Hypothecated bequests

Everybody is piling in with their opinions on this story. From an economics/accounting stand point, those schools are stupid for turning down the bequests, which were earmarked for paying for school places for "poor white boys".

Perhaps Bryan Thwaites did this for entirely benevolent and altruistic reasons; perhaps he was a downright racist - that is entirely irrelevant.

The point is that such schools usually award a few free places anyway to maintain the pretence that they are charitable institutions, which secures them a very modest corporation tax break and a very hefty Business Rates discount (which will be phased out in Scotland next year). Ultimately, the reason for this is to bump up their grade averages, thus attracting more fee-paying pupils, it's like a loss leader.

We would assume - or hope - that some of those free places would have gone to "poor white boys" anyway, so all the schools have to do is to match the income with the corresponding largely notional expense.

Let's say that in the absence of the bequest, they would have handed out ten free places, five to "poor white boys" and five to "poor non-white boys". The bequest pays for, say, two free places, they just earmark two of them as "Thwaites Scholarships" and reduce the number of other free places awarded to "poor white boys" from five to three; thus maintaining the intended five/five ratio (and banking the bequest for themselves).

If they want to be politically correct and pass on the benefit of the bequest, then in addition to the two "Thwaites Scholarships", they could also award the planned ten free places off their own bat, four to "poor white boys" and six to "poor non-white boys", meaning that instead of five/five it's six/six and everybody wins, including at least one "poor non-white boy".
----------------------------------
To give another example, I vaguely remember a case where a non-white person was prepared to be an organ donor, but insisted that his organs could only go to a non-white person (or perhaps it was the other way round, doesn't matter). The NHS turned him down for being racist.

Equally stupid.

If you are white and on a waiting list for a new heart, the chances are there are some non-white people ahead of you on the list. You aren't going to get that non-white heart, but a non-white person above you on the list will, so at least you move up the list and benefit from the donation, however indirectly.

Killer Arguments Against LVT, Not (463)

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

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

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

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

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

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

1. Poor Widows In Mansions

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

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

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

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

2. Land speculators

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

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

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

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

With LVT in place

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

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

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

Reader's Letter Of The Day

Things have come to a sorry pass when a Green Party candidate shows a better understanding of basic economic concepts like "opportunity costs" or "cost to the taxpayer" than the Tories (and just about everybody else).

From The Evening Standard:

Describing council rents as "subsidised" brings to mind cash payments to keep them low. But they're only subsidised in the sense that they're paying lower than private rents. It's like saying your energy bill is "subsidised" because you fixed a cheap deal.

Council tenants pay enough to meet the cost of building and maintaining their homes. Any up-front subsidy to build the homes is paid off in the long run through rents and benefit savings. Private rents are so high because the tenants pay the equivalent costs many times over, as landlords profits from rip-off rents and house price rises.

The unfairness isn't well-off council tenants enjoying a low rent that meets landlords' costs, it's private tenants being ripped off. We need rent controls and more social housing, not George Osborne's politics of envy.

Toim Chance, prospective Green Party mayoral candidate.

I'm a land value taxer and see things the other way round. Clearly, social tenants aren't paying the government for the real value of what they 'enjoy', but at least they are paying something, unlike private landowners, be they owner-occupiers, private landlords or land speculators.

Yeah, but that's not how you measure the success or otherwise of such schemes...

From The Daily Mail:

A council spent £134,000 employing a team of 22 'dog mess' wardens - but issued just 26 fines in three months.

Each ticket cost Islington Council, in north London, which ran the scheme, the equivalent of a staggering £5,150 to issue. The money was spent employing the wardens to pound the streets over a 12-week long pilot project, which the council hoped would be 'self-financing'. But it raised just £2,080.

