Killer Arguments Against LVT, Not (403)

Sam Bowman of the Adam Smith (is turning over in his grave) Institute had his KLN-fest of a year or two ago republished here this week, even though the commenters tore it to shreds on its original outing.

KLN #1: LVT supporters say that an LVT would encourage more productive use of land. But is this desirable? Land owners already have an incentive to do something with the land – opportunity cost. In other words, if I have an acre of land that I’m doing nothing with, but that I could profitably let a bunch of houses be built on, the cost to me of doing nothing is that house profit. An LVT would just add to this.

The first sentence is a misquote. In the first instance, LVT would promote the more efficient use of already developed land i.e. buildings, which by and large is the most valuable land i.e. urban land. In other words, Poor Widows In Mansions swap places with large families in small flats or groups of younger people sharing. I fail to see how that is A Bad Thing, so yes, it is desirable. PWIMs are like German tourists who get up early to put beach towels on sun-loungers and then go back to bed.

As to 'opportunity costs', I've heard this crap before from people who know a bit of economics jargon but don't understand the concept or how it applies in real life (this exchange from Twitter):

Mark Wadsworth: If land prices are increasing by 3% and interest rates are 1%, then there is no opportunity cost of owning idle land

Sam Bowman: The opportunity cost is the foregone profit from not using the land productively.

Mark Wadsworth: OK, so why are the land bankers aka developers leaving half a million plots with planning idle? Would LVT not change their behaviour?

He is of course jumbling two separate topics - the annual rental value and the capital gain; if interest rates are 1% and the potential profit on building a house is increasing by 3% a year, it is worth while deferring that as far into the future as possible, but let us fight him on his own turf.

We know that the land bankers release just enough land onto the market to maximise income without depressing prices or pulling up their own input costs, it is a fairly fixed ratio of one new home completed for every nine existing homes being bought and sold. The UK government in its stupidity (or venality) says that if they grant more planning that more homes will be built. Nonsense, real life tells us that construction levels are decided by other factors and any planning granted in excess of that just means that land bankers will hoard ever more land.

From the point of view of the land bankers, this is the optimal outcome. From the point of view of people who'd like prices to come down or construction workers who want more work/better wages, this is a bad outcome. The land bankers are just driving a wedge between the two and collecting the resulting rent.

So his original point was, a shift to LVT would make no difference to people's behaviour. Of course it would. Development triggers huge tax bills - CGT and SDLT when the landowner sells to a developer; 'planning fees', roof taxes like CIL and s106 agreements when construction starts, another layer of SDLT when the finished units are sold. Clearly, these discourage construction activity.

It is difficult to track down existing figures for these taxes for the whole of the UK, but let's call it £5 billion a year for sake of argument. Why not get rid of all that and just levy an average charge of £1,000 on each such plot (i.e. roughly the same as Council Tax)? That would push the land banker's decision towards developing rather than hoarding. It would discourage land banking, full stop, thus giving smaller builders who don't want to buy more land than they can expect to develop in the next year or two a look in.

I suppose the next KLN is "Yeah but, once the land banks are used up, where are you going to get the tax from?" Answer: from the homes that have been built, duh.