Thursday, 17 May 2018

Killer Arguments Against LVT, Not (442)

From 1984: "To know and to not know, to be conscious of complete truthfulness while telling carefully constructed lies, to hold simultaneously two opinions which cancelled out, knowing them to be contradictory and believing in both of them, to use logic against logic, to repudiate morality while laying claim to it, to believe that democracy is impossible and that the Party was the guardian of democracy.

To forget, whatever it was necessary to forget, then to draw it back into memory again at the moment when it was needed, and then promptly to forget it again, and above all, to apply the same process to the process itself.


Here's a real life example, armchair twat @RomanchukBrian on the topic of LVT:

"So your plan is to have city centres consisting of 40-storey blocks surrounded by the ruins of abandoned buildings? And you are wondering why economists are not endorsing this?

"It's rarely been tried because it's a policy that is obviously a disaster. If it makes sense in *your* model, *your* model is wrong.

"The owning firm goes bankrupt and nobody is stupid enough to pay the LVT in a deliberately sabotaged city core? You end up with abandoned buildings.

"North American city planners have been struggling for decades to rejuvenate city centres. Imposing a tax to wipe out the economic viability of the core would not exactly help.

"And away from city centres, you would tax a small farm across the road from a new development with a couple dozen houses on the same amount. So you would wipe out those farmers as well."


As you can see, in *his* model he completely contradicts himself. His imaginary waves of destruction start with the outer fringes of the centre, leaving just 40-storey buildings in the very centre, which then in turn are abandoned for exactly the same reason that they were built in the first place... the waves spread outwards and ultimately, farmers are driven out of business. He didn't make the final leap and claim that with cities and farmers ruined, the entire tax burden would fall on the couple of dozen houses, which would also promptly be abandoned. Which is a shame really, as it would complete the circle of nonsense. If he'd stuck to one or the other extreme (either people rush to the centre; or people rush away from the centre) then it wouldn't be so immediately obvious that he is a complete idiot.

Logic* is alien to these people, as are actual facts - most economists do endorse LVT; it is not a hypothetical, whenever and wherever it has been implemented it has led to more development in city centres; and as land would be taxed on its optimum permitted use (which 99 times out of 100 is its actual use), the tax on the farmland would be very low, much lower than one the houses across the road. DoubleThink is so much easier when the mind is unclouded and unburdened by actual facts!

* The logic is easy. In an LVT-free world, the rental value, selling price and mortgage repayments if you want to occupy/own any particular plot are set by normal market forces - supply and demand etc. Taxes on earnings and output are arbitrary amounts taken from you by the government.

LVT is, from the point of view of the land owner/purchaser, exactly the same as an interest-only, variable-rate, non-recourse mortgage on the land element. The LVT simply replaces the mortgage repayments on the land element AND some or all of all the arbitrary taxes on earnings and output, making it a double-win for those who don't own any land and a break-even for most of those who do.

With a normal purchase mortgage, there is a risk that the interest rate increases and/or the potential selling price of the land falls, potentially getting you caught in a nasty vice. LVT completely de-risks this. The quasi-interest payments only go up if the land value goes up and as the LVT liability attaches to the land, not to you personally, you can never end up hugely out of pocket.

24 comments:

Sobers said...

" the tax on the farmland would be very low, much lower than one the houses across the road."

Well no it wouldn't, if the LVT was based on sale values, which it probably would be as thats the easiest way of implementing an LVT, you yourself use that method most of the time when demonstrating the way an LVT might work.

Any piece of farmland that is next door to developed land will have significant hope value, that is the value people ascribe to it because the chances of getting planning permission are significantly higher than a plot of land miles into open country. So sale values for small plots of land close to existing developments will determine the values of all such land, and that will determine the level of LVT that was charged. Which could be many times agricultural value - agricultural value is c. £10k/acre (actually thats not agricultural value, no farmer could buy land at £10k/acre and hope to finance the purchase from the agricultural profits, £10k/acre is the market value, given that most land is purchased by people with existing capital made elsewhere, and the purchase is more tax reasons, or lifestyle choices, or as an investment) and land close to urban areas can sell for up to £50k/acre for small paddock plots, to people who wish to use it for horses, and/or hope that one day they might get planning permission for a house/houses.

So this would have a ratchet effect - open field market values are higher closer to existing developments, therefore the LVT would be higher on those plots, which could not be afforded by existing farming users, who would have to sell to developer types who would seek planning, thereby moving the development line further out, and the process would repeat. Even if a landowner didn't want to seek development, they would be forced to by the high LVT, there would be no way otherwise of paying it.

