Classic VAT DoubleThink

The myth is that VAT is a relatively benign tax because it is a "tax on consumption". Anybody who knows anything about tax incidence and bothers to look at actual statistics on what happens to prices, output levels and profits or wages when VAT rates change; or price differences in the USA where each state has different Sales Taxes knows that this is nonsense.

Value Added Tax is the worst of both worlds, it acts like a tariff, so dampens economic activity and is also, quite literally a tax on "value added" i.e. wages and earned profits. It's a crude profits tax that is payable even if a business isn't actually profitable (but would be if there were no VAT).

In the UK, businesses pay about three times as much VAT as they do corporation tax, so surely, if you interested in the tax system, you focus on VAT. But all the attention is directed at corporation tax. There are loads of headlines that Starbucks or Apple (or whoever) pay little or no corporation tax in the UK, which is quite probably true. But they still hand over £ billions in VAT.

So far so bad.
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Mombers spotted this at Bloomberg:

There’s a new bad idea doing the rounds in Europe. Many governments are convinced that a reduction in value-added tax will help relaunch their economies. Some, including Germany, have already wielded the ax. Others, such as Italy and the U.K., are taking this option seriously.

But the benefits of cutting VAT are limited, and the costs are large.

Reducing VAT from 20% to 17.5% was the best thing that Alastair Darling could have done back in 2009. He did it and it worked i.e. softened the impact of the financial recession. The benefit was measurable and large and far from 'limited'.

As with any other tax cut, the key question is who gains from it. The answer for VAT depends on a concept economists call “incidence,” which refers to how the tax burden or benefit is shared between companies and consumers. In the case of VAT, retailers can either pass on any reduction to shoppers by lowering their prices or they can keep their prices unchanged and pocket the difference.

Unfortunately, research shows they’re more likely to do the the latter, which wouldn’t be much use for any policymaker looking to use such cuts as a way of fostering a consumer-led recovery... They looked at a large cut (from 19.6% to 5.5%) for sit-down restaurants in France in 2009, after the financial crisis.

The results showed that consumers weren’t the chief beneficiaries of the reduction. It was the restaurant owners. The price of a restaurant meal decreased by a mere 1.4% in the month after the steep VAT cut, and it didn’t fall much further over the next two and a half years. The two researchers showed that restaurant owners pocketed 41% of the economic gain from the VAT reduction, while consumers got 19%. Restaurant staff obtained 25% in the form of higher wages, and suppliers accounted for the rest.

This is of course exactly what you'd expect to happen (it has been observed countless times). There was plenty of evidence ten years ago that this is what happened, it is hardly a new insight. What they don't mention is that output increased (a lot more people visited restaurants, even though prices had only dropped a bit).

So, having made the false assumption that VAT is a benign tax because consumers pay it, they argue that VAT cuts are bad because consumers don't pay it? The article then goes on to say that VAT increases are bad because consumers do pay it! Do they not realise that they are contradicting themselves at least twice over? Is there such a thing as TrebleThink? Everybody's entitled to be wrong, but at least be consistent!

As to "fostering a consumer-led recovery", people can't consume more unless somebody else is producing more. And do they not realise that restaurant owners, restaurant staff and restaurant suppliers (and their employees) are all consumers too? If they have more money to spend, they will probably spend it.

A key element of Home-Owner-Ism is a complete lack of self awareness...

Headline in Daily Mail/Money:

How Britain's £239bn buy-to-let bubble burst: Our devastating report reveals landlords ruined by tax penalties - and their pension plans hit

Evil greedy government ruining people's lives!

The first paragraph puts exactly the opposite spin on it, could be straight from the Morning Star:

During the Noughties, landlords ploughed into property* in the hope they could sit back, collect rent and watch house prices soar.

* More accurately, "people took highly leveraged bets on favourable tax treatment and massive government subsidies".

It was the Sun what won it!..... by backing both sides

Fantastic double think from the Sun.

