Wednesday, 18 March 2015

Ricardo's Law of Rent, sort of.

The Homeys don't really deny any of this, they just see land as an 'investment opportunity' rather than 'privately collected tax' or 'private appropriation of publicly created wealth'.

From today's City AM:


Over the last decade, we have seen the rise and fall of many housing-related indicators – from house prices, which fell 20 per cent and have subsequently bounced back by the same percentage, to private house-building, which is still 40 per cent below its 2007 levels.

The one measure that has hardly budged has been the proportion of average earnings accounted for by private rent. This measure has tracked in a consistent, narrow range of 31 per cent to 37 per cent, and has averaged 33 per cent since the fourth quarter of 2004. The stability of this measure is particularly attractive to investors.

That one-third figure is about right (it drifts up gradually as the economy grows, which is why the proportion is higher in high-wage areas than in low wage areas).

But the total rental value of land and buildings increases in line with the economy, and bears little relation to the cash cost of just providing the building. It must be far higher or else location/land itself would have little value; this is also evidenced by the fact that the rent for physically similar houses are wildly different in different parts of the country, even though the running costs are much the same.

It's not like a hire car, where the rental income declines over time and which has to be scrapped after ten years; and indeed where the daily charge for similar cars is much the same across the country.


a) rent is just privately collected tax. Higher incomes = more income tax; higher incomes = higher rents, and

b) that one-third gives us a good guide to the potential amount of revenue from Land Value Tax. Expressing it as one-third of gross income is far less meaningful than expressing it as half of net income after tax; get rid of income tax etc. and rental values would rise to nearly half of GDP. Seeing as a sensible government only needs to spend about one-third of GDP, that leaves plenty left over for personal tax-free amounts or a modest Citizen's Income (same thing, really).


Ben Jamin' said...

The taxable base of land is what ever we want it to be.

Let's say it was only 20%. Even if we collected more than that, as long as it was evenly applied there would be no loss of efficiency.

In effect a 100% LVT + a pro rata Poll Tax.

Negative land values are only a problem relative to positive ones.

With the reduction in deadweight losses, 33% GDP sounds like a good guestimate to me. Which would easily cover current expenditure.

Mark Wadsworth said...

BJ, exactly, it's a very big target and it doesn't matter if you miss slightly.

33% GDP is actually high spending - if you exclude welfare from spending.

The current lot only manage to burn through 35% of GDP excluding pensions and welfare stuff and at least a fifth of that is pure waste and theft.

Bayard said...

"rent is just privately collected tax"

So is interest. I suspect that if all rents were effectively collected by the government, then there would be a shortage of places to rent, just as there was when the Rent Acts were in force, which would be jolly inconvenient for those who did not want to buy. However, if we went back to the Middle Ages and banned the lending of money on interest, there would still be banks, just not the over-large and over-powerful ones we have today, which would not be inconvenient for anyone except today's bankers, whom we'd be better off without.

Mark Wadsworth said...

B, "yes" and "no" respectively.

LVT is a tax on rental values, whether a plot is owner-occupied, tenanted, second home, derelict or with planning but not developed, so does not reduce availability of homes to rent or to buy.

Random said...

LVT is likely to be neutral for buyers as the price of the location part of the house falls by the same amount as the LVT liability.
They will benefit from the income tax cuts, etc.

Mark Wadsworth said...

R, exactly. I suppose the "one third" rule of thumb applies to mortgage repayments as well.

Bayard said...

Well if I could rent a place out for, say, £500 a month and the LVT on it was £500 a month, then there wouldn't be much point. I'd be much better off selling it. As with me, so with everyone else, ergo, very few places to rent.

Mark Wadsworth said...

B well that would be an insane system.

If the rent is £500 a month gross, then the LVT would be in the region of £200 a month.

Logan Boettcher said...

Mark, what is your thought on the effects of a minimum wage hike on private rents for those who get the wage hike? I have been contending that landlords will raise the rent on their MW tenants when the lease is up if they can (i.e. no rent control) according to the 33% magic number. For example, if rent goes from a third of a MW worker's income to a quarter once the MW is raised, their landlords would just raise the rent eventually to one third of their new wages.

Pre-MW: $1,500 per month minimum for workers working 40 hours per week = landlords charging $500 per month in rent.

Post-MW, pre-lease renewal: MW is raised and MW worker gets $2,000 per month, $500 rent is now a quarter of their income.

Post-MW, post-lease renewal: Landlord raises rent to $660 per month to maintain 33% number.

I ask because it is highly contentious among the leftist, pro-MW crowd that increasing the MW gets cannibalized by landlords. And would the $340 wage increase (if you take out 33% of the $500 increase for rent) be competed away as higher prices? I'd love to hear your thoughts on it.

Logan Boettcher said...

