Thursday, 24 September 2020

Killer Arguments Against LVT, Not (485)

One of the main KLN's is that "Landlords will pass on the tax to their tenants, so tenants will be worse off".

I've done this one many times before, you have to explain about elasticity of supply and demand and most people don't, or won't, accept this logic (based as it is on observation), so that's a waste of time and energy.

The shorter rebuttal is, "OK, if the government increases income tax or NIC rates, can all employees just ask their employer for a pay rise to compensate? Can the self-employed just put their prices up?"

Clearly, there will be isolated instances where this happens, but most will just have to accept lower net incomes.

We've seen what happens when powerful trade unions in the 1970s pushed through above-market pay rises. It worked short term, but after a few years, the factories just closed down. If landlords try the same, they will end up with a load of vacant homes, so they will have to drop rents again to get tenants back in (or else they will have LVT bills with no income to pay them), thus rent levels will fall back to where they were before.

The fall-back rebuttal is, "So what? The LVT increases would go hand in hand with NIC and VAT reductions, so even if landlords 'passed on' every penny of the LVT, working tenants would end up a lot better off, just the same as working owner-occupiers."


benj said...

I like your open air concert analogy best, where people will pay to be near the front but only for free a certain distance away. If total demand to pay is X, then X+1(the tax) leads to total abandonment of the pay for area.

The owner of the field thus has to take the +1 entirely out of their own income.

benj said...
This comment has been removed by the author.
benj said...

Your concert analogy also works for the UBI. The total price the landowner can set is by the by the differences in incomes, thus willingness to pay to be nearer the front (all else being equal).

If for whatever reason everyone attending finds an extra £50, that's not going to change those differences. ie the person who was the least willing to pay, thus was getting to see the concert for free, isn't going to spend anything knowing they would be outbid anyway. So everyone just puts their £50s in their pockets and carries on.

Mark Wadsworth said...

B, thanks and agreed.

As to "UBI will lead to rent hikes", it's nonsense. We are not starting with a blank slate here.

A modest UBI that just replaced existing welfare would lead to much the same £££ outcome as current welfare system, just with fewer people falling through the cracks. We know that with current welfare system, there are many areas where the location rent is zero, and every where else starts from there. That wouldn't change.

Physiocrat said...

What counts are real wages ie net pay minus taxes paid on goods purchased. There is in practice a "floor" to wages, set by levels of benefits and the conditions which are attached to them.

It is one reason why minimum wage legislation is pointless. A further implication is that minimum labour costs are minimum acceptable real wages plus any taxes payable. In other words, the incidence of all labour related taxes is on the employer. The effect is that employers have an incentive to minimise labour costs by replacing labour with capital which might otherwise be uneconomic, or the work does not get done, or it goes overseas.

This is a good example of self-harming behaviour by governments.

Mark Wadsworth said...

Ph, there is a theory to explain why NMW didn't cause many job losses. That is, while NMW increases average wages, it reduces the marginal cost of wages. Monopoly businesses (most of them) set price, output and hence job levels based on marginal revenue and costs (not on average prices and costs) so in some businesses, the NMW can actually increase employment levels.