Killer Arguments Against LVT, not (105)

James Higham quotes from my previous post:

"... if you pay rent to a private landlord, they say that because you are paying to a private individual, that's fair game and voluntary, but if the state levies a land-related tax on top (e.g. Business Rates) that this is involuntary."

and responds thusly:

"Most uneasy about this one. A tax and a rent are two different things. One is payment for services directly rendered and the other a payment for theoretical benefits as a national whole."

Ho hum.

Let's look at facts and real life and logic.

1. The rent or price you pay to occupy a building is an all-inclusive price for that building at that location.

2. So if you compare two different buildings at the same location, the price will differ slightly if one is in good condition and the other is in poor repair etc. That difference is extra profit which the owner of the good building generates and clearly belongs to the owner. We can safely assume that there is such a thing as a fair return on the money tied up in bricks and mortar (let's assume five per cent per annum), so even the owner of the bad building will be getting some return on his bricks and mortar investment (see limiting case in 4. and 5. below).

3. Similarly, you can compare two identical buildings at two completely different locations (let's say Outer London and the North West). There will be a huge difference in the price which clearly has nothing to do with the efforts of the owner. It is the location which sets the upper limits for the price, and not the building.

4. Taken to extremes, let's imagine a well-built office block in north east Japan which survived the tsunami but is surrounded by tens of square miles of rubble; it is the only building which still has electricity and water supply, so the services which the landlord is providing his tenants is unchanged since a month ago.

5. Do people not think that this landlord will struggle to command the same rent as he would have been able to a month ago? It is quite possibly the case that the rent he can get is so low that it is less than a fair return on his bricks and mortar investment and the cost of other services he provides (concierge, cleaning, repairs, whatever) and he'd be best advised to give it up as a bad job and abandon the building to its fate.

6. Therefore, is is quite easy to differentiate between the value of 'services directly supplied by the landlord or vendor' and the value of 'benefits provided by the nation as a whole'. There is nothing 'theoretical' about it; the precise calculation is to some extent guesswork but the net present value of the 'benefits provided by the nation as a whole' is reflected by the cost of buying bare land at that location (again, to work out the annual value, you can either take this known figure and multiply it by an interest rate, or you can simply compare total rents at a good location and a bad location, as in 3. above).