Killer Arguments Against LVT, Not (495)

Sobers came up with a corker recently. My thinking is that trying to establish pseudo-accurate valuations for each individual home is pointless, and we should do averaging and banding of similar homes (by size or type, or plot size or plot frontage/width etc) in each area and have same the LVT bill for all homes in the same band. We are used to Council Tax banding, and ATED (mansion tax lite) is by very wide bands. SDLT operates in bands etc. To me this makes sense.

Sobers pointed out - rather too gleefully IMHO - that in some small areas (one postcode sector or local council ward or whatever), there can be a wide range of values between similar homes. He referred to an unnamed town near him and said that semi-detached ex-council homes on a 'scuzzy' estate there sell for £300,000-ish while semi-detached homes in the nicer parts sell for £400,000-ish.

I'll take his word for it that this is all true (I am sure that there are such places), that they are all in one postcode sector or local council ward, and that valuers wouldn't pick this up and split that area into two separate valuation areas, or the valuers wouldn't discreetly classify the ex-council homes as small semi-detached in Band C and put the nicer ones into the default Band for normal semi's, Band D.

Therefore *drumroll* LVT would act like a Poll Tax where 'the poor' have to pay as much as 'the rich'! Game over for LVT!

On closer inspection this is of course nonsense on stilts, LVT is the polar opposite of a Poll Tax (it has all its advantages with none of the downsides). How can LVT be simultaneously 'an attack on wealth' and a poll tax? But we have seen The Powers That Be do such fear mongering on an industrial scale, expecially with the Cameron referenda (alternative vote, Scotland, EU) and I wouldn't put it past the Mailexpressgraph to come up with this sort of shite.

I haven't thought of a punchy slogan to rebut this yet, but credit where credit's due.
---------------------------------------
Another one came up in conversation with Henry Law. We agreed that local taxes are inherently regressive (which we, like most people, think is A Bad Thing, opinions differ) and so LVT would have to be a national tax at a national rate, the same as most other taxes. So instead of local councils getting central govt funding for 80% - 90% of their expenditure and topping up with a bit of Council Tax, they all get grants to cover 100% of a reasonable level of expenditure, end of.

Whether that is flat-rate, per capita funding, or with loads of extras for 'deprived' areas or 'rural areas' or wherever the government of the day wants to buy votes, like the current system is a separate debate. I always prefer flat-rate, per capita of course.

The weak argument FOR local taxes is that it encourages fiscal responsibility by local councils and/or some democratic safeguards against high spending councils. So a national LVT that is divvied up equally everywhere, same as income tax or VAT receipts that pass through central government, is undemocratic..?

How exactly are fully-funded councils undemocratic? Is a fully funded police service undemocratic? Should the police meet their finance needs with on-the spot fines? The local/national distinction is in itself nonsense, if you think about it - nearly all spending is 'local' to somewhere. So your democratic safeguard is being able to vote for a low-spending government (if that were possible, you can choose between high spending Labour and tax-raising, black hole spending, fiscally irresponsible Tories).

The next layer of democracy is that local councils would still be elected, and you would judge them on results. Their job is to keep as many people as possible happy within a limited budget, so they have to choose fixing potholes vs having more cycle lanes; better old age care vs more daytime nursery places; longer library opening hours vs better upkeep of parks and playgrounds. Judging them by how high (or low) Council Tax is, is idiotic anyway, the level of your Council Tax depends largely on how 'generous' the central government is when it comes to funding your council.

(Which is why we pay twice as much Council Tax as people a few hundred yards away who are in Greater London, not Essex. So what? We paid accordingly less for the house and would be able to sell it for accordingly less. We could halve our Council tax bill by moving, but that would cost us £100,000s, so what's the point?)

What is the tax base under a LVT + Citizens Income?

One objection against LVT I recently stumbled over was that as a single tax it violated the principle that everyone should contribute to state spending.

Saint of Bacon who recorded a video on Youtube critiquing the LVT said "My argument is the idea of a single tax isn't going to fly in the US because we've adopted the view that everyone should pay into the government. Meaning having some segment of the population be tax exempt by choice isn't how America likes to function. Efficiency only gets so far and that is my point, quoting philosophy that I don't subscribe to isn't going to convince me. You're literally in the position of a Christian quoting Bible courses to an atheist."

Let's assume for arguments sake the LVT could indeed cover all of state spending is Bacon correct?

Say a country spends £250bn on services and £250bn on benefits.  As the rental value of land is £500bn pa, for reasons of efficiency and justice it decides to shift to a LVT and Citizens Income , negating the need to tax incomes, capital or transactions.

The principle behind the LVT is that it is a compensatory payment to those excluded from valuable natural resources. That it is collected and redistributed/spent by the state is a separate issue.  As we are all equally excluded we are therefore all entitled to an equal share of the rents, so this hypothetical country does this by paying out the £500bn pa as a Citizens Income.

