prices; weighted for the mix of flats, semi-detached, detached and terraced houses, and commercial premises) of all privately owned or occupied land and buildings. All this can be easily established using existing HM Land Registry and Valuation Office Agency data.

2. The DCLC has already gone to the trouble of working out precise land usage in each local council ward; it's called the Generalised Land Use Database.

3. So let's take our median town again, which is Swindon and look at the local council ward of Haydon Wick (chosen at random, I've never been there) as an example. The GLUB tells us that the total developed land is as follows:
343,000 square yards of residential buildings
1,096,000 square yards of domestic gardens
23,000 square yards of commercial buildings
46,000 square yards of commercial land (mainly car parks, estimated)
Total developed land = 1,508,000 square yards.

That's an average density of 24% for the residential land, i.e. an average plot is 450 sq yards with a semi-detached house on it with a 'footprint' of 108 square yards (which seems surprisingly big, presumably it includes garages, but there you go).

4. Haydock Wick straddles the postcodes SN2 and SN25. We know, having done the workings before, that the LVT rate in SN2, under a full-on LVT system (replacing all other taxes except booze, fags and petrol duty) would be about £23 per square yard. Multiply that by 1,508,000 square yards gives us required tax receipts of £34.7 million.

Reality check: the bill for an average semi on a 450 sq yard plot would be £10,350 per year (from which you knock off the household's Citizen Income entitlement, or personal allowances, which would bring the net bill down to a couple of grand), that seems fair enough.

5. Then along comes somebody who, for whatever reason, has a nice sized house (assume footprint 150 square yards to keep the maths simple) on an absolutely massive plot of 2,000 square yards, it seems a tad harsh to make them pay £46,000 a year in tax...

6. ... but it's not an issue is it? If local planning laws say that no more than that house may be built, we can work backwards and divide the footprint of 150 square yards by 24% to arrive at a taxable area of 625 sq yards and an annual bill of £14,375.

7. So the total taxable area for Hayden Wick of 1,508,000 square yards would have to be reduced by 1,375 square yards in this case. No doubt loads of other whiney moanys with BBG's will come along and want exemptions. if we just exempt them all, we would end up with only 1,300,000 square yards of taxable and we would have to adjust the tax rate up from £23 to £27 to get back to our required receipts of £34.7 million.

8. Now the boot is on the other foot. All the people with modest back gardens will wail "That's not fair; why should we pay more just to subsidise these show offs with a tennis court or off-street parking for twenty-seven cars?".

9. So the council holds a meeting to which all local land owners/taxpayers are cordially invited and allows them to decide, by simple majority on a case-by-case basis, how to deal with each individual BBG who has applied for an exemption. Either the owners of the large plots are given their exemption, if not they are given permission to build up their plots to average density (this doesn't mean they have to, but they can if they want).

10. The boot then is back on the first foot, and the people with modest gardens will wail "That's not fair, we don't want the character of our Faux Bucolic Rural Idyll ruined and more pressure on local services etc etc". Well it's their choice, isn't it? Either they chip in a bit of extra tax and "preserve the unique charm of the village" or they want to keep their bills down and accept that more houses are going to be built.

11. This puts the owners of the BBGs in a very interesting position. They can either pay the tax like gentlemen, because they actually quite like having a tennis court or off street parking for twenty-seven cars and not apply for an exemption; or they can apply for an exemption, which is bit of a punt:

If 'everybody else' is prepared to pay a bit extra, they will get their exemption; worst case, if enough other residents decide they'd rather save the tax and accept a bit of new development, then the owner of the BBG can either man up and pay the tax in full without making use of the planning (but this enhances the resale value, so there's something to fall back on), or get on the 'phone to a local builder ASAP (the chances are, most of the owners of BBG's are builders anyway, who have been trying to get planning for years).

12. These meetings can deal with ordinary planning applications in the same way: if a builder has bought a site and is refused permission to build, then in exchange, his LVT bill is knocked down to zero, his site drops out of the equation and 'everybody else' has to pay a bit more.

