Saturday 23 April 2011

Killer Arguments against LVT, not (116)

Another argument that people have launched against LVT is that
a) it is a tax on 'assets', and therefore
b) by implication, Land Value Taxers want to tax all 'assets', be that paintings, cars, the bricks and mortar of a building etc.

The thing fails because assumption (a) is wrong. Before we decide whether land is an 'asset' or not, let's look at the two basic types of assets:
a) Proper assets
b) Financial assets

a) A proper asset is something like a painting, a car, a building.

i. People have invested materials and effort into these, and in a freely competitive market, the selling price will be approximately equal to the cost/value of the materials and time invested in them, plus a small profit margin to cover the producer's risk element and cost of capital on the fixed assets which he needs to make the finished product.

ii These cannot be created out of thin air

iii. If they are destroyed, there is a real loss to the owners without there being a corresponding gain to anybody else.

b) A financial asset is something like a bond (or indeed a bank deposit) or an accrued pension entitlement from your employer.

i. These arise because the recipient has lent the payer money in the past, or because the pensioner has worked for that employer in the past for slightly less than a full market salary and the balance is paid out in the years after he stops working.

ii. Interestingly, financial assets/liabilities can be created out of thin air - if you bet somebody £100 that something will happen and it does, hey presto, you have a financial asset of £100 and the other party has a liability of £100, but let's ignore that for now.

iii. It is an asset from the point of view of the recipient, but is always an equal and opposite liability from the point of view of the payer, and the two by and large net off to nothing. So if you drop dead on the day your pension was due to start, your loss is your former employer's gain.
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There is no moral or economic case for taxing either of these types of assets (and it would be an administrative nightmare and open to massive evasion anyway). A tax on paintings or cars is like income tax on the person who manufactures them or like an annually recurring VAT on the purchaser; a tax on financial assets like bonds, bank deposits, pension rights is like income tax on the interest or deferred employment income.

In my view, income tax and VAT are Bad Taxes, so that rules out a tax on proper assets and financial assets.
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So we come to land, which behaves in some ways very much like a financial asset...

i. The buying or selling price of land at any location is just an estimate of the net present value of the future rental income that the owner will be entitled to collect (or enjoy himself, if he intends to occupy it himself). So by and large, the value of land goes up when interest rates go down and so on. And of course, the value of the rental payments to the owner is equal and opposite to the corresponding liability to pay those rents - the two net off to nothing. So like a financial asset, land is only an asset because it is a liability to somebody else, if you net the two off it is a big fat nothing.

ii. Can land be created out of thin air? Not really - even land reclaimed from the sea needs a sea bad - but location values very much are, i.e. if a farmer gets planning permission, the value of the land increases a hundred-fold. If the planning permission is then revised down to a lower density, the value of the land goes down again etc. And the location value of any plot is created by the actions of 'everybody else' (for example, when trouble kicked off in the Middle East recently, it was reported that demand for residences in London had gone up because all the despots were looking for somewhere safe to hide; land values in the Middle East presumably fell).

iii. Where location values differ from other financial assets is this: a financial asset arises because the lender has given the payer money in the past and they have a right to be repaid that money in future. There is reciprocity involved - it is a two-way street. For example, I lend money to the government and get a bond (an asset from my point of view) and the government has a liability (to repay me with interest). Even if I sell that bond to somebody else and the government is now liable to repay him, we can still see that it is a two-way street. (I am not making excuses for governments running up huge debts, but it is the government which runs up the debts, not the people willing to lend them money).

BUT... there is no such reciprocity with land.

The people with the liability (people who are renting or who want to buy) have never received anything from the land 'owners' with the right to collect the rent or sell the land. Land 'owners' in their capacity as land 'owners' never paid 'everybody else' for whatever it was they were doing to create those location values. For sure, there are plenty of things which happen which depress location values as well, but by and large the net overall effect is positive.

And for sure, most owner-occupiers are also income tax payers (so have paid towards a lot of the cost of publicly funded improvements) but IMHO it would be better to get rid of income tax (which forces tenants to pay for the COST of publicly funded improvements through their tax bill and for the VALUE of publicly funded improvements through their rent bill) and just have a Single Tax on the location value.

30 comments:

AntiCitizenOne said...

An LVT is akin to Land Loss insurance. i.e. the state moves anyone off your land if they invade it.

