Killer Arguments Against LVT, Not (463)

Sorry to return to the ASI dirge of two years ago, but I saw this excerpt trotted out elsewhere as the inevitable 'but...' in an otherwise fairly favourable article:

One false claim made in favour of the LVT is that it would force the land to be used ‘more productively’. But there is already a sort of ‘tax’ on owning land and not using it as productively as possible: opportunity cost.

If you choose to use your land as a garden instead of a block of flats to rent out, you are ‘paying’ the cost of doing so in the rent you’re forgoing [sic].

LVT and planning is indeed a bit of a red herring. The main benefits are the social and economic benefits of using it to replace taxes on output and employment.

He misses the point by yapping on about people selling their back gardens for housing (how many people have a back garden big enough? One in a thousand? How many of those would bother applying for planning? How many councils would grant it?) The additional value of a back garden beyond a certain size is minimal, so the LVT on a home with a big back garden would be barely more than the LVT on the house next door with a normal back garden; nothing happens.

But there is clearly a big difference between actual cash costs and opportunity costs. Consider two examples:

1. Poor Widows In Mansions

Our first Poor Widow owns and lives in a large/expensive home. She could rent this out, bank £20,000 a year rent and rent herself somewhere for £5,000 a year. I'm sure that some Poor Widows do this, but most of them don't. Her heirs aren't too bothered either, because if they kept nudging her to do this, she might get sick of them and cut them out of her will.

Our second Poor Widow rents the large/expensive home next door for £20,000 a year. Oh no, she doesn't, she traded down to renting somewhere for £5,000 a year decades ago when her husband died/she retired.

They are both getting the same benefits from living at that location (nice neighbourhood, near the shops, good GP, whatever); one has a notional cost and the other a real cost.

So with a real cash cost, housing is being used more efficiently, the larger/wealthier family is living in the large/expensive home and she is living in the smaller, affordable one.

2. Land speculators

Our first land speculator inherited some fields at the edge of a growing town years ago, mortgage free. He knows that its value is increasing by 5% or 10% a year compound (or, the chances of getting planning gradually approaches 100%). He can only earn 1% interest by selling up and putting the cash in the bank. So he will only ever sell the fields if he really needs the money.

Our second land speculator bought some fields nearby, financed with a large mortgage which makes the exercise cash negative. He will be keen to get planning as soon as possible, bank the uplift and pay of the mortgage and interest years. If he leaves it too long, the compound interest will wipe out any gain.

They are both getting the same benefits from owning those fields (steadily increasing likelihood of banking a nice fat planning gain); one has a notional cost and the other a real cost.

So with a real cash cost, land is being used more efficiently, the mortgaged fields are sold and developed, bricklayers get jobs and people can live there.

With LVT in place

LVT doesn't just turn a notional cost into a cash cost, focusing people's attention on optimising land use short term, it would, if handled correctly, keep land/housing selling prices very low and stable, thus discouraging people from hanging on as long as possible.

The heirs of the Poor Widow In A Mansion from the first example can't console themselves with the fact that the longer she remains there, the more they can sell the house for in future. If she really wants to 'pass on her hard earned wealth to her loved ones', she will trade down. If she doesn't care and prefers living there, she rolls up the LVT and her heirs can whistle for it.

Our lucky landowner from the second example will not be sitting back, waiting until he can realise a tasty windfall gain. His fields will never be worth more than a few thousand pounds per acre; when the council lifts planning restrictions, the higher LVT will cancel out most or all of the planning uplift. There will be no incentive to keep his fields out of use as long as possible and he will be sell it on to an actual builder or develop it himself ASAP.

When Oxfam talk more sense than the ASI and the IEA..

From Oxfam's actual report (page 10-11 of summary):

The mainstream economic justification of inequality is that it provides incentives for innovation and investment. We are told that billionaires are the ultimate demonstration of the benefits of talent, hard work and innovation, and that this benefits us all.

