Sunday 18 September 2011

Killer Arguments Against LVT, Not (163)

I cheerfully admit that simply pointing out that 'land is different' is not in itself a definitive argument in favour of taxing land values (and a few narrow classes of other government-protected monopoly rights) rather than anything else, because there are those who say that merely because something works in practice does not prove that it works in theory. But the reverse logic that 'land is an asset like anything else and therefore if you are going to tax land you have to tax everything' simply does not wash. For example:

Roger Helmer at ConHome: "Fifth, if we can tax mansions, what about other property? Cars? Racehorses? Pension funds? ISAs? Where do we stop?"

Or IanB in the comments here recently: "Look Mark, the whole economy is about allocation of scarce resources. Anything that isn't scarce ends up being free because supply is infinite. This whole "land is scarce but other products aren't so land is different" thing is inept reasoning, and if you are honest you have to use the same reasoning to conclude that anyone owning a scarce resource-which is just about everything from cheese to chalk- is a "monopolist" making unjust profits."

This notion that land is like any other asset or that rental income (cash or non-cash) is like any other source of income is quite clearly hokum. Let's start with 'cheese', but we can do the same exercise for cars, racehorses, pension funds or chalk if you really want:

1. As the economy grows, the price of basics/manufactured items tends to fall relative to wages (because we are more efficient or more productive) but land values rise relative to wages. 



2. This is mathematically true and verifiable - when the Mini was first made, it was sold for £500 and a house cost £2,000. Nowadays you can buy a small car that's far better than a Mini was then for £7,000. You cannot buy a house for £28,000 today (or only in the most depressed parts of the UK).

3. If there were some horrible situation, like pestilence, or war, or all our young people emigrating abroad, then cheese prices (in the UK) would rise and house prices would fall. 



4. There are no NIMBY restrictions on how much cheese can be produced; there are not even any practical or economic restrictions (or if there are, we are nowhere near those upper limits).

5. A piece of cheese has inherent value. A piece of land has no inherent value, it is just mud and stones. Its value depends entirely on where it is. Cheese with planning permission is not worth a hundred times as much as cheese without planning permission. The value of cheese or chalk does not change depending on where it is. A piece of cheese in Newcastle is worth the same as piece in Mayfair.

6. The only instance where cheese behaves a little bit like land is where the producer can exclude other suppliers from the market. The price of a cheese sandwich in the supermarket is £1.50, but on a train you are a captive audience, there are no competitors and they can charge you £3, take it or leave it (what I refer to as 'embedded rent'). 



7. If one man wants a piece of cheese he places no burden on others who also want one. If there were no demand for cheese, it would not be made in the first place. Not only is the amount of physical land fairly fixed, it does not need to be manufactured, it is just there. There is a natural tendency for people to want to live in urban areas (more jobs, more amenities); there are centripetal forces, which drive land values in urban areas ever higher.

8. Supply of cheese rises to meet demand. In demanding cheese, I am creating employment opportunities for cheese makers and retailers. If demand for cheese goes up, then that does not push up the price, it creates even more jobs.

9. Cheese producers and suppliers are fairly competitive and do not make super-profits. Demand for cheese is what it is, and as long as the price offered is more than the cost of producing and selling it, it will be produced and sold.

10. Land rents quite clearly reflect landowners’ monopoly power (or their share of the cartel’s monopoly power). A cheese factory in the middle of prime Surrey commuter-belt will be no more profitable than one outside Swansea (because they compete with each other), but land in Surrey commuter-belt will always command a much higher price than on the outskirts of Swansea. Two landowners in different parts of the country do no compete with each other, and two landowners of neighbouring plots do not compete either – they are members of the same mini-cartel.

11. Do cheese prices increase when interest rates fall and vice versa? Does the price of cheese depend largely on credit conditions?

12. Is there an eighteen-year credit-driven boom-bust cycle in the price of cheese, which always ends up with a financial crisis and a recession?

13. The supply of cheese rises to meet demand and prices stay stable (or might even fall because of economies of scale). If demand for land goes up, the full benefit of that increased demand accrues to land owners as supply of land in desirable locations is fixed.