Now this could be avoided if all land was valued without any hope value, based purely on its existing planning use, but that would then require a far more complex (and expensive) valuation process, rather than just taking existing sale values and applying them locally. It would also encourage people to ask to planning change of use back to agricultural for existing development plots so as to avoid the LVT if they didn't want to develop it at that point in time, which would rather negate the whole purpose of the LVT, which is to force people to use their land for the most efficient purpose. Equally developers would delay putting planning applications in until the last moment so as to avoid the LVT, so I can't see any government allowing that.

Mark Wadsworth said...

S, nope, we've done this.

LVT would be based on observed rental values assuming actual permitted use. So tax on farmland probably zero.

2. LVT depresses selling prices of developed land, so 'hope value' would also be depressed to the same degree.

3. Real life shows that LVT encourages development and use of inner urban sites and discourages sprawl. You are claiming the opposite.

ontheotherhand said...

'hope value' as things stand today depends on the possibility that future granted planning permission massively increases the total rental value of the land without any step increase in the tax paid on the land.


The paddock next to my house is in theory worth the NPV of the rent the farmer charges for two ponies to graze one it i.e. bugger all, but the 'hope value' for him is that he gets planning permission to put a house on it.

Let's say the rent for the ponies is £1,000 a year, and the rent if there was a house on it would be £30,000 a year. If LVT is inevitably going to be set to take annually the optimum chunk of the free uplift after building costs, then the 'hope value' disappears.

Mark Wadsworth said...

OTOH, exactly. Thanks. That's the full explanation of my point 2 to Sobers.

Sobers said...

"LVT would be based on observed rental values assuming actual permitted use."

According to your ideas yes. The way the State would implement it, maybe not. Never forget that one of the main drivers of the renewed interest in LVT is not tax efficiency, but political envy, and the desire to tax capital in some way. No one on the Left is going to accept an LVT system that taxes capital assets worth millions on the basis of the few ££ that it receives in agricultural rent.

Also you've not answered the point about planning status being used to hide land values from LVT - a developer would be able to buy a plot of land for millions, because it knows it can get PP due to local plans etc but only apply for change of use when he feels like it, and on the part of the site he wants to develop immediately. Thus paying no LVT. I can't see that anomaly lasting very long either. You'd very quickly arrive at a scenario where land is taxed on its value, not its rental value given its current planning status.

Mark Wadsworth said...

S, OTOH has explained the position. No builder would pay more for the land than he can sell it for. Ergo, won't be worth millions in the first place.

Sobers said...


Actually, thinking about it, if you are taxing rental value only, there is no increase in rental value on grant of PP - an undeveloped site with planning permission has no rental value other than agricultural, as there's no residential rental value until the houses are built. The rental value only increases when the actual houses are there. So in fact a developer sitting on a massive site with permission for thousands of houses (but none built) would pay no LVT under your proposals, as there is no rental value for open fields other than agricultural rental value, regardless of what planning status they have. Only the owner ever builds houses, not a tenant. So the land could be worth hundreds of millions, yet the only rent is from some farmer keeping his cows on it until the bulldozers move in. This does indeed happen - developers often rent the land they have full PP on to farmers just to keep it tidy and secure.

I can't see the powers that be agreeing to this state of affairs, so its a dead cert that they would want to tax capital values, not rental ones, which means you're back to taxing hope value, with the incremental pressure towards development that brings.

Mark Wadsworth said...

S, you appear to be suffering from some sort of cognitive dissoncance:

"So the land could be worth hundreds of millions, yet the only rent is from some farmer keeping his cows on it until the bulldozers move in."

I refer you again to OTOH's comment and my point 2. It won't be worth millions. You must know that or else you wouldn't hate LVT so much.

If the council wants housing built, it will grant planning anyway (charge LVT = homes built). If it doesn't, it will stick with the status quo (no planning = no LVT = no homes built). That is a political decision and has the same effect as existing planning laws.

Either way, it will be the home builders (entrepreneurs, bricklayers, carpenters, surveyors etc) who earn money from building houses (much as at present) and not landowners (you).

Sobers said...

" It won't be worth millions."

Why won't land with PP be worth a lot more than land without PP? You're not changing the planning system. Houses will still be worth a lot of money (you have admitted on this blog house prices could rise as a result of LVT, as people would have more disposable income available to buy property) and you'll still get 20 houses per acre, so why would the sale value of land with PP drop suddenly?

