Thursday, 5 May 2016

Killer Arguments Against LVT, Not (394)

An earlier variant of KLN 393, from here:

… while the land value tax is paid over time, the burden of the tax (its incidence, in economics jargon) falls entirely on the person who owned property at the time the tax was instituted. The value of future taxes gets immediately priced into the value of real estate. For those who buy property after the tax is instituted, the higher property taxes are offset by lower mortgage payments.

True so far… here comes the crap...

In other words, the economic efficiency of the land value tax comes from the fact that it operates by confiscating wealth accumulated in the past rather than taxing the accumulation of new wealth. This, too, is unfair. Society benefits when people defer gratification and save for the future. People justifiably expect that if they save today, they’ll enjoy the benefits of that accumulated savings in the future.

Of course, people who generate income from their accumulated wealth should pay their fair share of taxes. But a land value tax goes way beyond that point, depriving owners of one particular asset class of the benefits of decades of thrift.

That's clearly quite self-contradictory bollocks which flies in the face of facts. Note also the use of the words "confiscation" and "depriving" when talking about taxes on land values, whereas taxes on other things are referred to merely as "taxes".

If you are one of the original landed gentry, inherited the land or took out a BTL mortgage, it required no "decades of thrift" whatsoever to acquire the land - quite the opposite, you have been able to spend more than you earn (at the tenants' expense). 99% of owner-occupiers who bought with a mortgage will have paid considerably less in cash terms than somebody (of the same age) who has been renting all his life; it is tenants who really have had to "do without".

But enough of my musings, by coincidence, Ralph Musgrave emailed me a link to this bit of academic research shortly after I re-discovered the KLN above:

Our original interest was to enquire whether the introduction of land into a growth model might account for a “virtuous” circle in which saving-up for land (or housing) generates growth and higher land prices, generating further increases in saving, and so on.

Such an account is sometimes proposed for high saving rates in East Asia, where mortgage markets are limited or absent. Our analysis does not support such a story. The user cost of land reduces the resources available for consumption of reproducible goods, so that the introduction of intrinsically valuable land into a growth model lowers the equilibrium stock of capital and raises the equilibrium interest rate.

On the asset side, the presence of land causes life-cycle savings to be reallocated away from productive capital towards land. The social optimum in such a model is for land to be nationalized and provided at zero rent. Land markets, far from generating saving and growth, are inimical to capital formation.


Ben Jamin' said...

"In other words, the economic efficiency of the land value tax comes from the fact that it operates by confiscating wealth accumulated in the past rather than taxing the accumulation of new wealth."

No it doesn't. Current landowners could be compensated for any drop in HP's due to a LVT, and the tax itself would still be efficient.

"The user cost of land reduces the resources available for consumption of reproducible goods,"

If it had a "cost" that would be true but it doesn't. What is does have is an efficiency cost, but this isn't what the authors meant.

Mark Wadsworth said...

Bj, mistakes on both sides but the KLN is worse.

DBC Reed said...

Blimey ,Angus Deaton of the 2001 academic paper is the current Nobel laureate for Economics...and he is proposing land nationalisation! And we thought we were dangerously out of the mainstream.He appears to be a mate of John Muellbauer who has supported land value wheezes involving people we know in UK.

Mark Wadsworth said...

DBC Reed said...

John Muellbauer's latest wheeze (2015) appears to be Council Tax reform see FT "A fiscal fix for a peculiarly flawed property tax" .People get to defer paying any council tax if they want to and the State, in return gets a stake in the house.Come sell-up time the State gets a slice of the selling price.

mombers said...

"decades of thrift"
Thrift is spending less than you earn. Someone who pays down a mortgage is no different to someone paying money into a savings account. The increase in the value of the land is an entirely unrelated phenomenon. A better comparison is someone who puts money into a business e.g. buys shares or directly invests in their own business. The increase in the value of the business is due to new wealth being created (well, for businesses not in the rent seeking category). The increase in land value is not new wealth, and is not taxed nearly as heavily as the new wealth creation (VAT, NI, Income tax, UBR on buildings, corp tax, etc.)

Lola said...

It's good to see heavyweight academic support for what is observationally and intuitively the bleedin' obvious.

Mark Wadsworth said...

DBC, he's OK is Mullbauer but a bit timid.

M, more good points. But paying off a mortgage is usually no more expensive than renting in the short term and much cheaper in the long term. Ergo, not thrift.

L, well done to DBC for knowing who he was!

DBC Reed said...

Just skipping about the Net reveals other heavyweight Economists who make the same arguments as we do about land values but go for straight land nationalisation : the famous Leon Walras; the not so famous Maurice Allais who made the mistake of not writing in English but still got the Nobel Prize. They both believed a market in land was economically destructive.
As to Lola's point above: I am very angry to think of all the brush- offs we have had from so-called mainstream economists putting us on the crank fringe when our arguments are shared by the greatest minds in the mainstream.We do not have to keep quoting Henry George only.

Mark Wadsworth said...

DBC, most proper economists of whatever persuasion prefer LVT, but there are a load of economic commentators i.e. politicians or spokesmen of lobby groups, who pass themselves off as economists and bring the whole concept of "economics" into disrepute.

Ben Jamin' said...

@ DBC Reed

Regarding Walras, Fred Foldvary wrote this paper called " The Marginalists Who Confronted Land".

It's excellent read, and I thoroughly recommend to to everyone.