14. Does The Daily Mail celebrate when the price of cheese goes up? 



15. Do countries fight wars over cheese? Did the Normans invade us or did we invade North America to secure cheese supplies or did they/we just announce that the land belonged to them/us? 
For sure, countries fight wars over natural resources, such as water or oil, and in olden times may have fought over valuable agricultural land (needed to make cheese) but that is secondary.

16. A tax on cheese is shared between supplier and consumer, leads to a fall in cheese output/consumption, destroys businesses and jobs, makes us all poorer. The tax leads to evasion and smuggling and thus pushes up the tax rate on everything else to compensate.

17. A tax on land-location values does not affect the amount of desirable locations. It is paid by the occupant and born by the owner but cannot be passed on in higher prices, so it does not reduce output or increase prices one iota.

18. This is evidenced by the fact that the retail price of consumer goods is much the same all round the country, even though the Business Rates payable by shops in desirable city centres is a vast multiple of that paid shops in less desirable locations.

19. If all businessmen and workers decided that their income was taxed too heavily and went on strike to avoid earning money and thus having to pay tax, the country would grind to a halt. If all landowners decided that their rental income (non-cash rental income in the case of owner-occupiers) was taxed too heavily and decided to abandon their land and stop collecting rents, then the government would acquire the land by legal default and it could rent it all back to us and would have far more revenues than it could ever raise in income tax etc.

20. Ownership of land tends to become concentrated in fewer and fewer hands over time - look at the USA, they started off with everybody owning a smallholding and where are they now? Land ownership is almost as concentrated as it is in the UK. This is precisely because land ownership is so lightly taxed. Taxes on cheese are not particularly high, as it happens, so let’s look at taxes on motor vehicles. In the UK, they are very high indeed, about £50 billion year (mainly on road usage, i.e. fuel duty) on vehicles worth maybe £300 billion. As a result, people drive smaller cars or drive fewer miles than they otherwise would do, roads are used more efficiently and there is, unsurprisingly, a much wider spread of car-ownership than there is of home-ownership.

21. There is no 'community' input into the value of a piece of cheese - the cheese is made by a small group of individuals (farmer, factory, supermarket). There is a producer surplus (profit) and a consumer surplus.

22. To make money from cheese, you can't just make one piece – or buy one piece - and then sit back and collect rent for the rest of your life, you have to make and sell more cheese every day. A piece of cheese deteriorates and goes off, it does not slowly increase in value. It needs to be stored and looked after. Cows and machinery and lorries and fridges have to be regularly used and maintained at huge cost to remain profitable.

23. This is quite unlike bare land, which can increase in value enormously without the owner lifting a finger, all he needs is a register in HM Land Registry, a legal system prepared to evict squatters, an exemption from Business Rates or Council Tax and for the economy to grow or the amenities provided around his site to improve and he earns money in his sleep.

24. A tax on land values tends to depress buying and selling prices without affecting gross rents, thus dampens the boom-bust cycle without discouraging new development. See Business Rates, which is the closest thing we have to LVT, see also the fact that house prices were low and stable between 1950 (once the supply shortage caused by bombing in WW2 had been overcome) and the late 1960s, a period in which we had Domestic Rates and Schedule A tax (which between them amount to crude forms of Land Value Tax). High taxes on incomes, profits and output certainly do no dampen the boom-bust cycle, and if anything greatly worsen the impact of the bust/recession periods.

48 comments:

Sobers said...

"A piece of cheese has inherent value. A piece of land has no inherent value, it is just mud and stones"

I think that's a major flaw in you reasoning right there. Nothing has 'inherent' value, it is entirely in the eye of the person who wants it. If there is no extra person to buy your (unwanted) cheese sandwich it has no value. If I live on a desert island, and catch more fish than I can eat before they go off, those extra fish have no value, because there is no-one to sell or trade them with.

Similarly ALL resources are scarce. Land may be more obviously limited, but there is a finite amount of everything in the planet, even sunlight will be ultimately limited by the demise of the sun (though I guess for practical reasons you could call it infinite).

Anonymous said...

Clang.
My challenge is repetition,
Sorry mate but repeating stuff does not make it true, just boring.
Yours
Fuckov.

Mark Wadsworth said...

S, IanB has done the "nothing has inherent value it is agreed subjectively between supplier and consumer" argument to death and that is irrelevant.

