Thursday, 25 August 2016

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.


Lola said...

Your last paragraph is absolutely bang on. The collapse of the number of genuine small developers (as opposed to land speculators) is another feature of the failure of tax/subsidy/planning etc etc meme in recent years. The small developer typically carries between 2 to 4 year plot supply. He organises construction but spends most of his time finding and financing suitable sites.

Kj said...

Bowman happily ignores that opportunity costs are not payable costs, no depreciation, and no tax costs before realization, which matters quite a lot. If I bought a car for rental purposes, that depreciates by 10-15% every year without even leaving the garage, I'd be very concerned with opportunity costs. If I buy land, which carries no depreciation, no running costs (in some jurisdictions such as mine, usually near zero) except interests, and the very act of holding it out of use contributes to it's future value, I'm not very concerned.

Says Bowman: "An LVT would just add to this."

- he shows that he doesn't really understand the mechanism of LVT. By making his non-payable opportunity costs an actual costs, the capital value is reduced by this very same amount, so LVT doesn't add to that, it replaces non-payable opportunity costs with running costs.

Kj said...

Correct the first sentence with "with land banking there is no depreciation and no tax costs until realization etc."

Kj said...

Another point is that there is no opportunity costs when you don't make an investment. Building is an added investment to buying land. Any opportunity cost would be a higher return from selling/renting out land+building, than only selling land long in the long term, but then you have to invest in a building in addition to the land.
The exception is agricultural land, which can easily be let short term without much added investment, hence agricultural land is almost always rented out, even when it's bought for the intent of land banking/speculation.

Mark Wadsworth said...

L, that's another bonus.

LJ, more good points, thanks.

Lola said...

I am increasingly of the opinion that Bowman is a closet Keynesian. He clings to central planning nostrums like nominal GDP targeting. He's written a post for the ASI on it here

I quote: "...Nominal GDP targeting would mean that the Bank of England would stop trying to target price rises, and instead try to target the total amount of nominal spending that takes place in the economy. ..." Essentially replacing one form of central planning with another.

So is it surprising that he is confused about opportunity cost and LVT?

DBC Reed said...

Slightly off topic (and you know what, I don't care!)is the whole scandal of the Adam Smith Institute which is here effectively contradicting what Smith said, as usual. (If you google "Adam Smith land tax" you get Mark's spot-on argument of some years ago, and nothing else.) Shouldn't we get a formal letter together and get the usual LVT suspects to sign it amidst some useful publicity from the press and demand that the ASI cease and desist their misrepresentation of the great man which is so gross as to offend the Trades Description Act?
With the ASI onside our job would be immeasurably easier.
Likewise the Tax Payers Alliance should get a working over for crowding out intelligent argument about tax.
Action on the institutional level rather than the intellectual.

Lola said...

DBCR. That's not o/t at all. It's a criticism of Sam Bowman (deserved). Other writers on/for the ASI are pro - LVT; Tim Worstall fro example.

Shiney said...


Agreed about ASI - they're becoming a bit too authoritarian for me.

I know Lola calls you a lefty (and if I were you I'd wear that as a badge of honour) so I guess the "long march through the institutions" is in your playbook (again, just gently poking fun).... but I think that is an excellent idea.

As @L says, not off-topic..... and the fact you announced it as such is good form.

DBC Reed said...

Never thought much of the "long march through the institutions" ..and that was before Mrs Thatcher started her Operation Barbarossa on the British institutions which has left us in the mess where a High street institution like BHS and its 11,000 workers can be flogged for a pound to a racing car enthusiast who makes death threats and the country can leave the EU without any forward planning.
Thank you for your support for an attack on the presumptuous ASI which has occupied our ground.(This situation might explain the habit of left-wing groupuscules attacking each other for taking good ideas and burying them- but I wouldn't be too sure in their case. )
It is weird that a large and strangely non-partisan bunch of LVT supporters lacks institutional heft.

Lola said...

DBCR. How do you force an Establishment who do not want to Leave do some forward planning?

However there was other 'forward planning'. Vote Leave's 'Change or Go', for example.

DBC Reed said...

I am getting at the lets-get-out-and-see-what-happens brigade which is much represented on this blog. However, Nigel Farridge who has been plotting Brexit for decades had the time to prepare some kind of detailed prospectus of what to do next (which is now nowhere in evidence).

I am afraid I have not heard of a Vote Leave Change or Go campaign. Neither has anybody heard, post Referendum, of the Labour Leave Campaign. Like Jeremy Corbyn, very much of the Remain and Reform school of thought, this must have attracted a hundred thousand votes for vote leave only for their votes to be swallowed up in the general anti-immigrant morass,(also not discountenanced on here).

My general feeling is that the radicals who have attacked the State's institutions have left nothing in their place: we have banks (funded by the State) pumping out newly created money into property and fixed assets and yobbocapitalists with too many boats in the Mediterranean, managing the expandable economy. (Even the Daily Mail is after the Greens: they probably think they give capitalism a bad name yok yok!)

Lola said...

DBCR Right. If you haven't of or read the 1000 page manual on how to do BREXIT - Change or Go (plus lots of other stuff) I suggest you do so now.

DBC Reed said...

@L Not being a reader/victim of the Telegraph where Change or Go was heavily excerpted, I was hardly, as an ordinary member of British political democracy , meant to read this exhausting product of assorted London consulting agencies which is long on platitudes and seems to have been drafted well before the Referendum with a view to influencing Cameron's "negotiations" with reassuring sections on every topic about how everything will be just the same after Brexit, followed by a section about how things might change (almost always for the better).A plan it isn't.We need a plan like the WW2 beach landing inventories where everything is ready and everything is timed.
When are we supposed to trigger Article 50: what are our snapping points etc?This all looks quite tricky.(Not if you believe in the blind chance of the Market Gods of course which at the time of Lehman's pushed American house prices over the edge- and will do again.)
What worries me is if we are right.If an argumentative shower like us has got hold of the tablets of Economic Righteousness ,it is not a good look-out.

Bayard said...

To be fair to the Leave camp, planning for afterwards, whatever the result, was the job of the government. They were the ones that called the referendum, not the Leave camp. This was Cameron's Major Fuckup No 2, (No 1 being calling the referendum in the first place).

DBC Reed said...

I expect May, who was a Remainer/ Cameron Loyalist, has stuck Boris, Liam Fox etc with all the tricky Brexit forward planning issues and they, not really believing they would win and being intensely lazy, will make such a mess of it, that she will say she can't trigger Article 50, too many practical problems, not her fault etc.

Mark Wadsworth said...

DBC, that is quite possibly true.

I don't think laziness will do for those three but their giant ego battles and turf wars will. (That was the Hitler style of government, playing off your potential rivals one against another.)

DBC Reed said...

Making them all share Chevening,the country retreat which is traditionally the Foreign Secretary's ,tends to confirm this.

DBC Reed said...

@MW Alternatively the economic indicators will start pointing up Brexitwise, no thanks to the trio, and May will say she needs to take over because they haven't done anything or will fall out over something they have done .