Yet there is growing evidence that the current levels of extreme inequality far exceed what can be justified by talent, effort and risk-taking. Instead they are more often the product of inheritance, monopoly or crony connections to government.

Approximately a third of billionaire wealth is derived from inheritance. Over the next 20 years, 500 of the world’s richest people will hand over $2.4 trillion to their heirs – a sum larger than the GDP of India, a country of 1.3 billion people. Monopolies fuel excessive returns to owners and shareholders at the expense of the rest of the economy.

The power of monopoly to generate extreme wealth is demonstrated by the fortune of Carlos Slim, the sixth richest man in the world. His fortune derives from an almost complete monopoly he was able to establish over fixed line, mobile and broadband communications services in Mexico. The OECD found that this monopoly has had significant negative effects for consumers and the economy.

Monopoly power is compounded by cronyism, the ability of powerful private interests to manipulate public policy to entrench existing monopolies and create new ones. Privatization deals, natural resources given away below fair value, corrupt public procurement, or tax exemptions and loopholes are all ways in which well-connected private interests can enrich themselves at the expense of the public.

And so on and so forth. That seems like a fair summary to me. Their actual recommendations are a bit wishy-washy and vague, but at least they are on the right lines in identifying the causes of massive concentration of wealth - monopolists who add nothing to the economy and are only rich because other people are poorer. In no way can you construe the report as anti-capitalist or anti-free trade.

I'll mark Oxfam down for confusing "wealth" with "income" though. If interest rates fall and share prices go up, then that doesn't really change anybody's net income. You can't live off share prices, you can only live off the dividends. Similarly, it is the ongoing payments of rent which make tenants poorer and the landlord richer, not how much the house changes in value. Who cares what Carlos Slim's business is worth - what matters is that every Mexican is overcharged by a few $ a month, which all goes into Mr Slim's pockets.

Enter stage right, the Neo-Libs, who clearly couldn't be arsed to even read the summary document and just trot out the usual irrelevant story about capitalism and free trade being A Good Thing. Well of course they bloody well are, and the Oxfam report doesn't say that they aren't.

Mark Littlewood in City AM:

More needs to be done to break down trade barriers and to encourage more countries to replicate the radical free market policies that led countries like South Korea, Japan, and more recently China from grinding poverty to great wealth in a single generation.

This means advancing property rights and ending corruption in countries like Zimbabwe, privatising state monopolies in Venezuela, and working to abolish trade barriers such as the EU’s Common Agricultural Policy.

Charities like Oxfam should be out leading the charge on these issues. But instead of focusing on those who have too little, this report again relentlessly targets those the charity believes have too much.

From The Daily Mail:

Sam Dumitriu of the free market Adam Smith Institute said that every day for the past 25 years, capitalism has lifted 138,000 people have been lifted out of extreme poverty.

He said: 'The report is, as ever, exceptionally misleading and misses the point - we should care about the welfare of the poor, not the wealth of the rich. As China, India and Vietnam embraced neoliberal reforms that enforce property rights, reduce regulations and increase competition, the world's poorest have received a massive pay rise leading to a more equal global income distribution.'

'It's the countries that rejected free markets that have bucked the trend. In Venezuela, the move to socialism under Chavez and Maduro has meant that more than 75 per cent of the population now live in poverty with many unable to afford basic necessities like food and medicine, despite having the world's largest proven oil reserves.'

All of which highlights that these Neo-Libs are being paid to dress up privilege, corruption and monopoly power as free enterprise.

Two and a half cheers for the Adam Smith Institute

I'm surprised that Ben Southwood's article made it unredacted into today's City AM:

Some taxes distort the economy far more than others for every pound they raise for the Treasury. By this measure, stamp duty land tax is the country’s worst – and the chancellor should skip reform and go straight to abolition in this year’s Budget.

Not true, VAT is the worst, NIC is the second worst, but hey...