Unless of course you're going to tax the capital value rather than the rental value, which I've just pointed out is still agricultural until houses are actually built.

You can't have it both ways - either LVT is going to be calculated on the capital value of a property/piece of land or on its rental value. If the latter then there is no higher rental value to a piece of agricultural land that has just received PP, as its still just fields. No-one will rent it for more because its got PP, so its rental value remains agricultural until something has been built. The council can't charge more LVT, because there is no additional rental value to tax.

Mark Wadsworth said...

S, nope. Farmland without planning would be taxed as farmland (likely nil). Land with planning would be taxed as housing, possibly subject to a one or two year grace period.

I refer you yet again to the definition : "assuming optimum permitted use".

Sobers said...

"Land with planning would be taxed as housing"

Why? Its not housing, so why tax it as such? You've just said that your LVT would be based on rental values, now you're already introducing caveats. What you seem to have forgotten is that rental values only exist in the here and now, whereas capital values look forward. No one rents a house that hasn't been built yet, but they do buy one like that. So if an LVT is based on rental values, gaining PP on some farmland doesn't affect the rent at all, its just a field still.

And if land with planning is going to be taxed as if it had already happened, then what is to stop people applying for planning on other people's property and landing them with a huge tax bill?

Ben Jamin' said...

@ sobers

The rental value of land is the opportunity cost of leaving a site undeveloped for a year, even though that site may currently be developed, within the constraints of existing planning permissions.

This is called the raw site value.

http://www.wealthandwant.com/docs/Tideman_CTL.html

Mark Wadsworth said...

S, you are constantly inventing stuff.

The rule has always been that land is taxed on its optimum PERMITTED use. So land with planning for a house will be taxed as a house.

For sure - we know that people will leave applying for planning until the last minute. So what?

And we know that as part of general planning negotiations i.e. horse trading, in some areas, imposing LVT on a site from day one might make the project not profitable enough. In which case, the council can say, "Here's your planning permission sir, we accept it will take you two years to build all the houses so it is exempt for the first two years."

So our builder now wants to get stuff built ASAP, because if he finishes after only one year, he can sell the houses with one year of the LVT exempt period remaining.

If you apply for planning for somebody else's land (a rather bizarre concept), then the quid pro quo is that you have to pay the additional LVT yourself. That puts a stop to that.

Ben Jamin' said...

@MW

For all the YIMBYs, if the government want to encourage development in certain areas, it's just a case of changing what is permitted and applying the LVT to that.

That's exactly what should be done.

Sobers said...

"The rental value of land is the opportunity cost of leaving a site undeveloped for a year, even though that site may currently be developed, within the constraints of existing planning permissions."

No, the rental value is what someone will pay to rent the property. Not some calculated value, as MW has said further up in this thread ' observed rental values'. No one rents a plot of land with planning permission for the same as the amount they would for the house once its built. Ergo there is no additional rental value to tax, until the house is built. Which is ironic as you LVTers always go on about taxing the 'site only rental value' ignoring any improvements, and a house is most definitely an improvement, so in fact the rental increase of a house over a plot of farmland is all down to improvements, and therefore should not be taxed.

But even ignoring that logical inconsistency, the fact remains there is no rental increase for a field with PP until a house is built on it. It remains at purely agricultural levels until someone can move into the house, then the rental value goes up. That is observable fact in the real world - it happens all the time to farmland that has been zoned for housing, but is awaiting development - the only people who will pay anything to use it are farmers, and they pay agricultural rents.

Now you can start arguing that values should be calculated and imputed, but then its going away from the simple principle you say underpins the whole LVT concept, namely its a tax on rental values. Once you start saying that this or that situation is a special case and needs special rules that don't apply elsewhere then the whole thing becomes an arbitrary nonsense.

"If you apply for planning for somebody else's land (a rather bizarre concept),"

Not bizarre at all, just about every large scale development in the UK occurs with a planning application on land not owned by the person making the application. Very few developers own the land they are applying for planning on, they control it via option agreements and the like, but will only purchase it once the planning is granted. Indeed the original landowner may be left holding a significant proportion of his land holding for many years after a large development is started - the developers will buy the land in tranches as required, and not before.

Mark Wadsworth said...

S, you are still making stuff up.

Land Value Taxers since time immemorial say it is a tax based on rental value assuming optimum PERMITTED use.

