Thursday, 2 April 2015

Killer Arguments Against LVT, Not (357)

MBK emailed in this one from Forbes to add to the collection:

If you take an empty city block and fill it with dense, beautiful buildings, nice restaurants and bars and other sources of entertainment then the value of the land will go up. This reflects the reality that there are a significant amount of spillovers in local real estate investment. Land value is not just capitalized value of publicly provided public goods, but of nearby privately provided positive spillovers.

It’s widely recognized that when individuals clean up a property, or open a popular business, there are often spillover values in the neighbourhood. Urban economists recognize that the collective value of these spillovers is huge, and in fact makes up a significant amount of land value... The fact that private amenities have positive spillovers suggests that they will be underprovided by competitive markets.

All good and proper so far.

However, by allowing some of the value of spillovers to be captured, higher land values provide real estate developers, businesses, and even households with incentives to create them.

1. Even if that conclusion were correct (which of course it isn't), taxing such uplifts discourages economic activity a lot less than taxing earned income.

2. LVT assessments do not work on a plot-by-plot or street-by-street basis, they work on the basis of averaged out values for a whole area, which one individual land owner can only influence very marginally.

So if you own one out of a thousand buildings/plots and you manage to increase the rental value of yours and a few surrounding ones by a thousand pounds a year, the average increase in your LVT bill is only a few pounds.

The same applies to everybody else. And if you allow yours to fall derelict the reverse applies, but few people will be able to afford to allow a building to fall derelict, so they won't. The overall incentive is to improve or at least to maintain, unlike the current tax system where the incentive is to piggy back on what everybody else is doing.

3. We could do this with income tax as well, of course. If everybody has to report and pay tax on his personal income, that's a disincentive to earn more and an incentive to lie. But what if we averaged out everybody's income in the area and everybody paid income tax on the average? There is very little disincentive to earn more and barely any incentive to lie, because if you dutifully report a £10,000 pay rise, that only pushes up the average income in your area and hence your personal tax bill by a couple of pounds.

4. So with LVT we quickly reach a steady state in each area i.e. all the buildings in any area will be done to a similar standard, whatever is appropriate for that area, job done. It would be the same with averaged out income tax; low earners would end up living in some areas, medium earners in others and high earners in others. High earners would be prepared to pay more in return for living in nicer areas, so ultimately the effect wouldn't be very much different to LVT.

UPDATE 5. Mombers reminds us that LVT doesn't need to be 100% anyway, very few people ever said that. But this is typical Home-Owner-Ism - when you mention LVT they always attack it with the same venom, whether you suggest very modest LVT or 100% LVT.


mombers said...

Well the root of the problem with this article is that it's going after 100% LVT. You don't need 100% LVT to get rid of all other non-pigouvian taxes, right MW?

Mark Wadsworth said...

M, excellent point, I forgot that one in my rage and have updated the post.

Ben Jamin' said...

"However, by allowing some of the value of spillovers to be captured, higher land values provide real estate developers, businesses, and even households with incentives to create them."

The rental value of land is the surplus not needed to put Land to it's highest productive use.

It is only the amount someone is prepared to pay to exclude others from it's productive surplus. So these businesses don't need the incentive of free rent. Quite the opposite in fact.

Again, supply is created. As Land is supplied free by nature, demand for it is merely shifted. Land is not "created" and neither is demand for it.

If we took all of todays UK taxes and converted them into a LVT, we'd get a 300% LVT.

Leaving to one side the efficiency gains from eliminating taxes from income/capital, would a 300% LVT have any negative consequences?

I say no, because people are in effect already willing to pay this pro rata out of their after tax income.

It's just a lumpsum tax, people are already willing to pay.

Random said...

BJ, you are forgetting reducing other taxes increases the value of land. 100% LVT would likely raise more revenue than the current tax system.

Random said...

Ben Jamin' said...

@ Random

No, not forgetting, just postulating whether it's even relevant or not.

Mark Wadsworth said...

BJ, exactly and you're right, it is not particularly relevant.

R, yes, the Bedroom Tax and the Mansion Tax are sort of the same thing, only one is for council tenants and the other is for owner-occupiers.

So the lefties are up in arm about the former and the Homeys are up in arms about the latter.

Random said...

BJ - It is quite a significant effect, no?

Mark Wadsworth said...

R, we prefer to avoid those arguments.

Observation tells us that this is true. Without rent caps, if you reduce income tax etc then rental values will go up accordingly.

But on the Homeys first deny that this effect exists and in the next breath, they will say "landlords will just add the LVT to the rent". Which in a roundabout way is correct (in the absence of rent caps).

Well perhaps they would, but who cares, if the income tax saved by a tenant is on average twice as much as the rent increase?

Interestingly, according to a recent poll, 59% of people support rent controls, and I bet that among YPP's target voters, support is much higher than that.

Random said...

Beside, with 100% LVT, will there be many landlords? It is a non issue.
It depends though if the govt just implements LVT and does not reduce other taxes. If it does the other taxes will reduce rents as ATCOR? (All taxes come out of rents)

Random said...

Mark, I am surprised the Homeys have not implemented rent floors.

Mark Wadsworth said...

R, I dislike VAT, NIC and higher rate income tax just as much as I like LVT.

An they do have a rent floor. It is called Housing Benefit.

Interestingly, the Tories shot themselves in the foot here.

They were so keen to have a total welfare cap of £26,000 but they didn't realise that this is primarily a cap on housing benefit. There are only a couple of dozen families in the whole country who get as much as £26,000 excluding Housing Benefit.

Random said...

MW, the effect is tiny and offset by Help to Buy, etc.

Bayard said...

"An they do have a rent floor. It is called Housing Benefit."

ISTR you demonstrating that, if you are not in receipt of HB, you can rent for less than those who are on HB (presumably due to the positive feedback effect of HB).

Mark Wadsworth said...

R, correct.

B, that was Rantin' Stan who presented first hand experience of that, and I have no doubt that it is true.