This is the equivalent of replacing a stolen TV. PLus the insurance is linked to the value it insures.

Sobers said...

@ACO: in LVT world is the State going to evict squatters as well then?

We are always being told by the LVT crew that private land exists only because the State guarantees it, but I don't see them wanting to do anything to evict illegal occupants currently.

Mark Wadsworth said...

AC1, that's another way of looking at it. You insure your buildings and contents privately and your land value publicly.

S: "in LVT world is the State going to evict squatters as well then?"

Yes of course!

If you get squatters then you will not be liable for LVT from the day you inform police/courts until the day they are evicted.

And if gypsies set up camp next door and depress rental value of houses in your village, then the state (qua tax collector) has every financial incentive to turf them off again (unless the gypsies are prepared to pay more LVT on their bit than the collateral loss on the existing houses in the village).

The fact that LVT incentivises the government to enhance land values is yet another advantage of the system :-)

Paul Lockett said...

Sobers: "We are always being told by the LVT crew that private land exists only because the State guarantees it, but I don't see them wanting to do anything to evict illegal occupants currently."

I support LVT and I don't especially want the state to do much to evict squatters currently, because I don't see why title holders who aren't paying their way should get that sort of handout from the state.

However, in a situation of LVT set at, or close to, 100% of rental value, with a significant proportion being paid out as a citizen's dividend, I'd be perfectly happy for the title holder to have their exclusive occupancy upheld by the state.

Mark Wadsworth said...

PL:"I'd be perfectly happy for the title holder to have their exclusive occupancy upheld by the state."

Well, call me old-fashioned, but the right to exclusive possession of bits of land is more or less fundamental to any sort of economic system (even as a tenant, you need your landlord to have exclusive possession etc).

Sobers said...

@MW: so how reactive is your LVT system? When travellers set up next door can I reduce my LVT payments immediately, until the State gets around to move them on? Or will it be like every other State bureaucracy that takes years to agree a reduction, all the while I have to pay the full rate?

chefdave said...

@Sobers, house prices don't immediately drop the minute gypsies move in because the market figures that they'll be moved on shortly.

So in answer to your question, your LVT will reduces as soon as the market changes. In other words things will stay exactly the same.

Re; money out of thin air, I've been debating this over at the Cobden centre for a while now.

My point that is that the creation of money out of thin air is the optimum solution as it requires minimum effort. Compare that to precious metal where there's a lot of effort (not to mention danger) involved in it's extraction. I also doubt whether these gold bugs would be prepared to go down the mine themselves to achieve their "sound money" dream!

Mark Wadsworth said...

S: "so how reactive is your LVT system?"

I would suggest annual revaluations for each postcode sector. if you want to put a cap on maximum upside movements, then you also have to have a cap and maximum downwards revaluations.

Mark Wadsworth said...

CD, I've no objection to parties to a contract agreeing to 'deferred payments' which is effectively creating money out of thin air. Whether the liability is denominated in and to be settled in GBP, EUR, oz of gold or bales of hay is neither here nor there.

What I do object to is banks pushing up house prices to be able to lend ever larger amounts of money and collect more of the land rents as interest. With LVT that will hardly happen any more as the tax office gets the rental value up front and the banks can only lend on the bricks and mortar element.

Sobers said...

@chefdave: the market is instant. If you are in the process of selling your house and a load of travellers move in next door, watch the offers dry up completely as soon as the prospective buyers get wind of it, whether or not you expect them to be moved on in a week or so.

If you want to tax the unrealised value in a house (ie not when it is sold) you have to accept that value will fluctuate, and instantly when things that affect the property occur.

For example lets say you own a house in the country and a new road is proposed to run within yards of your boundary. I would say the loss of value is instant - the moment that information hits the public the price goes down (and vice versa of course). Now its entirely possible that the road gets moved elsewhere and the property returns to its original valuation. However why should the owner pay LVT on value that wasn't there for a considerable time?

William said...

WAAAAAAAAAAAAAAY off topic but those bloody cows are at it again...

http://www.nwemail.co.uk/news/farmer-killed-in-cow-attack-tragedy-1.830840?referrerPath=news

Mark Wadsworth said...

S, I answered your question on frequency of revaluations and now you claim (quite possibly correctly) that falls in value can be instantaneous.

So what? Under current rules, do you think that the bank will agree to waive a quarter of your mortgage if the new road is announced or gypsies move in?

