Tuesday, 15 April 2014

Killer Arguments Against LVT, Not (324)

A rich harvest of rather half-baked KLNs in City AM Forum:

[The Mansion Tax] would also be fundamentally unfair. Why should people who purchased properties that have appreciated in value be subject to an arbitrary annual penalty?

Perhaps those in all three parties who still support a classic mansion tax are also in favour of a windfall tax on owners of Apple shares, which have increased in value by 4,000 per cent in the past ten years?

And new plans for higher bands of council tax would retain many of the ugliest features of a mansion tax. Their introduction would almost certainly require a costly, full revaluation of all residential property in England.

Without substantial reform at the same time, this would push even modest properties in less desirable areas of London into higher bands and higher bills. Many of those hit by bigger tax bills would be renters.


OK, we can answer most of these questions by looking at something less contentious like beach huts.

Let's imagine the local council granted leases decades ago for £50 a year and never got round to increasing this, so hardly anybody has ever surrendered a lease, you either keep it for yourself, even if you only use it once or twice a year it's still good value, and if you don't need it, it is very profitable to sub-let.

The council maintains a waiting list with five times as many people on it as there are huts, and happens to pick up on the fact that they are being sub-let for up to £5,000 a year.

So the council finally mans up and increases the annual rent to £4,000. That doesn't require a "costly revaluation" of every plot of land in the whole town. It does not tax people on capital gains, the benefit (the rent saved/sub-letting income) is in the past and cannot be touched.

It makes no difference how long you have been a tenant, the £4,000 is demanded from those who have had a beach hut since the year dot and those who finally got to the top of the waiting list last year.

Those people on the waiting list don't mind about the charge, it is entirely their choice whether to pay £4,000 or not (which is better than having to languish on the waiting list for ever), and sub-tenants who are currently paying up to £5,000 aren't bothered either - a sub-tenant who was paying £5,000 cash in hand is not going to start paying £9,000 so that the actual tenant continues to keep the profit, because the hut is not worth more than £5,000.

The new improved beach hut charge is clearly not a "wealth tax". The local council doesn't care if the new tenants own Apple shares or not; the council is delighted that there are some people prepared to pay the new rent. If the council then levies a surcharge on tenants who own Apple shares then those tenants will disappear again (or simply not declare their Apple shares, hence and why "wealth taxes" are pointless at best.

This also illustrates the stupidity of the "disappearing homes conundrum" so beloved of the Homeys; while the Poor Widows In Beach Huts disappear off the scene, the beach huts are still there, and the chances are that anybody keen enough to pay £4,000 to rent one will visit it more regularly; keep in it good condition and have enough money to spend a bit in the local shops as well.

14 comments:

Bayard said...

You haven't picked them up on the "revaluation means pushing houses into a higher band" lie, though.
I just wish I could stand in front of the person who wrote this and be able to say "no, the band limits would increase at the same time, idiot" several times, each time hitting them on the head with a bit of 4 by 2.

Mark Wadsworth said...

B, indeed. The letter itself means nothing. Although to be fair the whole point of the exercise is to make some people pay more, what they never mention is that somebody somewhere else will be paying less.

Kj said...

Hah, yes, property tax opponents use this all the time; "don't revaluate". Do they think it's a good idea to tax people on their 1992 income as well?
MW: I'm reading up on the finer points of a proper wealth tax as part of an exam, and I promise you it's as pointless and complicated as you'd think.

Mark Wadsworth said...

Kj, when I first started in Germany, they still had a wealth tax, with dozens of different rules for valuations (land and buildings at about a fifth of market value, of course) and loads of exemptions for non-income generating assets, so really what it boiled down to was an extra 0.1% on income tax or something.

The revenues were laughable and they scrapped it a few years later.

Sobers said...

Actually this is a very good example, but not necessarily in your favour.