So the tax on
1. a house in good condition
2.the house door that is nearly derelict and
3. a plot at the end of the street with planning for a similar house.

will all be exactly the same.

You know all this perfectly well, don't pretend it is a surprise to you. Don't go making up your own rules on how LVT would be implemented and then saying that they wouldn't work.

Mike W said...

While Sobers is just changing his record over to side B again, and slightly of topic, I notice even Tory banker, John Redwood, tacitly admits to seeing things from the starting perspective argued here.

http://johnredwoodsdiary.com/2018/05/21/the-future-of-the-high-street-2/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+JohnRedwoodsDiary+%28John+Redwood%27s+Diary%29

He concludes: 'The combined rate and rent package has to be affordable for a moderately successful trader'.

Something I suggested to the manager at my Maplins that the Crown Estates might look into if he was lucky. He looked at me blankly and repeated his: ' Naaa, all exchange rate problems with China after Brexit mate'.

ontheotherhand said...

I don't think Sobers is being obtuse, I just the net NPV of future cashflows is not an obvious concept. It's a lesson the LVT fans that it needs explaining simply and repeatedly.


So back to my example. Field with horses in it: Rent £1,000, LVT £0. Value of right to collect net rent for perpetuity = £1,000/ interest rate = £1,000/ 2% = £50,000

Field with horses in it with planning permission to put house: Rent £30,000, LVT £21,000.
Value of right to collect net rent for perpetuity = ((£30,000 rent
- £21,000 LVT)/ 2%) - £400,000 cost to build house = (£450,000 - £400,000) = £50,000

Having got planning permission and facing a future LVT of £21,000, the farmer will seek the optimal rental use of the land, which is to develop a house.

ontheotherhand said...

Nice anecdote Mike W. These concepts are hard for many people to digest. Another example: I have a super clever friend who became an orthodontist on Harley Street, via the training that even required facial surgery. Last year when the Business Rates went up he relayed with annoyance the claim from his landlord that the monthly charge (combining rent and rates) would have to go up, because the landlord was paying on more rates. I explained that the incidence of the tax fell on the landlord, but my clever friend just could not understand. I took him through the whole story... Why are you on Harley Street paying more on rent than around the corner nearby? (A. because I get more high paying customers on Harley Street). If you and your competitor orthodontists could successfully charge double next year, but only on Harley Street, what would happen to your rent? etc etc etc

Mark Wadsworth said...

OTOH, beautiful example, thanks. S knows perfectly well how it would work. He just enjoys winding us up.

Sobers said...

"So the tax on
1. a house in good condition
2.the house door that is nearly derelict and
3. a plot at the end of the street with planning for a similar house.

will all be exactly the same."

Yes but not a tax based on the market rent for the house in good condition! You keep saying its a site rent value, not the improvements, so the condition of the house (ie the improvements to the site) will affect the market rent. So you can't just say 'This house in good condition rents for X/yr, therefore we will tax all similar houses, and plots with permission for similar houses on the basis of a rent of X', thats taxing the value of the improvements, which you 'say' you don't want to do.

Either your LVT is based on observed rents or it isn't. Which is it to be?

Mark Wadsworth said...

S, stop asking the same old questions over and over as if you didn't know the answer.

Which is here
http://kaalvtn.blogspot.co.uk/p/valuations-and-potential-lvt-receipts.html?#2

Bayard said...

"which would rather negate the whole purpose of the LVT, which is to force people to use their land for the most efficient purpose."

Er, no, that's a side effect. The purpose of LVT is like any other tax, to raise money.

"The way the State would implement it, maybe not. Never forget that one of the main drivers of the renewed interest in LVT is not tax efficiency, but political envy, and the desire to tax capital in some way. "

We are discussing LVT implemented in a sensible way. We are all fully aware that a) a snowball has more chance in Hell that LVT has of being implemented and b), even if someone found a moderately heatproof snowball, the chances are that LVT would be implemented in such a cockeyed way as to garner massive overall support for ts repeal shortly afterwards. That, however, does not detract from the principle of the thing.

But yes, I agree about the politics of envy and personally have no problem with the idea that LVT would only be charged when development starts or a fixed period after that, bearing in mind PP only lasts for a limited time unless development starts anyway. In any case, I take the view that granting of PP is no different that the lifting of a restrictive covenant, and, similarly, should cost the same.

Mark Wadsworth said...

B, lovely summary, thanks.