Tuesday, 28 February 2017

Laffer Curve of LVT Part 2

Prof Nicolaus Tideman kindly e-mailed me his thoughts on the matter.

"The answer is "it depends."

I assume that we are talking about a tax on the rental value of land, not on the selling price, so that a tax of 100% would collect all of the rent.

If the economy had no durable immobile improvements, and people were completely mobile, then as soon as the tax exceeded 100%, everyone would leave and the economy would disappear.

To the extent that there are durable, immobile improvements and people are mobile, the disappearance of the economy will be slowed.

If there are immobile improvements that last indefinitely, the excess tax will confiscate some or all of their value. If there is any vacant land in the community, no one will ever want to use it.

If there are no durable immobile improvements but people are unable to leave, there will be no equilibrium. Whatever the situation, people will find that they are better off using less land, and the rent of land will go up and up on whatever land is used, as people try to economize more and more on land.

One of the lessons of this analysis is that if a community wants to collect as much of the rent of land as possible, it will be important to have a mechanism by which the required payment is lowered to what someone is willing to pay whenever land is unused because no one is willing to pay the assigned taxes. It will also be important to give potential investors and residents assurance that the administrative procedures are intended to seek to ensure that they will never be expected to pay more than 100% of the rent."          


So as with other factors, there is a short and long term laffer curve. A landlord may decide to put his rent up by over market value. In the short term his tenants may pay it rather than being homeless. But in the long term, that property will become vacant and the landlord receive no rent. In the case of LVT the State is the Uber-Landlord. 

In which case the long term laffer curve for LVT drops off like a cliff after 100% of the rental value of land has been collected.

Point three is the effect of sending land values negative, which would happen in the short term.

Point four shows the effect on the margin of production. We know that a 100% LVT produces optimally dense cities. A 200% would lead under consumption of land.

Conclusion. From a public finance point of view, a hybrid Poll Tax/LVT seems optimum, insofar as it would stop migration to marginal locations that would harm the economy. It just so happens the Council Tax fits the bill nicely, and with a few modifications could be the perfect tax structure.

Edit: to clarify, by "Poll Tax" in this context I mean it as a flat lump sum tax attached to every freehold title/dwelling.

13 comments:

Ben F said...

For ref of others the first part is here:

http://markwadsworth.blogspot.ca/2017/02/the-laffer-curve-of-land-value-tax.html

Sean Vosper said...

Yes - agreed. Something like MW's "back-of-the-envelope" calculations from a few months back perhaps?
The only political shortcoming with this it seems to me is how to scale it to become the predominant source of all taxes - given the fundamentally local nature of Council Tax.
Maybe Local Authorities simply kick some of their revenues upstairs to the State. Or perhaps more central spending on Healthcare/Pensions/Education/Welfare, and Infrastructure say, is devolved to LA's?
One small, minor, trivial, miniscule, tiny point here. We don't need to "oversell" LVT, it's a vastly superior system just based on it's two most compelling features - lower deadweight costs on the economy than any other taxes, and the near-impossibility of evasion. I would add a third - related to the Profs comments - the Laffer curve effects would make it very difficult for govt's to be predatory/parasitic/confiscatory with these taxes, and would therefore be nice and fair/harmonious in the social contract between government and governed sense.

Ben Jamin' said...

@SV

The LVT purists have got things a bit wrong. They start from LVT and work their way up. In the real World its best to take the amount thats being spent and work backwards. What we want is lump sum taxes, attached to freehold titles. Council Tax? Perfect. MWs submission to the Scottish Tax thingy was a brillant in this respect. Needs to be put on the right desk IMHO.

The LVT puts a fiscal and moral ceiling on what the State can collect and spend on our behalf. Something you've have thought would have appealed to the Libertarians, but no. They hate it.

James Higham said...

Are people that mobile?

Mark Wadsworth said...

Broadly agreed, except with Poll Tax bit, a Poll Tax is incompatible with a Citizen's Income (or any sort of rational welfare system), ergo, best pitch LVT at 80% - 90%, set govt spending to match and hope for the best. If that's not enough, have a low-ish higher rate income tax.