Clearly, if a piece of cheese really had no inherent value, then it would be neither produced-sold nor bought-consumed. This does happen, so it must have inherent value.

But mud and stones are just there, aren't they? If I were to dig up your entire house and land and transport it physically to the outer Hebrides, you would find that it had very little value whatsoever, however the selling price of cheese in the outer Hebrides is much the same as elsewhere in the UK (it might even be more expensive because it has to be transported there first).

And if I were to nudge some mansions in Hampstead a little bit to one side and plonked down your house and land there, you would find it is worth ten times as much as where it is now. So clearly, the value is not inherent in the physical thing itself.

Comrade Fukov, thanks for putting the Socialist point of view. Your lot got away with the line that "Part commissars know best" for seventy odd years, but sooner or later the truth caught up with them.

chefdave said...

Sobers, I think you've taken a reasonable argument a bit too far. While it may be difficult to put an exact value on item X it's fairly easy to correctly price something to within a tolerable margin. Experience and input costs will determine the price producers can charge for cheese, and exactly the same applies to the housing market.

Just because a certain market doesn't interest you it doesn't follow that objective pricing is impossible.

Mark Wadsworth said...

CD, not only the argument patently nonsense, even if it were true, so what?

Let's assume that that

a) Land has neither objective nor inherent value (which is far from saying that it does not have a market value or that this market value can be easily ascertained to within a tolerable degree of error) and

b) People live in big houses purely for status reasons, i.e. to show off about how much money they have (like having a personalised number plate)?

In that case, a tax on land values, which would bear most heavily on big houses or on homes in particularly desirable areas, would be a tax on people's vanity.

That sounds like a splendid kind of tax to me, it's entirely voluntary and is only a tax on that part of the spender's income which by the spender's own admission is neither required for essentials and which would not go back into the general economy anyway.

A K Haart said...

"and he earns money in his sleep"

And when he wakes up he votes for the system to continue.

Mark Wadsworth said...

AKH, I wouldn't mind it so much if only the Home-Owner-Ist Elite (MPs with second homes, bankers, large landowners, BTL landlords, TV property porn stars, newspapers hungry for advertising revenue from estate agents etc) voted for it to continue, at least that's rational behaviour.

What annoys me is that the vast majority of people who would benefit (or at least whose children and grandchildren would benefit) are swept along by the propaganda.

Sobers said...

The argument on 'value' isn't irrelevant if you are basing your entire argument for LVT on the fact land is somehow 'special' and unlike every other form of scarce resource. As I have repeatedly pointed out, every resource is scarce, just in varying amounts. At one end you have sunlight (effectively infinite for human purposes) to various rare earth metals at the other end of the spectrum. Land is by no means the scarcest resource - land is 150m km2, which means each of the 7Bn population could have about 2 hectares each. Ownership of any scarce resource by definition means that others cannot have it - the entire population of the world cannot own a Mini any more than they can all own a 3 bed semi in Surbiton.

All resources gain their 'value' from the existence of people, not just land. The greater the concentration of people the greater the value resources have - as I pointed out, excess fish on a desert island = no value, excess fish in a small fishing village = some value, excess fish in a large city = lots of value.

Thus ownership of land is not some unique and special case, its just one of many cases of ownership of scarce resources, and taxation of any of them is equally valid.

NickM said...

Blessed are the cheesmakers...

Mark Wadsworth said...

S: "The argument on 'value' isn't irrelevant if you are basing your entire argument for LVT on the fact land is somehow 'special' and unlike every other form of scarce resource."

I'm not and it is.

"Land is by no means the scarcest resource - land is 150m km2, which means each of the 7Bn population could have about 2 hectares each."

Agreed. But would you rather own 2 ha of frozen tundra or 2 ha of Surbiton?

"Ownership of any scarce resource by definition means that others cannot have it - the entire population of the world cannot own a Mini any more than they can all own a 3 bed semi in Surbiton."

Oh yes, the entire population of the world can very much own a Mini, I would have thought that to be blindingly obvious. Look at how car ownership levels have increased over the last century.

"All resources gain their 'value' from the existence of people, not just land. The greater the concentration of people the greater the value resources have - as I pointed out, excess fish on a desert island = no value, excess fish in a small fishing village = some value, excess fish in a large city = lots of value."

