Saturday, 1 December 2012

Killer Arguments Against LVT, Not (285)

James James has submitted this bit of Faux Lib nonsense:

George was right that other taxes may have stronger disincentives, but economists now recognize that the single land tax is not innocent, either. Site values are created, not intrinsic. Why else would land in Tokyo be worth so much more than land in Mississippi? A tax on the value of a site is really a tax on productive potential, which is a result of improvements to land in the area. Henry George's proposed tax on one piece of land is, in effect, based on the improvements made to the neighboring land...

Broadly agreed so far. Apart from the fact that the 'neighbour's improvements' are only a small part of what drives land values: you need to have those improvements in the right place at the right time (for counter-example see Humber Bridge or all those spare airports in Spain), and you need people and businesses to take advantage of them; that creates the wealth that goes partly to those same people and businesses; partly to pay for the improvements; and the remainder accrues to the ultimate monopoly, the rental value of land.

And what if you are your "neighbor"? What if you buy a large expanse of land and raise the value of one portion of it by improving the surrounding land. Then you are taxed based on your improvements. This is not far-fetched. It is precisely what the Disney Corporation did in Florida. Disney bought up large amounts of land around the area where it planned to build Disney World, and then made this surrounding land more valuable by building Disney World. Had George's single tax on land been in existence, Disney might never have made the investment. So, contrary to George's reasoning, even a tax on unimproved land reduces incentives.
Without any background knowledge we can say this: any theme park's profits and the wages of their employees are all currently taxed at the rate of 40% - 50%. We don't know how much of their total income relates to the rental value of land, but it's maybe a tenth of the total - the bulk of what visitors are paying for are services, be that entertainers, creatives, maintenance men, cooks, chambermaids or car park attendants.

So instead of paying 40% - 50% on all their income, the theme park as a whole (lumping together the land owner, the employees and the shareholders/finance providers) would be paying tax on one tenth of its income at a much higher rate.

Not only does that look like a decent tax cut to me, the incentive to make a profit by providing more and better 'services' using labour (new rides, more entertainers, better menus, whatever) would be nearly doubled. For sure, some of this additional profit might, just might, flow through into higher rental values, but this is still no particular disincentive to continuing to provide them if it turns our that they have paid off. And it they don't pay off in this way, well at least there's no tax on that income.
However, Disneyworld Florida is probably the worst example he could have chosen. If you take the time and trouble to read the most interesting Wiki entry, you learn this:

In 1959, Walt Disney Productions began looking for land for a second park to supplement Disneyland, which opened in Anaheim, California, in 1955. Market surveys revealed that only 5% of Disneyland's visitors came from east of the Mississippi River, where 75% of the population of the United States lived.

Additionally, Walt Disney disliked the businesses that had sprung up around Disneyland and wanted control of a much larger area of land for the new project.

Walt Disney flew over the Orlando site (one of many) in November 1963. Seeing the well-developed network of roads, including the planned Interstate 4 and Florida's Turnpike, with McCoy Air Force Base (later Orlando International Airport) to the east, Disney selected a centrally-located site near Bay Lake.

So there's your rental income right there: the extra income which Disney can earn by being closer to its customers; by being easily accessible by road/air; by having its theme park in the 'Sunshine State' (they could be even closer to even more people if they'd sited it in Pennsylvania, but the weather isn't as nice up there).

And Disney was wise to the spillover effect, that their parks increase the rental value of surrounding land. Of course this is what has happened anyway; all the major theme parks are now in Florida as well, it's called 'agglomeration'. But these other theme parks are not taking business from Disney, they are driving customers to them - people now go to Florida with the sole intention of visiting theme parks, and Disneyworld is always near the top of their list.
If you read on, you learn that Disneyworld is effectively its own city-state. Remember: the total tax paid less benefit received by an entire state is of course $nil: it all nets off. So with one hand, Disney (the landowning corporation) would be paying tax (and it does pay US property taxes anyway, as a matter of real-life fact), but all its employees would be receiving their Citizen's LVT Rebate and Disney (as the quasi-government) would be receiving 'public' money to spend on improving roads and airports, public schools for the children of its employees etc.

Disney know what they are doing, they'd always reinvest the spare cash they receive as the quasi-government in doing stuff which further enhances rental values in a virtuous circle; if they make sure that schools in their precinct have a good reputation, then it will be easier to attract staff, so all things being equal they can pay lower wages, and so on.

