The impact of Sales Tax on selling prices

Using the same source for the relative price of goods for all US states (see previous post but one) and this handy table, from The Tax Foundation... we establish that there is no correlation whatsoever between the level of sales taxes (zero in three states, up to 9.46% in Tennessee)*.

Which is what we would expect. By and large, consumers have a lot of choice how to spend their money and whether to spend it or not; each business is set up to produce a fairly constant number of a narrow range of goods.

If demand is more price sensitive than supply, the supplier bears the tax (selling price unchanged and the supplier accepts lower profits per unit); and if supply is more price sensitive than demand, then the consumer bears the tax (prices go up by the amount of the tax).**

We've seen exactly the same with changes in the VAT rate in the UK and other European countries, selling prices remain unchanged, but profits and/or output levels change quite a lot - and nobody has ever produced any data to suggest otherwise. You can pick holes as much as you like, those are just observable and easily explainable facts.

* Actually, the coefficient of correlation between prices and the state average Sales Tax rate comes out as negative 0.16, heck knows how that happened.

** So land is at one extreme end of the spectrum and tobacco is at the other.

Readers' Letters Of The Day

From The Evening Standard:
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Allowing London to retain Council Tax and Business Rates revenues* would be a huge leap forward, encouraging the GLA to focus investment on transport and housing and increase the tax base.

Can Boris Johnson now resurrect Herbert Morrison's 1939 Site Value Rating for London Bill? An annual levy on some of the most valuable land in the world should sort out the capital's spending constraints nicely.

Mark Wadsworth, Young People's Party.

* My original list was much longer and also included Stamp Duty Land Tax, the Mansion Tax Lite (known colloquially as the "Annual Tax on Enveloped Dwellings") etc.
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And lower down the same page:

Economist Danny Blanchflower recently published a study demonstrating that high home ownership is strongly correlated with higher unemployment.

How timely of the Nimby residents of South Bucks to provide an example of this by obstructing the creation of jobs at Pinewood Studios.

Joe Momberg.

Reader's Letter Of The Day

From The Evening Standard (page 45):

Boris Johnson wants the rest of the country to "give London back its tax", but London already soaks up wealth from the rest of the country. The best-paid civil servants are based here; public sector workers receive London weighting; per capita spending on infrastructure is higher in London, and so on.

The biggest inwards transfer of all is because the financial services sector, which collects rent and interest from the rest of the country, is headquartered here. The value of all these payments to London far outweighs the payments going out.

This is quite clearly evidenced by the fact that London is the area least affected by the recession. As a result of all the internal migration to London, rents and house prices are on a rising trend even as they fall elsewhere. Higher rents in turn soak up most of the financial advantage of moving to London, so ultimately, the people who benefit most are those who own land and housing in London. It is from these people that Boris should be looking to claw back taxes, not the rest of the country.

Mark Wadsworth etc.

Channel 4: Britain's Trillion Pound Horror Story

Last night's TV programme was a very good introduction to how the whole system 'works' (or not, as the case may be), but it did gloss over certain issues and was in some cases deliberately misleading. Bellwether trotted out a few of the main claims made in the programme over at HPC, I responded as follows (BW's claims in italics):
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"There are, we were told 7.5 million public sector workers, of which the poster children for the state, eg nurses, police etc, the front line services, make up only 2 million."

Correct, I have been saying this for ages. They missed off 'social workers' (sort of middle ground between teachers, police, prison officers, probation officers and district nurses) which are about 300,000 but they admit they included teachers, nurses, doctors in the private sector, so that all evens out nicely.

"The public sector is bigger than the private sector."

Now that is simply not true, and an exaggeration at best. It is perfectly easy to imagine a teeny tiny state, with only 1 million coppers, prison officers, firemen etc, but which raises 50% of GDP in taxation (preferably LVT but flat rate 50% income tax will do) and which pays this out as a Citizen's Income of about £10,000 per person per year (or less for kids, more for pensioners) and everybody just pays for his own health care or his children's education out of that.

A far more relevant statistic is not just the 7 or 8 million directly taxpayer funded jobs, but the fact that the state spends nearly twice as much on 'procurement' from the private sector as it does on public sector wages and pensions. Yup, one fifth of GDP goes in juicy contracts to party donors, brothers in law of councillors etc.

"benefits last year were in excess of income tax."

Quite true, but misleading. Income tax in the narrow sense is only about ten per cent of GDP, "welfare" is about five per cent and old age pensions six per cent. The other taxes on income (national insurance, corporation tax, value added tax) add up to nearly twice as much again as income tax.
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I suppose the most outrageous claim was that the British taxpayer is on the hook for debts of £4.8 trillion. Official public sector accumulated debt is about £1 trillion and the net present value of accrued public sector pension rights is another £1 trillion, plus minus bits and pieces like PFI, but it is no more than that.

It is a wild exaggeration to include the net present value of e.g. future old age pensions, because we have a pay-as-you-go system. Each taxpayer has to stump up a share of current pensions, so you could say that each taxpayer is committed to paying liabilities with a negative net present value of £X0,000, but most taxpayers will live long enough to receive twenty years' worth of old age pensions themselves, which is a positive net present value of £Y0,000. The fact that for many people X > Y (it certainly is in my case) is a separate issue.

And further, Allister Heath trotted out the mantra that 'if you tax something you get less of it', which is quite true for the productive economy (if you have payroll taxes, you get lower employment), but completely not true for taxes on the rental value of land. However, the minute the subject turns to taxes on land and buildings, Mr Heath throws his economist's hat in the corner in a foot-stamping frenzy and he turns into a tired old politician:

... that didn’t stop Darling from launching yet another raid on the better-off, with his new 5 per cent stamp duty on homes worth £1m or above. There was time when aspiration was rewarded in Britain; this is no longer true... At least the stamp duty hike is not as damaging as Vince Cable’s mansion tax, a purer and more devastating form of wealth tax.