Stamp duty [sic] now funds three times as big a proportion of the state’s budget than it did during the 1980s and early 90s. It is technically voluntary, but if you don’t pay it when you buy a house, the transfer of property deeds won’t be valid.

That is not actually true; SDLT is triggered when there is 'substantial performance' of the contract, actual legal completion is irrelevant.

In 1993, 42 per cent of properties were liable for it. Today, 73 per cent are, and rates have skyrocketed to 12 per cent at the top. We have a housing shortage in the UK. There isn’t enough floor space to go around in the places people most want to live.

There is no overall housing shortage; by definition there will always be a shortage of homes in places people most want to live.

If housing is freely available then making sure each house goes to who values it most is less important, but when you have a scarce supply, allocating homes effectively is vital. But it is in precisely this market that we have repeatedly hiked a tax specifically on transferring homes. 

The real world effect is fewer people moving, meaning more of us living in areas far from our jobs, crammed into tiny boxes, or with spare rooms we don’t need. This causes more stress, more pollution, and lower economic activity overall. It also results in less of the complementary consumption you get when people move house – removal vans, extensions, decoration, and furniture.

Agreed, although the 'complementary consumption' is not really adding to the economy (broken window fallacy).

Stamp duty isn’t the main cause of the housing crisis, nor is scrapping it the main answer. Building more houses in the places that people most want them is obviously the biggest solution.

Not true; demand for homes in the most desirable areas is more of less infinite; build them and they will come; more people = agglomeration benefits = higher prices etc. Areas with the highest densities/largest number of people have the highest rents/prices, just look at a bloody map.

But this tax is making it worse by stopping houses from getting to those who value them most.

Agreed.

This damage totals around 75p for every £1 raised, according to a recent Australian government review, the findings of which echo what I have found across my research. That’s £10bn worth of wider damage to the UK economy on top of the cost to those actually paying the tax.

Not sure how they work that out; £10 bn is less then 1% of GDP, so you wouldn't be able to reliably measure it anyway. But let's accept it as perfectly plausible.

In contrast, income taxes and VAT do only around 20p of damage for every pound they raise...

Looks about right; if you assume an overall average 45% tax rate. So apply his 20p deadweight costs to total revenues from income tax, VAT, NIC and corporation tax of about £450 bn; the losses from those is easily £90 billion; nine times as much as his estimated deadweight costs of SDLT.

... and recurrent property taxes like council tax do almost no damage at all. In my Adam Smith Institute paper out today, I offer Philip Hammond a solution: scrap stamp duty land tax and fix council tax to replace the revenues. This is a tweak that would not cost the Treasury anything at all, but would replace a hugely damaging levy with a much milder one. 

Council tax as it currently stands is regressive and based on outdated values, hitting deprived parts of the country disproportionately by taking no account of the rapid and unbalanced house price changes since 1993. It would be easy to make it more progressive by linking it more coherently to property rental values.

Woah! How did that get past the Homey censors at City AM!?! It's clear that they'd lap up the bit about scrapping SDLT, they must have overlooked the sting in the tail.

That would take from those who have gained the most from the booming housing market, but these owners would be the ones to directly benefit from lower stamp duty when they sold. Essentially, it would lower the cost of moving home, without significantly disadvantaging either homeowners or the Treasury. When surveyed, people typically rank stamp duty as one of their most hated taxes, right up there by inheritance tax.

I'm not sure people hate SDLT that much; it's a one-off hit every couple of decades and you move on with your life. But Inheritance tax is the next most obvious tax to toll into a reformed Council Tax (by which he actually means Land Value Tax, although he daren't say it) or else it is a double charge on valuable homes/land.

The people are not always right, but on this one the chancellor can get a win, win, win: make the electorate happy, rebalance the country, and boost productivity by addressing the housing crisis – all without creating any hole in the Budget.