The only small net amount of $ tax money which would leave that city-state is the extra value it receives from being sited close to its customers in a state with nice weather, which is exactly where we started (and it pays property taxes to the county and state anyway). All the internally-generated wealth would stay in the city-state.
Or we can summarise the Faux Lib argument thusly:

"We accept the logic for making small landowners pay LVT rather than broad based income tax, but large landowners should be exempt", which is surely complete bollocks?

In any event, while Disneyworld is huge (39 square miles), that is still tiny compared to the surface area of the whole USA (3.7 million square miles). Those 3.7 million square miles and the three hundred million potential visitors who live on it are Disney's hinterland, so to speak, if they'd built their theme park on an island in the middle of the Pacific, how successful would it have been?


The Stigler said...

I do see his point, but we already do this sort of thing, by giving exceptional business rents, and that's done as a local decision.

For instance, it's quite common for upmarket department stores to get subsidies to move into town centres, because they bring more shoppers into your town who also come to your Costa, M&S and Ann Summers stores. No-one subsidises WH Smith because there's one in every town.

Mark Wadsworth said...

TS, yes, at a very large scale, there will always behind the scenes haggling and introductory special offers, but that has to be dealt with on a case by case basis and does not prove his point in the slightest.

With LVT, the council is saying "You do not have to pay for any likely future profits until a) you have made them and b) your activities are such that they increase surrounding land values.

Don't forget that if your "upmarket department store" draws more shoppers in so that more other shops open up, ultimately, the UDS benefits from spin off trade from shoppers visiting those other shops just as much as the other shops benefit from the UDS, so the UDS only pays incremental extra tax on the incremental extra future profits - it is no deterrent to opening up a shop NOW.

Lola said...

An UDS was enticed into my town by rent free and BR free periods. It failed when rent and rates became due. And it moaned about BR - why wasn't it moaning about ren

Richard Allan said...

*Ahem*, see KLN 194 and check the dates.

Mark Wadsworth said...

L, perhaps because location rent is paid for a valuable service, permission to use a government-protected monopoly right, whereas the council just pisses the Business Rates up the wall on fripperies like street lighting, police, road maintenance and loads of other crap which doesn't benefit businesses at all?

Mark Wadsworth said...

RA, well spotted. JJ emailed me two links to that blog, I covered one of them here and was about to do the other one tomorrow, but as you have spotted, you already offered the other one up for ritual slaughter a while agao.

Ben Jamin' said...

Owner occupiers are in effect getting an unfair competive advantage. A business that has to pay rent has a reduced margin when selling a comparable product. This increased margin for owner occupiers is really just economic rent and therefore another deadweight cost. LVT is just levelling the playing field.

Mark Wadsworth said...

BJ, exactly.

Now, if owner-occupiers were economically rational, they would factor in the notional cost of renting (that's what you are taught to do if you do cost accounting) and treat is as an expense and behave accordingly (i.e. decide what goods and services to sell at what prices).

So all LVT does is turn notional costs into actual costs - the economically rational people won't behave any differently, and the twats will get a kick up the arse or will be "forced" to become landlords rather than running what is effectively a loss-making business.

Kj said...

This has been covered by Foldvary if I remember it correctly. What you do is assess the value of Disneyland's land based on the surrounding land values, you totally ignore the actually land in question, hence if everything around Disneyland is orange-fields, Disneyland get taxed as orange fields, if everything around is other theme-parks, hotels etc., which it happens to be, you tax it like that. Another thing is that Disneyland also is it's own "improvement district" (does it's own water, drainage-etc.", so any rental value would be deducted in the assessment for these costs.
The faux-lib argument in the start is exactly right, LVT can (also) be a tax on private externalities, and so what? Private externalities are post-profit spillovers from improvements, someone has made them with the intention of earning it back through direct revenues, noone is hurt by collecting these spillovers, even when the benefactor and the improver is the same individual/corporation.

Mark Wadsworth said...

Kj, agreed, but...

"even when the benefactor and the improver is the same individual/corporation."

You could just as well say:

"even when the benefactor and the improver are two different individuals/corporations"

If the improver notices what is going on, he can then tell the benefactor that the benefactor has to start paying towards the cost and so on.

