Wednesday, 12 November 2014

Killer Arguments Against LVT, Not (348)

Emailed in by MBK, from The Economist:

But if LVTs are so great, why are they so rare?

One explanation is that it is too difficult to value land separately from what sits on it. There is not much of a market, for example, for undeveloped land in central London.

The author knocks that one right on the head:

… this can be overcome. The 2010 Mirrlees Review of British taxation argued that bean-counters could compare the price of similar buildings in different locations, for instance.

Correct. Identify a few bellwether buildings (a three-bed semi-detached house, an office block of a given size, whatever) in a marginal area i.e. very cheap areas, i.e. one where it's just about worth maintaining an existing building but not much new is being built. The land value in that area is to all intents and purposes zero. The amount by which the total value of a similar building (a three-bed semi-detached house, an office block of that given size, whatever) in a different area exceeds the one in the marginal area is by definition the payment for the "location, locate, location". Simple subtraction and a bit of averaging is all you need.

In any case, the efficiency of the tax does not depend on accurate valuations.

Exactly. LVT would probably work best if it's the same % rate everywhere, but it doesn't really matter. So if the tax on a three-bed semi-detached house in a valuation area is set the same for all such houses in that area, the cheapest might be paying 90% LVT and the most expensive only 70%. So what? There's no magic to the 70% or the 90%, either way it's a tax on the land value.

The bigger barrier is political.


LVTs would impose concentrated costs on today’s landowners, who face a new tax bill and a reduced sale price. The benefit, by contrast, is spread equally over today’s population and future generations. This problem is unlikely to be overcome. Economists will continue to advocate LVTs, and politicians will continue to ignore them.

That turns logic and facts on their head. Having done the spreadsheets umpteen times, it is quite clear that if you shift taxes off earnings and onto land values (and other monopolies), then in the short term one or two per cent of the population have their state granted privileges removed (and will scream blue murder) but at least three-quarters of the population would be thousands or tens of thousands pounds a year better off.

Once today's rent seekers have found themselves proper jobs and rejoined the productive economy, everybody's happy. Or else you might as well argue that we can't legalise drugs because it would put deprive drug dealers of their livelihood. You can't miss what you never had.

And if we are not to worry about the future, we might as well throw in the towel right now.


Ben Jamin' said...

Sounds like a load of buck passing to me.

The advantages of LVT can be split into two main groups.

Group 1. Economic efficiency i.e deadweight losses

Group 2. Redistributional effects.

For Group 1, apart from Nic Tideman doing his piece in "losses of nations" 1998, I've not seen any comprehensive study of the total deadweight losses in the UK economy.

Those being the deadweight losses of taxation, and capitalised land rent.

This quite extraordinary if you think about it.

For Group 2, other than what I've read on this blog, I've seen no serious economic study regarding LVTs effects on the following.

Household income/inequality
Wealth distribution/inequality.
Regional inequality.
Personal debt.
Housing affordability.
House sizes.
Planning incentives.
Vacancy/under occupation/land banking/urban sprawl.(deadweight losses)
Business cycle/housing bubbles/banking

I read loads of stuff emanating out of the LSE/Harvard going on about deregulation and planning, but sweet FA about LVT.

It's no good economists blaming politicians. The politicians have virtually zero empirical arguments to throw at the public.

No wonder LVT is a non-issue or non-starter.

Mark Wadsworth said...

Exactly. All the economists think that LVT is somehow "a good idea" but untried in the real world and that there are no real life examples and counter examples.

For a start, the UK used to have Domestic Rates. Plenty of countries have property or land value tax.

Business Rates = LVT and rents and mortgage interest = privately collected LVT. Council Housing = LVT minus equal and opposite Citizen's Income.

But sod all that, sod idealism.

Let's get to the real issue - the flat tax app.

People will vote for a £10,000 tax cut/pay rise out of naked self-interest, and social justice be damned.

Graeme said...

isn't it worth pointing out that a number of places do have LVT - including Hong Kong, various US it is not exactly untried in practice. If we look at those real life examples, all the pitfalls have been overcome.

Ben Jamin' said...


We are not worried about "LVT" per se, but de-capitalising land rent, and paying for public services, as efficiently and simply as possible.

LVT in the US is not really what we have in mind. Does HK have proper LVT?

When the US was a real economic power house between say 1800-1950, it did show us very nicely benefits of relatively high property taxes and low income/sales taxes.

The history of California should be lesson known to all economists of what good tax policy does. But they seem curiously oblivious. (blaming planning regulations for the now dysfunctional housing market instead of Prop 13).

The two best examples I've heard of are massive State supplied housing in Singapore, and the Non Dom Lump Sum taxes in Switzerland (which I first learned of here, courtesy of MW).

As The Economist, rather encouragingly, pointed out, the accuracy of LVT valuations isn't that important.

We want over here is what they do in Switzerland. Lump sum taxes, attached to freehold titles, not people. Relating to the rental value of land, as near as we can get it. But, it doesn't really matter that much.

They pay 5% in Switzerland. MW is proposing 3.5% as our starting point.

And do we see "wealth creators" flooding out of Bern or Zurich to avoid this Socialist conspiracy?

No they don't. They love it.

Bayard said...

Mark, to be fair to the Economist, I think they are talking about LVT as an additional tax, not a replacement.

Mark Wadsworth said...

G, exactly. Most irritatingly, the UK has Business Rates and had Domestic Rates, we don't even need to speculate about other countries.

BJ, yup, more real life examples. And not even the most hard core LVTer has said we try and do the tax shift overnight, we just nudge our way forwards bit by bit, year by year.

In the unlikely scenario that "it goes wrong" (how, exactly? It's never gone wrong) then we just stop.

As to Switzerland lump sum taxation, each canton does it slightly differently, but broadly speaking it works like this:

1. They take the rental value of the house you live in.
2. They times it by five to arrive at your taxable income.
3. They apply 30% or 40% income tax to that.

So actually, the lump sum tax works out at two or three times the rental value of your house.

Quite what that is as a %age of selling prices I don't know, it's quite probably more than 5%.

And wealthy people still pay it quite happily. It's the Swiss lefties who say that these people should pay even more.

B, maybe they are, it's not quite clear. But I am talking about proper LVT which replaces bad taxes.

Lola said...

Politicians don't like let because it's the very opposite of a,stealth tax. They know that they'd have a hello value job extracting more money from us. Everyone could see exactly what the government cost. And that is why lefties want LVT as an additional tax.

Lola said...

Re typos. Posting from smart phone

DBC Reed said...

The Economist, to be fair, does say that the "bigger barrier" is political and lies in the "concentrated costs" for today's landowners and reduced sales prices.Of course if you set a land price datum line ,flood the country with cheap money, then tax land price increases only, you avoid these problems and get a lot more production. See Martin Wolf JS Mill.
(The essence of LVT is Pigovian: deterring over investment in land and nudging it into personally more risky but communally more beneficial investment in producing goods and services, hein?)

Ben Jamin' said...

@DBC Reed.

If it's wrong, it's wrong.

Your argument would have seen us still with legalised chattel slavery, albeit stabilised at 19th century levels.

Exclusive use of land, without paying just compensation is economic slavery, which needs abolishing, not stabilising.

LVT is Pigouvian, because excluding others from productive land is an externality on the rest of society.

LVT is the compensation, set by the market.