Friday, 26 August 2016

Killer Arguments Against LVT, Not (404)

Returning to the KLN from #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: ... 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.

We covered the fact that whatever the notional/opportunity holding cost (lost interest or rent), this is more than cancelled out by anticipated capital gains, so there is an 'opportunity profit' (if such a term exists). If this were not so, then the land bankers would not be hoarding half a million plots with planning. As Kj pointed out in the comments, if land bankers own farm land with planning, then they are likely to be renting it out anyway; they are unlikely to be renting out smaller patches of urban land (except possibly for car parking?). So there is little or no lost rent on these sites until they are developed and SB's analogy fails anyway.

But in refuting this feeble argument, maybe I missed the more important one...

The flip side of the owner's opportunity cost is the external cost borne by 'everybody else'. If half a million houses could be built, then society as a whole is losing the benefit of half a million additional or more conveniently sited homes (and construction workers are going without the extra income etc). If indeed farm land is being held out of use, then society as a whole is losing out because less food is being grown (and farmers are going without the extra income etc).

The LVT is primarily there to compensate 'everybody else' for the external costs imposed on them. Mathematically it is equal to the opportunity cost borne by the owner (like all rent, it nets off to zero), so as a bonus, LVT turns an easy-to-ignore notional/opportunity cost into a real cash cost for those imposing it and provides compensation to the whole of society who have to do without the additional homes, additional food, car parking spaces, whatever.


Ben Jamin' said...

LVT=compensation paid for the burden caused to others from being excluded from a scarce resource= Pigovian Tax on externalities.

So an LVT allows the market to fully internalise opportunity costs/losses, which cannot happen when the owners of scarce(valuable) resources are also the user, because they can afford to be inefficient. Unlike the renter who cannot.