Glorious bit of Home-Owner-Ist DoubleThink

From an article in The Daily Mail on the Mansion Tax:

House price rises good; house price falls bad

Despite the setbacks caused by the global financial crisis, many in Britain have become used to the idea that the value of their homes will always go up...

Given the uncertainty over the valuations of property and concerns over whether more properties might get sucked into the tax at a later date, it is likely that the freeze will reach well below the £2 million threshold – and may even blight sales down to £1.75 million.

With buyers scarce, prices will tumble. For properties above and just below the threshold, an average fall in prices of more than five per cent seems likely. A much more severe fall in prices of up to ten per cent is possible. Ultimately this means that families could see hundreds of thousands of pounds wiped off the value of their homes.

House price rises bad; house price falls good

But the effect will not end there. With fewer people wanting to move up the property ladder because they would be whacked by the tax if their new home was above the threshold, competition for houses below the threshold will intensify.

Given that there is already a shortage of such houses, this can only mean that prices will be driven up, possibly by as much as ten per cent, pricing out many middle-class families. So the perverse consequence would be that the squeezed middle will be squeezed even more.

So there you have it: House price rises are simultaneously good and bad. If we apply their non-logic, the ideal policy must be to increase Council Tax on cheaper houses and exempt really expensive ones...
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The premise is nonsense of course.

Yes, the Mansion Tax will depress prices at the top - wiping out up to six or seven months' worth of recent capital gains. Boo hoo.

But the tax will have absolutely no effect on the price of houses further down the scale. There will be an mild upward push from those few thousand Poor Widows who might finally decide to trade down and an equal and opposite mild downward push from the few thousand people who can now trade up.

More Mansion Tax Double Think

As reported in The Times this week by economics and property correspondent Kathryn Hopkins,

"Young professionals in London could experience large rises in their rent if a mansion tax is introduced next year, an estate agent has warned.

Knight Frank said that if landlords had to pay Labour’s proposed tax on properties worth more than £2 million, they would be highly likely to pass the extra cost on to tenants.

Any additional costs would make landlords’ investments less viable, Knight Frank said. The impact would be particularly marked when landlords were paying a mortgage on the property.

“There has not been any clarification as to whether the proposed mansion tax would be the responsibility of the landlord or the tenant, but our assumption is that it will be the landlord,” Tim Hyatt, from Knight Frank, said.

Hopkins faithfully regurgitated the above. But in the very next paragraph...

Meanwhile, Hamptons International has said that George Osborne’s changes to the stamp duty system will boost prices and transactions in the first half of next year in all but the most expensive areas of England and Wales.

Its analysis of home sales this year suggests that 72 per cent of buyers would have been better off under the new regime, it would have made no difference to 27 per cent and only 2 per cent would have been worse off.

The typical gain is equivalent to 1 per cent of the purchase price."

So, increases in property taxes (Mansion Tax) raise prices (rents)... but decreases in property taxes(SDLT) also raise prices (capitalised rent/selling prices).

Granted, economics isn't Kathryn's main subject, but surely she should at least try to highlight this obvious contradiction.

Rents are set at the upper limit of affordability (inelastic supply) not cash costs. Landlords are not a charity, they are already charging the highest amount their tenants can afford. The incidence of taxation on immovable property always therefore falls on the landowner.

So, it doesn't matter who is legally liable to pay property taxes. The landlord or tenant, the buyer or seller. The effect is always the same: the tax reduces the landowner's rental income or selling price. Her analysis of the effect of SDLT changes on selling prices is correct; the assumptions about the Mansion tax are 100% incorrect.

Johnson takes aim.

 "Boris Johnson takes aim at Miliband and the mansion tax at Tory conference"

From today's Evening Standard

Mr Johnson made housing the centre of his speech, in particular laying into Labour’s plans for a mansion tax on homes worth more than £2 million.

He said: “What is the real answer to our housing problem? To put a new tax on housing, hammering those who find themselves living in a property whose value inflates through no fault of their own, punishing those who have worked hard for years to pay their mortgages and those who hope to pass something on to their children?