This country still has to finance £250bn of spending on defence, schools, hospitals etc, which it does by imposing a Poll Tax on each citizen.

For accounting purposes this makes no sense. So instead of collecting the Poll Tax, it's less bureaucratic just to deduct £250bn of the LVT at source, and pay the other £250bn out as a Citizens Income.

This is viewed by Bacon that only those that pay the LVT pay into state coffers, but that's not correct because that's not what is happening in principle.

The correct view is that the LVT  doesn't belong to the state as tax. The state is merely its collector and redistributor. Therefore any citizen that does not receive their full amount of compensation with no deduction is paying a defacto Poll Tax.

And as all taxes on income, capital and transactions are to some degree incident upon land, that's also true of all current tax systems around the world.  That is, we pay into state coffers simply by not receiving our full share of  land rent.

ATCOR and tax incidence

ATCOR is an acronym for "all taxes come out of rent". This means that apart from a poll tax, all other taxes are incident to some degree or another on land rental incomes and thus selling prices. It doesn't mean that every penny of every tax is incident upon land.

To illustrate, consider the simplified example of a hypothetical country called SmallLand.

SmallLand has a population of 1 million. They all rent their immovable property from a landlord called Mr Monopoly. Total incomes are £15bn per year. Due to agglomeration effects there is a linear relation between the size of a locations population and its average income.   Average incomes are lowest in the smallest town (A) Poorville at £10,000 pa rising to £20,000pa in the biggest town (B) StreetsofgoldCity.

Ricardos Law of Rent tell us that Mr Monopoly can extract the difference between the averages. Leaving the average discretionary incomes in SmallLand before taxes are applied at £10,000 pa(C), while Mr Monopoly gets a yearly income of £5bn(D) from land (leaving out income from bricks and mortar)



SmallLand's government needs to raise £5bn a year in taxes. It can do so by either a poll tax, a flat income tax, or a land value tax. The graphs below show how each of the taxes effect the incomes of the population.



To raise £5bn from a poll tax(F), everyone would pay £5000 pounds each, leaving total discretionary incomes at £5bn(E) for all those paying rent. Mr Monopoly's income becomes £5bn -£5000(G)



To raise £5bn from a flat income tax, it would be set a 33.3...%. For that part of incomes at £10,000 pa and under it would raise £3.33..bn(I). As incomes rise over £10,000pa the amount raised goes up in proportion to incomes, totaling £1.66..bn(J). This leaves total discretionary incomes £6.66..bn(h), leaving £6,666.66 for each renter. Mr Monopoly's income falls from £5bn-£1.66...bn, totaling £3.33..bn pa(K).



To raise £5bn from a LVT it would be set at 100%, so that the total income of Mr Monopoly (D) is converted into tax revenue (M). Therefore, in essence, those living in SmallLand who all rent become tax free so their discretionary incomes (L) is the same as (C).  The rent they pay is in effect rebated aback to them as State spending.

In conclusion, the incidence of a LVT and Poll Tax on land are at the opposite ends of the spectrum. Because incomes are dependent upon location, taxes upon output share their incidence between land, labour and capital in proportion to their "progressiveness".

In my example above, a flat 33% income tax is shared 1/3 land to 2/3 incomes. As the UK tax system is only mildly progressive in total, this this probably a good guesstimate of how much revenue a tax shift to LVT would raise.

How to make attractive cities.

Very good YouTube video that asks the question, what does it take to build a beautiful city? The short answer is balance. The right balance between development and planning regulations that preserve and enhance our shared environment.

As we all know, where there is an optimal balance, there is a laffer curve to measure it. In the case of development, that's best measured as aggregate land rents. see here

So, in order to align the incentives of the state to make sure they produce a framework of laws, rules and regulations that maximises those rents, they should be collected as public revenue to be spent on services or redistributed as a Cititzen's Income.

Something for LVT Man to sort out...

A goodly mixture of economic myths and dog-whistling in this clip, but nothing that LVT wouldn't sort out. If all those super-rich were paying super-high LVT on their "investments" either they'd sell up (not that that would make much difference, except to those who don't like having super-rich foreigners living in the UK) or they'd pay their LVT and then, who cares (apart from the aforementioned...)?

As one commenter points out, this problem is nothing new in places like Cornwall, but no-one takes any notice until it begins to bite in London, probably because, in Cornwall, those super-rich "foreigners" are the same Londoners who are now squealing about high prices. Also because, as this clip amply demonstrates, there is no understanding of the actual cause of the high prices, which is the increased buying power of the foreigners, instead ascribing it to lack of supply.

VAT vs LVT

I recently received another email extolling the virtues of VAT and saying that it fixes perceived problems that LVT can't.

Firstly, there is allegedly massive corporation tax avoidance, so VAT is a way of collecting a share of (taxable) profits at source. Nonsense, in relative and absolute figures, there is far more VAT avoidance/fraud that corporation tax avoidance/fraud. For example, Google were invoicing UK customers from the Rep of Ireland to avoid VAT, allegedly.