Except that people appear to hate Council tax most out of all taxes, duly whipped up by the whole Home-Owner-Ist lobby.

The bit he misses is that, yes, removing SDLT would increase the number of housing transactions; with the desired effect that older people/low earners would be more likely to move out of more productive areas allowing younger/more productive people to move there, that's where the estimated £10 billion boost comes in. Making up the revenue shortfall with a reformed Council Tax would easily double the effect, so it is not that it does "almost no damage at all", but actually boosts the economy; it has negative deadweight costs.

Adam Smith Institute FAIL

From City AM:

How did people react to the National Insurance hike?

Sam Dumitriu at the Adam Smith Institute said: “It’s right to bring National Insurance on the self-employed in line with that paid by employees. But the chancellor must ensure he is not discouraging the self-employed from investing, and allow them to immediately deduct capital expenditures from their taxable income...

LOLZ! has he not heard of the Annual Investment Allowance, which means that most small and medium-sized business can claim 100% of their capital expenditure in the first year? (This is some nonsense dreamed by Georgon Osbrown: reduce the normal capital allowance rate to a miserly 18% (or 8%) but then give most businesses a 100% rate anyway).

... We shouldn’t be looking to increase the overall tax burden, especially not on low-income workers. So we should use the extra revenue raised to cut the overall National Insurance rate.”

If he means align the NIC rate on employees and self-employed, they've got a long way to go (10% vs 23% on the first £43,000), even further if they look the rates above that (2% and 14%) and even further if they look at the NIC rates on investment and rental income (0%). But the Annual Investment Allowance (which is only a timing thing anyway) is bugger all use to low-income self-employed who probably don't incur much capital expenditure.

To give Philip Hammond credit, he did point out that employees pay/suffer two layers of NIC and IIRC, referred to it as a "tax".

Muddled assumptions which cancel each other out.

Somebody alerted me to this drivel at the Adam Smith Institute (but I can't find the email any more, thanks anyway):

Thankfully the situation is much better now, but in some ways we still have the worst of both worlds in housing policy. You might imagine that housing policy aims at balancing out two concerns: quality and quantity/price.

You might think policy picks one spot along a line: at one end we guarantee very high standards in design, materials, space, and amenity, but prices are high; and at the other we allow lower quality housing to proliferate, meaning prices are low. 

In fact we have managed to create a planning system that builds mostly ugly, unpopular housing in inconsistent and unpredictable ways, mostly where it's least needed, and builds so little of it that prices in growing cities are staggering.

He is making two opposite assumptions and completely ignoring the real world:

1. That an increase in supply of housing = lower prices

2. That an increase in the quality of housing = higher prices.

Truth is, rents and house prices are set by what people are willing and able to pay to live at any particular location. Construction costs have more or less nothing to do with it.

To show why his two assumptions cancel out, let's assume that higher quality means larger homes. Let's imagine every home had been built with one more room that it actually is, or that all rooms were a bit bigger, so two kids can share a bedroom comfortably, there's space for a guest bed in the sitting room, the kitchen's big enough to have some friends round etc.

It would be quite easy to have done this without using any additional land by building up a little bit higher, using loft space etc, so location values are barely affected. The additional construction cost would have been amortised and paid off years ago.  But the quality of housing (as crudely measured by size) has increased.

1. That is clearly an increase in the supply of housing. There is more space available. Applying his logic, prices would fall.

2. Each individual home is now more desirable, better quality and cost a few thousand pounds more to build at some stage in the past. Applying his logic, prices would be higher.

It can't be both can it? So one or both of his assumptions is incorrect.

IMHO both are incorrect. What would happen is that there would be a net movement of people from lower to higher value areas, pushing down prices in lower value areas and pushing them even higher in higher value areas.

Sour grapes

Health groups dismayed by news 'big tobacco' funded rightwing thinktanks:

"At the current time, with a centre-right government, thinktanks which represent the libertarian right wing like the IEA and ASI are crucial players in the development of public policy," said Deborah Arnott, chief executive of smoking-related health charity Ash.