[Actually, simple calculations, real life examples or a little logic shows property taxes do indeed make housing more affordable.]

Boris says it's not the fault of homeowners that property values have risen, then he says they are due the full capital gains increase from rising house prices because of their hard work!

Make up you mind, you thick twat. It can't be both can it?

"Cover-up over 16 baby deaths"

From The Daily Mail:

Health bosses are today accused of covering up their failure to investigate the destruction of a report looking into failings at a hospital where there was no enquiry into why no report was published on why 16 babies died through neglect.

Despite multiple warnings about Morecambe Bay hospitals, a Care Quality Commission inspection reported that its own internal review of its monitoring procedures gave it the all-clear in 2010 not to investigate its own failure to report.

Even when a CQC official produced a dossier purporting to show the internal review was flawed, bosses referred him to a confidential memo in which they denied telling staff to destroy it to protect the commission's reputation, therefore the dossier no longer existed and could not be produced.

In the account of a discussion between officials about what to do with the findings that there was nothing to find apart from the original report which they denied destroying, which is now not the subject of a further inquiry, one senior manager said:

"Are you kidding me? As this does not exist, it can never be in the public domain nor subject to a freedom of information request – read my lips. Plus I don't actually work here, I am on a secondment from an external review body set up to monitor the quality of the Care Quality Commission."

Incredibly, the CQC insisted a non-existent damning report into the scandal today should contain no names – so entirely innocent individuals could escape the suspicion of blame. Outraged parents said the commission's repeated failings raised serious questions about its ability to carry out a root and branch investigation into its procedures for learning from its own mistakes.

David Prior, (not his real name), new chairman of CQC, today defended the failure to investigate: He said: '

"If we had bothered to investigate, we wouldn't have been able to publish the names, or else we would have been in breach of the Data Protection Act and open to being sued. We had to make the decision to either investigate and then not publish the report or to simply not investigate in the first place. Can we keep this off the record?"

"If we are to get people back out shopping in their local town centres we need to give them more power to prevent shops being opened there"

Glorious DoubleThink from the Local Government Association, reported by the BBC:

... the Local Government Association, which represents councils in England and Wales, warned that the move [to liberalise planning/change of use restrictions] could alter the face of High Streets for the worse without residents being able to have their say.

"We have been clear that if we are to get people back out shopping in their local town centres we need to give them more say on what type of businesses and shops open there,"; said Mike Jones, chairman of the association's housing board. "Instead from today they will have less. Planning controls were not designed to make life difficult for business but to act as a "democratic quality control", he added.

"Most people would be more inclined to visit their local High Streets if they saw a resurgence in the sort of cherished local, good-quality shops, restaurants and businesses which can be at the very heart of communities. Instead, this blanket national policy will make it easier than ever for High Streets to become ghettos for clusters of 'here today, gone tomorrow' money lenders and betting shops."

Clearly, whatever democratically decided restrictions you impose, these cannot dictate which shops WILL open, they can only dictate which type of shops WILL NOT open. And there is such a thing as consumer choice:

If there is demand for "cherished local, good quality shops etc" then enteprising businessmen will open them. If there is demand for "here today, gone tomorrow money lenders and betting shops" then enterprising businessmen will open those instead. Simply preventing the latter category of shop from opening up is no guarantee that the former category will open instead. The chances are the premises will just stay vacant until they are re-opened as charity shops (to take advantage of the Business Rates discounts).

I don't know the exact figure, but on a decent High Street with a few dozen shops, restaurants etc, how many of those does any one individual actually visit? Not many, probably only three or four. How many of those shops are visited regularly by at least half of local residents? Not many, probably two or three.

So if each shop's existence required democratic approval, i.e. each resident is asked "Do you need or want Shop X? Do you need or want Shop Y?" them most of them would be shut down.

Or to paraphrase The Stigler, "we don't want the tide to come in, but we refuse to pay for a sea wall".

No wonder the politicians think they can get away with it.

