Saturday 23 June 2012

Killer Arguments Against LVT, Not (222)

The Homeys desperately come up with arguments which are in themselves incorrect at worst and irrelevant at best; not only that, but these arguments usually cancel out, so what you are left with is pretty much nothing.

Today's matching pair is as follows:

1. "Shifting taxes from earned income to the rental value of land would make it more expensive to buy a house, so owner-occupation levels would fall." (comment 8.)

By implication, this would mean that people would stay tenants for longer, which leads us on to...

2. "Landlords will just add the LVT to the rent."

By implication, this would mean that people would try to avoid being tenants; they wouldn't stay tenants as long as currently. In any event, there's a given amount of housing. The total of [tenanted + owner-occupied + vacant homes] is always the same. The number of vacant homes would go down, and LVT would be completely neutral between owner-occupied and landlord/tenanted. LVT expresses no preference for either, so if there is a net change, that is because the present system of taxes and subsidies is skewed, not because LVT would skew things.

Argument 2. of course also contradicts the Homey/Faux Lib assertion that "Georgists just hate landlords." If we did hate them, which isn't true, then why would we recommmend a tax which they wouldn't have to pay themselves? So that's another matching pair.
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Here are the numbers...

a) So let's imagine we shifted to a 50/50 tax system, with half of revenues collected from taxes on land rents etc and half from a flat 20% tax on earned income (no VAT, no higher rate tax, no NIC). You can muck about with the Zoho sheet:

... and you will see that the total tax bill for a first time buyer would go down by half, or ball park, a first time buyer (or first time buyer couple) would be £10,000+ a year better off.

Maybe I've missed something, but I think it's fair to assume that a lot more people would be able to afford to buy; there'd be as many who can now comfortably afford to buy as there would be Poor Widows In Mansion Forced To Downsize.

b) And for sake of argument, let's assume that landlords passed on every last penny of the LVT bill (net of the income tax which they no longer have to pay themselves). The tenant's total tax bill would still go down by half. So they'd have more money to save up for a deposit.

So tenants will be better off, they'll find it easier to save up a deposit and it will be easier to buy a house. Pretty much the opposite outcome to both 1. and 2.
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3. At this stage the Homeys, and especially the Faux Libs, start floundering and claim that landlords would put up the rent even further, so that even though existing owner-occupiers would benefit (apart from the PWIM's), existing tenants would see their rents rise to soak up every penny of the tax saving, so landlords would end up vastly better off and owner-occupation levels would tend to fall over time.

They vaguely grasp that it is a circular calculation, but tax and rent come out of the same pot; there is circularity but it is negative feedback; the situation tends to stabilise in the middle rather than positive feedback which leads to ever more extreme outcomes.

If, for example, it were true that rents would go up enormously (which it isn't, and by definition, the LVT would go up by the same amount anyway), so there would be more PWIM's Forced To Downsize, so selling prices would fall, so using Homey non-logic, the yield earned by landlords would go through the roof; they'd be getting an equal or higher cash return on a smaller cash investment.

In the real world, it cancels out. Landlords and first time buyers are competing in the same market, so if the price of houses falls, then both are at the same advantage when it comes to buying. And if there is now a disadvantage to renting and an advantage to buying, then people just won't rent any more. They'll stay living with their parents until their early twenties while they save up a purchase deposit, and then they'll buy their own home and move out (just like used to happen in olden times).

So there'll be less demand for rented accommodation, which sets a cap on rents, which sets an upper limit on selling prices etc etc.

18 comments:

Bayard said...

If most people will end up paying less under an LVT based tax system, then a few people will end up paying more, but who are they? It is a weak case for LVT if it only works if government expenditure is reduced massively as history shows that this is extremely unlikely to happen any time soon, if ever. It is not enough to say that public reaction to direct rather than indirect taxation will bring down government expenditure because i) LVT, if introduced, is most likely to be introduced in a PAYE form anyway and ii) most people feel pretty sore about the amount of tax they pay already, but still nothing is done about it.

Mark Wadsworth said...

B, all these figures are based on total tax revenues staying much the same (anything else would be cheating, obviously).

So who will end up paying more?

Those households whose current taxed/earned income is less than one-tenth the value of the land and buildings they own* - Poor Widows In Mansions, the semi-retired, Jimmy Carr, oligarchs who own flats in central London, the Duke of Westminster, people who own second homes, vacant homes or holiday homes, landlords generally etc.

And bankers and quangocrats will just earn less in the first place.

* That is the actual cut-off point, based on proper calculations, which makes the "winners and losers" maths very easy,

Physiocrat said...

Bayard, the present tax system, unlike LVT, has a massive deadweight loss variously estimated to be between 12% and 30% of GNP. The lower figure is bad enough. This saddles the government with a massive welfare bill if people are not to go out rioting on the streets.

In addition, the absence of LVT causes a failure in the operation of the land market - count the vacant shops and industrial buildings. This leads to a supply-side blockage which is part if not the principal reason for the recession. This too is adding to the government's welfare bill and is an continuing threat to the financial stability of the country.