Pray tell, which 'wealth' would be 'devastated' if we had a Mansion Tax, as poorly thought through as it was? Would the rental value of the affected villas or penthouses fall by one penny? Nope. Would millionaires take their land and buildings abroad? Nope. At worst, it's a 20% tax on the actual or notional rental income, which would bring the average tax rate on such largely unearned income closer to the punitive rates on most of the productive economy. Either we're in favour of flat taxes or we're not, eh?

They also majored on how Hong Kong's economy had grown exponentially since it adopted a flat income tax of 15% back in the 1960s (hooray) but didn't mention that half of Hong Kong government revenues come from granting leases of land (which is a very crude form of Land Value Tax, of course).

Killer arguments against LVT, not (69)

There was another fine article on Land Value Tax in The Guardian yesterday, which linked to an earlier article in The Spectator (of all places!), the comments sections of which provide us with a wealth of economic illiteracy to fisk at a later date.

But I'll pick up on these two from The Guardian anyway:

1. Peitha: "... the argument being advanced is that LVT represents a tax on (sometimes unearned) wealth but if the tenant is having to pay it when he does not himself own the asset then clearly it isn't a tax on wealth at all."

a) Epic fail, nope, neither nor. Pay attention at the back: Land Value Tax is a tax on 'consumption' of land and/or a user charge paid to [the government as democratically appointed representative of] society in general for respecting/protecting your right to exclusive possession of a scarce resource whose value is created entirely by that self-same society in general.

b) Never forget that tenants already pay Land Value Tax. It's just that the tax is collected privately by the landlord (who in turn pays a bit of income tax on it, fair enough).

2. Peitha (again): "LVT penalises anyone who stays in their property for an extended period... because the rate of rise in land values historically outstrips the rate of rise in wages over an extended period, so unless the % LVT is to fall to bring the two back into line the tax becomes increasingly onerous the longer you stay in the same property... Try running a few numbers."

a) That's factually correct - land prices rise slightly faster than wages over time, and no serious economist disputes that.

b) But the comment turns logic on its head: the land value taxers say, why should we allow landowners to collect an ever increasing share of an ever increasing GDP for absolutely no input on their part? Surely it is better to scrap existing publicly collected taxes (income tax, VAT etc) and collect the land rents that are currently privately collected? Economically, everybody would be a tenant, but everybody would also be a landlord (the bulk of government spending is redistribution in one form or another, whereby a Citizen's Dividend is the easiest and best way of doing it, together with paying off the National Debt).

c) Peitha's argument appears to be that it is better for people to pay ever larger amounts of income tax, VAT on their ever increasing pre-tax incomes as well as ever increasing land rents out of their post-tax incomes, which would have the observed result that most people's net disposable incomes after tax and housing costs, i.e. their living standards, rise much more slowly than GDP growth generally, possibly staying flat.

d) We ran the experiment in the 19th century of what would happen if we had very low income tax and phased out existing taxes on land values: of course the economy grew, but the gains to the huddled masses were minuscule compared to the gains to the landed gentry. So I'm afraid that's not really an option either.

Half a free market is better than none.

In case you were ever thinking about starting up an airline in the UK, presumably the first thing you'd do is get hold of the accounts for other UK airlines and look at the profit and loss account. Then you divide the profits you could make by the amount of money you'd have to invest in aeroplanes, and that gives you your return on capital. If that's more than, say, ten per cent, then you are on to a winner, yes?

Nope. There are two kinds of airlines in the UK - those who were granted take-off and landing slots for free when they were privatised in the 1980s (i.e. British Airways); and those who had to buy landing slots for their market value 'second hand' (most of the others). The accounts for the former will neither show the value of the landing slots (which is enormous, they are worth more than the aeroplanes) nor the associated amortisation*; the accounts for the latter will show the cost of the landing slots; the associated liability (or share capital) and the amortisation.

So before you can go into business, you need to buy some slots (and now might be a very good time to buy, the air travel industry being at rock bottom). How do you work out the value of the slots? Well, you work out your cash profit per flight and then deduct from that the required return on the money invested in aeroplanes; what is left over is a balancing figure - you then take a random figure as an "earnings multiple" and that's what you offer. Another airline with slots to spare does the same calculation, and provided your estimate is higher than theirs, they'll sell you it.

If you overestimate the value, then you are doomed, of course - you are committed to the corresponding loan and interest repayments for ever more, but the value of the slots can plummet (let's imagine that Eyeful o'yokel never stops erupting, for example). Or their value might rocket if the NIMBYs get their way and airports are never allowed to expand.

Anyways, getting back to the point in hand, Nick Drew looked at the Lib-Con Energy policy, and under "Good", he listed replacing Air Passenger Duty with per-flight duty. I commented thusly:

Per flight taxes are better than per passenger, but the best way of doing it is auctioning off the landing/take-off slots. The value of these is merely a balancing figure between revenues and costs; so however much the airlines voluntarily pay for the balancing figure does not change anything - it's a non-distortionary tax, because you cannot pass on a balancing figure.

In other words, instead of having to hand over a vast amount to another airline, every year or two, you would do your own calculations and turn up at the next auction and bid for the number of slots you think you need; and if yours is the winning bid, you buy an aeroplane or two to match (airlines who lose enough bids will no doubt have one or two spare), paint it in your colours and away you go. If you overbid for a slot for a year or two, you will go out of business, but at least the amount of money you have lost is much less than if you had overbid for buying up slots in perpetuity from another airline.

Nick D didn't seem to get the point, and replied:

I'd be cautious about price-setting distortions (market power) under your auction system, MW - auctions have been tried in many areas of the energy industry and have thrown up all manner of problems.

I specifically was not talking about auctions in the energy industry, which is all much trickier (because raw material costs fluctuate so wildly). Ah well. Here endeth today's.