I'm rather alarmed at the results so far to this week's Fun Online Poll after 39 votes:

Which Labour policies did the Tories oppose while in opposition but enact once in government?

2% National Insurance increase - 16 votes
Big Society Bank - 19 votes

*ahem*

Alistair Darling pre-announced the 1% plus 1% hike in National Insurance in Labour's last Budget of March 2010, it was scheduled to come in on 6 April 2011. The Tories opposed it at the time, and George Osborne pledged to slash Labour's tax on jobs. He became Chancellor two months later and the 1% plus 1% increases were duly introduced on 6 April 2011.

Gordon Brown first mumbled on about using money in dormant bank accounts to fund 'the third sector' (i.e. the quangocracy) in 2005 and the Tories opposed the idea at the time. The Tories were still opposing it two years later when it was to be called the Big Lottery Fund. The Tories then actually introduced the Big Society Fund last week, using the same money from the same dormant bank accounts.

*/ahem*

Debt Is Bad...

Unless it's good.

I tell you, if George Orwell had written that book this year, one of The Party's slogans would have been something like "Freedom is a big mortgage" or something.

People say the funniest things...

Here's one example of one of the cornerstones of Home-Owner-Ist propaganda which has entered popular consciousness over the last five or ten years:

The bigger problem is that, for good or ill, our economy now depends in significant part on the property market. Like our over-dependence on the financial sector, it's easy to see why this is a bad thing. Changing it is another matter.

To make homes really affordable would take such a price crash that, were it to happen, it would cripple the recovery and probably drive banks under. Nor are housebuilders going to build to increase supply while prices are static.

Meanwhile ordinary people have quite logically decided to invest in property — something Shapps tuts at —because of employers gutting their pension schemes. It might mean the end of Thatcher's “property-owning democracy” as we know it. But whether we like it or not, we need rising property prices.

That's just one example, but it is really quite extreme; he kicks off with a bald and entirely insubstantiated statement and then builds the rest of the article round it, cheerfully admitting that this is an unhealthy state of affairs but that somehow there is no alternative.

When challenged, Home-Owner-Ists will explain this Double-Think in a few main ways:

Version A

If prices fell, then lots of people would be in nequity. Banks would suffer such extreme losses on repo'd homes that the financial system would collapse.

That's not true. Half of homeowners are mortgage-free and LTV ratios on existing mortgages are spread fairly evenly (i.e. a tenth of mortgages are less than 10% of the current value of the home; a tenth are between 10% and 20%, and so on).

Even in an extreme (and highly unlikely) scenario where house prices fell by half; every borrower who was even one penny in nequity lost his job, defaulted and declared himself bankrupt; and the banks then repo'd and sold all those houses, the total losses to banks would be around one-sixth of their assets, which is an amount that can easily be covered by debt-for-equity swaps.

Version B

If prices fell, then lots of people would be in nequity. They wouldn't be able to trade up or down or move to where they can find a job.

For a start, the number of transactions is already at all-time low and very few people are selling, buying or moving anyway, so we already have all these negative effects.

And it's not true either. It would not be rocket science for the government to change the law so that nequity becomes 'portable', or that these debts are simply written off in 'deserving' cases (in which case see A above), or that the government assumes all or part of the liability and collects it from the borrower's future pay packets (like with Student Loans) etc.

And don't forget that for every 'forced' seller there is a willing buyer. This would get transaction numbers and hence mobility up enormously, which must be good for the economy, not to mention maximise people's happiness in terms of the size and type of home they live in.

Version C

If people's house price goes up (or stays up), they feel wealthier, so they spend more money.

This is quite obviously true, but is this a good thing in the long run? Nope.

By spending more now they are saving less, especially if they are doing mortgage-equity withdrawal, and this 'wealth effect' means that people aren't trying to go out and earn money, which is bad for the economy; even worse, the 'wealth effect' only works when prices are rising and not when they are flat.