It only works as a pro-LVT example if you assume all, or at least the vast majority, of tenants sub-let for £5k/yr. If there are say 50% of tenants who pay £50/yr, and use it themselves, and 50% who pay all sorts of rents, some of which might be the current going rate of £5k/yr, then it falls apart. Because the market dynamic that creates the £5k 'market rent' is based on a large % of the huts being off the market pretty much for good, and there being a considerable excess of demand over supply.

If the council charges £5k, they p*ss off the 50% who currently pay £50, most of whom can't afford £5K. So all those huts are then on the market, the sub let market goes through the floor. If the true market sub let rent is less than the councils £4k rent, they would have a large number of huts with no tenants. And there is no way of predicting what the rate should be to fill all the huts exactly and maximise the revenue.

Similarly all valuation of houses are based on the current taxation paradigm, and if that changes, then the valuations change (and the LVT amounts with them). So when you often predict that X% of people will be better off under LVT, it impossible to say because there is no way of predicting what the market valuation of properties would be under LVT, and how much LVT everyone would pay. Particularly if one is attempting to maintain the current revenue from existing taxes under a new LVT, it would be impossible to predict what LVT rate would have to be applied to achieve that, and what relative levels house prices would stabilise at under the new system. So predicting winners and losers, or rather particularly predicting the number of winners, would be impossible.

Mark Wadsworth said...

S: "the market dynamic that creates the £5k 'market rent' is based on a large % of the huts being off the market pretty much for good, and there being a considerable excess of demand over supply."

Indeed. But no doubt it is perfectly clear to you that the council would bump up rents to £1,000 in the first year and see how many vacate and how many people resign from the waiting list and so on.

"all valuation of houses are based on the current taxation paradigm, and if that changes, then the valuations change (and the LVT amounts with them)."

Indeed.

But the existing tax system depresses rental values!

If you went in large and had full-on LVT at current depressed rental values and got rid of existing property taxes and got rid of income tax, then the rental value of housing would increase by a large proportion of that income tax cut, so initially, the LVT tax base is £200 bn but after a year or two it would be £300 bn-plus.

The Homeys will say that this is because "landlords pass on the rent".

Well that's as maybe, but you can't argue "rents will go up" and "rents will go down" and say that both are arguments against LVT.

Even if, in some parallel universe, rental values did go down, well that's good as well, because it's cheaper for young people to get on the ladder!

Sobers said...

The point is you often produce reams of figures 'proving' that X% of people would be better off under LVT, and its all pointless, because you are trying to compare two completely separate systems. All one can say is that there would be a lot of winners and a lot of losers, and one can't with any precision predict who will fall which side of the line.

My guess is that valuation of houses at the top end would fall drastically, and those at the bottom would rise significantly. Rents would rise, probably more at the bottom end than the top, in % terms. Thus the LVT burden would fall more heavily on the bottom and less on the top than one would think, compressing house valuations into a far narrower band than today. Thus there would be more losers and less winners than your figures would lead one to believe.

But its all a guess, because you can't prove it either way without actually doing it. Its a leap into the dark.

Mark Wadsworth said...

S: "The point is you often produce reams of figures 'proving' that X% of people would be better off under LVT"

I do, and common sense tells us who the winners and losers will be, if we shift from taxing income to taxing the amount of land you 'own'. It also tells us there will be even more winners in future (bigger pie shared more equally).

For sake of illustration, total earned income+profits in this country is (say) £900 billion and the total rental value of housing is (say) £300 billion a year.

Nearly all taxes are currently on earnings, so we shift to taxes on land (wholly or partly).

Even assuming no changes in behaviour, those people who own (or occupy, in the case of tenants) land with a rental value of less than one-third of their gross income end up better off.

At the other end of the scale are Poor Widows In Mansions and various large scale landlord, who have little or no earned income and thus their land-rent to earned income ratio is anything up to infinity.

And we know that earned income is relatively evenly distributed, compared to land ownership, which is very concentrated indeed. No matter which sources you use, there is a huge difference in "skewness".