* Applying normal accounting standards, BA only accounts for landing slots which is has acquired from third parties, which are stated as having cost £212 million in its 2009 accounts, the cost is amortised at £8m a year. Back in late 2008, BMI which owns 11% of Heathrow landing slots, valued them at £770 million (the value has fallen since), BA owns 41% of Heathrow landing slots (plus heck knows how many at Gatwick etc) so their total value a year or two ago must have been about £5 billion, about as much as all its aeroplanes put together.

Killer arguments against LVT, not (33)

Ian B trots out the bizarre argument that taxing land values is only a short step away from enslaving half the adult population here:

... the big flaw in LVT is that it is a tax levied on what you think somebody can potentially earn from an asset (1), and that flaw will always remain. It is the equivalent of taxing all women on their potential earnings as prostitutes, regardless of whether they do or not, because they could rent their bodies out, you will tax their bodies as if they all do rent them out (2). I don't think many women would be thrilled (3), on demand of the Whore Value Tax, to be told that it's fair because your WVT assessor has assessed a high potential rental value.

You want to force every landowner to get on their back and think of England, or pay a regular fine for not doing so (4). It's simply morally wrong.(5)

I'm sure I've dealt with this before, but to recap...

1) There are two ways of looking at this.

a) The easiest way is to look at what somebody is prepared to pay for exclusive possession to a certain site. When you buy or rent a house, the mortgage lender or landlord will check you have sufficient income to pay the mortgage or the rent. So LVT is a tax on consumption of land. Sure, the land is not physically consumed, but it is consumed nonetheless in the same way as you 'consume' a hotel room or the pitch for your tent or caravan when you go on holiday. The rent you pay is a combination of facilities provided by the owner and for access to things that are not provided by the owner, i.e. hotels or campsites nearer the beach, the museums, the mountains or with a view over the sea or a lake command more rent than those further away.

So in one sense, LVT is a tax on consumption. My most-hated tax, Value Added Tax is also sold to the gullible public as a tax on consumption but it is not - it is a tax on gross profits of a business (i.e. a supertax on net profits plus salaries).

b) The other view is to look at land values as a function of how much people can earn if they live there and work nearby*. We know that there are wide disparities in average incomes across the UK, but if you deduct actual or notional housing costs, the picture is much flatter - i.e. you can earn £40,000 doing a certain private sector job in London but the mortgage or rent for a home within reasonable commuting distance is (say) £15,000 a year.

Maybe in Newcastle, the best paying similar private sector job that the same person can find would be £25,000 a year but the mortgage or rent for a physically similar home to the one he could have rented in London would only be £9,000 a year. So if that person takes the job in London, he is paying two kinds of extra tax - another £5,000 in income tax and National Insurance, which is publicly collected and an extra £6,000 in 'ground rent' which is privately collected.

* 'Nearby' is a question of commute time, not geographical distance, which is why in the South East, property developers and estate agents advertise properties as 'X minutes from Y station' and state that 'Y station is Z minutes from Liverpool Street/Kings Cross/Paddington Station'.

So take your pick whether LVT is more like a tax on consumption or a semi-voluntary income tax (for a given job, you can always choose a home with a longer commute time, or a flat in a block with more storeys, or a house with a smaller garden and so on).

2) Again, there are two ways or looking at this nonsense:

a) I have read all the arguments put forward by Adam Smith, David Ricardo, Henry George and Milton Friedman, all of whom I would consider to be towards the small government or libertarian-with-a-conscience end of the scale, and I know a lot of Land Value Taxers across the political spectrum and a few Christian ones as well - I don't think any of these have ever proposed a Whore Value Tax. This is tantamount to slavery, for crying out loud.

What the LVT-ers are campaigning against is that the bulk of the population are already enslaved twice over - once by the state who collect the 'public' taxes, and then again by the banks and the property market which collects 'private taxes'. We could, in theory abolish income tax and so on, but you cannot abolish 'ground rents' (short of shutting the state down and allowing anarchy to ensue, which I am not recommending either, before Ian B accuses me of it). As long as the state protects and guarantees exclusive possession (subject to you paying the rent or mortgage in full, of course), there will always be ground rents.

b) On a practical or political level, Ian B's idea is a non-starter of course, and I don't see why I should dignify it.

3) Nor many men either.

4) In a world where we have fines on finding a job (loss of means-tested benefits), fines on earning more (income tax and National Insurance), fines on gross profits (Value Added Tax) and fines on net profits (corporation tax), all of which are hugely economically damaging, that's another complete non-argument. The point is that the public collection of ground rents is not a 'fine', it is a 'service charge' or a 'user charge' or a tax on consumption etc (see above). Ground rents are an irreducible minimum of taxes - the only question is, should they be collected privately or publicly?

5) As I may have mentioned before, simply stating that something is 'morally wrong' doesn't give me much to rebut. That's about as uninteresting as the tabloid majority saying that 'taking drugs is morally wrong' or that 'homosexuality is morally wrong'. LVT is a largely voluntary tax - like VAT, for example - if you want to live in the nicer bits of west central London, it'd be £100 per square yard per year (or the appropriate fraction if you live in a block of flats), for Outer London it would be £5 to £10 per square yard per year, but, assuming the usual skewed distribution of values, the land tax on two thirds of privately-owned developed land across the UK would be £3 per square yard per year or less.

PS, I have used £3 per square yard as a reasonable mid-figure, by assuming that all existing property or wealth related taxes (Council Tax less Council Tax Benefit, Business Rates, Stamp Duty, TV licence fee, Inheritance Tax, Capital Gains Tax, Insurance Premium Tax etc) which currently raise about £60 billion per annum were divided up by the total amount of privately owned, developed non-agricultural land, which is about 4 million acres. So that's a good place to start.

