Friday, 30 March 2018

Killer Arguments Against LVT, Not (437)

Patrick Hutton left this comment half way down a thread on Peter Thiel balking at the high rents in Silicon Valley:

An important apologerap* is the response to "won't a LVT exacerbate the high rent problem?" I know there'll be face palms of frustration at this question. But it's one we need to be able to answer off the cuff.

* That was a typo, PH explains what he meant in the comments.

I never replied to that comment because I haven't come up with anything pithy yet, despite having mulled it over for the past week.

Agreed, we are pretty certain that in absolute £-s-d terms, rental values will be much higher under an LVT-only system. Any reduction in taxes on output and earnings grows the economy (= higher rents) and rents will increase to soak up the tax saving.

Two counter-arguments why people in the productive sector will be better off are:

1. Instead of average earners in high wage areas paying 40% of their gross income in tax and then 40% of their net income in rent, leaving them with 36% of gross income as disposable, they will be paying 60% of their new, higher gross income in rent/LVT, leaving them with 40% of their higher gross income as disposable.

2. At present, landlords (and banks/depositors) collect rent (and mortgage interest) and spend it on themselves without actually producing anything, meaning a huge net cost to the productive sector. LVT is just the government collecting rent, of course, but most of it (assuming a reasonably efficient and honest government) will be recycled back to 'everybody' and most of 'everybody' are in the productive sector. Collectively, we will all be owner-occupiers.

So even though people in the very high wage areas might be paying 60% rent/LVT instead of 40% taxes on earnings, they'll be getting a lot of that extra 20% back in one way or another.

Neither of which is very pithy or off the cuff, I'm afraid. I'm sure some of you can do far better.

28 comments:

Derek said...

It all depends upon what you want to do. LVT may well reduce the purchase price of houses but it won't reduce rents unless there are a lot of houses sitting empty because they are owned by corporations or non-residents who want to keep them empty in a low property tax environment. In fact as you say chances are good that rents will actually rise as LVT is introduced because of higher disposable incomes resulting from reduction in other taxes.

Rents in a specific area are set by the income level of residents combined with the number of housing units available in that area. So if you want to reduce rents, you have to reduce income or increase housing availability. That means that the only sensible way to reduce rents is to build more housing without using more land. And that means higher density housing.

It doesn't matter too much whether that high density housing is luxury apartments or basic accommodation. What does matter is that it is built in large enough quantities to satisfy the demand for housing. And that it doesn't require any more land than is currently being used for housing.

So for a pithy response you need to say something like, "Supply and demand can fix that. Build more luxury apartment blocks and software folks will stop competing with retail workers for basic accommodation".

Derek said...

And if you want to cover the LVT angle you could add, "And levy a stiff LVT so that those new apartments aren't held empty for "speculative" purposes".

Lola said...

Somehow you (we?) have to reduce both rents and taxes (which by definition if collected by LVT are 'rents'). The government is notoriously unreliable, self serving and inefficient as a spender of tax revenue. And as much as it pains me me to say it - as I abhor all price caps - maybe there has to be a rent cap. And as LVT is calculated with reference to rents this would have a double bubble.

Discuss.

Mike W said...

What Derek says, or what you say in Killer Arguments Not. I like your LVT Lite policy bundle because it puts a line under which the poorest cannot fall. In truth, I have never given much thought to the rich computer designers in Seattle or San Francisco Bay. We never claimed we were getting everyone a trendy loft appartment, free of the other wealthy bidders in the city centre, by the lake or beach. Sorry.

Nevertheless, my attempt at the pithy bit.

For the rentier

'LVT: If you own it: Use it: You pay the tax on it'

For the renter

LVT In: Universal Basic Income Out. Two birds and all that :)

For the future Home Buyer

LVT: Don't worry. Be happy. It will never be out of reach.

For Kirsty Allsop

LVT: Location, Location, Location

Bayard said...

"It doesn't matter too much whether that high density housing is luxury apartments or basic accommodation. What does matter is that it is built in large enough quantities to satisfy the demand for housing. And that it doesn't require any more land than is currently being used for housing."

