Laffer Curve of LVT Part 2

Prof Nicolaus Tideman kindly e-mailed me his thoughts on the matter.

"The answer is "it depends."

I assume that we are talking about a tax on the rental value of land, not on the selling price, so that a tax of 100% would collect all of the rent.

If the economy had no durable immobile improvements, and people were completely mobile, then as soon as the tax exceeded 100%, everyone would leave and the economy would disappear.

To the extent that there are durable, immobile improvements and people are mobile, the disappearance of the economy will be slowed.

If there are immobile improvements that last indefinitely, the excess tax will confiscate some or all of their value. If there is any vacant land in the community, no one will ever want to use it.

If there are no durable immobile improvements but people are unable to leave, there will be no equilibrium. Whatever the situation, people will find that they are better off using less land, and the rent of land will go up and up on whatever land is used, as people try to economize more and more on land.

One of the lessons of this analysis is that if a community wants to collect as much of the rent of land as possible, it will be important to have a mechanism by which the required payment is lowered to what someone is willing to pay whenever land is unused because no one is willing to pay the assigned taxes. It will also be important to give potential investors and residents assurance that the administrative procedures are intended to seek to ensure that they will never be expected to pay more than 100% of the rent."          


So as with other factors, there is a short and long term laffer curve. A landlord may decide to put his rent up by over market value. In the short term his tenants may pay it rather than being homeless. But in the long term, that property will become vacant and the landlord receive no rent. In the case of LVT the State is the Uber-Landlord. 

In which case the long term laffer curve for LVT drops off like a cliff after 100% of the rental value of land has been collected.

Point three is the effect of sending land values negative, which would happen in the short term.

Point four shows the effect on the margin of production. We know that a 100% LVT produces optimally dense cities. A 200% would lead under consumption of land.

Conclusion. From a public finance point of view, a hybrid Poll Tax/LVT seems optimum, insofar as it would stop migration to marginal locations that would harm the economy. It just so happens the Council Tax fits the bill nicely, and with a few modifications could be the perfect tax structure.

Edit: to clarify, by "Poll Tax" in this context I mean it as a flat lump sum tax attached to every freehold title/dwelling.

Another classic Daily Mail headline

Husband, 65, and wife, 58, are found dead at the £300,000 house they shared with two of their four children 'after gunshots were heard'

As an encore:

Couple LOSE court bid to keep their dog in their £1million 'no pets policy' flat leaving them with an £70,000 legal bill

Outbreak of common sense at the TPA!

Wonders never cease!

From City AM:

The TaxPayers' Alliance has suggested that business rates are a “bad tax” and could be replaced altogether.

The campaign group proposed several reforms to the current system including automating revaluations annually to avoid so-called “cliff edges” when business rates suddenly jump...

The TaxPayers' Alliance said it was time to review the entire system, and to consider replacing it completely with a land value tax.

Correct. If you strip out the bad bits from Business Rates, SDLT, Council Tax and so on, what you are left with is Land Value Tax.

The Laffer Curve of Land Value Tax

The principle that deadweight losses act as gravity on government revenue is uncontroversial. The top graph below is familiar and shows the effect of taxes on factors that are produced by human effort. Like income or added value. 

However, this doesn't apply to taxes on the scarcity value of natural resources. In the bottom graph, straight line A shows the effect of a land value tax where markets are perfect. That is a market where we all rent our property from a landlord.

Curve B shows the effect of the alleviation and elimination of deadweight losses, area C, due to the fact owner occupiers can impute their rent (thus over consume immovable property).

But what would happen to revenues after more than a 100% tax was applied to the rental value of land? How would you extend that line? Please share your thoughts.

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Mark W adds: It's a straight line up to 100% with no Laffer Effects. At rates above 100%, first it would discourage new development, which might reduce the total tax base in the long run. Once the rate was so high that it exceeded the total rental value of land and buildings then people would abandon them, so total revenues would decline. It's not difficult to know where the 100% limit is, as long as land and buildings are being sold for rebuild cost/value or more, you haven't exceeded 100%. We can argue and bicker over what the rebuild cost/value is, but if similar buildings are being sold for similar amounts wherever they are - ignoring buildings in areas with zero land value - we know that we haven't exceeded 100%.

Shammy Leather: Dictionary Definition

A Shammy Leather: A soft, non-abrasive section of mountain goat; if you rub the Labour Party with it for long enough, it will come up all nice and shiny.

Fun Online Polls: In-car entertainment & Responding to a speeding ticket

The results to last week's Fun Online Poll were as follows:

What do you usually listen to when you're driving your car? (You can choose more than one if appropriate)

* Music (excl. radio) - 58 votes
Nothing, just the engine noise - 47 votes
Radio (spoken word) - 43 votes
Radio (music) - 42 votes
** Other, please specify - 9 votes

* "Music" consists of the following sub-categories:

iPod or Bluetooth etc - 19 votes
CDs (shop bought) - 18 votes
USB data sticks with MP3s - 17 votes
CDs with MP3s - 4 votes
Eight-track - 0 votes
Cassettes - 0 votes

** "Others" were mainly audio books or podcasts, with one vote for MiniDisk.

122 voters in total. Thanks to everybody who took part.

I'm surprised how many listen to nothing. I go for USB sticks with MP3s myself, being the maximum amount of music in the least space, you can leave the stick permanently plugged in so you don't need to remember to take your iPod with you, plug it in, take it with you when you park the car etc. One of the greatest inventions of the 21st century IMHO.
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Turning to more unpleasant topics, we drove to Liverpool in Mrs W's car last weekend and it was my turn to do the last bit on the M62. There was a long 50 mph section because of roadworks/narrow lanes, fair enough, stick the speed limiter on. Getting nearer town, the roadworks ended and the lanes were normal width again.