Ben Jamin' said...

@ MW

Just to clarify what I meant by Poll Tax. In this context a flat lump sum tax attached to a freehold title/dwelling.

For example in your submission to the Scottish Tax Commission,the lowest tax paid is £585 and the highest £8217. Say the former is almost a location with a rental value of zero, then that is what I meant by Poll Tax. Lets call it Dwelling Fee instead.

The highest is therefore paying £7632 LVT and £585 which together we'll call Domestic Rates.

The point being, lets say LVT isn't enough to pay for all the services we need (I think it would). Is and LVT + Dwelling Fee better/less distortionary than LVT + Bad Taxes (VAT, Income Tax etc).

As Prof Tideman implied, a Dwelling Fee applied to all property would lead to under consumption of land. Is that worse than taxes on output?

Not based on anything other than my own prejudices, I'm going to say no.

Lola said...

Bj.mw. et al. Aren't we also going to have bank asset taxes? And i really don't like a dwelling fee. It complicates matters.

Mark Wadsworth said...

Bj, I can see the argument that says: the local council has a bare minimum cost associated with each home (such as maintaining roads and pavements and collecting rubbish). Even if the land value is zero, the LVT attached to the home should be at least equal to these bare minimum costs, or else it is clearly a waste of money.

L, yes, but the bank asset tax would only bring in tens of billions in the first few years until banks shrink their balance sheets and get away from low-margin, high-risk, high-volume lending (i.e. for land price speculation). After that the receipts will be negligible (one or two per cent of tax receipts).

Lola said...

MW. So double bubble then. Banks shrink their land price speculation lending AND government gets less money to waste/spend badly. Excellent!

Mark Wadsworth said...

L, exactly!

Mike W said...

BJ and SV above,
'One small, minor, trivial, miniscule, tiny point here. We don't need to "oversell" LVT, it's a vastly superior system just based on it's two most compelling features - lower deadweight costs on the economy than any other taxes, and the near-impossibility of evasion. I would add a third - related to the Profs comments - the Laffer curve effects would make it very difficult for govt's to be predatory/parasitic/confiscatory with these taxes, and would therefore be nice and fair/harmonious in the social contract between government and governed sense.

Agreed. Nice point, well put. This is what I assumed Wandsworth meant when he said to us, he could do the merits of LVT from a center,right point of view as well! A new Social Contract nails it. But once every 100 years, biblical word like 'Covenant' could be used with no blushes too.

Mike W said...

BJ, my concerns,

'The point being, lets say LVT isn't enough to pay for all the services we need (I think it would). Is an LVT + Dwelling Fee better/less distortionary than LVT + Bad Taxes (VAT, Income Tax etc)?'

Bad taxes Meaning1 = Your/our use; distortionary VAT, income tax etc
Bad taxes Meaning2 = General use; non progressive poll tax of any kind for any reason.
Taxing Bads = No relevance here

Unless I am missing something in your thinking ,quite possible,so please say, the answer to your question is, yes this proposal is worse than LVT and a 'massively shrunken VAT, national insurance, etc'. This is not a 'purist LVT view'. Remember, we will be shrinking all these Bad taxes - M1 - as we go, year on year. Real world, Popperian implimentation of the LVT project; seeing where we are at the end of each period (normal metrics; inflation, unemployment etc), no need to worry and solve apriori in my view.

Ben Jamin' said...

@ Mike W

Having mulled on the pros and cons of replacing the 20% tax on all incomes with a Poll Tax/Dwelling Fee in the YPPUK tax plan, it's really not worth the effort. In theory there might be some efficiency advantages, but it would cause an a lot of damage to the fabric in our society.

By doing it Marks way, we get to the same place eventually, only it's done in an acceptable way, if a little slower.

Lump sum taxes are preferable to taxes on wealth creation, we've just got to work out a the best way of doing it. Marks YPPUK tax plan can't be faulted in that respect.