Killer Arguments Against LVT, Not (212)

Oliver Hartwich trotted out the tired old lies again in 2006, I don't know whether he's changed his mind since:

  ...most of the arguments in favour of LVT rest on a few axioms that are either highly questionable or outright wrong. First, it is assumed that land ownership does not fulfil any economic function and that, therefore, all income received from owning land is basically unjustified, even unjustifiable.

Of course there has to be land ownership, or there'd be nobody to pay the tax and nowhere to build buildings! Hurray for land ownership! The point is that instead of people who want to own land having to pay large amounts of money to the previous owner or to the bank, they would pay the same amount of money in tax, with a corresponding reduction in taxes on earned income. And nobody said "unjustified". The point is that land rent is entirely unearned in the sense of being passive income; it is generated by the community as a whole; and it can be taxed at 100% at no detriment to the economy.

In practice, however, one could hardly ever separate the incomes from land and from improvements to the land. It would take a government agency and some highly questionable assumptions to determine which part of the value of the land was ‘justified’ and which was ‘unearned’ and thus taxable.

Schoolboy error. This is the easiest thing in the world. Even if you know nothing about rebuild costs and amortised costs, all you have to do is identify comparable buildings in different areas. If the rents for some of them are higher than for others, it stands to reason that the difference can only be due to the location rent. And now to the nub of his argument:

Closer inspection, however, reveals that landowners perform a number of valuable economic tasks. Like the owners of any other factor of production, landowners have to make frequent decisions on what use to make of their property. They decide in which way to utilise their land, which could mean to keep land idle. For one, there is much more land than there is labour to keep all land in use all the time.

Secondly, it can be necessary at times to keep land from the market and wait for a better opportunity to bring it back into use, for example when there is a chance to develop a larger area. These decisions have to be made, and they have to be made by someone who bears the economic consequences. This is the task of the landowner who accepts the residual risk and takes the opportunity costs of withholding land from its most valuable unrealised economic potential.

I'm glad he mentioned 'opportunity costs' because that completely demolishes his own argument.

1. A sensible businessman works on the basis of opportunity costs. In other words, if you've bought raw materials for $1 and the price shoots up to $2 before you've sold them, then you put your selling prices up as if you'd paid $2 for them. And most land speculators use borrowed money anyway. All LVT does is turn opportunity costs or interest costs into tax costs. It does not and cannot increase the total costs.

2. For example, a site with planning permission to build a certain building has a site-only rental value of £50,000 i.e. once the building is finished, the rent you can collect will cover the entire amortised cost of the building and leave you with £50,000 surplus. If you are a land speculator looking to buy that site and interest rates are 5%, then you will bid up to £1 million for it (£50,000 divided by 5%), and once you have bought it, you will be paying £50,000 a year in interest on the £1 million you borrowed. Imagine instead that this site was subject to £40,000 a year LVT. Clearly, the land speculator would only bid up to £200,000 for it, so he will end up paying £10,000 in interest and £40,000 in LVT - his total holding cost is exactly the same.

3. Or maybe you own the site anyway, free of debt, having acquired it for pennies decades ago, and it's now worth £1 million. If you are a sensible businessman, you will at all times bear in mind the opportunity costs of owning an undeveloped site with no rental income. This is however much interest you could earn by selling it and putting the money in the bank, so your opportunity cost of owning that site is £50,000 a year - and that is what you base your decision making on. If the site is subject to £40,000 LVT, then your opportunity cost is only £10,000 and the real tax cost is £40,000, but your total cost is the same.

We can at this stage merge 2. and 3. Perhaps you own a double-sized site, debt-free which you bought for pennies ages ago, inherited last week, won at a game of cards etc, and you sell off one-half for £1 million to a land speculator who takes out a £1 million mortgage to acquire it. Whatever is the optimal use of your remaining half is exactly the same as the optimal use of his half. If the best you can do (restricted by local demand, planning laws or both) is to build a three storey building with mixed retail/residential, then that will be the best thing for the owner of the other half to do as well. The fact that you have no cash holding cost and he has a £50,000 a year holding cost is irrelevant.

4. So as long as the LVT on that site (or each half) is no higher than £50,000, the decision making will not change very much. Yes, this is a bit of an annoyance for land speculators who have bought expensive tax-free land with borrowed money, who lose on both sides of the equation on the day LVT is introduced, but hey. Most land speculators go bust at regular intervals anyway. The point is that the land is still there - and even if the current owner goes bankrupt, the land can be sold off to the highest bidder.

5. It may well be that with LVT, land owners behave slightly differently, but they will behave 'better' rather than 'worse'. On the other hand, it is pretty clear that taxes on income, output, wages and profits ONLY have bad impacts, they have dead weight costs, lead to unemployment, business failure, evasion, off shoring etc etc.

6. The mantra that "land owners perform a valuable service by holding land out of use" was originally invented ages ago by Rothbard and was demolished for the umpteenth time by Fraggle recently.