Indignant outrage ensues, but that's not the point. The number of fines issued is almost completely irrelevant. The correct way of looking at it is:

i. Ascribe some sort of monetary notional cost to each dog shit on the pavement approx. equal to the unhappiness it causes people who have to walk past/through it plus cost of cleaning it up. This is very tricky - is it £10 or £20 or £1,000 per dog shit?

ii. Count the number of dog shits prior to the scheme being introduced.

iii. Announce with a great fanfare that the council means business, that it was have an army of pooper snoopers spying from every corner with the power to impose large fines for transgression.

iv. Count the number of dog shits for the period thereafter and subtract this from the number there were beforehand.

v. The cost-benefit analysis is then
cost = actual cash cost of scheme minus income from fines
benefit = reduction in number of dog shits multipled by notional cost of each.

As it happens, the scheme appears to have failed anyway, separate topic.

Imagine: a police force is so good at apprehending perp's that nobody ever dares commit a crime and no fines or punishments are ever imposed. Does this mean that that police force is a waste of money?

Killer Arguments Against LVT, Not (212)

Oliver Hartwich trotted out the tired old lies again in 2006, I don't know whether he's changed his mind since:

  ...most of the arguments in favour of LVT rest on a few axioms that are either highly questionable or outright wrong. First, it is assumed that land ownership does not fulfil any economic function and that, therefore, all income received from owning land is basically unjustified, even unjustifiable.

Of course there has to be land ownership, or there'd be nobody to pay the tax and nowhere to build buildings! Hurray for land ownership! The point is that instead of people who want to own land having to pay large amounts of money to the previous owner or to the bank, they would pay the same amount of money in tax, with a corresponding reduction in taxes on earned income. And nobody said "unjustified". The point is that land rent is entirely unearned in the sense of being passive income; it is generated by the community as a whole; and it can be taxed at 100% at no detriment to the economy.

In practice, however, one could hardly ever separate the incomes from land and from improvements to the land. It would take a government agency and some highly questionable assumptions to determine which part of the value of the land was ‘justified’ and which was ‘unearned’ and thus taxable.

Schoolboy error. This is the easiest thing in the world. Even if you know nothing about rebuild costs and amortised costs, all you have to do is identify comparable buildings in different areas. If the rents for some of them are higher than for others, it stands to reason that the difference can only be due to the location rent. And now to the nub of his argument:

Closer inspection, however, reveals that landowners perform a number of valuable economic tasks. Like the owners of any other factor of production, landowners have to make frequent decisions on what use to make of their property. They decide in which way to utilise their land, which could mean to keep land idle. For one, there is much more land than there is labour to keep all land in use all the time.

Secondly, it can be necessary at times to keep land from the market and wait for a better opportunity to bring it back into use, for example when there is a chance to develop a larger area. These decisions have to be made, and they have to be made by someone who bears the economic consequences. This is the task of the landowner who accepts the residual risk and takes the opportunity costs of withholding land from its most valuable unrealised economic potential.

I'm glad he mentioned 'opportunity costs' because that completely demolishes his own argument.

1. A sensible businessman works on the basis of opportunity costs. In other words, if you've bought raw materials for $1 and the price shoots up to $2 before you've sold them, then you put your selling prices up as if you'd paid $2 for them. And most land speculators use borrowed money anyway. All LVT does is turn opportunity costs or interest costs into tax costs. It does not and cannot increase the total costs.

2. For example, a site with planning permission to build a certain building has a site-only rental value of £50,000 i.e. once the building is finished, the rent you can collect will cover the entire amortised cost of the building and leave you with £50,000 surplus. If you are a land speculator looking to buy that site and interest rates are 5%, then you will bid up to £1 million for it (£50,000 divided by 5%), and once you have bought it, you will be paying £50,000 a year in interest on the £1 million you borrowed. Imagine instead that this site was subject to £40,000 a year LVT. Clearly, the land speculator would only bid up to £200,000 for it, so he will end up paying £10,000 in interest and £40,000 in LVT - his total holding cost is exactly the same.