Secondly, it discourages consumption - the logic being that it thereby encourages investment instead. Duh. You will only invest in a business if it can produce and sell stuff profitably. If the amount of stuff it can produce and sell profitably is significantly reduced by VAT, then there is significantly less investment.

Thirdly, VAT falls more heavily on services (cutting each other's hair) than on exports of goods (which are zero-rated for VAT). That is blatant mercantilism and the opposite of free trade. Plus what's wrong with cutting each other's hair if it adds to the sum total of human happiness?

Finally, to the extent that you perceive the trade deficit as a problem, clearly, having 20% VAT has not reduced the trade deficit at all, unless some maniac wants to suggest massive import duties and 40% VAT? So it's an interesting theory but fails completely in real life.

Ask yourself, if we buy stuff from abroad, what is the foreign exporter going to do with its GBP?

A buy UK government bonds
B buy land (and collect rent in future which worsens deficit)
C buy shares in UK monopolies (railway, utilities, banks etc)
D buy shares in productive UK businesses
E invest directly in expanding a UK business
F buy goods and services from us

If the government is not running a deficit then A is not a problem, and deficits would be lower with LVT. Even if it is running a deficit, what matters is whether the money is being spent/invested wisely. Ultimately, those UK govt bonds will never be repaid and the interest cost is minimal, with or without LVT.

B - If we have a significant reduction in taxes on production and a corresponding significant increase in LVT, then they can't do B. If they acquire land, they will end up paying back their GBP to the government. The accumulated trade deficits melts away. So this also reduces future trade deficits (rental stream won't be going abroad).

C- Remember that what foreigners really like buying is rental stream/monopoly profits - railways, utilities, banks. This is not really "investment" at all. We can collect that rental stream at source via the tax system i.e. under the same principles as LVT.

D - If they want to buy existing businesses, then fine. Somebody builds a business and he can sell it to who he likes. The UK government always retains a 20% via corporation tax anyway.

E is always cheaper than D. UK shares trade at three times real assets, the rest is "rent", so why not buy plant and machinery and set up on your own? Clearly, whoever sold us "stuff" is good at making "stuff" and is well placed to make "stuff" in the UK, especially if the worst taxes on UK business (VAT and NIC are reduced/scrapped). He can spend £1 on shares for 4p a year dividends or spend £1 on plant and machinery for a 12p return. So more real foreign direct investment.

F - what are foreign exporters going to do with their remaining GBP, having exhausted A to E? They will spend it on UK goods and services.

(The foreign exporter could of course just leave the money in the bank, which the banks can then lend to UK businesses, which achieves D by the back door).

As a result of which, the trade deficit melts away, output goes up, unemployment is reduced, this is one of those things that LVT sorts out on its afternoons off, it is not the main event.
--------------------------------------------------
Or we can start from the other end.

The UK's trade deficit is about 6% of GDP, so if we increased output by 3% and reduced consumption by 3%, we'd be all square. Getting rid of VAT and NIC would increase our total output by far more than 3%, but let's call it 3% for now.

The 'UK' is merely the sum total of all its resident individuals and businesses. Any individual who produces more than he consumes is not contributing to the deficit. It is those who consume more than they produce who are. Most of those who consume more than they produce are living off rents; choke off the rental stream and they will either have to consume less or produce more.

Think about a Boomer/retired couple doing Mortgage Equity Withdrawal - they buy themselves a nice imported car and go on foreign holidays while producing nothing. MEW is 2% or 3% of GDP, so the total rental stream supporting the lifestyles of the non-productive (whether collected as capital gains, straight rent or mortgage interest) is a large multiple of 3%.

I really don't know what is so difficult to understand. This is not idle and untested theory, it is observation.When Denmark introduced modest LVT in the 1960s, their trade deficit quickly turned into a surplus (and back to a deficit again when the next government reversed it). Hong Kong has always had a surplus, and so on.

Outbreak of common sense at the London Assembly.

From City AM:

Scrap council tax and business rates and replace them with a land value tax to encourage development, says London Assembly member

London’s housing shortage could be partially alleviated by replacing business rates and council tax with a tax on the value of land, a member of the London Assembly has argued today in a new report.

The tax changes could lead to the release of nearly 2,000 hectares of land for development, which would provide enough space for 275,000 new homes in the capital, according to the research from Tom Copley. The role of the London Assembly is to ensure the Mayor delivers on their promises.

It's City AM so they are wilfully misreporting as per usual. The report clearly stated that Stamp Duty Land Tax would have to go as well. Things in London are so skewed that SDLT on residential sales raises as much Council Tax, and SDLT is arguably a worse tax. Being City AM, they round off their article with two tired old KLNs, "What about valuations and how do we find out who owns what?". Duh. LVT is just Council Tax or Business Rates with more accurate valuations.