For example, when you pay for public fire brigade or public rubbish collection, what you are really paying for is for the fire brigade to put out a fire in your neighbour's house which might damage your house (if you set fire to your own house you are fucked anyway); you are paying for your neighbour's rubbish to be taken away, because if you didn't, then you'd be infested with rats and smells.

Kj said...

True, but LVT ectracts the full value of public "externalities" that are "free", but private externalities that are paid for by users, are just a bonus, like someone building a theme-park. Disney builds hotels, access roads etc. to raise the value of the theme park itself (and vice versa I suppose), and they expect to earn this back by entrance-fees/hotel stays. If the other theme parks around benefit from Disney's actions, and are taxed on that, that's just spillovers, noone looses from that.


Mark Wadsworth said...

Kj, we are as usual in complete agreement.

There is a name for this effect, it is called "agglomeration". That is why in towns, you find all the restaurants close together in one street, all the clothes shops together in another street, and so on.

You might think "But if you have a clothes shop and there are lots of other clothes shops in the area, surely they take away your business?"

Wrong - because if somebody wants to buy "clothes", they will go to the street where all the clothes shops are, and you have a good chance that they will come into your shop.

If you have your clothes shop somewhere else (like on the street with all the restaurants), you will get fewer customers.

So each clothes shop benefits from all the other clothes shops, and collectively there is a big benefit which relates purely to the location value. It is of course far more sensible to tax the small part of their income which relates to the location value than to tax all of their income (if the taxman doesn't take it, the landlord will).

Ben Jamin' said...

Fred Foldvarys solution is pretty daft. So what if it's the owners change of use that increases the value of land? It's the unimproved portion i.e unearned income that LVT mops up. You only have to ask yourself what if Disney had located in the middle of the Sahara instead of Florida?

Mark Wadsworth said...

BJ, FF's solution is not so daft when Disney first sets up.

They can start from a low tax base, and it is difficult to quantify the location value element (even though we know there is one - sunshine, close to audience, good air and road links). Although with something on that scale, Florida can just haggle for a price, which Disney then compares with what the Sahara or anywhere else is offering.

But then as soon as other theme parks set up, they will know (internally) exactly how much extra they are prepared to pay to be in Florida, and the state of Florida can haggle them up to that amount.

Once the competition have shown their hand, we then know the correct amount for Disney. They are no longer taxed at the same rate as surrounding fruit growers but at the same rate as surrounding theme parks.

Obviously, if Disney made a big mistake and the theme park does not take off, there'll be no other theme parks wanting to set up, so no market comparatives and they continue to get taxed at fruit grower rates.

Ben Jamin' said...

Sounds like a subsidy to me. No other theme parks may set up next to them, but there will be plenty of other entertainment outlets all over the usa competing for the same dollar.

Just how far would you measure this surrounding margin? 500 metres? 5km? 500 km?

Mark Wadsworth said...

BJ, call it subsidy, call it introductory special offer, but the first rule is also subject to the override "Florida can just haggle for a price, which Disney then compares with what the Sahara or anywhere else is offering."

The Sahara is a lot further than 500 km away.

ontheotherhand said...

MW, I like the concept of agglomeration. There is a fascinating example of it on the corner of Putney High Street and Upper Richmond Road where in closely packed shops there is Townends, Foxtons, Winkworth, Warren, Gascoigne-Pees, Douglas Gordon, Lauristons, Hamptons, Alan Fuller, James Anderson, Chesterton, Barnard Marcus and Kinleigh Folkard & Hayward

Mark Wadsworth said...

OTOH, thanks, good example.

We know that these agencies are all benefitting from each others' presence (so location value fair game for LVT, that value certainly was not created by and so does not belong to the landlords).

But what if all these agencies merged? They could then argue "we are only benefitting from ourselves" but that is then also not true - they are benefitting from having a cartel-monopoly in that area and newcomers are excluded (so their location value is still fair game for LVT).

James James said...

I looked at but I don't think you're engaging with their real argument.

I've left a comment over there.

Mark Wadsworth said...

JJ, that's too cryptic for me. I can't see your comment, can you reproduce here?

In any case, they have no "real argument", all their "arguments" are based on lies or stupidity.

Plus, it doesn't really matter, does it? The Homeys and Faux Libs tell a lie, and you disprove it with logic backed up with hard facts (if in doubt, refer them to Business Rates or old Domestic Rates) but they never, ever, ever, say "Ah well, you make a good point, but what about..." they just completely ignore your counter-arguments and dream up another complete lie anyway.