Saturday, 20 July 2013

"Land" versus "location"

One of the typical KLN's is that "farmers will all go bankrupt if we had Land Value Tax", but the people who say this have no grasp of the basic concepts or the actual figures involved, i.e. basically, farm and forestry land is barely worth taxing, it would be quite sufficient to apply the tax only to farm houses (thus putting farmers in the same position as everybody else).

1. Going by Defra's figures for 2009 (the most recent available), the total value at "farm gate prices" (or presumably "dock side prices") of agriculture and fishing was £7 bn a year.

2. If we multiply up land use statistics from here by average rental values from here, the total rental value of all UK farm and forestry land is about £1.7 bn a year; two-thirds is pasture (rents as low as £50/acre) and a third is arable (rents as high as £150/acre).

3. So superficially, about one-quarter of agricultural output goes into land rents. This is higher than for the rest of the economy, where about £230 billion goes into location rent (i.e. total rental value minus the rental value of buildings and improvements) out of a total GDP of £1,500 billion, i.e. one-sixth.

4. For a fairer comparison, we'd have to make three adjustments:

a) The subsidies paid out to farmland (single payment scheme) are just under £2 billion a year. The subsidy has two effects: some goes into higher land rents and some goes into higher profits for the supermarkets. Let's call it half each, which means that true farm rents are only £0.7 billion a year and the true value of agricultural output is £7.7 billion, in which case only one-tenth of the total value of agriculture goes into land rent.

b) That GDP figure is questionable as there is lots of double-counting and notional figures, the value of the actual annual output of goods and services might be as little as £1,000 billion, in which case a quarter of GDP goes into location rent, the same as for farming.

c) The rental value of farmland relates not just to location but also to man-made improvements, like walls, drainage, ditches, the cumulative effects of keeping the land fertile using crop rotation and getting rid of weeds etc. I do not know how you would separate the two, but the location element (the advantages provided purely by nature or other things like being close, but not too close, to towns and cities) is going to be a lot less than the rental value net of subsidies of £0.8 billion.

5. Whatever adjustments you make, it is clear that there isn't much in it. While agriculture itself needs a lot of physical land (about 80% of the surface area of the UK), this is only has a very small location value (compared to developed land) so it seems to even out or more likely, the amount of location rent which farmers have to pay 9actually or notionally) as a fraction of output is considerably lower than for the rest of the economy. Basically, farming is bloody hard work, it's not like retail where you can double or treble your turnover for no extra effort simply by having your shop in the best location.

6. And, as I keep saying, before we even think about reinstating Agricultural Rates, let's get rid of the subsidies first and see what happens.


Kj said...

And, as I keep saying, before we even think about reinstating Agricultural Rates, let's get rid of the subsidies first and see what happens.

Fair enough. But as I've nagged about before, farmland speculation is just as much of a problem as speculation in urban land, forming a major obstacle for using farmland efficiently, getting in fresh blood etc., so there is an efficiency case for having ag rates, even if the revenue is minimal. Say the rental value that is possible to tax (with A.Smiths provisio not to tax land improvements in mind) is somewhere in the hundreds of millions £, it's worth f all to society as a whole, but might be plenty to fund seed development, ag education, weather forecasting tailored for farmers or some other "public good" that gives value to UK farmland. And because of it, have a slightly more efficient farming structure, with new entrants coming in all the time. This might be allotments, or 10K acre farms with robots, who knows.

Kj said...

And there's also the Renegade Ecologist's environmental case for LVT on farmland, as far as I've understood it; if you use land, change it from it's "natural" state, you should pay for it. Ofcourse it's valuable and essential that we use and change land, but there's also a good case for leaving marginal land alone (marginal when land elsewhere is used more efficiently), reducing tax to zero on land where things can run it's course (i.e. not economically exploited), is a Good Thing.

Mark Wadsworth said...

Kj, yes of course.

If you like, we could collect £500 million a year in Ag Rates and spend it on special stuff for farmers, like bad weather or injury insurance pay outs. Or to pay for the funerals of farmers and ramblers killed by cows. Or cows who choke on Chinese Lanterns.

The point is that this is tiny sums of money, about £2,000 per farmer per year or something.
As I've said elsewhere, a tiny allotment costs £100 a year to rent and a one hectare field costs £200 a year to rent.

The amount of food grown on one hectare of allotments it ten times as much as the same area of farmland.

Conclusion - if you increase rent on farmland you get more food, especially if you got rid of income tax on farmers.

Graeme said...

it hurts doesn't if a government would enact a tax to wipe out farmers without any consideration of transitional reliefs....

OK...the current bunch of politicos are possibly stupid enough to do so.

My real beef is tht the current team of "tax-simplifiers" have to prove "empirically" that removing some clause/provision/relief will not reduce tax collections. How can any progress be made under such conditions?

Derek said...

I'm with Kj on this one. Taxing Ag Land Value is worthwhile because of the efficiency gains in land use even if it doesn't raise very much in actual revenue.

Sobers said...