Disappointingly, they didn't adopt all of what I submitted, so they don't propose getting rid of section 106 agreements and the Community Infrastructure Levy, both of which discourage new construction (this is clearly something which the London Assembly has the power to do), let alone getting rid of Inheritance Tax and the TV licence fee (which are the obvious next steps but would require some devolution of powers or back room deals).

Wealth and income distribution: New theories needed for a new era

"New theories needed for a new era", say Ravi Kanbur and Joseph Stiglitz, in an article on inequality published for the CEPR here.

I'm not sure why we need new theories when a modicum of common sense applied to Classical Economics does the trick nicely.

What the question really boils down to is can we empirically differentiate between fair inequality and excessive inequality?

In order to answer that question, we must firstly define fair. For something to be efficient, it must maximise wealth and (economic) welfare.

It is therefore axiomatic that for something to be fair it must be also optimally efficient. This is really just restating a banal utilitarian position.   How we measure welfare, which is subjective to each of us, may be problematic, but this has no bearing on the fact that what is fair must also be efficient.

However, applied to (wealth) distribution and Public Finance is where things get interesting.

We know that the taxation of produced factors, Income/Capital is inefficient(deadweight loss) and we know that the value of land capitalised into selling prices is also inefficient(deadweight loss), so;

a fair economic system=fair distribution of Land/Income/Capital=aligned incentives=optimal economic efficiency.

In other words, in a fair and thus efficient economic system,  the exact amount of compensation you owe the community(tax) is rental value of land your property occupies (plus some other negative externalities which are of a minor concern here).

Given the ATCOR principle (all taxes come out of rent), to see if we have fair or excessive inequality today we then only need to compare current taxes paid (% of total tax) to rental value of land (% of total land rent) between households.

We accurately know that the top 1% of households in the UK pay around 14% of total taxes or about 18% of domestic taxation.
Less accurately, because the data on the distribution of land by value is sketchier, they own around 40% of all land by rental value. (based on HMRC, Times Rich List, Pareto distribution).

Therefore they are paying less than half of what they would be under a fair and optimally efficient tax system.

Furthermore, as the value of land has risen faster than the returns to labour and capital, its concentration among the wealthiest percentile is the reason why we’ve seen widening and excessive inequality.

The reason Land does capture a greater return of GDP than Labour and Capital, all else being equal, is covered by David Ricardo and his Law of Rent.

No new theories needed. Wasn’t too hard was it?

Burnham on the Mansion Tax

From the Telegraph

Andy Burnham, the frontrunner for the Labour leadership, has described Ed Miliband’s flagship mansion tax policy as “spiteful” and disclosed that his mother telephoned him to warn it was a vote-loser.

Describing the policy as “spiteful” and anti-aspirational, he said he knew it would lose votes when his mother Eileen phoned and told him it represented a return to the 1970s.

“It felt spiteful and went against the grain," he said. “We need to get back to communicating simple policies that will make a real difference to people.

“Labour looks like an elitist Westminster think-tank talking in language that people don’t understand. We lost our mooring.”

Jesus H Christ on a Bike. It was Labour's best policy, you idiot. In terms of public support, I refer to YouGov:

The poll reveals that 65% of people in Britain support introducing a mansion tax, while 22% are opposed and 13% are undecided. A plurality (49%) of Tory voters support the plan, while 41% are opposed and 10% aren’t sure. Labour and Lib Dem voters are strongly in support of the mansion tax, at 79% and 74% respectively.

So, even rather a lot of Tory voters, probably the less well-off end that are marginal voters support it. And most free-market economists of the Milton Friedman school support the broader tax, land value tax because the alternative is taxes on the productive economy. That's why land value tax is aspirational. We want people to not be taxed on their work, because that's what makes the world better. Taxing land values, created by the state, doesn't destroy productive wealth.

How many people in this country honestly have an aspiration for a £2m home? I'd love to own one of the big places on Rightmove in the beautiful Kennet Valley. If I made my millions, that's what I'd do. And you know, there are literally 3 over £2m. There's a load of lovely places costing £1.5m that I doubt I'll ever own. But let's say that the 9 bed place near Pewsey was my aspiration, does anyone think that I'd feel crushed at knowing that I'd have to pay £3K/annum to own a £2.3m home? I'd have had to have earnt £4m before taxes just to do so. another £3K/annum is like losing some spare change down the sofa at that level.

Under his leadership, Mr Burnham said, renters would be offered help to buy their home.

With what? We're going to take even more money out of the productive economy to hand to BTL landlords so that productive people can own a house? How is that a good thing, you dickhead?

Diane Abbott Gets LVT Horribly Wrong

From the Telegraph:

Ms Abbott, a veteran Left-winger who hopes to run for London mayor told World at One: “I’m very surprised John (sic) Murphy is making these boasts. I support the mansion tax in principle but there are to big problems.