3. Or maybe you own the site anyway, free of debt, having acquired it for pennies decades ago, and it's now worth £1 million. If you are a sensible businessman, you will at all times bear in mind the opportunity costs of owning an undeveloped site with no rental income. This is however much interest you could earn by selling it and putting the money in the bank, so your opportunity cost of owning that site is £50,000 a year - and that is what you base your decision making on. If the site is subject to £40,000 LVT, then your opportunity cost is only £10,000 and the real tax cost is £40,000, but your total cost is the same.

We can at this stage merge 2. and 3. Perhaps you own a double-sized site, debt-free which you bought for pennies ages ago, inherited last week, won at a game of cards etc, and you sell off one-half for £1 million to a land speculator who takes out a £1 million mortgage to acquire it. Whatever is the optimal use of your remaining half is exactly the same as the optimal use of his half. If the best you can do (restricted by local demand, planning laws or both) is to build a three storey building with mixed retail/residential, then that will be the best thing for the owner of the other half to do as well. The fact that you have no cash holding cost and he has a £50,000 a year holding cost is irrelevant.

4. So as long as the LVT on that site (or each half) is no higher than £50,000, the decision making will not change very much. Yes, this is a bit of an annoyance for land speculators who have bought expensive tax-free land with borrowed money, who lose on both sides of the equation on the day LVT is introduced, but hey. Most land speculators go bust at regular intervals anyway. The point is that the land is still there - and even if the current owner goes bankrupt, the land can be sold off to the highest bidder.

5. It may well be that with LVT, land owners behave slightly differently, but they will behave 'better' rather than 'worse'. On the other hand, it is pretty clear that taxes on income, output, wages and profits ONLY have bad impacts, they have dead weight costs, lead to unemployment, business failure, evasion, off shoring etc etc.

6. The mantra that "land owners perform a valuable service by holding land out of use" was originally invented ages ago by Rothbard and was demolished for the umpteenth time by Fraggle recently.

"A playground for the rich"

Some splendid Homey whining in a recent Evening Standard:

Houseboat owners on the Thames fear their way of life will be threatened if huge rent increases are imposed on them. About 280 boats moored will be affected, with many facing rises of more than £1,000 [per annum]...

But residents of the Thames marinas and riverside moorings have accused the PLA of cashing in on the increasing popularity of living on the water. They fear the rise in mooring fees - by an average of about a third - will drive out traditional river dwellers, leaving only a "playground for the rich" *...

Alison Barnes, 47, a mother of two, said of the rise in mooring fees: "It's difficult to know what we'll get for the new charges, apart from the mud. They want a portion of our 'notional income' from the mooring, but we don't get any. It's not like we have an income from our boat and that's why people are objecting to these high increases."

Ho hum.

This lady doesn't know much about cost-accounting or economics. Of course she receives "notional income", it's however much she would have to pay for that mooring site on the grey market**. As we know, the best form of rationing is price rationing, and distant second best is the waiting list approach - if the waiting list is too long (which it is***), then the prices are too low. If it's true that the PLA could double or treble their mooring fees and still find tenants, then that shows that the value of those moorings is in fact two or three times what they are currently charging, and that's exactly how much the "notional income" is.

Are social tenants allowed to refuse to pay rent on the basis that they don't get any "notional income" from their home? Or private tenants for that matter? And shouldn't it be illegal for people to sell houses to owner-occupiers for more than a nominal sum, seeing as the new owners will never get any "notional income"; and if a buyer didn't get any "notional income", why would they pay more than a nominal sum anyway?

* You can look at the prices for houseboats in London here, it quickly becomes clear that, just like with houses, you are largely paying for the location.

From Houseboats: A Buyer's Guide:

** "With a mooring you basically get the ability to stay, plus key facilities: mains, gas, sewage, and in more up-market places, broadband and so on. Usually you're all connected up, though a lot still have to pump out sewage into the Thames at high tide. A boat roughly triples in value when you put it on a residential mooring, assuming it's secure in length of time (at least ten years)."

*** in London [mooring] licences are extremely hard to come by. A spokesperson for British Waterways, who control London's canals, says: "We provide permanent residential moorings in places like Bloomfield Road, Little Venice and non-residential sites which allow people to live four nights a week on sites like Lisson Grove. But it's very difficult to get a mooring - we have a waiting list with hundreds of people on it." Demand is also massively in excess of supply on the Thames.