If anything there is negative location rent for agricultural land. The closer you are to large urban areas the worse things are for trespass, crime, vandalism, fly tipping and general criminality.

To take things to their logical conclusion, a agricultural field in the middle of a town would be worthless in rent terms because it would be unfarmable - the fences would be constantly cut, so livestock could not be kept (the livestock themselves would be attacked by dogs and human scum) and crops could not easily be grown as they would be damaged/set fire to/stolen. No machinery could be left on site unattended, ditto no produce.

My father used to rent urban land off the local council back in the 70s (in the days of Urban Development Corporations councils often owned land zoned for development but that wasn't being built on yet) for nothing (beyond a peppercorn rent to make it legal) and make hay on it. It was a nightmare - the grass would be full of hidden objects dumped by locals, which damaged equipment, nothing could be left without supervision, bales would have their strings cut or set alight if left out overnight, so everything used to have be shifted before nightfall.

You really don't have a clue what you're talking about.

Mark Wadsworth said...

G, I don't know.

D, yes of course, I'm just saying it to shut the Homeys up.

S, I know exactly what I am talking about.

While of course you don't want too many townies using your fields as a rubbish dump, if your father had been offered some other identical quality land for a peppercorn rent, but this other land happened to be in outer Mongolia or something, with a hundred mile long beaten track between him and the nearest market, I don't think he would have been too keen.

James Higham said...

Wonder what blogger The Englishman [a farmer] would think of this.

Kj said...

Sobers: first of all, the case for LVT on farmland does not rest on the problems of near-urban farming. You misunderstand land/location to just mean proximity to human activity. It also entails natural fertility, topography, etc., which gives a yield someone is prepared to pay rent for.
Second of all. If the rent is negative for problematic near-urban fields, then it's bad business of farming it, and it should be a park, built on, or fenced-in allotment if there's a demand for that.
My family farms some rented near-urban fields for silage, and yes, there are problems, but it still gives a positive yield, and it wouldn't be farmed if it didn't. End of.

Sobers said...

"You misunderstand land/location to just mean proximity to human activity. It also entails natural fertility, topography, etc., which gives a yield someone is prepared to pay rent for."

Well thats the precise opposite of everything MW tells us about land rents - that they are created by the proximity to other people (and the amenities that large numbers of people bring - hospitals, stations, shops etc). And thats the reason given that houses should be taxed by LVT - that society creates the value, and therefore should have that value.

And now for agricultural land, when I demonstrate that proximity to people actually reduces the rental value, you say 'But, oh no the value is created by some other factor, such as soil fertility or topography'. In which case there is no reason for society as a whole to extract any of that rental value, because society didn't create it. It just naturally existed. The fertile soil, the rolling landscape was not created by man but nature.

Kj said...

In which case there is no reason for society as a whole to extract any of that rental value, because society didn't create it. It just naturally existed. The fertile soil, the rolling landscape was not created by man but nature.

Exactly, and not the landowner, thank you for accentuating that point. It's the same reason we tax oil rents.

Kj said...

I know these complex arguments confuse you Sobers, but human activity and what nature has created, produces rents. Human activity catalyze natural rents, for better or for worse. Two opposite cases: excellent farmland near a crap neighbourhood where kids set fire to laid out strings of grass for fun -> farmland rents are reduced as opposed to the case where the same quality field were two miles away where the kids wouldn't bother to go. The opposite case: boomtown near oilfield, large naturally produced rents -> land value increases in the nearby town because of worker influx, much larger than it would be if only human factors were involved, because the town is in northern Alberta, where f all economic activity would exist without the oilfields. Do you think you're able to grasp this?

Lola said...

In effect Sobers dad was being subsidised by the council to look after land with a rental value much greater than they were charging him. LVT would have got them to get that 'development land' developed PDQ

Kj said...

Lola: Yes, often, near-urban land is often farmed at symbolic rents because it's free maintenance, and it looks slightly nicer than the field growing weeds and collecting garbage. Ultimately, such land is a product of planning ofcourse. As it happens, sometimes, near urban land being farmed has some amenity value, can be quite productive. It's a matter of taste ofcourse, but IMO, a system where we distinguish between land that can be built on and land that cannot, is fair enough, *if* we apply LVT. In one development I used to live on, we lived next door to a 5 or so acre, steep, field in the middle of a town, privately owned. It was used for grain in the summer, and for sledging by the kids in the winter. It increases the value of living next to it for families with kids, and actually gives a healthy crop that the farmer is willing to expend the costs of growing in the summer, win-win.

Mark Wadsworth said...

S, I'm puzzled as to what your point is.

1. wrote a post explaining that the location value of farmland is very, very low. You appear to agree with this, you list more things which push down the agricultural use value of land.

2. My general view is that the location value of land is not created by the landowner, i.e. there are factors which are beyond his control which push the value up or down (and it is only the final net answer in £ which matters).

You have listed more such extraneous factors which can push value of land up or down, which are beyond control of landowner.

Only, your general bad tempered tone suggests to me that you disagree with the post, but I'm puzzled as to which part.

Kj, L, ta for back up.