“It’s effectively a tax on London – 80 per cent of it will come from London – and there are problems. The super-wealthy plutocrats, who will all think should pay the mansion tax, probably using their lawyers and accountants will evade it.

If you support a Mansion Tax in principle, the of course it's going to be a tax on London. That's where most of the £2m homes are. In fact, if you support it in principle, as a tax on unearned wealth, you'd actually want more of it hitting London and the odd person with a massive country pile in the cheap bits of Wiltshire to not be paying it.

And does Diane Abbott really have any idea what the hell she's talking about when she talks about lawyers and accountants evading it? Unless the government writes some daft loophole, you can't evade owning a house. Where are you going to put it? Under a mattress? Ship it to Monaco? Of course, even if you ship the house to Monaco, you can't shift the valuable bit of a house in London which is the location.

“But you could be a teacher in Hackney literally who bought a house at the beginning of the ‘80s for £50,000 and it’s worth £1 million and climbing. Jim Murphy can’t surely mean he is going to expropriate money from Londoners to win an election in Scotland.”

She said many people bought homes 30 years that were in areas that were unfashionable then but are now “very worried” about the levy, before adding: “Jim Murphy isn’t helping matters.”

Did those people do anything to make them "fashionable"? No, they didn't. House prices in London rose because of things like government improving railways, selling off council houses and spending billions on housing benefit in London.

Just to add on this: there's a myth about how fashion raises house prices, when it's actually the other way around. You have a run down area, government does something like improving the rail line and it now makes it a place that commuters would like to live in. Rents rise because they can now get commuters to rent the place, which means that you get people who can afford to eat at Gordon Ramsay's rather than McDonalds.

Clowns to the Left, Jokers to the Right

From the Guardian

Last week, as the Tory faithful cheered on George Osborne’s new cuts in benefits for the working-age poor, a little story appeared that blew a big hole in the welfare debate. Tucked away in the Guardian last Wednesday, an article revealed that the British government had since 2007 handed Disney almost £170m to make films here. Last year alone the Californian giant took £50m in tax credits. By way of comparison, in April the government will scrap a £347m crisis fund that provides emergency cash for families on the verge of homelessness or starvation.

If you follow that article, you find the following:-

The first analysis of accounts for the Disney movies made in the UK reveals that since the scheme was introduced in 2007 the company has benefited from HMRC to the tune of £167.6m. Last year the tax credits reached a high of £50.1m, believed to be the largest ever payment to a studio. A third of that was awarded to the blockbuster Thor: The Dark World, which was filmed at Pinewood Studios in Buckinghamshire.

To qualify for the tax relief, 70% of a film’s labour costs must be paid to European workers and at least 25% of the production costs spent in the UK.

So, Thor: The Dark World received £16m of tax credits. According to Box Office Mojo, that film cost $170m to make (or around £105m). Most of that cost goes on staff - the writers, actors, crew and CG artists. So, around £73.5m gets spent in Europe for £16m of tax credits (and in reality, if you're in Pinewood, most of that will be going to the UK). If you work out the taxes spent on that £73.5m, it's probably about break even, or even a money earner.

Jonathan Isaby, chief executive of the Taxpayers’ Alliance, said: “Fiddly little favours for special interests are why we have such a terribly complicated tax system and it’s why ordinary taxpayers no longer trust that everyone is paying their fair share. Exemptions and reliefs like this should be scrapped altogether, and we should then cut the rates for everyone to attract investment and boost growth. It’s not up to politicians to pick winners through the tax system, so radical reform is a must for the next government.”

This isn't "picking winners". The government knows what the budgets of these films are, what the subsidy costs and what extra taxes and jobs you'll bring here. That's pretty much known. And these exemptions and reliefs exist not because we have a complicated tax system, but because we have the wrong tax system, based on incomes rather than land (and the TPA are against council tax, so I think we can assume all land taxes).

Income tax takes no account of the flexibility of labour demands in a globalised world. It's a rather unbusinesslike and anti-free market way of taxing people. Any normal business understands that you have market segments.

Take moviegoing. People have different reasons for going. Some people go to have a pleasant evening with a date. Some people just go to see a movie. The first group aren't just going to see a movie in a better format. It's about an evening out. They can't really replace it with watching on Blu-Ray. The second group can. Plus, lots of people want the Saturday night tickets. Cinemas therefore price differently. They can charge up to the rate that fills an auditorium on Saturday, but on Tuesday, they don't fill auditoria, so charge people a bit more than a HD rental, the alternative they're competing with, and get some people in. Not a huge amount of people, but it's still money and better than empty seats.

The fixes governments do of handing out tax breaks are simply a crude attempt to deal with that flaw in income tax. It doesn't discriminate between a film company making films about jousting that can do it in a huge number of places, and therefore can pick the one that has the cheapest costs (and tax is a factor in costs), and a cafe owner outside Windsor Castle that can't.