"The government needs to take note that tobacco industry funding of such organisations completely undermines the credibility of their opposition to standard packaging," she added. "For the government to allow its policies to be influenced by tobacco-funded think-tanks would be a breach of its legal obligations under the WHO tobacco treaty."

Whereas the fact that over recent years "the centre-right government" has directly or indirectly handed up to 20 times as much each year and more to its unacknowledged "agencies" such as ASH [£220,000 in 2010/2011 and £150,000 in 2011/2012] and in the process paid Deborah's salary is not something we should question or discuss.

"King lifts lid on inflation error"

City AM's headline is presumably their entry in the "understatement of the year" competition, it's not some little minor technical error, it seems fairly fundamental. The article explains:

Inflation was higher than official figures suggested throughout the housing bubble and credit boom, the Bank of England admitted yesterday. Consumer price inflation was 0.3 per cent higher than previously thought every year between 1997 and 2009, due to errors on clothing prices.

Sales prices were wrongly assumed to be the norm, distorting the Office for National Statistics’ numbers. The blunder was bound to have misled the Bank, economists said, and meant that interest rates were kept too low for too long during the boom.

1. Well, given the BoE's remit of "keep the house price bubble going, or else", I'd say they got interest rates about right, but hey. If the BoE (and by extension the government) were actually serious about inflation (which they aren't and haven't been for ages) there's no need to go round measuring CPI, RPI and all that nonsense, it's quite sufficient to look at house prices/land values. If there is 'too much' money sloshing around, then it feeds through into higher house prices/land values; so if they are rising faster than x% then that is a sign of inflation.

2. Mainstream economics* says that a) you can combat inflation by increasing interest rates, but b) that has a negative impact on the economy. This is the excuse they are now using to ignore inflation that is running way over the official target of 2%, although the real reason they don't dare increasing interest rates is because their precious house price bubble would finally pop.

3. So what the article is saying is that they completely failed to notice the house price boom, and if only some statistician had weighted clothes prices slightly differently, then none of this would have happened? Is anybody really that gullible? I suppose they must be - Mr Butler fell for it hook, line and sinker:

“If the ONS had got its figures right, the Bank might have moved more quickly to raise rates and get us out of the cheap-money spiral that caused the housing and borrowing bubble, and the inevitable bust that followed,” said Eamonn Butler of the Adam Smith Institute think tank.

4. It appears that banking shill Allister Heath on page 2 of the same paper is only too keen to toe the party line:

This may seem like a small error but it was a major gaffe. Interest rates would undoubtedly have been higher every year during the bubble had the Bank known prices were going up as much as they were. Even half a per cent more on rates would have dampened credit growth and property prices; the bubble wouldn’t have been as bad.

* Proper economics says it's best to leave interest rates to the markets and to prevent bubbles in house prices/land values by taxing them (which does not damage the real economy, and the receipts can be used to pay off national debt or reduce other taxes, which boost the real economy even more in a virtuous circle), but this is a separate debate. DBC Reed-onomics goes even further than this.

Adam Smith Institute Bloggers' Bash 2010: A plague on all their houses?

"Dear blogger,

On Thursday, 29th April, we will be holding our annual Bloggers' Bash. Details are as follows:

Speakers:
Paul Staines – Guido Fawkes' blog
Tim Worstall – It is all obvious or trivial except…
Perry de Havilland – Samizdata.net

29th April 2010, 6.30pm to 8.30pm
Plentiful beers & lagers will be served
23 Great Smith Street, London, SW1P 3BL
RSVP: events@adamsmith.org

Feel free to extend this invitation to any friendly bloggers that I might have missed, and if you feel inclined, it would be great to see it promoted on your blog."