And any decisions based on a complete illusion must lead to an unfavourable outcome:

What if, by a sheer coincidence, every single lottery ticket used the same numbers and these numbers came up on a Saturday, but Camelot's machines broke down so every single ticket holder thought he'd won a million pounds, rather than 47 pence? So millions of people would rush out on a mad spending spree for a few days or weeks before they found out the bad news?

Version D

When house prices are going down, there's a feel bad factor. Without optimism, nobody wants to invest or take risks.

This is quite probably true as well - but only as long as prices are falling.

The speed at which they are falling doesn't seem to matter, so if prices fell by ten per cent a month for six months, this would do far less such damage than if they fell at one per cent a month for five or six years (even though in either case, house prices would roughly halve). Does nobody remember the 1990s? Once house prices had bottomed out between 1993 and 1995, that's when things started to pick up again in terms of rising employment, lower government deficits etc.

Home-Owner-Ist DoubleThink

Housing Minister Grant Shapps said something mildly sensible about house prices in an interview with The Observer:

Grant Shapps argues that dramatic increases in the price of property cause "enormous pain" for tens of thousands of young people not yet on the housing ladder. He wants to use government levers to help usher in a new era of "house-price stability" in which prices rise very slowly and below the rate of earnings, making property more affordable long term.

In which he is quite correct - high house prices are a transfer of wealth from young to old; from poor to rich; from free markets to monopolists etc. Anti Citizen One spotted a write up of this on Sky News, which allows comments, the third one down being this rather splendid bit of non-logic:

UNLIKE CONSERVATIVE [MPs] THE COMMON MAN ONLY HAS ONE HOME SO YES SHAPPS IT IS A HOME TO THEM AND ALSO A INVESTMENT FOR THEIR CHILDREN (WHO ACCUALY [sic] HAVE TO "WORK" FOR A LIVING) UNLIKE SOME I COULD MENTION.

So there you go - the Home-Owner-Ists even have the temerity to claim that high house prices benefit future generations, when they actually make them poorer, remembering that "investment" is being used to mean "something that increases in value" and not "something that helps increase economic output in future".

And if you look at that rant closely, what this commenter appears to be saying is that "some I could mention" (i.e. Conservative MPs) don't have to work for a living, i.e. can make money purely from house price rises. If the commenter really wanted to have an economic system which rewards people who "WORK" instead of benefitting property speculators, then surely he would want house prices to stay low and stable?

Ten Years Gone

Cross posted at Nourishing Obscurity.

I have often described the last decade as the pinnacle of Home-Owner-Ism - an economic philosophy which, in true 1984 fashion, represents the mutually exclusive beliefs that "Rising house prices are a good thing" and "It is important to encourage a wider spread of home ownership".

"Home-Owner-Ism" (with hyphens and capitals) just happened to be a phrase I coined started using* on one particular day, which has led to some people thinking that I am somehow against owner-occupiers or the idea of owner-occupation. Far from it! I was one in the past and fully intend to be one again in future (and Her Indoors is definitely in favour), it's deeply engrained in our national psyche and I wouldn't deny others that which I'd like for myself.

What I believe in is the second half of the Home-Owner-Ist mantra: I'd like to see a wider spread of home ownership, which entails lower prices and/or more new construction and/or lower taxation of incomes etc. Remember that during the Home-Owner-Ist decade, the proportion of household who are owner-occupier actually fell quite markedly (see page 9 of this).

So, without further ado, I've drawn up a Venn Diagram, with 'homeowners' (in the narrower sense) in the left hand set and "Home-Owner-Ists" in the right hand set. Of course there is a large overlap in the middle, and none of these categories are clear cut, but hopefully this will give you an idea of who is driving "Home-Owner-Ism" and who really benefits from it.

* DBC Reed and Lola both claim they invented it, see comments.

More Blue Socialism

From the BBC:

Communities Secretary Eric Pickles has lost a court battle over his decision to scrap the last government's regional housing targets in England... Housing developers had asked the court to block it, arguing Mr Pickles had abused his powers...