That's not going to make any difference, because the demand for housing makes very little difference to the price. This is an observable fact. If the demand goes up, the price does not rise, because no-one can afford to pay more than they can afford to pay (by definition), regardless of demand. Thus the top price level is set by what people can afford to pay. If demand goes down, what we observe is not that prices fall, apart from a small proportion, the amount any vendor would reduce their property for a quick sale, no matter what the market conditions, but the number of unsold homes goes up. Why this is is not exactly clear, but it could be because the market is driven by sellers and people are very reluctant to sell anything for less than they want to get for it, even if it means waiting a considerable time. This applies to developers, too. We see this in that, as soon as the price of land starts to fall (always for reasons unconnected with supply and demand), the market seizes up. Sellers don't want to "make a loss" i.e. sell for less than what the place was worth the previous year and buyers don't want to pay what they see as over the odds.

My answer the original point would be: "Sure rents would go up, but they would be more affordable, because incomes would go up too. What is much more important is that LVT would wean the Anglo-Saxons off their obsession with owning land, because all the increases in value would be captured by the state. Then we could get back to building enough social housing again.

"And as much as it pains me me to say it - as I abhor all price caps - maybe there has to be a rent cap."

Why? by observation, we see that rents are set a level people can afford. Ok it is the maximum they can afford, but it still makes rents affordable. The problem comes when you have sufficient high earners to price low earners out of an area completely. The answer to this is not rent caps, but social housing. Nearly all the grumbling about rents is a result of the lack of social housing, the movement from controlled to uncontrolled rents that came with the repeal of the Rent Acts and cheaper food.

Patrick Hutton said...

Thanks for the reply Mark. So FYI "apologerap" is meant to read "apologetic".

Derek said...

Note that I was (and I will be) talking about rents, not purchase prices.

Economically speaking, demand IS ability to pay. If there are 1000 homeless people with no cash and nobody else in an area there is zero demand for housing. There might well be a big desire for housing from the 1000 people but if their ability to pay is zero then their demand is zero. So demand can only go up if ability to pay goes up. And ability to pay can go up either because people get a pay increase or because more people with money want to stay in the neighbourhood.

As for what people actually pay, it's not always as much as they can afford. In theory a town with 1,000 rental properties ranging from okay to grotty and 900 people with various incomes bidding for accommodation, the 900 "nicest" houses will be rented at prices ranging from slightly more than the second wealthiest person can afford down to basically zero for the poorest person. And there will be 100 vacant houses. Nobody will be paying as much as they can afford. Every one will be paying just enough to outbid the next guy down the income ladder.

But if another 200 people arrive, also with widely differing incomes, rents will rise all the way down the line, the top rents not by much (if at all) but the bottom rents will rise to slightly more than the 1,001st person can afford. And there will be 100 homeless people. So the rents may rise quite a bit at the bottom end.

Strangely enough, if the houses vary from luxury to okay instead of okay to grotty it shouldn't make much difference to the rents. People bid against each other for what's available, whatever condition it's in. The big difference lies in the gap between numbers of housing units and numbers of people.

Now okay, that's just theory. The real world is more complex. But if we look at the real world we can find some examples where things seem to work this way. In particular we can compare San Francisco and Seattle, both west-coast, US cities with lots of high-income, hi-tech workers. SF has more of a housing shortage than Seattle. And higher rents.

Likewise we can look at Calgary, which has recently switched from being a city with a shortage of rental units to a city with a surplus of rental units owing to the recent exodus of oil workers. Rents have dropped sharply there. Partly because incomes have dropped a bit, partly because there were a lot of new downtown apartments built during the last few years, but mostly because people have left.

So supply and demand are important for housing costs because while land is in fixed supply, housing isn't and because demand is so strongly related to "ability to pay".

Bayard said...

"Economically speaking, demand IS ability to pay."

I see your point, but that is not how the expression "demand" is used in general. The popular misconception is that there are a lot of people renting who would like to become home-owners, thus there is a high "demand" for homes to buy. This has forced up prices according to the "law of supply and demand". However, this effect is supposed to operate right across the market, regardless of what end of the market the supply or the demand is found. So the talk is all about "building more houses", regardless of whether they are two-bedroom "affordable" terrace or five-bedroom plus double garage executive detached.