Killer arguments against LVT, not (24)

Richard Teather (who did a fairly decent 'flat tax' manifesto in 2005) did a 'think-piece' over at the Adam Smith Institute explaining why reintroducing Schedule A taxation, to broaden the income tax base and hence enable the income tax rate to be reduced, would be a good idea. Interestingly, this proposal was already in Patrick Minford's flat tax proposal of 2006.

Arguments against were invited today.

martinwc2 chimed in with the inevitable...

Surely the main argument against a tax on homes is that cash is demanded when there is no underlying cash flow? E.g. income tax arises upon cash income, even with capital gains tax, it falls due after a realisation. With houses, cash is extorted and funds must be taken from elsewhere. It's utterly irresponsible to force house sales to meet tax or force borrowing, especially when values fall as well as rise..."

Richard Teather replied rather nimbly with this:

As I said, we already tax people where there is no cashflow. We tax employees on non-cash benefits (company cars, private healthcare, etc.). A property tax is very similar - the company car saves you the expense of buying your own; home ownership saves you the expense of rent. There are other examples already in our tax system of taxing non-cash income, but the "benefit in kind" tax on employees is the main one.

I gave a more detailed reply:

@ Martinwc2. You are advancing what Winston Churchill and Henry George dismissed as the "Poor Widow Bogey" over a century ago.

There are four stages to the home-onwership life-cycle. Even if the property tax were an additional tax (I'd like to see any new property tax replace Council Tax, Stamp Duty and Inheritance Tax as a start, for example, and then use it to reduce income tax rates by broadening the base), then ...

1. People saving up a deposit to buy their first home. Any property tax acts like a higher interest rate, so prices would adjust downwards and their total cost of purchasing is fixed as a certain fraction of their net income. So they can obviously afford it.

2. First time buyers, who have a mortgage debt approx equal to the value of what they have bought. As they ought to have budgeted with a possible increase in interest rates of a few per cent (depending how pessimistic they are) the sensible ones will be able to afford a 1% or 2% charge on capital values, as it's no worse than a 1% or 2% interest rate hike. This would be easily affordable if such high tax rates reduced income tax by an equal and opposite amount.

3. People who have paid off or nearly paid off their mortgage, who thus have lower mortgage repayments than those in category 2, and hence can also easily afford it (esp. if income tax rates reduced).

4. Retired people. They could simply 'roll up' the tax to be repaid on death (which is why I would always recommend getting rid of IHT as a quid pro quo - IHT only raises £3 billion, about as much as the TV licence fee, but is a particularly spiteful tax in its own right).

Now, let's try and invent a system that treats all asset classes the same. Ideally, people save up some cash to live on in retirement (as well as paying off mortgage). If they are cautious, they only spend the interest element, so on death, the nominal value of the cash = the nominal value when they first retired.

Similarly, as the long run trend in house prices is to increase in line with wages growth (about 2% faster than RPI), as long as the annual tax is less than 4% of the nominal value of the house (a very, very high rate indeed!), the nominal value of the house minus rolled up tax [on death] would still be no less than its nominal value on retirement (taking a long run average sort of view). So the annual rental value is not actually taxed at all - this is earned and consumed while you are still alive - much like interest income (glossing over the fact that interest income is and should be taxed if we are to have the broadest tax base and hence the lowest overall rate).

My G20 protest

I did my bit and wore one of these things to work, including journey on The Tube (like I do every day):

After work I met up with like-minded at the Adam Smith Institute.

The Invisible Hand

My daily visits (that had reached about 80 at the height of my 'Kate McCann's tits' series, which is still reeling 'em in) had dropped to around 60 as of late.

Today's visits have doubled already (by 8.30 pm), having checked referrals in Sitemeter, it turns out that they all come via a brief mention in the Adam Smith Institute blog review #373*.

Netsmith, ta muchly!

*Bad new is, the average page views per visit was down from 3 or 4 to 1.5, those who came via the ASI didn't hang around long.