There - I've proved what you said I couldn't by applying common sense.

Bayard said...

"If the council charges £5k, they p*ss off the 50% who currently pay £50, most of whom can't afford £5K. So all those huts are then on the market, the sub let market goes through the floor."

Not so. Those who want a beach hut and are prepared to pay £5K for it, will be happy to pay £4K to the council. So all that happens is that sub-tenants become tenants and save themselves £1K. The erstwhile landlords then give up their leases and the net result is the council now has 50% occupancy at £4K a year instead of 100% occupancy at £50 a year. Also, some of the pissed-off 50% will stump up the extra cash, say 10%, and some of the erstwhile frustrated sub-tenants would snap up the empty beach huts, say another 10%. Assuming that there are no more than, say, 1000 beach huts, then the council is better off as it will be getting £2.4M a year instead of £50,000. Indeed, the council would still be quids in if only 1.5% of the beach huts remained occupied.

Mark Wadsworth said...

B, excellent point. I wish I'd thought of that.

But let's assume the council uses the money raised to employ some people full time to clear litter from the beach, builds a new shower and toilet block etc, the beach is more attractive = more people = value of a hut even higher (you're paying to exclude others so the more you can exclude the higher the value), and so on in a virtuous circle until some optimum point is reached where marginal additional spending/organisation no longer produces a higher marginal income from the huts.

fraggle said...

The Homeys will say that this is because "landlords pass on the rent".

I think we have to shut down that at every opportunity, because until people grasp the fact that the rise is actually due to the tax cut, they'll keep looking for tax cuts without public ground rent, which will just start the right/left cycle all over again.

Sobers said...

"Nearly all taxes are currently on earnings, so we shift to taxes on land (wholly or partly)."

And where does the money come from to pay the taxes on land?

Income of course! The vast majority of tax revenue comes from income. Yes there are a few such as IHT and CGT that tax capital, possibly SDLT as well, but they raise a tiny % of the total tax take. The rest comes from income. And the only way to have an ongoing tax revenue stream is to tax income, because it repeats itself - you get more income for more work, year on year. If you tax capital eventually there's no capital left, and no tax revenue either.

LVT is just an income tax by another name, just one that doesn't tax you on the size of the income, rather the size of your house. The basic effect of LVT would be that most people would end up paying similar amounts of tax as before, but having moved to a house more commensurate with their income (and if they don't move because they're better off under LVT chances are the house will rise in value until their LVT roughly matches what their income tax would have been).

There may or may not be positive economic effects of an LVT, but if you assume you are going to raise the same revenue as before, an LVT will tax people roughly the same, in the long run.

Mark Wadsworth said...

S: "The basic effect of LVT would be that most people would end up paying similar amounts of tax as before, but having moved to a house more commensurate with their income (and if they don't move because they're better off under LVT chances are the house will rise in value until their LVT roughly matches what their income tax would have been)."

Quite possibly so, but under LVT you are getting some back directly and personally for the "tax" (actually ground rent) you are paying. So in effect, nobody pays any tax at all. If you buy a new car, that is not a tax, you get a new car for it. If you pay ground rent on your house, that is not a tax because you get a nice location for it etc.

"There may or may not be positive economic effects of an LVT..."

There are huge economic (and social) benefits to0 LVT AND there are equally huge economic (and social) benefits to reducing taxes on earnings, profits and output. It's win-win.

"... but if you assume you are going to raise the same revenue as before, an LVT will tax people roughly the same, in the long run."

Also agreed, quite possibly or probably true, but see my first para above.

Mark Wadsworth said...

F: "the rise [in rental values] is actually due to the tax cut,"

Yes of course, but that is a more subtle point and the Homeys will refuse to accept it as true - while clinging to the incorrect notion that "landlords pass on the tax".

So we and the Homeys are actually agreed on what would happen to rents, just arguing over the explanation.