But LVT deals with the problem without any further tweaks for particular industries. The sort of businesses that can put themselves in any country are also generally businesses that can put themselves anywhere within that country (e.g. Pinewood have opened a new facility in South Wales). By introducing it, you don't need exceptions for certain industries. Flexible industries will come here, use cheaper areas of the country and create jobs. OK, they won't pay as much tax as the Windsor Castle cafe owner per head, but it's better to get a job with someone paying some tax than a business going to China and having lots of people on the dole.

And if you want a moral perspective, who has got more from the state? If the state had left Windsor Castle as a wreck after it caught fire rather than spending £37m repairing it, how much money would a cafe outside of it earn? So, why shouldn't that cafe owner, who gets a large amount of the benefit from that huge amount of money pay a larger share of paying for it?

Capitalists, Landlords and Owner Occupiers

There’s plenty of stuff in the news about getting rid of Business Rates, which chimes in with the standard fake-Capitalist arguments regarding LVT . That just like any other tax, they harm work and enterprise.

We can easily demonstrate this is all bollocks.

Firstly imagine a landlord(A) who rents out his site (plot A) for £4,000 per month to a Capitalist (A).

Capitalist(A) earns £5,000 per month, of which he keeps £1,000 (including his 10% profit). We can say, that the market has allocated this site to the Capitalist who can put it to its highest productive use, yielding a £4,000 pm productive surplus.

The landlord has no economic function. But, landlordism also produces no deadweight costs (loss of GDP), although those engaged in rent collection add no value (so you can impute a loss i.e. all the wealth they would otherwise be creating if they had proper jobs). What landlords do is increase income and wealth inequality.

So, if you imagine I owned all the land in the UK, and everyone paid me rent, GDP would actually be better than now (see below), but I would quickly become the wealthiest man in history, and everyone else would become poorer.

Now imagine that same site, plot A being owner occupied. We know the maximum income from it is £5,000 pm. The trouble is, this Capitalist (B) isn’t a very good one. He is only earning £1,000 pm from plot A. As an owner occupier, he is both Capitalist and Landlord. As a Capitalist his profit is still the same as Capitalist (A). But, as a landlord he is £4,000 pm down on Landlord (A).

This £4,000 pm is a loss of productivity, i.e. a deadweight cost. By being able to impute his rent (knock if off his costs), Capitalist B is shielded from the demands of the market. This lowers GDP. Capitalist B is a therefore burden on the rest of society.

What we need is the efficiency of market allocation via rents, with none of the inequality. So, let all capitalists be co-proprietors of all land, and let all capitalists only be tenants not owner occupiers. In other words Land Value Tax.

As we can now deduce, LVT cannot produce any deadweight costs. It eliminates them. It also ensures a fair distribution from the value derived from locational advantage. And, far from being a Socialist conspiracy, LVT is about as hard core as Capitalism gets. If you cannot pay the rent, you are a burden on society and can sling your hook.

And, as a bonus, the shared rent can be used to cut/eliminate damaging taxes on work and enterprise.

Torys Plan 100,000 New Starter Homes

From the BEEB "First-time buyers under 40 to get 20% off under Tory plan" see here

On closer inspection, it says doesn't say how this 20% off is guaranteed. Unless that means they will  be capping prices. If not, why should the developers not just charge the full market rate? All be it, only to UK citizens, under 40s, first time buyers. My guess is, any "savings" from being granted permission to build on brownfield industrial sites, less green building regulations and no section 106 agreements will only be capitalised into greater profits for the building companies.

We've seen it all time and again. They own land give them money.

Would it not be better if the Government built and sold these houses themselves, but charge the site rental value in perpetuity?

That way, people get to own their own home for less than half the current selling price.

The Government gets to keep the value it creates by granting planning permission and infrastructure it builds. So land rent is not privatised.

Unlike Council Housing the owner would be responsible for the upkeep, and gets to keep the value of improvements made upon sale.

And because a site rent is paid every year, those homes would always be put to their best use. So, couples whose children had grown up and left, would be more likely to downsize.

All the economic benefits of council housing (see Singapore) but with none of the downsides.

You'd Really Think That Someone, Just Someone, Would Have Cottoned on by Now...

Same same old

Rabbit Hutch Homes. LVT will sort it out.

Under LVT, we would basically be swapping our tax into payments for land rent. As rents are based on affordability, the logical conclusion of this, is that State revenue becomes current taxes + current rents= 65% GDP.

Luckily for us small government fans, things aren’t quite so simple. Allocational efficiency as a result of LVT reduces demand i.e. Poor Widows In Mansions out, young families in. We also have to take into account that increased discretionary incomes do not all get spent on land/location rent.

Average UK household discretionary income, with £160,000 mortgage debt, is around £14,000 per year.

Assuming we have equilibrium, under LVT, that becomes £25,000 + 50% less mortgage debt = £31,000 or an extra £16,000 or so.