That's my point exactly, thanks for that. Land values are generated entirely by how many people live, or want to live somewhere, and are generated to 0.000% by people who arbitrarily declare themselves 'land owners'.

If you dropped dead tomorrow, what impact do you think that would have on the value of your house and land? Answer = none.

Conversely, if you were the best car repairer in your town and earned your money from repairing cars and you dropped dead, what would happen to the value of your income? Answer = it would fall to zero.

"Thus ownership of land is not some unique and special case, its just one of many cases of ownership of scarce resources, and taxation of any of them is equally valid."

The bulk of value is generated by people working hard or with particular skills making free exchanges. That is our base case.

The amount of value that 'land owners' can siphon off has nothing to do with working hard, having particular skills or making free exchanges. It has to do with having a privileged quasi-monopoly position.

NickM, don't blame me, it was the Faux Lib's who started with cheese.

chefdave said...

S, if there were other resources as scarce and vital as land I think there could be a moral case for their taxation, or at least some form of sharing out. But as you're talking from a theoretical as opposed to practical perspective I fail to see how it's relevent.

The point is, when you tax certain "scarce" resources such as labour or Mini Coopers you only serve to increase their scarcity and raise the price, the total opposite occurs with LVT, the exchange price drops and surplus lands would find their way back into the market.

In this way land is very different from other resources.

Derek said...

Exactly, ChefDave. Mark has provided a list of ways in which land behaves differently from cheese (and the vast majority of other goods and resources). Given that land does behave differently, it must be special in some way. Sobers can point out the trivial similarities as much he likes. That doesn't change the fact that there must be a crucial difference which explains the different behaviour.

QP said...

Put simply, land is different is because it is a fundamental cost of production. i.e. it is factored into the cost of all other goods (including cheese). Even an internet company will have a presence on a server in a room somewhere. And even if the employees of said company work from home, the wages the company has to may well reflect the rents due to those employed.

QP said...

edit: "rents liable"

Mark Wadsworth said...

CD, there is in fact another freely provided natural resource even more important than land, or even water, and that is 'air to breathe'. Thank Heavens they haven't worked out how to privatise it and charge us for breathing it.

D, apologies for 'cheese' it was just the first thing on our favourite Faux Lib's list.

QP, it's worse than that. By and large, land in itself is not a cost of production at all.

If access to land is free to all - like the pavement in front of your house or the pavement in front of your place of work and you do no have to pay for crossing either - then the value of the right to use the pavement does not enter into any equation.

It is only if other people obtain the right to charge you for access to land - for example privately owned toll bridges - that this even enters into the equation.

Sobers said...

"If you dropped dead tomorrow, what impact do you think that would have on the value of your house and land? Answer = none."

Thats because I'm one of 60m people who live in the UK. Me dropping dead is not going to affect the number of people who want a house like mine.

What do you think would happen to value of my house if the population of the UK was 1m not 60m? I'm guessing it wouldn't be worth very much. Its in exactly the same place so why would the value have dropped?

QP said...

Its in exactly the same place so why would the value have dropped?

If that population drop was spread equally across the country then land values would drop proportionately. "location, location, location" still applies just with a different supply and demand. If the population (and employment opportunities) was slashed in all areas apart from your own then you might find a big influx of people looking for work and your house might increase in value as the land value of rest of the country drops to zero.

Mark Wadsworth said...

S, you might be a Homey, but at least your honest.

Now answer the second part of my question:

"Conversely, if you were the best car repairer in your town and earned your money from repairing cars and you dropped dead, what would happen to the value of your income?"

Does that give you a clue as to a way of distinguishing between 'unearned' and 'earned' income?

You in turn ask a question:

"What do you think would happen to value of my house if the population of the UK was 1m not 60m? I'm guessing it wouldn't be worth very much. Its in exactly the same place so why would the value have dropped?"

Which is easily answered. The value would, as you say, fall to more or less nothing.

The value (i.e. the amount you can collect in rent) falls because it was the other 60m people creating the wealth which in turn enabled you qua landowner to charge rents.

Conversely, the price of a piece of cheese or a car or a hair cut in the UK would probably rise ever so slightly, as there would be far fewer people willing and able to provide those goods or services.

