Saturday, 2 February 2008

Rebutting Tory arguments against Land Value Tax

1. Oh no! Not another bloody tax?*

Wrong. At the very least LVT could and should replace all property-related taxes, such as Council Tax, Business Rates, Stamp Duty Land Tax, Inheritance Tax, Capital Gains Tax and the TV licence fee, net of Council Tax Benefit and subsidies for agricultural landowners (total net revenues, about £50 bn, or 10% of the UK's total tax receipts).

It would be payable by the landowner, not the occupant, and there would be no discounts or rebates. So it has the merit of simplicity if nothing else.

2. What's the point?

Land price bubbles and the associated credit bubble have enormous economic costs and, and have led directly to the current 'credit crunch', a probable house price crash and fears of a serious recession. If LVT were introduced at the bottom of the 18-year property/land-price cycle (in three or four years' time), the fiscally neutral rate required to replace the above list of existing property-related taxes £ for £ might be as high as 5% or 10% p.a. on capital land values (the cost/value of buildings would be excluded, of course). This would act like an extra interest rate, so in future, price rises would be dampened and values/prices would be kept low and stable.

And if and when confidence returns and land prices start to inch up again, LVT receipts will increase, allowing cuts in income/corporation tax, which boosts net incomes, which in turn boosts land values, which boosts LVT receipts further, allowing further income/corporation tax cuts and so on in a virtuous circle**.

3. Why should I pay tax on something I've already paid for? It's my land!

Ultimately, we are all tenants. Either you pay rent every month or you make a large up front payment to the previous freeholder.

I sold-to-rent recently. If I deduct a reasonable return on the rebuild cost of the house that we are now renting, we are paying £10,000 a year to be a) in a low crime area, b) near the kids' private schools and c) near the Tube station. That my neighbours are law-abiding citizens has nothing to do with our landlady and she does not pay our school fees or our Tube travel (we do). So I could counter, why should a freeholder be able to charge rent for access to services that the tenants themselves pay out of their own pockets? Or access to amenities that nature, local businesses or the local council provides? Or to be able to sell the right to that access for a lump sum to the next owner, which is what creates capital land values?

4. Why should I pay tax on a non-income producing asset?

For sure, land (except farmland) does not producing cash income for an owner-occupier, but it certainly produces non-cash income, the value of which is exactly what you could rent your house for. But why not have a tax system that discourages speculative spending on unproductive assets (land) and enables/encourages more spending on productive assets, be that the building itself, investing in business or in your own education and training?

Land-ownership (and more importantly, planning permission) is a licence to enjoy local amenities. So LVT is less of a tax, and more of a user-charge, something of which the Tories are supposed to be in favour.

5. Asset-rich, income-poor people would be forced out of their homes. What about 'ability to pay'?

This is just code for 'pensioners', who admittedly make up a key part of the Tory vote. Pensioners would be allowed to defer LVT to be repaid by their heirs. Which is why Inheritance Tax and Stamp Duty Land Tax should be scrapped as a quid pro quo. Alternatively, older home owners could enter into a contract whereby the heirs agree to pay the LVT on an ongoing basis in exchange for inheriting the property (if the heirs intend to keep it in the family rather than sell it).

The Tories on the whole are opposed to paying welfare to asset-poor, income-poor people, why exactly is there a special case for tax-breaks or subsidies or welfare for the asset-rich, income-poor? In any event, a flat-rate LVT would be cheaper for low- to average income households in smaller homes or in cheaper areas than Council Tax/the TV licence fee are at present (both of which are highly regressive***).

6. It would be very difficult to value twenty million homes

Not true. LVT ignores the value of buildings and improvements, so homes do not need to be valued individually. In each post-code sector (e.g. LS = area, LS28 = district, LS 28 5... = sector) there are two-to-threee thousand properties, five or ten per cent of which are sold each year. HM Land Registry already records selling prices and knows plot sizes, so all that is required is to deduct rebuild costs (per the ABI calculator, for example) from actual selling prices in each sector each year, tot up the residual values, average them out over the total surface area of the plots sold, and there you have an up-to-date capital value per square yard for each sector. A parallel system would operate for business properties.

And do not forget the huge cost savings that would be achieved by scrapping all the other taxes that LVT would replace (see point 1)!

7. Farmers would be forced to sell off their land and the South-East would be concreted over.

Nonsense. Agricultural subsidies for land owners set an artificially high floor for agricultural rents of about £75 per acre (if the landowner can't charge that much in rent, he is better off leaving it fallow and collecting the subsidies). Once this welfare-for-the-wealthy is scrapped, agricultural rental values might fall by half, to say £40 an acre per year. Even though over 80% of the UK by surface area is farmland, or 50 million acres, the total rental value is only £2 billion a year. It is barely worth trying to collect tax on such a small amount, so farmland would be exempt.

8. Charging a tax on land values would hit the first time buyer

This is straight out of David Cameron's book of Economic Illiteracy. As explained, a tax on capital land values would act like a higher interest rate, so for a given first-time-buyer budget, land values would fall to a level so that buyers are paying the same amount as they would in the absence of the tax - they are just paying less to the bank and more in tax. Further, Stamp Duty Land Tax would be scrapped, so relieving the purchaser of an immediate cash cost.

9. LVT is tantamount to nationalisation of land.

Residential land values have increased five- or ten-fold since the early 1990s, even after adjusting for the increase in wages.