Robin Smith said...

Aint it right that rent will rise absolutely in general with an LVT. But proper earnings will rise in proportion to rents too.

They have to because the speculative part of the rents no longer available has to go somewhere and the only place it can go is to earnings. Everyone's a winner.

Thats why a Citizens Income is a naive idea at least until we see how basic LVT all plays out.

Bayard said...

"landlords generally"

ISTR you saying that landlords generally wouldn't lose out, because they would be able to pass all the LVT onto their tenenata in the form of higher rents, as the tenants, with untaxed income, could afford to pay this (Ricardo et al).
I'm just worried that there are too many winners and not enough losers (however right-on that would be).

P, nice to find someone else who thinks that the purpose of the welfare state is to stop the poor rioting rather than some sort of benevolence on the part of the state.

Mark Wadsworth said...

P, yup.

RS, not sure if your maths stacks up, unless the idea is to collect the land rents and then somehow not do anything with them.

B, today's batch of landlords, those who own housing today, will probably lose out once you net it all off. As you say, somebody has to.

However, it will always be worth investing in land and buildings because if the net cash profit is known, then prices adjust up or down so that the net % return on investment makes it worth while. So there will always be some housing which is landlord/tenant.

Lola said...

Assuming LVT/CD is implemented purely, that is all other taxes and subsidies are cancelled, then doing so would remove the implicit lanlord subsidies not available to private buyers; for example tax relief on interest payments and other expenses. All of which IMHO give Buy to Let landlords a considerable advantge. Of course these advantages get passed through into higher house prices, which is the same thing really.

Mark Wadsworth said...

L, that's not true actually.

Under current rules, a landlord-tenant home generates more tax revenues for the government than an owner-occupied one. It's not huge amounts of money either way, and you can net off housing benefit paid back to private landlords etc, so maybe it's a break even overall.

Lola said...

MW. I think we're talking at cross purposes. I was making the point that subsidies (tax relief on interest payments for landlords) goes straight through to land prices. Hence land (aka housing) is 'more expensive' than it would otherwise be. It's the MIRAS effect. Isn't it?

Mark Wadsworth said...

L, landlords can only deduct interest up to the level of rent received, so there are two possibilities: some income tax is due or no income tax is due. With owner-occupied there is never any income tax due. Similarly, CGT is due on landlord-tenant homes but not owner-occupied. For most other taxes, they are the same.

So as between rented and owner-occupied, owner-occupied is treatly slightly more favourably than rented. The point is that both are treated far more favourably than any earned income.

Lola said...

MW "With owner-occupied there is never any income tax due. . I don't understand what you mean by that? Please will you explain?

Mark Wadsworth said...

L, just compare and contrast.

Landlord owns house with mortgage, rent income £8,000 mortgage interest £5,000, taxable £3,000, income tax due £600. (if the interest is > £8,000, then for tax purposes this is £nil, it is not a loss). (yes it is a bit more complicated than this, but it'll do for now).

The identical house next door is owner-occupied by a household with exactly the same earned income and exactly the same mortgage. The income tax due on the (non-cash) rental income will always be precisely £nil.

Lola said...

MW So what you mean is that the 'non-cash rental income' is the money not spent on renting by the owner occupier?

Mark Wadsworth said...

L, yes of course. The tenants in one house and the owner-occupiers are getting the same benefit-enjoyment from the same location and for the same reasons, it's only the legal form which is different. So why should the tax bill be different?

In notional cost accounting terms, the owner occupier has rental income which he spends on renting his own house.

Bayard said...

"The income tax due on the (non-cash) rental income will always be precisely £nil."

Unless Schedule A income tax is re-introduced.

Anonymous said...

Hmm...that comparison is not as straightforward as first appears...

I'm not sure what you mean, for example, by 'the same earned income'. I'm assuming you mean they both have, say, the same day job and the landlord's rental property is his 'second job', but that changes the very nature of the comparison.

A landlord typically, as in your example, pays the costs of ownership from the rental income. The owner-occupier doesn't (not least, because that income is non-cash). Surely you need to consider the income tax paid on the earnings that pay the mortgage?

Out of interest, what tax rate do the banks pay on the mortgage interest received?

Mark Wadsworth said...

B, not "unless", you mean "until".

F, no, keep absolutely everything constant and ask how much tax revenue is payable from that rented home. Now, imagine the tenants buy the home they live in with the same size mortgage, they are in exactly the same position as the people next door.

So despite in real life, nothing has changed, the total tax collected from the owner of the formerly rented home has done down.

Banks pay (at the moment) very little tax on their income, but in the long run, it averages out at 30% or 40%.

So you can do the same comparison, keeping everything constant, with house number 1 (no mortgage) and house number 2 (large mortgage). The tax collected from the (economic) owner of the mortgaged house is more than the mortgage-free one.

Anonymous said...

Aaahh! I'd neglected the tenants themselves. Schoolboy error!! That makes more sense now.