Wednesday, 3 June 2015

Killer Arguments Against LVT, Not (360)

There was another good (as in 'really bad') argument against LVT in this article in Forbes:

I think a good comparison, and indeed a related phenomenon, is the agglomeration effects of urban labour markets. It’s not clear where these agglomerations rise from specifically, and empirically it’s difficult to measure an individual’s contribution.

Yet the total effect of this agglomeration on total U.S. output and productivity is huge, and it is ultimately made up from the choices of individuals to show up and participate in these markets.

The difficult empirical measurement of rents in this context, and the economic importance of the total spill overs, mean we should be very hesitant about trying to tax away the individual rents any one individual accrues from showing up.


Does this man even think about what he is saying? Does he not realise that he has demolished his own argument?

1. He is right to say that the rental value of land arises mainly from 'agglomeration' effects, i.e. private efforts, with the government playing an enabling rĂ´le (roads, public safety, public transport etc). The question is, should this be collected by landowners or collected by the government instead of collecting taxes from private effort and enterprise?

2. The total agglomeration effect is easy to measure - it is the same as market rents, and no, we don't have the foggiest idea how much each individual adds to or subtracts from the total value, it's like twigs on a fire, you can't light one or two twigs, but chuck those two on a roaring fire and it will burn even hotter.

But so what? The LVT collected depends on the overall temperature of the fire, and not on 'by how much hotter the fire is now that we've chucked those two extra twigs on'. The overall temperature of the fire is easy to measure and the second question is a philosophical question as much as anything.

3. Remember that all these individuals are currently paying income tax; each one has to declare his income and pay tax on it; income tax has the effect of depressing reported and actual incomes for obvious reasons. A newcomer has to report his own income as well as paying rent to incumbents.

4. So what happens if we replaced income tax for that city in its entirety with a Poll Tax? The Poll Tax would be equal to the total income tax divided by the number of residents, which gets rid of the disincentive to earn more or to lie on your tax return. Above average earners would be laughing, but below average earners would not, so many low earners would be forced to move away, which is not good.

5. So we can make the Poll Tax more progressive by having Land Value Tax instead, where you can choose how much tax you want to pay i.e. by choosing a mansion in a nice area or sharing a flat in a tower block in a cheap area. Poor Widows In Mansions would move away, freeing up space for more workers.

6. Averaged out, it is clear that working people's/businesses' total tax bills would go down (same total bill, more workers/businesses = win); the extra workers/businesses increase agglomeration effects (win); so tax paid as a % of total earnings would go down even more (win); and the Land Value Tax would not be a disincentive to earning more, indeed it would be an incentive to do so (win), and newcomers would only have to pay quasi-rent (LVT) but not income-tax-plus-rent as at present (win).

Looks like a win-win-win-win-win to me.

36 comments:

Random said...

http://www.theguardian.com/public-leaders-network/2015/mar/24/how-council-tax-pound-spent
Field day in the gran at the moment.
The old "council tax pays for local services."

Mark Wadsworth said...

R, that's not really a KLN.

1. It's a lie. Council Tax only pays for 10% of local services (depending how you define them).

2. It's irrelevant. "Local services" have got to be paid for somehow, the question is how.

3. The statement pre-supposes that Council Tax is the best way of doing it. The obvious alternatives are LVT, local income tax or Poll Tax. Weirdly enough, you'll find Homeys arguing for Poll Tax and Local Income Tax in the same sentence, even though these are diametric opposites and LVT has the advantages of both and the disadvantages of neither.

4. Council Tax is actually a weird mix of Poll Tax, LVT and local income tax.

Dinero said...

I clicked through and read the article.

The only substantive point he made , what he calls his "main point" was landlords recirculate the rents to the local community and it is private investment.

I'm not saying its a good point but it is a real academic observation. The simmilar observation of the opposite scenario can said for large coporations who have shareholders located far from their customers.

Kj said...

The difficult empirical measurement of rents in this context, and the economic importance of the total spill overs, mean we should be very hesitant about trying to tax away the individual rents any one individual accrues from showing up.

Ofcourse, because it would disincentivize showing up, no such problem exists with land, which is what we keep banging on about. The idea is to let people have these Labour market agglomeration "rents" (which aren't really rents, just competitive wages), and then decide by way of the market how much they want to spend on actual rents.