Given the choice, how many people would forgo the 50% less mortgage, and opt for a new home that was twice as big/twice the quality or a combination of both? Under LVT they'd still have an extra £11,000 per year to spend on other stuff.

The point being, higher discretionary incomes do not all get absorbed in higher rents, and a good proportion of it under LVT will no doubt go into building better homes.

We only need Greenbelt planning and building regulations because capitalised land rents skew the market.

Saving the Fields of Old England

Andrew Motion in the Guardian

Today is the centenary of Laurie Lee's birth and a fitting moment to reflect on Cider with Rosie's evocation of an England "which saw, by chance, the end of a thousand years' life". Today, many feel the gigantic upheaval he witnessed is being followed by another, which is producing the biggest changes to the countryside within our living memories.

It is a defining moment, crystallised by a threat that faces Lee's countryside. Even as I write this, government planning inspectors are deciding whether to allow developers to build a housing estate in the green fields of the Slad Valley where the book was set. This is despite the local council's rejection of the plans. Similar things are happening all over the country.

That's precisely why the government have to intervene. Because "similar things" means no-one builds housing. It's a tragedy of the commons problem.

David Cameron recently visited the valley and said he understood the book's "wonderful links with this very special part of the world". But on the subject of the proposed development, the prime minister observed: "New houses have to be built so we have to make choices about where they will go."

He is right: there is a choice. We need to build more homes, but our politicians are failing to show the vision and ambition of their predecessors – the men and women who acted to protect our commons, national parks, green belts and footpaths.

Because their predecessors weren't faced with development hitting the problem of green belts. Oxford has pretty much expanded to the edge of its greenbelt. It's why Mini are recruiting in Swindon for staff to commute to Cowley (it would make more sense to move the Mini plant to Swindon, but that's another story).

I understand that MPs are inevitably pulled towards the immediate wishes of voters concerned about economic growth. But politicians have always been beset by day-to-day challenges, not least the postwar governments, which faced huge problems of reconstruction but still managed to introduce protection for landscapes, nature and heritage.

That's just hilarious. Post-war planning almost entirely ignored heritage and nature. There's all sorts of buildings from the 1960s and 1970s that got thrown up with almost no consideration of how they fitted into the existing aesthetic. Old buildings were knocked down to make way for a new golden era of Le Corbusier influenced eyesores (some of which are now protected, you monsters).

We need to recapture some of that inclusive, progressive and enlightened thinking. It's not an alternative to sound economic and social policy; rather, it can be the foundation of such things.

Our democratic, locally led planning system was part of the great postwar settlement for the countryside – together with national parks and green belts – but it has been steadily eroded by recent governments. To address the problems the country faces, we will need more land-use planning, not less.

Bollocks. It's been steadily eroded by homeownerism. When people were pro- building houses, you could leave it up to local democracy. If you travel to some of the large villages that I knew as a boy, you can look at the architectural styles and see that there was a massive amount of building from the 60s to the 80s, followed by the odd tiny development since. More land-use planning would make things even worse.

There are enough brownfield sites in England to accommodate 1.5m homes close to jobs, services and infrastructure. We must make these homes affordable, without compromising on quality.

Developing disused sites will both improve our towns and cities, and help us safeguard the countryside. This matters. Contact with the natural world is not just a pleasure, it's a necessity, and a part of what makes us who we are.

Governments are already in favour of this. This is current policy, started by Prescott. Stop pretending that this isn't current policy.

Englishness is tricky to define, not least because it tends to shun large gestures and rhetorical flourishes. But traditional attitudes, such as pride in our countryside, exist in a wonderful, big melting pot of Englishness, together with our pride in absorbing new cultures and our refusal to make Englishness an issue of race or birthplace.

Satish Kumar, Benjamin Zephaniah, Marina Lewycka and Anish Kapoor have all signed the Campaign to Protect Rural England's "save our countryside" charter. But too many politicians lack the courage to stand up for the countryside. That is a shame.

Brown people like the countryside, too. Who knew?

As we approach the general election next May, we should also give thought to the big, over-arching questions. How do we want to live? What sort of country do we want to live in? We should be thinking of houses as homes not investments, of other marks of national progress than mere economic growth, and of the importance to everyone's life of beauty and wellbeing.

Indeed. So, why is the CPRE against building, when this would help to destroy investments and give more people homes? Why is it in favour of sticking VAT on building which will kill off new builds and only having LVT on unused sites? If you want to reduce building, you'd introduce LVT which would encourage people to move away from the south of England and to cheaper bits of the country where there's plenty of land.

Global Warming and Coastlines

The Daily Mail has a number of scaremongering photographs of artists impressions of what a global warming sea level rise would do to various parts of the world. Miami's Ocean Drive, Venice Beach in LA. All with buildings underwater.

