Tuesday, 4 August 2020

Killer Arguments Against LVT, Not (481)

I might have done this before, but it's worth repeating.

The KLNs go something like this, "The future LVT would be capitalised into a one-off tax hit on current landowners or home-owners, it's unfair to single out one asset classs [etc]" and "House prices would fall, people's savings would be destroyed [and banks would go bankrupt etc etc]"

OK, maybe the first KLN is true, but the flip-side is, having taken this on the chin, current landowners and home-owners wouldn't have a future LVT liability. You can count the NPV of the future LVT or you can see it as a series of future payments. Not both.

For example - if you have a mortgage of £100,000, you'll have to make regular, monthly payments for the next few years or decades. The NPV of those payments is £100,000. You can't add the two ways of measuring the amount of the mortgage together to make a mortgage of £200,000. That's Home-Owner-Ist maths, not real maths.

The second KLN says that house prices would fall by the NPV of the future LVT. So the best way of measuring the NPV of the future LVT is by looking at how much house prices would fall, which also addresses the first KLN.

And how much would that fall be? I actually see little reason to assume that house prices, in nominal terms, would change much.

House prices are dictated by how much purchasers are willing to pay i.e. borrow to buy them (or how much tenants are prepared to pay to rent them, and the landlord then borrows on the back of that). If the LVT on each home were approx. 3% of its current selling price and taxes on output and earnings (not to mention minor crap like Council Tax, SDLT, Inheritance tax and so on) reduced accordingly, then average working households' disposable earnings (after tax) would be £10,000 to £15,000 higher each year, year in, year out.

So working owner-occupiers would be laughing anyway (the average LVT bill would only be half the VAT and NIC reductions), and less likely to want to sell (unless they want to trade up). Even if landlords 'pass on' the LVT, tenants will still be a lot better off (again, the average LVT bill would only be half as much as the average NIC and VAT reductions) and pensioners will either pay it or roll up and defer. So there would not be a flood of homes put up for sale (even if there were, where are all those seller going to live? They'd have to buy or rent somewhere else, so there's be an equally large flood or buyers and tenants. Some of them will trade down, but just as many others will want to trade up.)

Likely buyers (and tenants) are prepared to commit a certain fraction of their net earnings (after tax) towards housing costs (SDLT, Council Tax, mortgage payments; or Council Tax and rent). This fraction is around 40% across the UK (higher in London, lower in lower wage areas). The amount which purchasers (or tenants) are willing to pay would go up (40% of a larger number is greater than 40% of a smaller number), the annual LVT comes off that first and the balance would go on mortgage payments.

You can muck about with spreadsheets to your heart's content (and I have done), but by and large, what people are prepared to pay towards a mortgage wouldn't change much, therefore, house prices wouldn't change much (and if there were the slightest risk that they would fall, then the government could just cap mortgage interest rates at 2% or something).

So on closer inspection, the KLN's melt away (as they usually do). The NPV of the future LVT hit would be plus/minus nothing. Even if prices fell, would a rational person accept a fall in the selling price of their home if it meant a massive increase in net pay and it made trading up a lot cheaper? Surely yes, unless the fall in prices and you had been intending to trade down to a cheaper home and bank the difference.

But the future tax reduction on output and earnings is real and can be enjoyed every year for the rest of your life, or the rest of your working life at least. The NPV of that is massive. After that, you can just roll up and defer if you'd rather spend it. There's no particular need to "Leave the house to the children" because they will have bought their own homes long before you shuffle off.


Shiney said...


When you write this stuff it always makes sense to me - I find it weird how 'everyone else' apart from the nutters around here don't see it.

Mark Wadsworth said...

Sh, thanks.

I've always been like this. When I bought a house in a Labour council area in 1993, people warned me against it, admitting it was relatively cheap (compared to neighbouring Tory areas), but it was a false economy because Labour areas had higher council tax than neighbouring Tory areas.

I tried to explain that it didn't matter - the money I save on a cheaper house cancels out the extra council tax. It wasn't a 'false economy', it was a straight swap and I know all about discounted net present values.

It fell on deaf ears.

benj said...

A tax of 3% on selling prices, used to reduce other taxes, may well be a 100% tax on land rents today, but they won't be the day after those taxes are reduced.

So its easier to explain a straight LVT paid out as a UBI. Which would reduce HP's to their capital only value because of the way incomes are redistributed i.e the locational advantage is nullified by the tax, to which a equal per person payout makes no difference.

So the tax, and all future taxes falls on present day landowners. Of whom, only those whose land's rental value is greater than their UBI will be worse off.

But seeing as those in perpetuity are getting their taxes paid for free, this is a no brainer. If you are doing something immoral and society decides to stop the music, tough if you are the one without a chair. All part of the game you chose to partake in.

Mark Wadsworth said...

B "A tax of 3% on selling prices, used to reduce other taxes, may well be a 100% tax on land rents today, but they won't be the day after those taxes are reduced."

Correct. I'm a moderate, half LVT and half higher rate income tax* will do me. They are sort of the same thing.

* Not sure what the threshold should be. Gut instinct, at least £50,000. Any earnings under that are truly earned and shouldn't be taken away.

Physiocrat said...

There is a hidden iceberg of land value which is concealed due to existing taxes. As existing taxes go down, land values go up, since all taxes come out of rent (they cannot come from anywhere else); the key to understanding is to observe what happens at the marginal locations, where economic activity is currently not viable, but which becomes viable when taxation is reduced; LVT is not payable at marginal locations.

Mark Wadsworth said...

Phys, yes, ATCOR.

But that won't become obvious until we start doing the tax shift, which at this rate, will be never.

Robin Smith said...

You're still supposing that people are rational. It's a very curious mistake