Your example of Calgary is interesting: are you sure that rents have not fallen in line with average incomes, now that all the well-paid oil workers have left. After all, if there is a surplus of housing over potential tenants, then the "law of supply and demand" says that rents should fall to almost zero, on the basis that it is better for a landlord to have some rent coming in than no rent at all and, since some landlords are bound to end up with empty properties, it is in the interest of all to offer the last few properties to be let at a rent that even the poorest can afford.

Dinero said...

In a desirable area increasing the number of flats per block does not decrease the rent per flat , it increases the rent per block.

Derek said...

Well, reality is always more complex than theory. I didn't include the fact that landlords tend to try to sell rental units when they can't make a sufficient profit on them by renting them. No one wants to rent at a loss. So the last few properties will probably be sold rather than rented to the poorest. And if they can't be sold they'll be kept empty on the (perhaps mistaken) basis that that's cheaper than possibly having to repair damage caused by some "no-good", poorest-of-the-poor tenant.

As for Calgary, average incomes may well have gone down a bit. Rents are still dropping apparently, as described in the Calgary Herald recently. However it's a complex situation with many more factors than just the drop in incomes and in residents, important as they may have been a couple of years ago. Things are still developing, so I won't comment further on it.

Mark Wadsworth said...

PH, thanks for clarification!

Din, exactly.

B, social housing is always a good answer, with or without LVT, but once you have it, allocating it is a political thing rather than an economic thing, so leads to inefficiencies.

Everybody else: thanks for input, but we are drifting off the topic. What Patrick and I are looking for is an off-the-cuff, one sentence answer why LVT would ameliorate the 'high rent' drag on the economy.

Mark Wadsworth said...

D and B, the point is not to confuse 'need' and 'demand'. It was explained to me thusly: starving Africans 'need' food as much as anybody else, but as they have little money, there is no 'demand'.

Derek said...

Sorry for drifting. Here's a fairly pithy answer.

"No, LVT lowers rents by putting empty houses back on the rental market and by putting new rentals on empty lots".

Of course they may comeback with "How?" but that's all to the good.

Ben Jamin' said...

High (land)rents aren't the problem. Not sharing them equally among society is.

Ben Jamin' said...

@ Lola

High land rents result from optimal resource allocation.

As the main source of revenue, the state becomes a firm(landlord/property developer) and its citizens customers(tenants).

In order to maximise their revenue the state must adopt polices for optimal resource allocation. ie the correct balance of development and preservation/enhancement of our shared environment.

Instead of being a passive recipient of taxes on output, it would have to compete in the market against alternative goods and services for our spending.

Thus we get aligned incentives throughout society, resulting in thriving economy, excessive inequalities eliminated and beautiful cities we can all be proud of.

Regarding your point of spending, that would all be in the context of increasing land rents.

ThomasBHall said...

Echoing Ben- high rents are the result of a successful society. A level playing field is better than our real life version of Monopoly. It's who gets to keep the rental value that is the issue.

Mark Wadsworth said...

D, BJ, TBH, that's more like it, that's as concise as we can make it.

BJ: "As the main source of revenue, the state becomes a firm (landlord/property developer) and its citizens customers(tenants)."

Agreed, but I'd emphasise that the 'firm' is mutually/collectively owned by its citizens/customers, so the average/median citizens/customers breaks even. They get back as much as they pay for. They get all the benefits of a civilised society for free, literally.

Somebody said that 'tax is the price we pay for civilisation', in a Georgist model, the net price/cost is zero, so it's all gravy.

Bayard said...

"High (land)rents aren't the problem. Not sharing them equally among society is."

Agreed. For most people "high rents" just means "higher than I'd like to pay/used to pay/than my parents paid/than I think the place is worth". The only people for whom high rents are a problem is those who simply can't afford to rent anywhere and for them the answer is social housing, as I said before. However I don't see LVT as a mechanism of sharing rents equally among society, but simply the best place for the state to source its revenue.

"social housing is always a good answer, with or without LVT, but once you have it, allocating it is a political thing rather than an economic thing, so leads to inefficiencies."

