Monday, 12 August 2013

Reply to The Thought Gang/The Boundless Savannah

thethoughtgang left a comment/question which requires a lengthier reply.

If house prices/ rents are linked to the money we have available (therefore not to planning permissions) then what changes [with LVT]?

I guess... I can see how the whole thing becomes more equitable... but not, so much, how it changes the problem we have with the aggregate cost of housing.

Forget about LVT for the time being, and think about the surplus which a free market capitalist economy generates. We refer to this as The Boundless Savannah and it's a very simple concept.

We know that two people acting together can achieve more than twice as much as two individuals acting alone (try lugging a sofa upstairs by yourself). So if you help me lug my sofa and I help you lug yours, we have both made a surplus.

This leads on to specialisation, which leads on to automation and mechanisation, which means that people can produce ever more "stuff". This is A Good Thing.

If we are looking at the level of one employer, if he breaks down the whole task into simple enough steps, he can take on untrained people who'd achieve nothing on their own, so he doesn't have to pay them much, the surplus goes to him.

But then one of his underpaid managers will set up his own factory and copy and improve the processes and snaffle the labour force by paying slightly better wages. The new owner/ex-manager  earns less than the old owner did, but more than he did as manager, so apart from the old owner, everybody is happy.

And so on and so forth. In the long run, wages go up and the factory owner's share declines to the level where none of his managers are tempted to strike out on their own.

Next, we have agglomeration. A coal mine has to be where the coal is. A power station could be anywhere, but ideally not too far from the coal (to reduce transport costs) and not too far from the nearest town either (to reduce transmission costs). Steel and aluminium producers like being near coal mines and power stations.

Manufacturers like being near steel and aluminium manufacturers. People like being where the jobs are, so house builders like being near the people. If people live closer together, utility connections are shorter and you can build terraced houses instead of detached houses, so more inhabitable space per brick or timber.

The list goes on and on and you can make it up as you go along.

All of this is good. The coal mine benefits from the nearby power station and steel foundry, and the power station and foundry benefit from the coal mine; they all need people as employees and customers. The people who work there benefit from the people and businesses already there, they have a wider choice of jobs and employers have a larger pool of potential employees.

As a result, costs go down and overall output and profits and consumption opportunities go up.

Yippee, all this surplus is a quantifiable figure - that's the whole point of capitalism - and it's got to go somewhere, somebody has to receive it or benefit from it. But while the wicked factory owner can "underpay" his employees in the short term (thus collecting more of the surplus), the coal mine can't overcharge the power station or they will just import coal; and the power station can't demand price cuts from the coal mine or the coal will just be sold elsewhere for a higher price.

So where does the surplus go? The answer is that the land "owners" get most of it. The value of the coal is pure land rent. They know that the power station can make higher profits by being sited at the optimal point between the coal mine and the town than they could anywhere else, and they charge a rent which soaks up most of those extra profits. They do the same with the steel foundry and the aluminium smelter.

They know that people will want to live where the jobs are, so they can charge rent which soaks up the bulk of the extra income that people can earn by living in that area. They know that with more people, there is more demand for electricity and everything else, so they can collect rent from all the businesses that spring up there to satisfy those demands.

Then people invent stuff like the Internet, copper cable and digging up pavements is expensive, so you get broadband in densely populated areas first, so homes and offices in the area can now work more efficiently than before and are now even more attractive in relative terms (compared to non-broadband areas) so rents go up yet again.

The point, or one of the many points, about LVT is that instead of this surplus going to a small group of insiders who did nothing to earn it and merely consume other people's output without producing anything themselves, the surplus is collected and spent for the benefit of everybody, just like any government is supposed to do with its tax receipts, with the surplus of receipts over expenditure being dished out as 'welfare' payments (or ideally a Citizen's Dividend).

So no, the point of LVT is not to depress gross headline rents payable (it might do, it might not, it might push them up), the point is that everybody gets an automatic rent rebate in terms of "free" public services or "free" unemployment insurance (or Citizen's Dividend). So clearly, net rents payable, after deducting the value of those items is much lower than the headline rents.

And whatever happens, unlike taxing earned income, output and profits, taxing the rental value of land is no burden or brake on the whole capitalist, wealth creating process. That rent is going to be paid one way or another and the person paying it doesn't really care who gets it (landowner, bank, government). A sane capitalist would actually prefer the government to get it, as - however kleptocratic it might be - they will still spend a lot of it on stuff which further boosts the economy (like roads, or policing, or education), unlike banker or landowners who will spend precisely £ zero on public goods and merely consume the capitalist's output themselves.


Anonymous said...

Thanks for taking the time to write this.

For the sake of clarity, I am interested in understanding what LVT *can* achieve.. not what it can't/might not.

Mark Wadsworth said...

TTG, theory to one side, wherever LVT has been used, it has worked a treat.

It always works. There is no need to even understand it properly or even do it for the "right" reasons, provided you implement it in a half-way sensible fashion. even badly implemented LVT (i.e. Business Rates or lease auctions) knocks the spots off any other tax.

The UK was largely funded by LVT-lite until the 1800s and it worked fine. Full-on LVT would have been better, but our decline started once we relied mainly on income tax and sales tax (i.e. after WW2).