Ian Ginbey from Cala Homes' lawyers... said scrapping the targets without anything to replace them had "left a policy vacuum, caused confusion throughout the industry and directly resulted in proposals for tens of thousands of new homes being abandoned" (1).

... But junior communities minister Bob Neill said it "changes very little... Later this month we will be introducing the Localism Bill to Parliament, which will sweep away the controversial regional strategies. Top-down targets don't build homes (2) - they've led to the lowest peacetime house-building rates since 1924. (3) The government remains firmly resolved to scrap this layer of confusing red tape." (4)

1. Who do you think is more likely to have a more realistic forecast of whether The Morbidly Obese One's plans would have increased or decreased the number of new homes being built? The home builders, who brought the case, or a politician who is desperately pandering to the NIMBY vote?

2. Mr Neill claims that "top-down targets" decrease the number of new homes being built* - surely, if this were true, then the home builders wouldn't have brought the case to try and keep those "top-down targets" in place, and would have welcomed the decision to scrap them?

3. Let's not forget that reducing the number of homes being built is seen as A Good Thing on Planet Tory, see point 1). The Tories' new "top-down target" will of course achieve its purpose in full: the new "top-down target" is zero and that's one target that's fairly easy to meet.

4. This "localism" may well reduce the amount of "confusing red tape" involved. But the red tape he is talking about is not the bureaucratic hurdles faced by home builders - he is talking about the bureaucratic hurdles faced by NIMBYs who want to prevent new construction. The Tories want to make it easier to prevent new construction, and not easier to obtain planning permission.

Once this all pans out and new construction is down to its lowest level ever, the Tories will proudly announce that all demand for new housing is being met in full, and as evidence for the lack of demand they will present all the petitions that have been submitted asking the local council to prevent new construction.

Which is all a bit like the Politburo deciding that this year's quota for shoes is one million pairs, telling the factories to make exactly one million pairs, and then Stalin proudly announcing that demand for shoes has been met.

* In a literal sense, he is correct, it's home builders who build homes, not "top-down targets".

Double NIMBY Fun. With a Side-Order of Home-Owner-Ism.

From the Evening Standard 17 August 2010:

A series of bizarre protests from residents has left 1,000 “Boris bikes” stranded in an underground garage and unable to be used by cyclists... One group of residents claimed it would be a “violation of their human rights” if a docking station were to be built outside their mansion block in Bloomsbury.

From the Evening Standard 10 September 2010:

It's a property rule of thumb that some of the most sought-after homes are near Tube and train stations — but now a new transport hub is driving up prices: the Boris bike docking station. Estate agents are reporting a surge in demand for properties with easy access to the Mayor's cycles for hire... Edward Mead, sales director of Douglas and Gordon in Chelsea, said: “The bikes are so impressive, they will put up rental prices. My only whinge with them at the moment is that they are very much only in the centre.”

So by a miracle of Home-Owner-Ist DoubleThink, these land owners will be claiming compensation for the disturbance with one hand and collecting extra rents or selling their land for higher prices with the other.

PS, somebody emailed me the link to the second story or left it in the comments a couple of weeks ago. I'd give him or her a hat tip but I can't track down who it was.

Joined Up Home-Owner-Ism Of The Week

Steven_L linked to a diatribe in The Telegraph at my previous post. As the article points out:

Even before the current crisis hit, this presumed "right" to home ownership was under threat. According to the last English Housing Survey, owner occupation fell from 70.9 per cent of households in 2003 to 67.9 per cent in 2008/9.

Yup. That's Home-Owner-Ism at work for you: rabid NIMBYism; a decade of reckless lending and its aftermath (quantitative easing and artifically depressed interest rates, i.e. robbing savers to subsidise borrowers); low taxation of property income and gains combined with savage taxation of labour and enterprise; selling off councils houses at significant discounts; and to a lesser extent the massive public sector deficits that they are piling up - all have inevitably led to a decline in the level of owner-occupation, exactly as planned by those who are really behind it all.