As Superman: the Movie explained (and one of those rare movies that can teach you something useful about economics) and Mark has shown with some data, people like living near the coast and pay more for being near the coast. Salisbury is a lot cheaper to buy a house than near the beach at Bournemouth.

And as Superman: The Movie explained (bullet 5. here), while you destroy a lot of land in the process (and in Lex Luthor's case, millions of lives) you also raise all the value of all the land that now become coastal, or near coastal. So, the people with Venice Beach apartments might find themselves losing their land values, the people in Inglewood will be a bit richer.

Assuming we had 12ft rises in water levels (which even with global warming predictions would take centuries), very little of any real value would be lost. We'd lose a few buildings, but that's a fraction of the value of beachfront property.

Regional Inequality. LVT will sort it out.

Every time a city doubles in size, it gains a 15% bonus.15% higher GDP per capita. 15% higher wages. 15% more amenities per capita.

This becomes a positive feedback loop with more people attracted by those benefits. Economists call it agglomeration. 

Given London is not only the largest city in the UK, but Europe too(over twice as large as Berlin), it attracts everyone from around the World for a piece of the action.

The problem lies in the fact this productive surplus is captured by landowners, by the simple expedient of owning a freehold title. Hence higher house prices. 

The right to exclude others from gaining access to this surplus is granted by the State. So the fact it doesn't ask landowners to pay for this privilege is therefore an implicit subsidy.

Given London and the SE has about 60% of land by value, this has some very important ramifications for others parts of the UK. It means taxation on income and enterprise, that has to be raised in order to support this subsidy also falls on more marginal areas.So regions outside the SE are effectively being priced out by tax.

End this subsidy, and lower/eliminate taxation, those areas outside the SE have a far lower tax burden than at present. This would attract much higher investment where it is needed most.

So on a 100% LVT only model. London and the SE would be paying an extra £134 bn per year (2007 figures). Or an increase of 75%.

We don't need redistributive government policy. That has, and always will fail. Just a level playing field so Birmingham, Leeds and Glasgow can up their rate of agglomeration too. 

Housing Affordability. LVT will sort it out.

Housing affordability is measured by the Median Multiple, the ratio of median house prices to median gross household income.

In the UK, the MM is 5.1. So this roughly breaks down to median household income of £28,000 and house prices £143,000.

The trouble with this is, it doesn't really tell us about how affordable housing is once we've stripped out taxes and mortgage repayments. That's what is felt in peoples pockets at the end of the day.

So if we do that, we take off about £6,177 for net tax ( benefits netted off) and mortgage repayments £7,248, which leaves us with £14,575 per year to pay all the other bills and expenditures of life.

Which is a pretty small amount. If we use this as our measurement of affordability we get a ratio of 9.8:1 We'll call this the True Affordability ratio.

Now, what happens under LVT? Well simplistically you might say because the mean house prices will half, we'll end up with a Median Multiple of 2.5. So twice as affordable.

Pretty good, but that doesn't tell us the true picture of how LVT will affect True Affordability. Taken from the KAALTVN LTV net liability calculator here, we get the following.














So after-tax income becomes £29,300 minus £3,624 in mortgage repayments equals £25,676 to pay all the rest of life's expenditures.

To get the True Affordability Ratio we divide £70,000 by £25,676, which gives us 2.73

So under LVT, true affordability improves from 9.8 to 2.73, which results in housing being 3.6 times more affordable, as a ratio of discretionary incomes to selling prices.

The Ultimate Regulation Tax

Economists keep banging on how planning regulations are the main cause of high house prices. They say, if we scrapped regulations, prices would dramatically fall.

We tend to disagree with this simplistic analysis, but no matter. Even if they were right, is it still the correct policy?

Good urban planning goes a long way to making a location desirable. Not just amenities, but making sure development enhances the shared environment.

High rental value of land is a sign not just of a good economy but good planning too.

The problems in regard to affordability all start when high rental values(good) get capitalised into selling prices(bad).

The reason for this is landowners do not create location values. Locations has value, but no cost of production. In other words, this is the Mother of all subsidies/free lunches.

Naturally, this also creates the Mother of deadweight losses too. Huge transfers of wealth from poor/young to rich/old and land inefficiency and mis-allocation. Those looking to get on the housing ladder are therefore most disadvantaged by this.

Therefore, the correct policy for the most net welfare gain cannot be to just "relax" planning, but to stop the gains from it being monopolised.

Anything else is akin to throwing the baby out with the bath water.

LVT is the perfect mechanism for internalising all the externalities regarding the issues surrounding planning vs demand.

If local authorities were incentivised by receiving a share of any uplift in rental values, planning would take care of itself.

Greenbelt laws not required.

Or we could always get rid of the ultimate "Regulation Tax": law and freehold property rights.

Without those "regulations" we can absolutely guarantee lower "house prices".

Not doubt we would be accused of being silly and "throwing the baby out with the bath water", but then why not take this "Regulation Tax" idea to its logical conclusion?