But but, I can give him as much as that I also think taxing the "full rents" is not necessarily practical, and you can probably get to a tax > 100% of rents that do depress development. Using average rents/sales prices in a reasonable area instead of maximum, and taxing up to 80-90% more than covers this. If you buy property A and build a house that is so smashing that it raises the land price of B, the average land value of A, B, C, D, and E is only raised a portion of that, not a problem.

Mark Wadsworth said...

D his main claim is probably not true and even if true is irrelevant

Mark Wadsworth said...

Kj agreed 80 - 90 percent is probably the best

Random said...

http://www.3spoken.co.uk/2013/02/the-insidious-arrangement-fee.html?m=1
This is interesting IMO.
More rent extraction and a loophole for the banks.

Mark Wadsworth said...

R yes but we knew that

Random said...

Mark, what is YPP's view on monetary policy. Do you support ZIRP forever?

Mark Wadsworth said...

R, two points
1. Don't run deficits.
2. Don't tinker with interest rates. If they happen to be low naturally, then great.

gavka said...

But couldn't one argue that the benefits of agglomeration that occurs in one specific location, say, London, should be distributed within London, and not within the larger political unit of the United Kingdom? And that if the benefits of agglomeration that occurs in London are distributed around the UK then this will disincentivise further agglomeration in London? Obviously one must take account of the 'enabling role' played by publicly funded services and the contribution of the population in the rest of the country - but assuming that the agglomeration that occurs in London generates great benefits that constitute a large proportion of the land value in London, then wouldn't it be both unfair and inefficient to tax 80-90% of this value and distribute it all around the UK?

Mark Wadsworth said...

G you could argue that but it's nonsense. London is not an island it lives off the rest of the country so why should the London LVT be redistributed in the same way as London income tax is redistributed?

Kj said...

And that if the benefits of agglomeration that occurs in London are distributed around the UK then this will disincentivise further agglomeration in London?

Agglomeration benefits are not based on any costs, they are based on businesses and innovative folks being close to one another, there is no disincentive when you tax this windfall, because it is exactly just that, a windfall. Yes, there are costs of public infrastructure in a city, but not necessarily much higher than in less densely populated areas that have lower rents per capita.

Random said...

" Don't run deficits."
So how will this be "funded." Running persistent current account surpluses?

Mark Wadsworth said...

R don't start all this again, deficit spending benefits today's older people at the expense of today's and tomorrow's young people who will have to pay it off. So YPP prefers break even or small surplus,paid for by the Boomers.

Random said...

, "deficit spending benefits today's older people at the expense of today's and tomorrow's young people who will have to pay it off. So YPP prefers break even or small surplus,paid for by the Boomers."
Mkay, but when the boomers have no savings, where is the money for the surpluses?
Secondly, deficit spending is not "paid off" until people stop saving money in aggregate. Government "borrows" in the same way a bank does when your money comes into your account. So all this "it will be paid off by the young" is nonsense. It is accumulated financial assets, either as bonds or cash if QE. It will "paid off" when spent, although govt can confiscate savings.

Bayard said...

"but when the boomers have no savings, where is the money for the surpluses?"

Are you saying that government debt can only be paid off by money from private savings? If so, how can that be? Why can the government not pay off the debt simply by paying the gilts as they fall due and simply not borrowing more?

Mark Wadsworth said...

R the boomers have no savings? Not a problem - our friend LVT man rides to the rescue yet again

Random said...

"deficit spending benefits today's older people"
At the moment. It doesn't have to though. Most likely running surpluses will harm everyone, elderly people more.
It seems like you dislike "older people." Lefties use the same excuse when they call to "tax the rich." They then make up excuses after deciding to do this.
MW, you are missing out on the basic accounting. The govt debt liabilities are an asset. It is like trying to get a bank to "pay off" its depositors. Fortunately banks cannot tax and destroy net financial assets - loans create deposits.
Currency issuing govt liabilities = Currency user assets
So saying "don't pass debt onto children" is equivalent to saying "don't pass on private sector assets" to children. 100% inheritance tax??
MMTers (well Mosler) support ZIRP. This would:
Remove interest -free welfare to the rich (and elderly people, to an extent.)
Reduce govt bonds being used as casino chips for various games in "finance."
The UK really needs to "sort out" its trade deficit first if you want balanced budgets. Which means all imports "funded" by private borrowing until it is "sorted out."
If you want to run surpluses fine, I disagree with you though. But why not support ZIRP as well and go for the whole hog?

Random said...