Or would they raise rents to $1000 per month when it goes to $2000 per month minimum? Seeing that MW tenants were getting by on $1000 per month before the MW increase, landlords could surmise that they can get by on $1000 per month after the increase.

Bayard said...

Mark, sorry, I must have misunderstood your maths, but your point b) does read as if the government would be collecting half of GDP in LVT, i.e. 100% of the rental values.

Mark Wadsworth said...

LB, that is a good question and nobody really knows.

a) In the short term (less than a year) nearly 100% of increase in wages go into higher rents.

b) In the longer term (decades), it averages out at approx. one-third.

There is plenty of easy evidence for (a).

And (b) must also be true, because the economy is ten times bigger than a century ago, but rent still only consumes one-third of the economy, instead of all the growth (which would be nine-tenths of the economy).

Mark Wadsworth said...

B, yes you did misunderstand.

I never said the government could or should collect and spend half of GDP from LVT alone.

I said that it could collect and spend about 30%. The other 20% is called 'Citizen's Income' or 'personal allowance' which the government does not collect and does not spend, it just leaves it where it is.

Random said...

Is there a laffer curve for rents?

Mark Wadsworth said...

R, no, that applies to taxes on income or consumption. it's about supply and demand contracting.

It does not apply to the value* of a monopoly over something in fixed supply, which is just worth what it is.

* From the owner's point of view, not the value to society as a whole.

Random said...

OK. Is it possible to raise LVT over 100%?
Or is there eventually a point at which revenues are reduced

Mark Wadsworth said...

R, yes of course. But the cliff edge is not as bad as with taxes on earnings and production.

Up to 100%, LVT makes things better in every respect (in particular if it replaces bad taxes).

Past 100%, it becomes a tax on land AND on buildings, so over time, it discourages construction of new buildings where needed (high value areas) and maintenance and renovation of buildings (especially in low value areas - which is what we observe with Business Rates).

But it's a soft target, the world would not come to an end overnight if LVT were inadvertently set at 110%, it would take five years for any sort of mild stagnation at the margins to set in, at which stage we row back to [any number lower than 100%].

Bayard said...

"it just leaves it where it is."

Certainly if it a personal allowance, but not if it's Citizens Income. CI must be collected from taxpayers and given back to everyone, taxpayers and non-taxpayers alike. So to have a 20% of GDP CI, you would need to collect 50% of GDP in tax, which is a) above the Laffer maximum and b) does not work with LVT, or only works if the sole landlord is the state.

Mark Wadsworth said...


"CI must be collected from taxpayers and given back to everyone, taxpayers and non-taxpayers alike."

No, that's nonsense.

It is perfectly easy and do-able to knock off people's CI entitlement from their LVT liabilities and collect the balance. It is exactly like the personal allowance.

It is only people who live in the cheapest houses, or who do not own land at all who would have the CI paid out in cash.

The CI is not some magic figure that stands on its own, it is a balancing figure between total rental value and "how much the government actually needs to spend on schools and hospitals and policemen".

Random said...

I guess you expect landlords and banks to give you a better CI then.

Mark Wadsworth said...

R, was that question addressed at Bayard or at me?

Bayard said...

"It is perfectly easy and do-able to knock off people's CI entitlement from their LVT liabilities and collect the balance."

Still going to put all the landlords out of business, though. If you are a landlord, you will, most likely, have more than one house, one that you live in and remainder that you rent out. You will pay all the rent on these houses over to the government, but only receive back one personal allowance/CI.

Mark Wadsworth said...

B: "Still going to put all the landlords out of business, though"

Not necessarily.

Landlords are perfectly happy to rent out home to make a profit of a couple of thousand pounds a year - there are plenty such homes being rented out.

It will just be that homes on which they can currently make tens of thousands a year profit will only make them a couple of thousand pounds under LVT.

Bayard said...

"will only make them a couple of thousand pounds under LVT."

They won't even make that, if 100% of the rental value is taken by LVT. Look, this post is talking about the rental value, that's what the magic 33% refers to, that's all the rental value, not just the location value, so if the entire 33%, or the entire 50%, if the percentage goes up under LVT, is taken as tax, then there's nothing left for the landlord, certainly not thousands of pounds a year. You'd need either an allowance per property or less than 100% LVT (comes to the same thing) to make it worthwhile renting anything out.

Mark Wadsworth said...

B, as ever, I was talking ballpark figures.

I caveated it with the sentence

"that one-third gives us a good guide to the potential amount of revenue from Land Value Tax."

Clearly, the "site premium" is a few thousand quid less than the full rental value; the difference is about 7% of GDP (the total cost of maintaining buildings etc).

If you want me to painstakingly go back and rework the post to the third decimal place, I could, but I don't see the point so I won't.