The current government has given all those lucky enough to have owned their own home at the time a massive windfall gain (albeit for many, only on paper) by a combination of:
a) not introducing LVT on coming to power,
b) very restrictive planning laws,
c) keeping interest rates artificially low by linking them to CPI rather than RPI inflation and/or
d) allowing two million immigrants into the country.

And market forces will probably take away a large part of those gains again over the next few years (land values fell by two-thirds in the early 1990s! See previous link). Would it not be better to keep land prices low and stable in future?

10. The cost of local services should be paid for by user charges, i.e. a Poll Tax.

Wrong. It is more important to look at the value of what the home-owner gets (as reflected in land values) than the cost of local services. Having more policeman on the beat reduces crime, cuts a household's home and car insurance bills and makes an area more attractive, thus boosting selling prices. Having armies of five-a-day advisors and environmental-awareness-officers costs just as much but adds no value whatsoever.

This imposes a fiscal discipline on local councils. If they want to collect more money, than can only do this by concentrating spending on useful, value-added activities, which boost land values and hence tax receipts.

* This slogan is (c) Dave Wetzel, 2004. The rest is all my own work.

** The 'single taxers' believe that ultimately, the amount of LVT that would be collected (whether you call it ground-rent or call it tax is by-the-by) would be sufficient to fund all State spending - including welfare - so all other taxes could be abolished. This would be a feudal system with redistribution, so to speak.

*** Even the Daily Telegraph has woken up to this.


Neil Harding said...

Mark, completely sold on this LVT idea and I agree the TV licence is regressive, but the great thing about the TV licence is you can see exactly how much you are paying and what you are getting. Won't consuming it into the LVT completely destroy this transparency and inevitably lead to cutbacks in BBC funding?

Mark Wadsworth said...

How much money the BBC gets is haggled out 'twixt government and the BBC. Then they divide this by 24 million and that's your TV licence fee. I'm talking about an efficient tax system here, how the State funds State broadcasters is neither here not there AFAIAC.

Jock Coats said...

Nice one Mark - incidentally Chris Dillow last week had an article in which he posted two links to good FT articles in which an LSE economist explained why housing is not wealth, or at least not net wealth which I think will be useful in persuading people at some point.

Mark Wadsworth said...

Jock, thanks. I saw the FT articles, that's a bit too far advanced for some. None of this is new or original of course, I just thought it might be handy to have a checklist ready for future arguments, so I can say "Please refer to item x" rather than reinventing the wheel each time.

Unknown said...

This is good stuff - personally I don't see the rationale for exempting farmland though...

Jock Coats said...

Yeah - I probably wouldn't either actually. Though I see the argument for exempting it for a while after subsidies were abolished - if only to let the market settle. But ultimately if farming is more marginally efficient because of withdrawal of subsidy I can see bigger disparities in agricultural land values appearing and "von Thunen rent" would begin to appear. This would be more marked if we did things like toll roads more accurately highlighting the cost of transport to market and so on.

But there would continue to be issues with "hope value" on the edge of urban areas, though such issues could be addressed with the idea of "Community Land Auctions" opening up the process of "bidding" to have your land rezoned for the urban uses and capturing the one-off uplift in land values.

But since it would yield very little it might well not be worth it. There was an issue a few years ago highlighted by the RICS though in which it appeared that in some areas - such as home counties - agricultural zoned land was being bought up at the rate of ten per cent a year by people wanting to "escape to the country" with no intention of using it for farming, unless keeping Hermione's little pony on it is classed as farming!

If you did tax it though, the incentive would be increased for tenant to "buy" the land they farm - often effectively for nothing - in many areas. Which I reckon would only be a good thing for agriculture as a whole.

Mark Wadsworth said...

PT, JC, it will be hard enough to wean people of agricultural subsidies, actually taxing the land is a long way off!

As to 'escaping to the countryside', the easy way out of this is not to exempt farmland per se but to exempt e.g. the first £5,000 in capital value per acre - proper farmland is worth less than that, and Hermione's parents might have paid £10,000 per acre. This is all pretty marginal, anyway.

Anonymous said...

RE: "If LVT were introduced at the bottom of the 18-year property/land-price cycle (in three or four years' time)"

I'm sure the market will continue to slide (even not in a straight line) over the next 3/4 years.

I'd say that the market will be very variable with slight upward and "across" movement over the next few years.

Also the government is already moving to value each house independently and have the power to enter our properties, take photos and give their valuation.

Mark Wadsworth said...

Chard, the bottom of the market tends to be fairly flat for a couple of years, so timing is not hypercritical. Entering and valuing individual properties is politically unacceptable and quite unnecessary - see point 6 on valuations.

Or perhaps we could skip the "deducting rebuild costs" bit (yet more hassle) and just have a lower percentage annual hybrid land/property tax?

Rob Watson said...

Mark I'm completely in favour of a land value tax, both from an ethical and practical perspective. In fact in the long run I'd go further and set the tax to the full rental value of land, and distribute the excess over government expenditure as a citizen's dividend.

However, I don't think it should be the only tax. Some hypothecated taxes make a lot of sense. For example, a tax on petrol to cover the cost of building intercity roads and any carbon tax. And taxes on cigarettes and alcohol equal to the extra cost created for the NHS and police.