"Are you saying that government debt can only be paid off by money from private savings? If so, how can that be? Why can the government not pay off the debt simply by paying the gilts as they fall due and simply not borrowing more?"
Let's make sure we are working at the same level of abstraction here. If govt is taxing more than spending more bank accounts are debited than credited. This means the same thing. Govt surplus = private sector *deficit*
As to point 2, I support this. No more debt/ZIRP/"print money. Just "pay off" debt when due.

Random said...

"the boomers have no savings? Not a problem - our friend LVT man rides to the rescue yet again"
I think we are talking past each other here. I mean why is there a need for consistent surpluses *after* LVT implemented in full.

Mark Wadsworth said...

R old people, boomers, Homeys, land owners same thing

And govt bonds are assets and liabilities in equal and opposite measure, they net off to zero. If I lend my wife money, she spends it and we both die, what do our children inherit? Nothing!

Random said...

MW, agreed but surpluses are shrinking bank sheets, not "paying off" anything. Like paying off bank loan.
The point I am trying to make is I don't understand why surpluses are a good thing of themselves. Why not implement LVT and have deficits as well.
Once we have LVT in full why is there a need for surpluses?
The nat debt (or ZIRP in my case) grow along with the economy.
We always spend by swapping debts for other debts we prefer. So if I buy a loaf if bread with some cash, I swap central bank debt (money) for my debt to the store.
Bonds are really money. The closer the rate to zero the more this is. So I see them as "liabilities" to the govt but not really, it allows things to not net off to zero in the private sector. The nat debt is not "debt" like most people think of it, more the store of non-govt sector assets. It only gets played back if they run down savings or borrow from banks in aggregate.
The govt can "print money" and have "no debt" and "pay back" but it is not really - money is the debt, although people pretend it isn't. £10 is debt for £10 with no coupons (and tax credit/LVT credit.)
So we have full LVT and maybe a few other monopoly taxes, the govt spends by issuing LVT credits, some are used to pay LVT, some stored away for use to pay LVT in an account payable in more LVT credits. Unless ZIRP/cash.

Random said...

http://bilbo.economicoutlook.net/blog/?p=21467
Sectoral balances.

gavka said...

London is not an island and 'lives off the rest of the country' to an extent, so its LVT should be distributed around the rest of the country to that extent. But if the benefits of agglom that occurs in L are as huge as they appear to be, then taxing 80-90% of London's land value and distributing around the rest of the country seems like plain old redistribution to me, as opposed to fairly distributing unearned wealth. Maybe 40-50% LVT would be more like it. Not that plain old redistribution is necessarily unfair or a bad thing, but it's not the same as fairly distributing unearned wealth, which is what LVT is all about.

gavka said...

Kj, If agglomeration benefits are 'based on businesses and innovative folks being close to one another', then it seems odd to call these benefits a 'windfall', as they are generated only when these businesses and people choose to go somewhere, with their skills and innovative minds and so on, and utilize these assets (very) productively. If you tax and redistribute this 'windfall' then it might well disincentivise these bueinesses and people from choosing to go to this particular place to exercise their talents and abilities, especially if there is another place they can go to do this where the 'windfall' generated by their productive activities is not taxed (which is why it is not in fact a windfall). Of course, this would only happen if there was indeed such a place, with no or very low taxes on production, consumption, employment etc, and no or low LVT. But this is just the sort of thing that right-libertarians support, so one of these might say 'why tax 80-90% of London land values to be distributed around the rest of the UK? Why not 30-50% for distribution around the UK, and the rest for distribution within London?

Mark Wadsworth said...

Gavka, you fail to grasp the concept of "unearned windfall".

That extra rent has to go somewhere. It can go to landlords/current landowners or be redistributed. It can be sent abroad, it can be burned. It does not matter. Whatever you do with it will not deter people from wanting to move to higher wage/rent areas. Similarly, not taxing it will not encourage people to move to higher wage/rent areas.

It's like the oil strike near Gatwick. Clearly, the people who searched for the il need to be paid and the people who extract it will need to be paid, but the rest of the value is windfall.

gavka said...