We'd then phase out The Worst Taxes (VAT and Employer's NIC, static shortfall £120 billion, dynamic shortfall £60 billion) and reduce grants to local councils by a corresponding amount. It is then up to local voters to decide what they want to pay for collectively by majority - a flashy new council-run sports centre with swimming pool might lose £8 million a year, so that'd be an extra 10p per square yard per year or an extra 2% on your land tax (I'd vote against, maybe my wife would vote in favour) and so on.

The £1 billion annualised cost of Crossrail might be an extra £2 per square yard for the areas that benefit (let's say a quarter of Greater London, for sake of argument), so it's up to businesses and homeowners to decide whether the increase in capital or rental values, or the increase in amenity or shortened commute times is worth £2 per square yard - either it is or it isn't.

And before some faux-libertarian tells me that 'Crossrail should be privately funded' or 'the ticket prices should cover the cost', even if it were, land values within a certain radius of the stations will increase by a significant amount, so I'd ask them, why would or should a railway company make such a massive investment? That's like expecting painters and decorators or roofers to provide their services to landowners for half-price (which is exactly what this London Borough is seriously proposing). See also Empty Property Grants, more taxpayer-funded subsidies for people who allow properties to fall derelict.
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Ian B then continues in his next comment:

All "rights" in those terms exist because of state enforcement. (6) That is, using the WVT example, the only reason women can assert ownership of their bodies is due to state laws against violence and rape (under the current system, let's not get into anarcho capitalist enforcement), otherwise anyone could invade their bodily property without repercussions. As such, the state's legal system protects bodily property ownership and creates the opportunity for bodily rental (prostitution). The same argument applies as to land. Land property rights are just one of the property rights the state protects. (7)

6) I agree that things like copyrights or patents are created by individuals or businesses but the 'rights' only exist because the state protects them, which is why there is a good argument for a modest income tax on copyright or patent income.

Ian B's view that people ought to pay for the right to not have their bodies violated is extreme, but in real life, people are prepared to pay for this - so house prices in an area with a good police force and low crime levels will always be higher than in another area where crime is (perceived to be) higher. So however we finance the police, it is always the landowners in the lower crime areas who benefit. The only relevant consideration, which applies to all 'public' services of course is 'Is the increase in rental values that arises from ... greater than the cash cost of providing ...?'.

Or, in Ian B's parallel universe, let us imagine that Country A were mad enough to introduce a Whore Value Tax and Country B replaced as many taxes as possible with Land Value Tax. To which country would a lot of people from Country A migrate? How many people would migrate into Country A? In which country would people live happier lives? And hence, where would rental values be higher?

7) Land and property rights are, in economic terms the most important 'property rights'. But yes, the same logic applies to radio spectrum, landing slots at airports, fuel duty (you're paying for the roads as well as the physical petrol), copyrights and patents, cherished number plates and anything where there is a state protected monopoly.

These forms of 'property' only exist because of The State - unlike your own body or physical possessions which are only protected in principle. In reality, you have to them protect yourself , rely on good luck or insure privately. Ask yourself, how many stolen goods get returned to their owners? How many murdered people does the state bring back to life? How many fraud victims get their money back?

Fun Online Polls: Local Services and Welfare for Immigrants

Thanks to everybody who took part in this week's poll. There is no right or wrong answer to this, but the general perception appears to be that the following items (which more than half of the 124 people who took part chose - in a democracy, a simple majority is enough) are 'local services':

Refuse collection - 120 votes
Schools - 109 votes
Hospitals and GPs - 92 votes
Police - 91 votes
Public transport and roads - 90 votes

The following items didn't make the grade:
Welfare - 36 votes
Old Age Pensions - 10 votes
Immigration control -7 votes
Defence - 5 votes

I suppose you can all guess what I'm limbering up to here, i.e. separate debates on...

a) Which things are local services - defence may seem national, but in the case of e.g. The Falkland Islands, it is very much a local issue; and I fail to see a real distinction between 'police' and 'immigration control'. Sure, the Borders Agency should be preventing the wrong sort of people from coming in in the first place, but assuming they're here, do you really care whether the people who apprehend them are nominally police officers or immigration officers?

b) Which things the state should provide rather than leave to the markets;

c) To the extent things are local services which the state should provide, to what extent they should be paid for by local taxes, rather than nationally collected taxes which are redistributed by The Man in Whitehall;

d) What the least bad kind of local tax is, and having established that;

e) Whether the tax should be based on the market value of the services or the cash cost of the services.
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Anyways, it's too late to continue that debate, so the next Fun Online Poll is purely subjective - in your opinion, after what period of legal residence and having supported him- or herself, should an immigrant be entitled to the same welfare as a UK born citizen? This includes cash benefits, the right to 'free' NHS treatment or a school place for children as well as the 'right' to a council house. I'm not really sure in my own my mind about this, so your input is appreciated.

Vote here or use the widget in the sidebar.

The only tax that doesn't have a Laffer Curve ...

To sum up the series so far, we could get rid of the two worst taxes of all, VAT and Employer's National Insurance (which currently raise about £110 billion between them, four times as much as corporation tax and nearly as much as income tax), and because of various knock on effects, post-tax incomes in the productive sector (i.e. returns to employees and shareholders) would go up by £100 billion and state revenues would only fall by about £30 billion. Maybe my estimates are a tad optimistic, but it would seem that net incomes would go up by at least double the amount of the tax cut (let's say plus £80 billion as against a £40 billion fall).

I refer to this as the "Laffer Rainbow" (because that is what it looks like on a graph). So then we arrive at a situation where the only tax on economic activity is a flat income/corporation tax (the second least bad tax). If we were to cut that, the increase in economic activity and post-tax incomes would be rather more than the amount by which the tax is cut, but (say) sixty per cent of that increase would merely flow through into higher rents/mortgage payments.

So the Laffer Rainbow applies here as much as anywhere else; the tax cut merely leads to a corresponding increase in other taxes, the 'tax' in this case being the ground rent of land. (Private land-ownership being the flipside of, and entirely dependent on the existence of, the state; you can't have the former without the latter - under the Normans this was simpler to envisage - land-owners and the state were exactly the same people).