13. For the people with a particularly small home on a normal-sized plot, the same logic applies; they have implied permission to build something bigger anyway, but if other residents are happy to pay a bit more tax and for them to be exempted, then so be it.

Here endeth.

8 comments:

Lola said...

Those meetings are going to be immense fun...Confronting nimbys and H-O-Ists with logic will give me more laughs that I've had for ages...

Anonymous said...

Why not just do what the business rates system does (but simpler), different rates.

The garden can be treated like farmland for all that it will matter.

Total LVT bill = (planning_permission_square_yards * property_value + non_planned_square_yards * land_value) * lvt_percentage

Since LVT is mainly taxing the value of the planning permission; we can expect the land_value factor to be significantly smaller than the property_value factor. So much so that I expect it won't make any significant difference for typical houses. It might shut up the neighbourhood moaner though.

Mark Wadsworth said...

L, I'll be in the front row voting against every single exemption and voting for planning to be granted instead.

OP, but there's my dilemma:

a) That system comes perilously close to taxing the building, so people would e.g. demolish the garage, remove a bay window, remove an overhanging roof; does a front doorstep count as "developed" or not?

b) It's the planning which benefits the owner, but the land ownership which places a burden on others. LVT has to try and balance that.

In simple terms, let's imagine there's a large plot on either side of the railway station. One of them is vacant (for whatever reason), the other has a big block of flats on it.

Clearly, the owner(s) of the flats is/are getting a lot of benefit from having planning permission, and the owner of the vacant plot isn't (capital gains notwithstanding).

However, the vacant plot is still placing a burden on people, because everybody else has to live 100 yards further from the station, so every commuter loses a minute every day in extra walking time, multiply that by 200 working days and hundreds of commuters, the burden is enormous (ignoring the benefit of the forced exercise).

Lola said...

MW. Yep. What fun.

Old BE said...

MW, off topic: I raised LVT arguments over at Capitalists@Work and I was rebuffed by an argument that a tax rate above the long-term interest rate would create a downward spiral of property prices and therefore tax revenue. I'm not quite sure I understand the argument any ideas?

Also, if you know the figure off the top of your head (I don't and am too lazy to Google) roughly what is the Business Rate as a proportion of "price"?

Mark Wadsworth said...

BE, the "downward spiral" is a non-argument, as LVT is (ultimately) a tax on rental values, which are entirely unaffected by the tax rate. People (perhaps deliberately) assume that the tax rate is applied to the capital selling price.

To be honest, even if the tax rate were applied to the selling price, there is no Laffer Curve effect. Let's say a plot of land sells for £100 tax free and the expected rental return is £5, that's basic maths:

1. If the annual tax is expressed as 1% of selling price, the selling price drops to (about) £80 and the tax is 80p

2. If the tax is 10% of selling price, the selling price drops to (about) £30 and the tax is £3.

3. If the annual tax is 100% of selling price, the price drops to (about) £4 and the tax is about £4.

4. If the annual tax is 1,000% of the selling price, the price drops to (about) 49p and the tax raises about £4.90.

5. And so on ad infinitum, there is no cut off beyond which the tax take starts to fall, it just flattens off at something just shy of £5.
------------------
Business Rates is a good example, as it is a tax on rental values, it doesn't matter what happens to selling prices. By and large, Business Rates averages out at about 3% of selling prices (anywhere between 2% and 5% for individal premises, it's pot luck).

Old BE said...

Well my basic point was that a "land value tax" on commercial premises hasn't caused the investment in commercial property to vanish. My example was skyscrapers being built in expensive rental areas like the City/London Bridge/Wherever.

So I think we are right and the panickers are wrong.

Mark Wadsworth said...

BE, yes, a good fall back when having an argument about LVT is to say that we have it in spades, it's called "Business Rates".

The price bubble in commercial buildings was much smaller than for residential; they still get built and used; when Labour reduced empty property relief occupation rates went up; commercial rents have risen more slowly than residential etc etc, it's a good dry run for LVT on residential.