Nope.

So it is vastly preferable to pay the old LVT level for max. one year and then have a corresponding cut at the start of the next year?

Yes. So that's the end of that debate.

Don't forget that as a Homey, you don't like the idea of UPWARDS revaluations being instantaneous, and there has to be some symmetry of treatment here.

In any event, LVT taxes the rental value, not the capital value. If the new road is announced but everybody knows that it won't be built for five or ten years, for the next five or ten years, the rental value doesn't change anyway.

Mark Wadsworth said...

W, cow attacks are never off topic round these parts. I have posted.

chefdave said...

@Sobers, I second Mark's response but just want to add that under LVT it's much more likely that nearby vacant land will be used productively, leaving gypsies etc less opportunity to take advanrage and start ruining the place.

With the road example it's just as likely to increase the price of your property by adding access value, the upside being that you're enjoying a tax freebie until the next revaluation. If it causes that much of a problem I'm sure we can issue rebates easily enough, we do so with our current arrangment.

To make doubly sure we could offer rebates when somebody has been overtaxed but not demand additional payments when somebody has been undertaxed. Does that float your homeownerist boat?

Sobers said...

Er what do you mean LVT taxes the rental value not the capital value? Using your own figures for the Swindon area the tax on my house came in at around £30K/pa if I remember correctly, and I don't think anyone is going to pay that to rent my house.

I can't get a handle on it - you keep changing the goalposts. One minute its average value per square foot per postcode times the area of your house plot, next thing its 8% of the capital value, now you say its taxing the rental value. Given the tax on my house under (a) is £30K, under (b) is c. £20K and under (c) is about £12K, it all makes no sense whatsoever.

Max said...
This comment has been removed by the author.
Mark Wadsworth said...

S, remember:

1. Capital values are broadly proportional to rental values.

2. Once income tax and so on are scrapped, rental values will increase a lot.

3. The 8% figure was an approximation, being [required tax take] divided by [current capital value of all land and buildings].

So yes, were you to rent out your house today, the rental value might be £12,000, and if you were to sell it, you might sell it for £250,000 (if I understand your figures correctly).

But to be able to pay £12,000 rent, a tenant has to be earning about £40,000 gross, so is already paying £15,000 a year income tax etc. In the absence of income tax etc , the chances are that the rent you can charge would increase to approx £20,000 - £25,000 to soak up the bulk of the income tax saving.

To be able to buy it with 80% LTV and 4x salary mortgage, a buyer would be earning £50,000 and is paying £20,000 income tax etc, so he's probably not too fussed about paying £30,000 LVT because the price will adjust down so that his total annual mortgage expense goes down by £10,000 a year so he's break even.

Your house appears to have an unusually large size plot for your area, so even if the current capital or rental value is not much more than a similar house on a plot half the size, the tax would be double.

It's not my problem if people haven't used land efficiently in the past (i.e. squeezed two houses onto your plot) and there is nothing to stop you doing so in future.

So ballpark, let's assume your tax will be £30,000 a year and stick with that, shall we?

That might well be 12% of the current capital value, but an identical house next door on a plot half the size which currently sells for £200,000 will have a tax of £15,000 which is only 7.5% of current capital value. And somebody in a block of flats round your way might end up paying £5,000 a year LVT on a flat which currently sells for £100,000, so for that home the rate is only 5%.

In a free market, this will always smoothe itself out, because selling prices adjust up or down and under-utilised plots will have more stuff built on them.

Anonymous said...

I agree with most of this post, except this bit:

"The buying or selling price of land at any location is just an estimate of the net present value of the future rental income that the owner will be entitled to collect"

The buying/selling price of land is actually determined by supply and demand, as with any other thing. There is no connection with future rental incomes. We have seen buying/selling prices fluctuating wildly over the last few decades, while rentals have not.

Basically, the housing market is not a "perfect" market. People do not buy houses just because they think it will be cheaper than renting, and nor do they sell based on comparisons between future rent streams and current market value.

Mark Wadsworth said...

AC, fair points, but...

In a bubble phase, what land sells for is the net present value of future rental income PLUS hoped for 'capital gains' DISCOUNTED AT the prevailing interest rate. The 'capital gains' start off by simply reflecting the fact that the discount rate has fallen - so people think that this is real money, as do the banks, so the interest rate falls even further and the bubble becomes self fulfilling.