In other words, if you happen to already own your home or business premises, your disposable income would increase by £12,500 for every £10,000 of tax cut, but if you are a tenant or are yet to buy a home (which is every future generation, glossing over inheritances), your disposable income after housing costs would only go up by £5.000. I personally don't think that this is A Good Thing. And the only tax that would constantly level up the playing field is a tax on those rents, to be redistributed as a universal benefit or citizen's dividend (which was Tom Paine's idea two centuries ago).

Among Land Value Taxers, there is a heated debate between those who want to charge a tax on the annual rental value (and they seem to have the upper hand) and those like me who would prefer to see a tax on capital values. Firstly because this is far easier to understand and calculate (HM Land Registry have quite enough data on plot sizes and selling prices as raw material, the rest is number-crunching). Secondly, because it acts like a higher interest rate and keeps land values low and stable (so no credit crunches to worry about etc.). Thirdly, because such a tax does not have a Laffer Curve - there is no percentage rate above which receipts would start to fall again. Click to enlarge:

For example, the UK has a lot of taxes on land and properties (such as Council Tax, Business Rates, Stamp Duty Land Tax, Inheritance Tax, Capital Gains Tax and so on), these average out to about 1% of residential property values or 2% of commercial property values. If you strip out the bricks and mortar etc, that would be rates of 3% and 6% on site only values (call it 4% for sake of argument). If we doubled the rate to 8% (over the period of a few years, of course!) and applied it to the future market value, receipts would not double, of course, because it would act like a higher interest rate and depress capital values by a third, and 8% x 2/3 is less than 2 x 4% x 1. For every 1% increase, the additional receipts would be less and less, and receipts would be much the same whether the rate is 20% or 50%. At this stage, you do not need to worry about the rate increasing any further, even if they were daft enough to try it.

(Twenty per cent on capital values sounds like a lot, because at current market values, the value of an average residential plot in the UK is about £100,000. But a twenty per cent rate would depress that to £20,000, so the tax raised would be £4,000. The theoretical First Time Buyer wouldn't care too much, because his annual mortgage payments would be £4,000 less than they otherwise might have been (and he'd have no Stamp Duty Land Tax or Council Tax to pay). And if a First Time Buyer can afford it, then existing owners would be able to afford it as well as they have smaller mortgages and higher incomes. Pensioners, for the zilionth time, would be allowed to roll up the tax to be redeemed on death (which is why Inheritance Tax would have to be scrapped as a quid pro quo.)

The only way that the government could increase receipts is by doing what it's supposed to do, i.e. making the UK a nicer place to live and to do business, which is primarily cutting taxes, but also focussing on carrying out it's "core functions" to the best of its abilities (and keeping its nose out of everything else). Click to enlarge:

In other words, for every £1,000 cut in income tax/corporation tax, the economy would grow by £1,250 and rents would go up by £750. A twenty per cent tax on capital land values would collect about £600 of that £750 (so total tax revenues only go down by £400) but without any distorting effects on the economy, and could be used to a) cut income tax/corporation tax even further; b) cover the cost of the core functions of the state and c) be redistributed as a citizen's dividend.

Three little words that say so much ...

Those three little words are "independent of government", of course, which appears to be NewSpeak for "government propagandists". From The Green Fiscal Commission website:

The Commission is independent of government. It is formed of Commissioners with wide experience and expertise drawn from a representative range of social, economic and political stakeholders...

... followed by a list of two dozen commissioners, nearly all of whom already hold posts on other quangos.

Land Value Taxation - The True Libertarian Choice

Cut and paste in its entirety from www.obamaers.com on a take-it-or-leave-it basis:

Land value taxation is free market taxation. Under a land value taxation system, individuals choose how much government they want, and correspondingly, how much they wish to pay in taxes. How do they choose? Simply by moving closer or further away from areas where governments provide services.

Do you want government in your life? Do you want asphalt roads, do you want your ditches mowed, do you want snow plows to clear the road in the winter? If you do, move to a location where government provides those services; beware that others also want to be near these services, you will have to compete with them, which will result in a tax liability.

Do you want to be left alone? Are you content to live without government services? Move to a location where government provides little or no services, your taxes will be little or nothing; if you settle on land which nobody else wants, you need pay nothing in taxes, regardless of your level of production or consumption.

Do you want the government to educate your child? Do you want access to health care? Do you want the government to provide health care? Move to locations where those services are provided, just understand that those services are likely to increase the demand for land in the areas where they are available, competition for that land will result in an increased tax liability.

Under a land value taxation system, you pay for what you get in a competitive market. Competition between governments leaves little room for corruption, and government has no incentive to grow beyond its role as a service and infrastructure provider.

Fun Online Poll Results & The Law Of Unintended Consequences

Thanks to everybody who took part in this week's Fun Online Poll. The response to the simple question "Ultimately, who is best-placed to decide what is produced?" was even clearer than I expected/hoped, as follows:

Consumers - 87%
Producers - 10%
Governments - 3%

What happens when governments (under pressure from producers) think they can outwit the consumer? Let's have a look at the winners and losers from Germany's car scrappage scheme, as covered in today's FT:

Winners:
New and nearly-new car dealerships (sales are up 11.9 per cent).
People who applied for the bung of €2,500 (1.2 million).
People who happened to own a second-hand car that was at least nine years old (the value of which must have increased to at least €2,500).
East European manufacturers of cheaper cars (exports to Germany expected to double this year), and to a lesser extent German car manufacturers.
German recycling plants (who are probably in line for more handouts to actually physically get rid of all the old cars).

Losers:
The retail sector (spending has fallen on everything else, especially on consumer electronics).
Owners and vendors of second-hand cars from one- to nine-years old. "The classic used car market, with cars older than one year is pretty much dead"
The taxpayer generally, who has to foot the bill (approx. 40 million people sharing a €3 billion bill so far, plus maybe another €1 billion bung for the recycling companies).
German motor mechanics (new cars require less servicing).