Killer Arguments Against LVT, not (96)

Let's deal with the Poor Widow Bogey once and for all, as played for the zillionth time here:

Just because someone lives in a £1M house does not mean they are rich or have massive amount of disposable income. it could mean they are pensioners struggling to get by but paid for their home over the decades.

Forcing people to sell their home just because the Labour party think "property" equals "fat cat" is ridiculous. Taxing objects already purchased is fundamentally wrong - tax income.(6)

I have suggested discounts or deferment schemes to get round this issue; or simply exempting pensioners, full stop, and all of these schemes would 'work', but you know what, sod it.

It is far simpler to tax all land (or land and buildings) at the same rate and for pensioners the get-out would be that they would be awarded an additional state pension, payable for life, based on whatever the tax bill is on their sole and main residence on the day the tax is introduced; and this is payable regardless whether they stay in that house or move.

So, assuming a Full-On Land Value Tax has replaced all other taxes, a widow shivering in an ex-Council flat in Glasgow pays £2,000 a year LVT and receives an extra £2,000 pension for life; another widow who struck lucky and is in a Hampstead Mansion pays £100,000 a year LVT and receives an extra £100,000 pension for life.

What's the point of the government taking with one hand and giving with the other?

1. To provide the nigh-perfect argument to the Poor Widow Bogey, no pensioner is 'forced to sell their home'.

2. Because it's easier and less distortionary to tax everything at the same rate and patch up the survivors via cash redistribution than it is to exempt people.

3. To ease the transition (and yes, we'd need to phase this out for subsequent cohorts of retirees, i.e. people who are 55 years old now will only get 50% paid back as a pension when they retire, and people who are 45 years old now will have to fend for themselves, or whatever). The end game would be that each pensioner gets a Citizen's Pension sufficient to cover basic cost of living for one person (food, eletricity etc would become much cheaper once all other taxes are scrapped) plus an additional amount equivalent to slightly more than half the LVT on an average or median home, how they choose to spend it is up to them.

4. The pension would be payable for life, so the Hampstead Widow might well decide to trade down a bit to somewhere where the bill is only £20,000 a year, and has £80,000 a year extra to spend (or to pass to her heirs; if she continues with the same lifestyle, by and large her heirs will inherit just as much as if she dies today and the heirs sold the house). So the on the tax-raising side, we still have an incentive for more efficient allocation of housing (a younger, productive couple can now trade up into that Hampstead Mansion).

5. It would highlight exactly how our Home-Owner-Ist tax system redistributes income and wealth from the productive economy to land owners:

Under current rules, our Hampstead Widow could trade down and buy an annuity with the proceeds of (say) £80,000 a year. So the money flows directly from Young, Productive Couple to her. With LVT in place, but with her hallowed 'property rights' guaranteed by the state, that couple would still be paying her, only indirectly. And if our Hampstead Widow chooses to stay put, at least it's clear to all and sundry that she does indeed get £98,000 more in pension than our Widow Shivering In Ex-Council Flat.

6. Wot? Taxing income is 'fundamentally wrong' - taxing 'government-protected quasi-monopoly rights' is the way forward!

So there.

Economics Fail

There was a fine article on the Adam Smith 'blog pointing out the merits of auctioning off radio spectrum to the mobile 'phone companies (the only alternative is giving it away, i.e. corporatism).

The second commenter said this: "A lot of people think the service providers pay this amount but, surely, in the long run, it is the user who pays?"

Nope. It's all got to do with commonsense/economic concepts like 'sunk costs', 'marginal costs', 'revenue maximisation' and 'marginal profits'.

1. Let's ignore discounting and assume (i.e. these are made up figures to illustrate the point) that the companies estimated revenues from users for the next twenty years (the duration of the licence) at £50 billion and future costs (satellites, mobile 'phone masts, advertising, providing handsets, billing, maintenance, etc) at £30 billion.