But does the article suggest reversing any of these policies? Nope. Another survey reveals yet more DoubleThink:

According to a survey conducted by the National Housing Federation, 34% of middle class parents with kids aged between 20 and 30 would like to see house prices stabilise, while 28% would rather see values fall in real terms, in order to help their offspring get on the housing ladder... The research also revealed that 82% of middle class parents want more pressure on the banks to help first-time buyers, for example by increasing the availability of high loan-to-value mortgage loans.

Right. So 28% are clued up enough to realise that falling prices are the best way of improving their children's chances of becoming an owner-occupier without becoming over-indebted, and by subtraction, 72% aren't.

82% minus 72% = 10%, so 10% simultaneously want prices to fall and for the banks to continue reckless lending in order to prop them up again. Weird.
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Another maths point is that the majority commanded by the Home-Owner-Ist coalition appears to be crumbling: if 28% of homeowners want prices to fall, that's 67.9% x 28% = 19% of all households, to which we can add the 32.1% who by definition are renting privately, living with their parents or in social housing* who probably want prices to fall as well, or are at best indifferent, making a grand total of 51.1% who have no great interest in rising prices.

* Which is why Home-Owner-Ist politicians in New Labour and the Lib-Con coalition are so keen for the Right To Buy social housing to continue, and for their to be all manner of 'shared ownership' schemes, in order to persuade as many tenants as possible to buy into the Home-Owner-Ist ideology.

The gimmick behind shared ownership is pretty evil. What you do is 'buy' ten percent and pay a subsidised rent on the rest; as and when you have a bit more cash to spare, you 'buy' another ten per cent and so on. So in economic terms, it's in your interests for prices to fall (so that you can snap up the subsequent fractions for lower amounts), but psychologically, you want prices to go up so that you have more 'equity' in the home (without which you will not be able to borrow ever larger amounts of money to buy up the other ninety per cent).

Tory MEP Tomfoolery

From theparliament.com:

UK Conservative MEP Kay Swinburne has welcomed new rules on EU financial supervision which have been adopted by the European parliament in Strasbourg... "It provides the markets with a common rule book and greater certainty over the key questions of who will regulate what and where. Instead of handing over the keys to the City of London, this deal places it in a kind of European neighbourhood watch programme.

Peer oversight will provide us all with loudhailer warnings when there are macro systemic or particular risks. This package must be seen as the high-water mark of European financial supervision and not the first step towards handing over these powers to Brussels. With this new certainty the financial markets can begin to look to the future."

That's a novel use of the word 'must'. I assume that the sentence really means 'We would like to palm this package off on the voters as...'?

Killer arguments against LVT, not (48)

What is really difficult about this is that the Home-Owner-Ist coalition will often make two entirely self-contradictory claims. For today's episode let's look at two such claims:

a) Higher taxes on land values would depress property prices (which is correct and A Good Thing, in my book), and
b) Landlords or vendors would merely 'pass on' such taxes to the poor unwitting tenant or purchaser (which is arrant nonsense).

Similarly, the Home-Owner-Ists claim that:
a) Land Value Tax would be wildly unpopular (which is unfortunately correct; the good news is that it would only have the slightest chance of catching on if a shedload of other taxes were replaced such that there were far more winners than losers), and
b) Those evil politicians would simply slap LVT on top of other taxes (which again, is arrant nonsense, see (a)).

Simon68 advanced both these over at HPC yesterday:

I believe if UK is going to impose LVT it will be on top of existing council tax. So, landlord will pass on such tax to occupiers who are already paying council tax and ground rent.

*sigh*

Most of us start our 'housing careers' by renting. Let's imagine you find a job and go to the letting agent who offers you a a choice between a flat in Block A or a flat in Block B. The two flats and the two blocks are physically identical, they are on the same side of the same road and separated only by a strip of grass. The letting agent tells you that the rent for Flat A is £1,000 a month (inclusive of Council Tax).
Q: What do you think the rent (inclusive of Council Tax) is for Flat B?
A: £1,000.