Can anybody seriously say that Germans generally are now better off, or do the losses not always outweight the losses, however slightly, remembering that there'll just as much friction if and when the policy is reversed (which they are already seriously considering)?

The next Fun Online Poll is another commonsense question.

Fun Online Poll Results: What kind of economic system would you prefer?

Thanks to the hundred people who took part in last week's poll. The results were that 87% preferred an economic system that makes it easier to become wealthy, as against 13% who preferred one that makes it easier to remain wealthy.

As ever, I would like to point out that this is a subtle distinction. All things being equal, high taxes make it more difficult to become wealthy and more difficult to remain wealthy (unless you belong to the elevated class who lives off tax receipts, in which I include not just the quangocracy but those who live off ground rents and property gains as a form of privatised taxation), as do regulations. But, as much as industry decries EU or government imposed regulations, there are two classes of affected business:

Take for example maternity rights* - for a large supermarket chain, with hundreds of stores and tens of thousands of employees, it is quite easy to cater for the fact that at any time x% of your younger female staff will be on maternity leave - when they're ready to come back to work, full- or part-time, it's quite easy to slot them back in again. It's not quite the same for a small business employing a dozen people or fewer - for such businesses, one employee going on maternity leave (with all the associated costs and hassle) can make the difference between profits and losses or between survival and failure.

So, while such regulations don't appear to immediately benefit large businesses, they certainly raise barriers to entry, and by harming small employers far more than large employers, I'd class them as part of an economic system that makes it more difficult to become a large employer and relatively easier to remain a large employer.
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This week's Fun Online Poll: "Can anybody see the slightest difference between Labour's and the Tories' tax and spend policies?" Vote here or use the widget in the side bar.

* The lazy reader will instantly accuse me of being a MCP. Far from it, I happen to be married and I know exactly what it's like when women in their twenties are applying for jobs, with or without young children.

Taxes on rental values don't prevent property price bubbles

Many Land Value Taxers reckon that a high tax on annual site-only rental values would prevent bubbles in land and property prices. On the basis of actual evidence, I strongly suspect that this is not true.

1. I base this on the real-life example of Business Rates (also known as National Non-Domestic Rates), which are the closest thing we have to LVT in the UK (it's a progressive property tax with a few tweaks). Broadly speaking, NNDR are calculated as 47.1 per cent of the annual rental value of the whole property. In other words, if you are a tenant paying £10,000 rent to the landlord, you also have to pay £4,710 in NNDR.

2. Economic theory tells us that as the supply of business premises is fixed in the short or medium term but demand is price-elastic, the tax is borne by the landlord - in other words if it were scrapped, the landlord in this example would just increase the rent to £14,710, leaving the tenant no better or worse off. There are plenty of real life examples in the UK that bear this out, i.e. successive governments have declared certain areas exempt from NNDR from time to time, and all that happened was that landlords put up rents, or the market value of owner-occupied business premises increased.

3. The British Retail Consortium (who represent tenants rather than landowners) is perfectly aware of this phenomenom, which is why they recommended replacing NNDR with Land Value Tax in their submission to Sir Michael Lyon's Review of Local Government Finance at para. 6.43:

Land Value Tax (LVT) has a number of advantages. These include not distorting behaviour in the same way as taxes on income and profits do, LVT’s potential effectiveness in incentivising the efficient use of land (as all land would incur a charge even when it was not being used for productive activity) and taxing land values could also enable local governments to profit from some of the increase in value as a result of a prosperous local economy.

4. For simplicity therefore, let's assume that the landlord charges the tenant an inclusive price of £14,710 in rent and pays £4,710 NNDR. Unless the landlord is a tax exempt body (pension funds, Crown estates, CofE Commissioners etc) then there's income tax or corporation tax to pay as well, after deducting maintenance and interest costs, but let's ignore that for now. That equates to a tax of 32% on the total rental value.

5. The split between the rent paid for the location and for the building depends on what type of premises and where. In the case of used car lots or petrol stations, with very little in the way of buildings or improvements, NNDR is more or less the same as LVT, which is why (at least in East London), many of these sites were converted to residential use in response to the increase in residential property prices. Conversely, the split for a well maintained office block in a not-so-desirable area may be 90% for the building and only 10% for the location.

6. For simplicity let's assume that on average, one-third to one-half of the rent that businesses pay is for the location and the rest is for the buildings and improvement. Thus it wouldn't make much difference overall if NNDR were replaced with a tax of somewhere between 64% and 100% of the site-only rental value of each plot, payable by the landlord.

7. In the medium term, wages, business profits, share prices and rents all increase in line. Per Treasury figures (Excel, Table C4), over the last few years, total revenues from NNDR were as follows:
2001-02 £17.9 billion
2002-03 £18.5 billion
2003-04 £18.4 billion
2004-05 £18.7 billion
2005-06 £19.8 billion
2006-07 £21.0 billion
2007-08 £21.4 billion
which is a compound growth rate of 3% nominal (slightly less than I would expect, but hey).

8. Research by CB Richard Ellis (Powerpoint, Slide 16) shows that between January 2004 and July 2007, rents had risen by about 10% (also about 3% compound) but capital values had risen about 45% (about 10% per annum compound) - since when capital values have fallen by about 20%, but that's a different story.
9. To summarise so far, NNDR are pretty much the same as an LVT of between 64% and 100% of site-only location values, but they did not dampen the bubble in commercial property prices in the slightest; according to The Nationwide, the average UK house price increased by 'only' 37% over the same three-and-a-half-year period.