Conditions dry, good visibility, normal amount of traffic. All the other cars shot off like bats out of hell, so I took off the speed limiter and started speeding up a bit so that nobody would rear-end us. "Oo-er," said Mrs W, "I think we just got flashed."

Sure enough, a fixed penalty notice turned up a couple of days later, 61 mph in what is allegedly a 50 mph stretch at 10.22 in the evening.

My options appear to be:

1. Go to court and try and talk my way out of it, I suppose the only thing I can argue is that the speed limit was not clearly signalled. That's at least half a day wasted and might backfire on me.

2. Take three points on the chin and pay £100.

3. Go to grown ups detention a Speed Awareness Course which also costs £100.

I think we can consider the £100 a sunk cost.

In my position, what is the best course of action?

That's this week's Fun Online Poll.

Vote here or use the widget in the sidebar.

Housing Supply (non)Crisis. LVT will sort it out.

Currently, total housing expenditure is depressed because landowners do not compensate those they exclude for their loss of opportunity. This increases the demand for housing, leading to over consumption/misallocation. In order to quantify this, we only need to compare the consumption of owner occupiers and those that rent, as the latter are already paying the correct level of compensation, albeit pocketed by a landlord. 

Note, that due to the effect of subsidised social housing, the differences are smaller than if following were to strictly compare private rented vs owner occupied.

It is reported that the UK has over a million more dwellings than households, and twenty five million empty bedrooms. How many of these are over consumed due to owner occupiers not paying their full housing costs? Lets try doing some maths to find out.

Across England and Wales the average household size was 2.4 people. This figure was the same for owner occupied, but lower for rented households at 2.3 people.


Looking in more detail, the average household size was lowest among those households owned outright, at 2.0 people per household. This may in part be explained by the residents being older, with some members of the family having moved out, or a pensioner living alone.

The above graphic and text was taken from the ONS Home ownership and renting in England and Wales – Detailed Characteristics

 From it we can extrapolate that for every 100 owner occupied households 300 bedrooms are consumed but for every 100 rented households only 218.

So if we factor in 0.1 more people per household on average for owner occupiers, their below market housing expenditure causes the over consumption of  11.8 million bedrooms in England and Wales alone on a pro rata basis.

A 100% tax on the rental value of land(LVT), would thus take those 11.8 million bedrooms and reallocate them more evenly across tenures. This would involve lots of up-sizing, down-sizing and side ways moving.

While the consumption of bedrooms may not be the whole picture regarding housing demand, a LVT would allow the market to rationalise our existing stock,  and radically alter the demand for housing in the process. It may well be the UK has more than enough housing to cover any changes in population or household make up for the foreseeable future, it we allow a fair and efficient market to do its job. Yes, new housing always needs to be built. But perhaps just not the extra number or types currently being forecast.

NIMBY's of the week...

Other than to say this was a screenshot taken from this video, I've really nothing to add to this one...

"Crouching Tiger, Hidden Figures"

From Wiki and Wiki:

Mathematician Katherine Goble works as a "computer" in the segregated West Area Computers division of the Qing Dynasty during the 43rd year (1961) of the reign of the Qianlong Emperor, alongside aspiring engineer Mary Jackson, a female warrior and professional body guard and unofficial supervisor Dorothy Vaughan. The death of Katherine's closest friend and fiancée to Mary complicate these characters' feelings for one another.

Following a successful Russian satellite launch, Katherine decides to relinquish the warrior lifestyle, and asks Mary to gift her sword "Green Destiny" to head engineer Sir Paul Stafford. One evening, white supervisor Mrs Vivian Mitchell sneaks into Sir Paul's estate and steals the sword. Katherine and Mary trace the theft to the Space Task Group of Al Harrison, who has been has been posing as a governess for many years.

Following a protracted battle, the group is on the verge of defeat when Mary identifies a flaw in the experimental space capsule's heat shields, encouraging her to more assertively study the Wudang manual and surpass Vivian in combative skills.

Economic Myths: "We all hate wasting food"

Quite clearly we don't, or we wouldn't do it, but people keep bringing up the topic, so here goes...

For example, they have posters up at my local Tesco saying Love Food Hate Waste. They had a segment on a recent Food Unwrapped programme (which are very interesting programmes on the whole) where one of them was interviewing a farmer who employs people to sort carrots for the supermarkets. About a third of them are not 'supermarket quality' i.e. long, straight and easy to peel and these are chucked on a huge pile and sold for animal feed etc.

The presenter then got on his Righteous Horse, bagged up some of the odd-shaped ones and got permission to sell them in a supermarket for half the price of the long, straight ones. "They taste just as good as the long straight ones", he explained breathlessly to a few Righteous Shoppers who bought them.

1. Well of course they taste the same, that's not the issue here - they just aren't as easy to peel and chop. Peeling and chopping carrots is a chore and you want to get it done as quick as poss, so people who value their own time are quite happy to pay double for fairly uniform, long, straight ones.

2. It's like pre-washed lettuce. If we were given bags of unsorted carrots, assuming that people value their own time, it would make economic sense to buy more than you need, peel and chop the easy ones and chuck the rest in the compost. There is simply no point faffing about for ten minutes rescuing ten pence worth of carrots.

3. Farmers are businesses like anybody else, and of course there are unwanted by-products. They are quite happy to throw away all the carrot leaves, the odd-shaped carrots are just a by-product, the same as the leaves.

4. In theory, farmers could reduce their carrot production by one-third, see a corresponding fall in income and use the spare land for growing something else. We have to assume that markets have sorted that out and that growing more carrots (even if a third end up being sold for pennies) gives them the most extra income compared to growing more of something else. So in economic terms, this is not waste - they are maximising the value of their output.