You do a bit of digging and find out that the council tax on Flat A is £100 a month, so the rent is £900. It turns out that Council B messed up badly and lost a lot of money with Icelandic banks, which they recoup by increasing the Council Tax on the flats in Block B to £150 per month. Apart from that, the level of services offered by either council are identical.
Q: What do you think the rent (exclusive of Council Tax) is for Flat B?
A: £850.

You move in to Flat A and happily pay the inclusive rent of £1,000. The leaseholds of a flat in that block and a flat in block B come up for sale - the leases are of identical length and have exactly the same service charge and you're thinking of buying.
Q: Assuming that the flat in block A is on for sale for a fair price of £180,000 (200 months' rent), and you expect the monthly Council Tax to stay at £100 and £150 respectively, what do you think a fair price for flat B is?
A: £170,000.

You dig even further, and it turns out that the leases both have nine hundred years remaining, but differ in one important respect: the owner of a flat in block A only has to pay £1 a year in ground rent (which the freeholder never bothers to collect), but the owner of a flat in block B has to pay £2,500 a year (and the freeholder makes sure it is paid on time).
Q: Assuming £180,000 to be a fair price for flat A, and applying a discount rate or interest rate of five percent, what is a fair price for flat B?
A: £120,000.

I could go on, but hopefully you get the drift. Unless I've miscalculated something, you will notice that the vendor or landlord cannot 'pass on' a single penny of his additional costs. In case you wonder why this is the case, it is because rents are dictated by demand (primarily local wage levels). Supply is severely restricted, so the demand and supply curves (in most parts of the UK, at least) cross far above the cost curve. A landlord's costs simply have nothing to do with the rent he can charge or the amount for which he can sell a property.

At the other end of the scale, imagine flat C in a run-down area which is expensive to insure (higher crime rate); which was badly built and has massive regular repair costs; with a landlord who foolishly locked himself in to a punitive interest rate; a local council which has very high Council Tax (let's say £200 a month for the flat concerned). All these costs amount to £800 per month, but wage levels are only half as high as the other area you were thinking about (see example A and B above). It is impractical to commute from one area to another.
Q: What do you think is the maximum rent is that the landlord can charge? £800 or £500?
A: £500.

*/sigh*

Here endeth.

Black is White! Up is Down!

From Monday's FT:

For internationalists everywhere, for believers in much deeper co-operation between nations, for those pushing for the establishment of an international legal order, the EU is a beacon of hope.

If the European experiment begins to unravel – after more than 60 years of painstaking advances – then the ideas that Europe represents will also suffer severe damage. Rival ideas – the primacy of power over law, the enduring supremacy of the nation state, authoritarianism – may gain ground instead.

As opposed to the EU dream, which is, er, the primacy of power over law, the enduring power of the EU and authoritarianism?

And yes, I know that the FT is an EU-phile paper...

Lib Dem Fun (3)

Just to round off the day by poking a bit more fun at the Lib Dems, as a footnote to their tax policies is this:

No to unfair bills. We will stop banks and energy companies raiding your pocket with unfair bills and charges. We will put a stop to unfair bank charges and make sure energy companies charge you fairly so people who use the least pay the least.

There's no hint as to how they distinguish between 'fair' and 'unfair' bank charges, or what they propose to do about them, so that's a fail, As to 'unfair' energy bills, let's not forget that top of the list of things that the Lib Dems stand for are these nuggets:

Environment Making real commitments to stop climate change

Economy A sustainable, green economy for Britain

Which almost certainly boils down to forcing energy companies to subsidise windmills and all the other 'green' tomfoolery, which, however you estimate it, will be passed on to consumers and will add hundreds of pounds to every household's annual domestic fuel bills. So on the one hand they are in favour of higher domestic energy bills but on the other hand they are against them.

Or is there some double-think at work here whereby energy bills would be 'high but fair' if the Lib Dems were in charge, as against 'high but unfair' under some other unspecified party? This is all EU-driven anyway, so I don't really see the point in having a policy on it at all, you might as well have a policy on changing the tides.