10. As we know, capital land values are merely a balancing figure between the value of a finished building and the cost of building (or replacing) it. It is futile to argue whether a bubble in property prices leads to a bubble in land values or vice versa. We also know that a half-way sophisticated investor looks at net present values and compares yields on different types of investments. We also know that property price bubbles and credit bubbles go hand in hand. For a constant annual rental stream of £10,000, if the landlord can borrow at (or earn interest on his cash at) 7% he is prepared to pay up to £142,857 for the building - but if interest rates fall and landlords can now borrow at (or only earn interest on his cash of) 5% (and expect this state of affairs to continue for the foreseeable future), he is now prepared to pay up to £200,000 for the same building. It is only mug investors who buy on the basis of expected capital growth.

11. Ignoring the 3% annual increase in rents and NNDR, it is therefore pretty much a truism to say that NNDR, as a fairly high % tax on location/land values has little or no dampening effect on bubbles in commercial property prices.

12. Which, to summarise yet again, is why I think NNDR (along with all other property- or wealth related taxes, such as Council Tax, Stamp Duty Land Tax, Inheritance Tax, Capital Gain Tax, TV licence fee etc) should be replaced with a tax on capital location/unimproved land values. Assuming that landlords and investors expect a return of 5% on the capital cost of land, a tax of 10% on the capital site-only land value would collect about two-thirds of the annual rental value thereof (the tax wouldn't apply to the buildings and improvements of course, for the reasons outlined by the BRC at point 3. above) and be a pretty straight swap.

13. Under such a tax, capital values could and would not increase by a ludicrous 45% in three-and-a-half years. Going back to CB Richard Ellis' figures (link above), for a £100 capital investment in UK commercial property in January 2004, rents would have been about £7.25 and the NNDR bill would have been £3.41. The LVT bill under the system I suggested in point 12. would have been £100 capital value less two-thirds relating to buildings/improvements = location value £33 x tax rate 10% = £3.33 (i.e. pretty much the same).

14. By mid-2007, capital values had risen to £145 and rents had risen to £8. Under my LVT suggestion, capital values simply would never have risen this far - LVT would have risen to £7.10 (£145 less indexed cost of buildings and improvements £74 x 10%). This would have made the return on investment negative (once other costs are taken into account) so the more sophisticated investors would have bailed out by 2005 or so. Yes, we know that there are mug investors who pile in just as a bubble is about to burst, who are prepared to accept negative rental yields in the hope of making capital gains, but firstly there's not much we can do to educate people like this, and secondly, the capital losses they will suffer from buying at £145 in 2007 are considerably higher than they would have been had the bubble in capital values been dampened by LVT and peaked at (let's say) £130 in 2005.

15. You may say "To hell with the property investors, why should I care?". It is important though - had the property price bubble been dampened then the credit bubble would also have been dampened, and the property price crash and credit crunch would, to some extent have been averted and we wouldn't now be staring at the wrong end of a recession, or even a Second Great Depression.

Here endeth.

Let's be clear what we are talking about

I have had interesting discussions recently with chaps from The Renegade Economist and Systemic Fiscal Reform, and while I disagree with them on a lot of things (and they no doubt with me), we have a lot of common ground.

It now strikes me that there are two main arguments* why Land Value Tax is superior to just about any other form of taxation (except "user charges" like fuel duties to cover the cost of roads, for example). This is because land values consist of two distinct elements, the location value (which is fairly stable) and the speculative element, that goes up and down in approx. eighteen year cycles:

1. The 'left wing' or 'humane' argument is that 'local services' (as defined) should be paid out of a tax on location values rather than taxes on incomes/production, because otherwise tenants have to pay double - they pay their landlords for the value of local services (because the value is included in their rent); and they pay again for the cost of local services (out of their income tax).

As the tenant's loss is the landlord's gain, this is a transfer from productive workers to land owners. We can extend this to first-time-buyers. A large part of the price they pay for a home is the net present value of local services, for which they themselves will be forced to pay out of their own income tax. For existing home owners, it's neither here nor there whether they pay a bit more income tax or a bit less income tax and a bit more LVT. Those who can cash in are people who can sell up and move abroad; if local services are funded out of income tax, they can effectively claim a refund of all the income tax that they would have paid had they stayed here.

2. The 'right wing' or 'free market liberal' argument is that these house price bubbles/credit bubbles steer the economy in the wrong direction; when the bubble bursts, the subsequent recession more than wipes out any illusory growth during the bubble period and we are back to where we started, instead of having gradually progressed to a more sophisticated and successful economy**.

Mathematically, and in real life, high house prices drag land values up with them. If there were a fairly savage tax on the 'bubble' element of house prices or land values, which is reflected in capital values but not in rental values, this would dampen down any bubble before it had started.

Just sayin', is all.

* There is also the Christian angle that God created The Earth for mankind to share; if you declare land to be your own and hence deprive others of the benefit thereof, it is only fair that you compensate your fellow man by paying for the privilege; and the Greenie angle that it discourages 'urban sprawl', which in turn reduces commuting distances (and pollution) and leaves the countryside untouched. Fair points as well, but I am neither a Christian nor a Greenie.

** Wouldn't we be in a slightly better position to 'weather the downturn', if instead of having an army of soon-to-be-unemployed and/or repossessed property developers, buy-to-letters, equity release junkies, estate agents and structured finance derivative traders (whose collective efforts over the last ten years have, with the benefit of hindsight, added bugger all to the value of the economy), we had an army of scientists, entrepreneurs, bio-chemists, plumbers, maths teachers, bus drivers whatever?

Twat of the day (10)

From Property Week:

Alistair Darling, chancellor of the exchequer, has scrapped empty property rates* for properties with an estimated value of less than £250,000 ... Martin Davenport, rating partner at Hartnell Taylor Cook, said: "It will help small businesses ...

Of course! Let's not forget those thousands of small businesses occupying empty business premises the length and breadth of the land ... er ...

* Of course taxing the value of empty buildings in themselves is counter-productive, because at the margin, landlords will demolish empty buildings in order to reduce supply and hence put a floor under rents that they can charge for the occupied properties. This problem would be solved at a stroke if it were only the site value that were taxed, whether there are building on it or not.