So taking your points in turn...

"The buying/selling price of land is actually determined by supply and demand..."

Supply is restricted by the NIMBYs and demand is stoked by banks, property porn shows, low interest rates etc.

"There is no connection with future rental incomes..."

a) Because people factor in 'capital gains'

b) In relative terms, the ratio between rental values, capital values and local incomes still holds, even in bubble phases.

"buying/selling prices fluctuating wildly over the last few decades, while rentals have not."

Correct. Rental values are the Maypole around which house prices dance, and hence rental values are that which LVT would tax.

"Basically, the housing market is not a "perfect" market..."

Correct. I explained the difference between efficient markets and woefully inefficient markets here.

Sobers said...

Well why the hell should I pay 12% LVT when others might be paying less than half that?

I thought LVT was supposed to the 'fairest' tax? Doesn't seen that way from where I'm standing!

Which is exactly the reaction you'd get times a million if you implemented such a system. There is no way that a system that allows houses that sell for the same price but pay wildly differing LVTs would ever get off the ground.

And its hardly LVT anyway, is it - the clue being in the name - LAND VALUE TAX. I'm not sure what you're taxing but it isn't land values.

Mark Wadsworth said...

S, it's a tax on land values, not total selling price incl. bricks and mortar.

So homes which are arranged so as to use as little land as possible don't pay much, and ones like yours which use as much as land as possible will pay a lot. If you don't like paying that much, then either move elsewhere or build another house.

As to "fair", you'll find that the two-thirds of people who end up paying significantly less will find it very "fair". All "fair" means nowadays is "somebody else pays more than I do".

Sobers said...

No its not a tax on 'land values' because the way you calculate it is to take selling prices in a given area and work out a per sq metre figure. Those sale prices include the bricks and mortar and any other improvements the householder has created.

In order for it to be a tax on pure land values you would have to take all the house selling prices, and remove the 'improvements' from each one, and then arrive at a figure which would be pure land value.

Your method also creates value (or destroys it) out of nothing. If house A sells for £200K and has a plot size 200m2, and identical house B on the other side of town also sells for £200K but only has a plot size of 100m2 (lets say house A is a nice house in a rough area, and house B is a (relatively) small house in a posh area) then each plot has identical land value, and the LVT should be the same. But your system reduces the taxable value of house A (because its neighbours are not so nice) and inflates the taxable value of house B (because it has nicer neighbours).

So in fact your system isn't a tax on 'land values' at all but a 'nice neighbourhood' tax. It may approximate to a LVT but is isn't an actual LVT.

Mark Wadsworth said...

S: "If house A sells for £200K and has a plot size [500 sq yds] and identical house B on the other side of town also sells for £200K but only has a plot size of [250 sq yds] (lets say house A is a nice house in a rough area, and house B is a (relatively) small house in a posh area) then each plot has identical land value, and the LVT should be the same."

That's a reasonable approximation, and this is how it will pan out for most people.

"But your system reduces the taxable value of house A (because its neighbours are not so nice) and inflates the taxable value of house B (because it has nicer neighbours)."

???

Using my rough and ready method, tax in area A will be £32/sq yd and tax in Area B it will be £64/sq yd and those two houses end up paying exactly the same amount in LVT.

"So in fact your system isn't a tax on 'land values' at all but a 'nice neighbourhood' tax. It may approximate to a LVT but is isn't an actual LVT."

If land rental values are higher in the 'nice neighbourhood' then you could see it as a tax on 'land in nice neighbourhoods' if you so wish. There's a limited supply of 'nice neighbours' and nice people with a bit of money to spare are by and large happy to pay more to live in a nice neighbourhood. I know that my wife and I are.

And yes, everything is just an approximation - there are infinite ways of working out what LVT rates 'should' be - but I refer you back to the example of cigarette duty, which is 50 cents a packet in Greece and £5 a packet in the UK. They both function as excellent ways of raising tax money without damaging the economy in any particular way, despite it would be ludicrous to suggest that UK smokers enjoy their fags ten times as much as Greek smokers.

Sobers said...

'Using my rough and ready method, tax in area A will be £32/sq yd and tax in Area B it will be £64/sq yd and those two houses end up paying exactly the same amount in LVT.'

Well yes, assuming the average value in area A is exactly half that in area B!

