Wednesday, 27 December 2017

Killer Arguments Against LVT, Not (430)

My attention has been drawn to a couple of oldies but goodies, good job I wrote up all the rebuttals for future cutting and pasting.

ShineyMart emailed me a link to this comment under a fairly balanced article about the Laffer Curve by Tim W at the Adam Smith Institute:

Tom Dodds: If something looks too good to be true, it probably is.

LVT in place of all other taxes merely switches the method of collection. LVT becomes a cost of production of everything, filtering through to all products, including those bought by the very poor. As a consequence, the tax burden on the poor would go up through higher prices and people surviving on benefits would need more support.

As LVT is related to the value of land use, the army of tax employees merely switches from taxing individuals to calculating the value of land uses. Laffer curve still kicks in as landowners otherwise have no incentive to maximise productivity. Government would, of course, interfere to nudge 'healthy' uses - low LVT on Scottish oats for porridge, high LVT on Scottish grains for whisky.

My response, taken straight from the KLN blog:

We all know perfectly well that most stuff you buy in shops costs pretty much the same wherever you are in the country. Prices are the same in a Primark in a retail park at the edge of a low-income town as they are in Primark on Oxford Street, London. Research backs this up, wherever you shop in the UK, prices for similar goods are within a range of +/- one percent.

Q: But we also know that rent and rates for shops in the best locations are much, much higher than for shops in less favourable locations? So why is this so if retail prices are the same in all shops?

A: It's do do with volume. If a retailer has a net mark up of £1 on something and can sell 1,000 a week from Location A, but can only sell 100 a week from Location B, then by and large, the rent for a shop at Location A will be nearly £1,000 a week and the rent for the shop at Location B will be less than £100.

Observed facts, simple logic. Prices are fixed and volumes drive rents. Taxes on rents do not increase the total rent which a tenant will pay. If the tax on the shop at Location A is £800, then the rent net of taxes will fall to less than £200.

As to this bleating about "the poor", the taxes that hit them hardest - or cause most of them to be poor in the first place - are of course VAT and National Insurance contributions. So shifting to LVT is a straight win for them (putting a few thousand Poor Widows In Mansions to one side, whom we can sort out with a roll-up and defer option). And the rental value of farmland is so low it's not worth taxing (but let's scrap the farm land subsidies for a start).

His comment about the "army of surveyors" chimes in with a thoughtless aside in an otherwise sympathetic article on the Scottish Land Commission blog:

One important challenge associated with land value taxation is the issue of valuation. The principle of land value taxation requires valuers to assess the value of land separately from the value of any buildings or other assets that might be on it. This presents technical challenges, particularly in urban areas where vacant sites rarely change hands.

This is all old hat:

Compare and contrast: if the government wants to find out how much you earn, it has to employ people to do a lot of snooping, they have to see your payslips, employment contract, bank statements etc. Even with the force of the law on their side, people can still cheat. Most don't, because they can't be doing with the hassle of an investigation, but they would if they could. And these calculations have to be done from scratch every month, every quarter and every year. Last year's turnover, wage bill, income or profits are only a very rough guide to this year's.

In contrast, how difficult is it to establish the site premium of any home? Very easy indeed. Once all homes are valued and banded, then it is an easy matter to observe how rents and selling prices develop and index homes in different areas up or down accordingly, every year is an incremental exercise only.

There is also absolutely no need for internal inspections, that goes against the whole point of the tax!

The site premium depends on where a plot is, what sort of planning permission it has and how big it is, plus or minus a few external factors (like being next to a mobile phone mast), that's all. And HM Land Registry, the Valuation Office Agency and local planning departments already hold 99% of this information.

The point is that if the average total rent for generic 3-bed semi-detached houses in Area Such-and-such is £10,000 a year and the total rent for the zero baseline generic 3-bed semi is £4,000 a year, then the site premium is £6,000. All generic 3-bed semi detached houses would be allocated to Council Tax Band; the tax thereon in the zero baseline area would be close to £nil (by definition) and the tax on Band D homes in Area Such-and-such would be £6,000 a year (or a percentage thereof) and no back chat. The tax is the same for a semi which is in tip-top condition with brand new kitchen and conservatory as it is for one in the same area with no central heating and an outside toilet.

Clearly, there will have to be a bit of averaging across and interpolating between different types of building/use (residential, commercial, car parks etc), but even if some of the initial assessments are somehow objectively "wrong", this will all wash itself out after the next sale. The under- or over-assessment leads to a one-off windfall gain or loss for the current owner who sells, and the next owner is heartily indifferent, the size of the tax bill is just one of dozens of things to be taken into account when buying a home, just like the size and number of the rooms or how sunny the garden is and will be reflected in the price.

It's the same as interest rate changes - if they go up, it is bad for people with an existing mortgage, but prices will fall so future purchasers end up breaking even (smaller mortgage x higher interest rate).


Physiocrat said...

That is much too simple.

Mark Wadsworth said...

Phys, I can do complicated if you like.