That rather presupposes that there is a dearth of social housing. Pre-RTB, it seemed to me that a) most social housing was generally quite grotty and therefore shunned by those who could afford better b) people were generally snobbish about it and avoided living in a council house if they could rent privately. Ok you got the occasional relatively well-off middle class young person living in a council flat because it was cheap and spacious, but they were very much the exception and this was when private rented accommodation was bloody hard to find. So there wasn't much need for political interference in the application process.

Mark Wadsworth said...

B: "most social housing was generally quite grotty"

That's an economic myth. You have to look at price and quality. For most people in the 20th century, like my grandparents (in the 1930s), a council house was a mini-lottery win, far cheaper and far better than what they could have afforded from a slumlord.

(My dad, in turn, got a reasonably good job and told us (when we were kids) that buying a new-ish home privately was just what you do when you get a reasonably good job. Call it snobbery, call it keeping up with the Jones, what do I care, our house WAS nicer than the council house in which he grew up a couple of miles away. But that was back in the day when even private housing was well affordable for most.)

That's why even now, waiting lists for council houses are so long. It's pretty basic, maybe, but for the bottom half of the income scale, the local council is a far better landlord than any private landlord. Some combination of cheaper/better/less likely to chuck you out.

Ben Jamin' said...

@ MW

"Somebody said that 'tax is the price we pay for civilisation', in a Georgist model, the net price/cost is zero, so it's all gravy."

I'll post that in "best Georgist quotes" Reddit.

@ B

" However I don't see LVT as a mechanism of sharing rents equally among society, but simply the best place for the state to source its revenue."

If you don't share rents equally, ie compensate those excluded from natural resources for their loss, excessive inequalities and resource misallocation gets baked in.

That then necessitates all sorts of mitigation strategies, that come with added costs ie socialism.

Lets say LVT didn't even get paid to the state but straight to us in the form of a dividend, along with all the other users fees, Pigou Taxes, royalties etc. I'd say that is us merely being paid what we are owed for our losses.

In which case, the only fair and necessary "tax", would be a Poll Tax.

Bayard said...

MW, Agreed, many council houses were good quality, especially rural ones. However there were also huge numbers of fairly terrible tower blocks and even the rural houses could be cheaply built: the ones in my local village when I was growing up had solid concrete panel walls and internal walls (including party walls - they were semis) made from two thicknesses of 6mm hardboard. Sound insulation? heat insulation? what insulation?

Also isn't the argument that you need to vet potential social housing tenants so that the housing doesn't end up getting let to the undeserving rich just another variation of the KLN that the rich will all avoid the tax by going to live in tiny houses? I can't see anything wrong with building enough social housing that anyone who wants to live in social housing can do so. Who's going to suffer from this? Only private landlords and those Daily Mail readers who think that social housing is subsidised.

Mind you, given the daft way that things are organised in this country, we'd probably end up with a situation where the LAs and the HAs would have to pay LVT to central government despite there being no location value in the rents they charge.

Bayard said...

BJ, agreed, but you don't need LVT to have a form of reimbursement such as you describe: it can be applied with the existing taxation structure. It's the same with CI. CI and LVT are often quoted as going hand-in-hand, but in reality, CI as an idea is completely independent of LVT.

Mark Wadsworth said...

B, redistribution from land/banking via LVT to the general populace can be in many forms, choose your own mix:

1. Cut taxes on output and earnings (the most important, as far as I am concerned).

2. Spend more on stuff that benefits the majority (health education, filling the potholes). This of course can be done independently by the government simply wasting less money on crap and bribes.

3. Straight cash welfare and pensions payments, or indeed school and health vouchers.

4. Pay off national debt. Which could also be done by reducing spending or increasing any old taxes.

As you can see, welfare payments are only part of the mix. Whether we stick with all the overlapping means tested nonsense or simplify into CI, is a separate debate entirely, as you say. The same argument goes for health or education vouchers. Whether we should spend more or less on CI than we currently do on welfare is yet another topic, on which I am entirely agnostic.

Mike W said...

Lola above, a bit off topic,

Somehow you (we?) have to reduce both rents and taxes (which by definition if collected by LVT are 'rents'). The government is notoriously unreliable, self serving and inefficient as a spender of tax revenue. And as much as it pains me me to say it - as I abhor all price caps - maybe there has to be a rent cap.