Boris: Twat (2)

From today's Evening Standard:

Boris: 50,000 cheap homes on the way

BORIS Johnson has announced plans to create 50,000 affordable homes and kickstart the housing market. The Mayor said he wanted to build the ambitious total, including 30,000 social housing units, within three years. The £5 billion scheme will attempt to get middle-income families on the property ladder and ditch previous mayor Ken Livingstone's target that all new schemes are 50 per cent affordable...

*sigh*

Houses in London are becoming more affordable by the day and rents are falling. The housing market does not need to be 'kickstarted'; we are now at the fag end of a property price bubble; prices will overshoot on the way down and then recover, and then the next bubble will start and so on ad infinitum. Or until they introduce Land Value Tax, whichever is the sooner. As to "middle-income families", I can see the point of redistribution from rich to poor - preferably via a Citizen's Income-style welfare system - but redistribution from middle-income-to-middle-income? What's the point?£5 billion is a heck of a lot of money; there are about 2 million households in Greater London, so that works out at £2,500 extra Council Tax per existing household. So he's just lost 2 million votes in order to win 30 thousand.

Twat. Thank God I don't live in Greater London any more.

The article continues with endless bullet points, which I could fisk individually, but you get the overall drift.

*/sigh*

Valuing landing slots at Heathrow

Continuing my occasional series, the FT reported that Lufthansa had been tricked into paying £800 million for the 49% of BMI that they didn't already own, however "The value in BMI lies with its coveted take-off and landing slots at Heathrow, about a seventh of the total. Earlier this year, BMI put a balance sheet value on these slots at £770m."

The Times reckoned that BMI owned 11% of Heathrow's landing slots, so let's call it one-eighth in round figures. There are 471,000 aircraft movements at Heathrow each year, so that's 235,500 'pairs' (one to land, one to take-off) and BMI 'own' the right to land/take-off 30,000 times a year. £770 million ÷ 30,000 = £26,000 for the right to land/take-off once a year, in perpetuity.

Assuming that this right could be reasonably amortised over ten years, that's a notional cost of £2,600 per pair if you own them, and a real cost of £2,600 per pair if you have to buy them (cost of finance + uncertainty premium). In other words, if the local councils around Heathrow were allowed to auction off land slots, airlines would and could pay an average of £2,600 and still be profitable. Times that back up by 235,000 pairs gives local councils potential income of £611,000 million.

And the value of those landing slots is depressed by Air Passenger Duty. If we scrapped that crude tax as well, the annual 'rental' value of the slots would go up by another £673 million (67.3 million passengers at an average of £10 APD), bringing the total local revenues to a nice round £1.3 billion (rather less than my earlier estimate, I admit).

And in difficult times like these, the auction price would drop of course - in extremis to £nil in the short term. Great, that means that airlines can drop ticket prices by several per cent, which will hopefully keep things ticking over, minimise job losses and ensure that they recover much more quickly again in future (so the auction receipts quickly revive again, and so on and so forth).

"Squeezed business struggles to pay rates"

You'd expect slightly more incisive commentary from the FT, which is supposed to be the economically clued up paper, but here goes:

Companies hit by the economic downturn are struggling to pay their business rates on time, adding to evidence of the economic squeeze on business. More than half of councils surveyed by the Local Government Association said companies were experiencing difficulties. The association estimates that business receipts [sic] – which councils collect and send to central government for redistribution – have fallen by more than £1bn ($1.6bn) in the year to April, representing about 6 per cent of takings. They are expected to deteriorate even further in the coming year.

Again, this is easily fixed.

1. Business Rates should be replaced with Site Value Rating, which does not distinguish between undeveloped sites, vacant or derelict buildings or well maintained and fully occupied ones (so as not to discourage owners from maximising the return on their sites).

2. SVR should be collected directly from the landlord, not the occupant. The landlord will in most cases increase his rent to cover the extra cost, but this does not change the total occupancy cost to the tenant. As SVR will only ever be a fraction of the rental income (Business Rates averages out at 30% to 40% of rental income, for example), there is no question of the landlord being unable to pay.

3. Of course, owners of undeveloped sites or vacant derelict buildings will have no current income, but this will be reflected in a much lower cost/value of the land element when the site or building is acquired, giving a lower up-front fixed interest costs, leaving the purchaser with more funds to develop the site.

4. In the very short term, this will not necesarily help the tenant of course, because he still has to cover the increased rent. So he will just have to negotiate a reduction; faced with more competition from other landlords and potential landlords, a fixed SVR bill and a lower tax rate on the actual buildings, there will be more incentive to develop and keep up occupancy rates, and more competition between landlords, so the chances are, the tenant will find it easier to negotiate a reduction in difficult times.

5. A further tweak is this. Business rates, "which councils collect and send to central government for redistribution", should be collected locally and spent locally. How else is a council supposed to be forced to operate any sort of sensible cost-benefit analysis?

That's that fixed. Next.

"Market towns like wild west"

An article in today's Metro about 'Britain's 24-hour booze culture' includes this comment:

Simon Reed, vice chairman of the Police Federation, told MPs on the Commons Culture, Media and Sport committee that market towns have suffered most since the introduction of the Licensing Act. He said: "At times, policing is being really stretched, often in the smaller towns more than in the bigger cities. My impression of many market towns is they are really like the wild west on occasion because they are really stripped of resources."

I fixed all this a while ago, to summarise, scrap VAT on sales of alcohol (in fact scrap VAT, full stop) and replace modest (but bureaucratic) pub license fees with proper auctions of the value of licenses, the market value of which are £10,000s or even £100,000s a year (depending on location, size of premises and how long they are open etc). Provided the extra income covers the cost of the extra police officers, A&E visits, repairing vandalism etc, then we are still ahead of the game.