2. Once the cheques for £20 billion have been handed over, they are a sunk cost, they play absolutely no part in future pricing policy.

3. Next, the companies spend another £20 billion on long term capital expenditure (satellites, mobile 'phone masts etc). Once completed, these are also 'sunk costs'.

4. The balance if £10 billion is 'marginal costs' i.e. things which relate to current or future income (advertising, providing handsets, billing and maintaining the physical infrastructure). Let's assume that these are fairly fixed at whatever level of usage, and cost £0.5 billion a year for twenty years.

5. These companies are profit maximisers and it makes sense for them to stay in business if their current/marginal revenue exceeds their current/marginal costs. They can only do a trial and error thing to work out which prices maximise their revenue (i.e. if they cut prices by 5% and unit sales go up 9%, it's better to cut prices; if they can increase prices by 5% and unit sales only fall 1%, then it's better to increase prices; there's no right or wrong answer, and what one company does depends on what all the others do, and so on).

5. Provided that they can get more than £0.5 billion a year in revenue, this covers their marginal costs and it is worth while for them to stay in business. Perhaps, try as they might, they can only get £2 billion a year in revenue, so over twenty years they get £40 billion revenue and have spent a total of £50 billion.

6. Overall, they will have made a loss, but the user is not paying for the original £20 billion for the licence, he is paying for the service provided. It is the mobile 'phone companies who paid that £20 billion for the licences.

7. Sunk costs play very little part in all this. Imagine that a few years in to the project, one of the companies with a licence goes bankrupt and is snapped up for £1 nominal by a new entrant. The new entrant has effectively paid £1 for the licence and the infrastructure, for which the predecessor paid £billions. This new entrant has the same marginal costs and the same revenue maximising decisions to make as his competitors, and these is no reason to assume that they will be very different, therefore he will be charging very similar prices for mobile 'phone calls as his competitors.

8. What this boils down to is that the price paid for the licence was a wild guess at a balancing figure, and businesses cannot 'pass on' wild guesses or balancing figures to their customers.

9. To take a simple example, let's imagine you're in the business of retailing apples. A man in the pub tells you he has a lorry load of apples he needs you to shift, he'll take £500 for the lot, and just for a giggle, you buy them. The next day he turns up at your market, and the lorry is full of ten thousand absolutely tip-top apples, which you can sell for 20p each, hooray, your revenues are £2,000 and you've made a handsome profit. Or maybe the lorry only has a hundred apples in it, that are just past their 'best before' date and you can only sell them for 10p each, total revenues £10 and you have made a loss.

10. The £500 you paid him was a wild guess of the price you thought you could sell the apples for (minus your normal daily running costs, which we will call £nil for simplicity) so the £500 is in fact your estimate of the profits you think you might make on the apples, and once paid, it is a sunk cost and has no impact on the prices you charge your customers - you cannot say to your customers: "I'm sorry that these apples are a bit over-ripe, but I paid £5 each for them so I have to sell them for £5 as well."

Outbreak of commonsense

In among all the others lies obfuscation and large gummint dross in this morning's Andrew Marr interview, Dave The Chameleon showed a small glimmer of intelligence with his idea that it was silly to have prisons in inner cities where property values are high - these should be sold off and the money could be used to build a much larger prison out of town. Transcript here.

In other words, although the Prison Service might not pay rent for such buildings, a serious cost accountant resets the clock and asks "If the Prison Service had £x millions in the bank, would it buy or rent in an expensive area or a cheap area?" And if the Prison Service chooses to use valuable buildings, that should be treated as notional income and expenditure.

Having grasped the concept of notional costs, we should extend this to ALL government buildings, including council estates and offices in Whitehall, which leads to all sorts of interesting conclusions.

Funnily enough, the gummint kicked off the idea of Asset Management Plans, whereby all local authorities were supposed to value their properties and work out notional rents, but it was never really followed through - which is why there are so still many government offices in the centre of London which are worth billions.