But your method wouldn't arrive at that position (other than by luck) very often.

I repeat - if your system arrives at positions where some people are paying twice as much LVT, for the same value property, then its dead in the water. It will matter not that maybe both people are better off (or not worse off) under LVT. People will look across town and think 'Why am I paying X when he's paying half X, and our houses cost the same?'

And as an aside, your LVT/CI system is a considerable attack on single people (of which I'm one), as families will get double or even triple as much CI. So single people will be paying extra tax not only to pay for free schools etc, but extra CI as well.

Paul said...

Sobers: "And as an aside, your LVT/CI system is a considerable attack on single people (of which I'm one), as families will get double or even triple as much CI."

By that reasoning, you could argue that democracy is an attack on single people as families get double or even triple the number of votes. Personally, I think that is nonsensical.

Mark Wadsworth said...

S: "if your system arrives at positions where some people are paying twice as much LVT, for the same value property, then its dead in the water."

You are confusing "land value" and "value of land + bricks and mortar".

It's easiest to illustrate this with two identical sized plots of land in the same area - if one is just a tiny cottage and the other is a block of six very large flats, then the people in the flats would pay one-sixth as much as the person in the tiny cottage.

It may well be that at current market prices, the tiny cottage with huge garden is worth the same as one of the very large flats, so what? Each flat is using up one-sixth as much land as the tiny cottage and that is the end of that.

Paul, indeed.

These single people could achieve the same advantageous position as people in families by, er, sharing a home and sharing income and expenses and chores and so on. Nobody currently in a family would ever try and prevent them doing so.

Sobers said...

Well all I can say is that if my £250K house (4 bed semi, not some mansion) can only be afforded by someone who pays £30K in tax (I did last tax year, which puts me in the top 2% of earners) then its a sh1t system.

Mark Wadsworth said...

S, the bits you may be missing are:

1. The "land value" part of the equation. I take it that you arrived at the £30,000 figure by multiplying the rates I calculated for various Swindon postcode sectors x square yards, so to arrive at £30,000 your plot must be huge.

2. The average (not median) total tax bill per productive worker (including productive workers in private sector) is about £20,000 per worker, so there are plenty of households who pay more than £30,000, not just the top 2%. (What the median tax bill is I do not know off hand).

3. A house worth £250k is well into the ninth decile of houses by value (using HMRC figures).

4. As a rule of thumb, the average LVT bill (assuming we use it to replace all other taxes, esp. taxes on incomes) on a home currently costing £250k will be £20,000 (it will be less on high value flats and more on houses like yours).

Therefore, by and large, most of the top fifth of earner households will still be better off if we replaced all taxes with LVT. And if you aren't prepared to pay it, I'm sure there will be somebody who will - free markets can adjust to this sort of thing.

Sobers said...

I can't find your table of LVT rates for Swindon, so I'm working from memory. But I recall it being in excess of £40/sq yard for my area. Multiplied by the area of my plot (1000 sq yards) in fact makes my LVT bill at least £40K pa, possibly more.

So I repeat - if you think that people who live in £250K houses can afford LVT of £40K+ you need you head examining. You assume that anyone who lives in a house should have the income to afford to buy it on a mortgage, which is definitely NOT the case. Millions and millions of people live in houses they do not have the income to afford to buy at current values. And most of them would be forced to leave their homes (to go where I don't know) under LVT.

Mark Wadsworth said...

S:"Millions and millions of people live in houses they do not have the income to afford to buy at current values. And most of them would be forced to leave their homes (to go where I don't know) under LVT."

Yes, under the miracle of one-sided maths, there will be 'forced sellers' without 'willing buyers'; and all the 'willing buyers' (who don't exist) are by definition not living anywhere at the moment, and so it is inconceivable that everybody shuffles round a bit and 'right sizes'.

In the real world, the fact is, all the willing buyers who are currently paying £30,000 in tax every year will be happy to buy houses like yours. And if it's a four-bed semi, then the chances are it will be a family with three or four kids, so their Citizen's Income will be £14,000 a year, which gets the net tax bill down to £20,000-odd a year

This is less than what a potential buyer has to pay in income tax under current rules, i.e. somebody earning £50,000 (who can afford to buy your house with an 80% LTV and four-times-salary mortgage).

... and the people who are 'forced' to downsize can buy homes from those younger people/higher earners who have taken the opportunity to trade up.