Killer Arguments Against LVT, Not (213)

Rather out of context, in the comments at Tim Worstall:

IanB: This reminds me of attempts over at Mark Wadsworth during lively discussions about the Land Value Tax, where I’ve tried to explain that a valuation isn’t the same as a value. Nobody can get anywhere with economics if they don’t understand what value is. And very few people actually do.

To which the ever reasonable Richard Allan replied: "IanB you’re totally ignorant of economics in general and LVT in particular. Please don’t do this to yourself."

IanB then proved Richard's point with this: "I presume this is based on my having some knowledge of economic theory developed later than the mid nineteenth century..."

Which is about stupid as a GCSE physics pupil dismissing Isaac's Newton's theories as stuffy old 17th century nonsense. Yes, I'm dimly aware that some of Newton's formulations had to be tweaked ever so slightly in very minor respects, but by and large, not much has changed on that front and calculus still works etc.

1. Turning to the point in hand, yes there is a difference between 'valuations' and 'value'. If you ask various estate agents what they would try to sell your house for if you wanted to move within (say) six months, they will make all sorts of wild valuations, and most vendors tend to go with the agent who gives the highest valuation. If your house is on the market for more than six months, clearly the estate agent's valuation was higher than the value, which is whatever it eventually sells for at that point in time at which it is sold.

2. None of this is particularly relevant to LVT. The economy neither functions on the basis of values nor valuations, it works on the basis of prices, and LVT is just one element of the total price of occupying land.

3. In the UK we have a tax called Business Rates which is pretty close to LVT. It is calculated at about thirty per cent of the estimated open market rent of each building*. Subject to lots of stupid exemptions, the tax is payable whether the building is vacant or occupied, whether owner-occupied or tenanted, and whether the actual rent paid by the tenant is lower or higher than the estimated rent. Unlike with income tax on rental income, there are no deductions for interest costs or running costs.

4. Are these estimated rents 100% accurate? Are they heck as like. But they are accurate enough in relative terms, i.e. a bigger office block will have a higher estimated rent than the smaller office block next door; a shop on the high street will have a higher estimated rent than one on a side road; a factory in a good area has a higher estimated rent that one in a worse area etc etc, which is the main thing.

5. The point is that (except in some very marginal areas), the Business Rates on any particular building (or part of a building or area of land) is less than the total rental value of the building minus annual running costs. So it will always be possible to make money by owning that building, because the selling price of the building will adjust up or down so that the return to the investor is 'enough' to justify him buying it (or not selling it). And whoever is prepared to own the building will be happy to rent it out or occupy it himself.

6. It is not the case that investors and businesses have fled the areas with high Business Rates, a tax which has been on the statute books pretty much unchanged for over four centuries. Take a look around the UK and you will observe that if anything investors and businesses are fleeing areas with low Business Rates and it is blindingly obvious to all but a Home-Owner-Ist or Faux Libertarian why this is.

7. Ergo, if we simply applied Business Rates to residential land and buildings (and scrap a corresponding amount of other bad taxes, such as VAT and National Insurance), we would observe much the same thing happening. Buildings would still be occupied and the tax would be collected, given the political will. We would just have to be a bit more careful about ensuring that Domestic Rates on homes in very marginal areas was nothing or next to nothing, which is one big mistake they make with Business Rates.

8. Will some people in some houses in some areas not be able afford the Domestic Rates on that house? Of course. Does that mean that the rental value of those houses has been over-estimated? Of course it bloody well doesn't. If BMW can sell swanky cars for £100,000, then that is what they are worth and that is their value. The fact that most of us can't afford one, or wouldn't waste money on one even if we could is completely irrelevant.

9. But will people who are unwilling or unable to pay the tax still be able to sell their houses to somebody who can afford the tax and is willing to pay it? In 999 out of 1,000 cases, yes of course. Even if the rental value has, on some objective level, actually been over-estimated? Still yes! Because the tax is only part of the cost of owning that house, the other half is paying off the mortgage. So it might well be that a lot of houses end up being sold for less than their current 'value' (or indeed 'valuation') but at the point in time at which they are sold, that is their market value.

10. From that point on the new owner pays the total monthly bill of mortgage repayments plus tax, then clearly, that total bill is a very close approximation of the total rental value of that house (or else he wouldn't be paying it, he would have bid the purchase price down a bit more; or somebody else would have offered a higher price etc). This is the beauty of the system - the price that the house was sold for was the true market value of the house (when you take the pre-existing LVT bill on that house into account) and therefore... the LVT bill on that house will also be the market value tax rate (when you take the price paid for the house into account).

11. Of course, there will be a far larger number of people who are perfectly happy to stay put, because the LVT they are now paying is less than the VAT and National Insurance they were paying. For this vast majority of people not much changes, and a sufficient number of them will trade up to buy up the houses of those who wish to trade down - that is what happens in a free market, prices adjust up or down to ensure that stuff is put to its optimum use.

PS, John at comment 12 and Jim at comment 13 were both right. What they describe is basically Business Rates.

* Morons/smart arses will point out that the official multiplier is 45.8%, but as the tax is payable by the occupier on the estimated rent net of the tax, the effective rate is thirty per cent or so.