In my humble view, Lola is 100% correct here. As we phase in LVT (even with no other tax change) Private Land Lords would lament the loss of the rich folk's rent, but come after the poor's reduced council tax, even when the LL is presented with the LVT council bill itself. This is more an open question for the team here, as I am not sure.

Rising high 'rents' on stagnant and low wages are the issue today. So as we phase in LVT, at first, Guv will have to take a hand in controlling LL's rent rises taking back this new source of wealth. (1)Perhaps only necessery in cities with the most distorted rents (2)Perhaps only necessary for the first few years? Again I am not sure.

BJ you are discussing an 'Ideal type model of Georgism. So the 'single tax' becomes the 'optimised tax' aligned to society efficiently. But the problem with the 19th century journalistic chant 'single tax' and the ideal type tax model is that we may never get there. Surely anywhere along the curve is good though?

So you conclude,

'If you don't share rents equally, ie compensate those excluded from natural resources for their loss, excessive inequalities and resource misallocation gets baked in. That then necessitates all sorts of mitigation strategies, that come with added costs ie socialism.'

Pithy - Very good, the central problem of Political Economy?

Bayard said...

"The government is notoriously unreliable, self serving and inefficient as a spender of tax revenue. "

Also as an implementation of economic measures, like rent caps. They made such a cock-up of it last time, that I am fairly certain they'd do the same again.

"Private Land Lords would lament the loss of the rich folk's rent, but come after the poor's reduced council tax, even when the LL is presented with the LVT council bill itself."

This is LVT as an instrument of social justice again, which is the taxation equivalent of using a chisel as a screwdriver.

Ben Jamin' said...


@ Mike W

There's a difference between the Georgist view of LVT and my "true" libertarian view.

In the Georgist view, land rents are socially created, thus belong to society as a property right. It would be neither possible or desirable for LVT to be a "single tax". There being plenty of other externalities in need of Pigou Taxes.

In my view, land rents are not "created" by anyone, let alone society, which being merely a tool to exploit agglomeration effects, doesn't create anything. Instead, land belongs to no one/anything as property, but each individual should be compensated for the opportunity loss they suffer when excluded from its use. Thus an equal share of land rent belongs to each of us, in the same way a wage does or payment for a good/services we own/produce

To and equal share of rent, I would also add all the other Pigou Taxes, users fees, royalities, as something that is owed to all individuals as an equal share, rather than tax revenues that belong to society/government.

The result from us all being paid what we are owed, is that the true "single tax" is a Poll Tax. This is should be the true libertarian way of looking at the state and the fairest way to finance it ie we all pay exactly the same.

I would add, that anything other than this approach, including Georgism, as but a shade of socialism. Including the philosophy of the faux-libs.

Ben Jamin' said...

@ B
"The government is notoriously unreliable, self serving and inefficient as a spender of tax revenue. "

That only true because taxes on output don't just distort the incentives of individuals/firms, but also the government.

For me, how the LVT might change the incentives of the government and society in general, is an area not really appreciated by Georgists/LVT advocates.


"This is LVT as an instrument of social justice again, which is the taxation equivalent of using a chisel as a screwdriver."

You can say the same thing regarding wages or payment for goods/services. When people are not compensated for their loses, resources are misallocated. We all end up poorer and unhappier. Fairness and efficiency are two sides of the same coin. With LVT you can come at it from either side and end up in the same place. Notwithsiding, neither Conservatives or Socialists have done so, which shows that perhaps wealth creation and equality aren't really their main agendas.

"It's the same with CI. CI and LVT are often quoted as going hand-in-hand, but in reality, CI as an idea is completely independent of LVT."

Taxes and benefits are two sides of the same coin, so never independent, IMHO.

A CI is basically saying we all own an equal share of whatever revenue steam used to finance it. The only thing we can morally expect to equally share is land rent. Other sources are unfair, thus add costs.

Likewise, as the LVT is an equal share of land rent, any surplus should be equally shared. ie CI.



Mark Wadsworth said...

L, MW, in my darker moments, I do think that the transition to LVT could be smoothed if we had caps on rent/LVT increases until the final iteration. I just worry about the admin and circularity of it.