It's not really like the oil strike though is it, because, as Kj pointed out, the benefits of agglomeration are the result of businesses and innovative people choosing to work productively together in a specific place, rather than the result of these businesses and people just suddenly being found to exist in a particular place, like with the oil near Gatwick. If the extra rent from agglom is not taxed then it will go to landlords/current landowners, and if these are the innovative people from whose talents and efforts the benefits of agglom are generated, then that would not be an unearned windfall, and taxing them would deter these people from moving to this area. A right-lib would probably argue that if there were no taxes on production, employment, consumption etc, then the innovative people doing the agglomerating would be able to buy land outright, in which case they would own the land which is increasing in value from their agglom, and they would benefit from the increasing value, which they would not if it were taxed.

Mark Wadsworth said...

G: "If the extra rent from agglom is not taxed then it will go to landlords/current landowners, and IF these are the innovative people from whose talents and efforts the benefits of agglom are generated, then that would not be an unearned windfall.."

Firstly, that's a big IF.

There is no particular overlap between who owns the land and who does the work. Two thirds of businesses are tenants and half of people under 35 are tenants. They contribute to the agglomeration and end up paying for it in higher rents.

Further, the benefits of agglomeration i.e. higher land prices can only be banked by people who sell up and leave the area. Who pays that? People who want to move to the area and contribute in future.

A cut in income tax clearly rewards workers and businesses - but a cut in taxes on land values mainly benefits people who are or will be contributing little or nothing.

Finally, wages and rents are pretty much in line all over the country. You can earn more in London for doing a particular job than you can doing an identical job in Wales, for example. That extra £££ income is in itself windfall and is currently siphoned off in higher rents/prices. It would make no difference to workers and businesses who will be contributing in future who gets the windfall £££ - the government or landowners. For example, a lot of businesses rent their premises from the government i.e. Crown Estates.

Kj said...

No Gavka, rents are what people are willing to pay post their returns from doing wealth-creating proper work, there is no disincentive. And it doesn't matter if it's through tenancies or owner-occupation, landownership and productive enterprise is two entirely different functions, even when performed by the same person; you can always rent out, even if you don't do business anymore.

Bayard said...

"If govt is taxing more than spending more bank accounts are debited than credited. This means the same thing. Govt surplus = private sector *deficit*"

Why does this deficit have to come from savings? Why cannot it come from current earnings, like the bulk of the taxation revenue does today?

Mark Wadsworth said...

Kj, exactly.

B, don't get bogged down in this MMT stuff. Clearly, if the government spends money on improving infrastructure etc, that adds to net wealth (and if it spends money on white elephants, that reduces overall wealth).

But government bonds themselves are not net wealth, one man's liability is another man's asset.

gavka said...

Kj, no, just because someone is willing to pay a certain amount does not mean that they would not prefer to pay less if they could, so higher tax on rent, which would leave less to be imputed by the landowner, might be a disincentive to go to that particular place if there are other places where more rent can be imputed (ie in another country with lower LVT but same level of other taxation)

Mark Wadsworth said...

G, a new entrant has to pay rent or mortgage interest to 'buy' his place.

He couldn't care less who gets that money. The extra rent he has to pay in the new place is +/- equal to the extra wages he can earn in the new place. These are easily observable facts. Not even The Daily Mail denies this.

But you have dragged this conversation down to endlessly repeating "You are wrong" without having any evidence, so if that is what you genuinely believe why do bother coming back and asking the same old questions? Either you assume that Kj and I (and thousands of others) are on to something or you don't.

gavka said...

Of course I think you and Kj (and thousands of others) are on to something, or I wouldn't be reading your blog. I'm just trying (unsuccessfully it would seem) to come up with some right-libertarian arguments against full-on LVT, as there are many more of them (faux-libs) than there are of those who think you and Kj are on to something, and it's good to know how to reply to them.
And also, 'being on to something' is not the same as 'knowing precisely what you are talking about', and I'm trying to work out whether the likes of you and Kj do in fact know more or less precisely what you're talikng about, or whether you might be being slightly over-confident some of the time.
Yes, the new entrant has to 'buy' his place, but once he's paid he's paid, and if we assume he was able to pay cash, or a very short-term mortgage (remember I'm only talking about keeping LVT down to 40-50%, or distributing high-agglom LVT revenues in high agglom areas, not about eliminating LVT), then (part of) the additional benefits from further agglom will be his, which they would not be if he was having constantly to pay 80-90% LVT. Would he then not choose to live in the place with slightly lower LVT than the place with full-on 80-90% LVT if he had the choice?

Mark Wadsworth said...

G, we are not worried about a few Faux Libs, it' s the Homeys who are the problem

With 90% lvt the mortgage is even smaller so more people want to move to the area, what's the problem?