QP, that's exactly what happened after 1945 in Germany. The big landowners in the West were laughing and the former big landowners in the East were just landless peasants like everybody else.

Mark Wadsworth said...

"you're" not "your" obviously.

Sobers said...

""Conversely, if you were the best car repairer in your town and earned your money from repairing cars and you dropped dead, what would happen to the value of your income?"

Does that give you a clue as to a way of distinguishing between 'unearned' and 'earned' income?"

If I'm dead the value of my labour falls to zero, thats self evident. But any assets I owned would have the same value after my death as before. My house, my car, my money, my shares. Because their value is not created by my existence, but by everyone else.

This is the very nub of my point. Yes there is a difference between income earned by your own labour, and income earned by ownership of assets. But land is only one of many assets one may own, and that create income. And as such it is no more reasonable to tax land (because you can charge rent) than to tax money (because you can charge interest) or tax cars (because you can hire it out).

If I have £1000 in the bank and charge interest to loan it to people, why is that not rent seeking, and requiring of a MVT (money value tax)?

Mark Wadsworth said...

S, answer the bloody question instead of avoiding it:

"any assets I owned would have the same value after my death as before. My house, my car, my money, my shares... there is a difference between income earned by your own labour, and income earned by ownership of assets."

A building, a car, cash in the bank, shares etc do not generate income in themselves, they are merely a store of income which you generated before you pegged it and which you heirs can draw on. In fact, not even land generates income - that is a way of enabling your heirs to draw on wealth which other people haven't even created yet.

As to the specific question, we already have MVT. There are at least three types: income deducted from interest income; inheritance tax and inflation. All of these taxes are diverted into propping up land values, and you know it.

As a speculative land owner, you must accept that inflation is just another way by which wealth is diverted from savers to land owners?

Anonymous said...

Just out of interest Mark, would you still advocate LVT in a society where land was not scarce, for example when the US was expanding westwards or perhaps in Roman Britain?

Sobers said...

"As to the specific question, we already have MVT. There are at least three types: income deducted from interest income; inheritance tax and inflation. "

But you are advocating abolishing 2 of those (I'm assuming you mean tax deducted from interest income) and IHT, in favour of just LVT.

I repeat how is 'renting out' money not rent seeking, and worth of MVT?

"A building, a car, cash in the bank, shares etc do not generate income in themselves, they are merely a store of income which you generated before you pegged it and which you heirs can draw on. In fact, not even land generates income - that is a way of enabling your heirs to draw on wealth which other people haven't even created yet."

What? A house generates no rent? Money generates no interest? Shares generate no dividends? All those things will continue to happen if I die (assuming the house had a tenant to start with). Money and shares will continue to generate income whether I'm alive or dead. Surely that is the ne plus ultra of unearned income - you don't even have to exist to earn it! Why should those assets escape taxation, when land is taxed?

Bayard said...

"I repeat how is 'renting out' money not rent seeking, and worth of MVT?"

S, that's a bloody good idea - it would stop the Envious whingeing on about banks making too much money in a LVT-only taxation system.

Anonymous said...

This whole what happens if you drop dead thing is a complete sideshow. I have no idea why you brought it up, Mark.

S - "What? A house generates no rent? Money generates no interest? Shares generate no dividends? All those things will continue to happen if I die (assuming the house had a tenant to start with). Money and shares will continue to generate income whether I'm alive or dead. Surely that is the ne plus ultra of unearned income - you don't even have to exist to earn it! Why should those assets escape taxation, when land is taxed?"

Earnings of capital are just as much earned income as earnings of labour, because capital is produced. Locations never can be produced, not even in theory. Physics says so, and it's the fundamental physics that makes land different economically. Some locations are simply more desireable than others and no more of them can be made, so people fight over who gets to use the good ones. In the past we used to fight violently, and now we (usually) fight financially. All the effort goes into controlling what exists, rather than making more.

This is why house rents (as in renting the structure itself) are not unearned. The house has been produced and if necessary, you could make another one or five...where'd you put them, though, is another matter entirely...

Money does have a similarity. Production is restricted by force of law in this case (rather than by physics), and that restriction results in holders of cash having a slight unearned advantage over those who do not. Holders of cash in an environment where cash is required for some necessary purpose (eg paying taxes) are a very loose cartel as new entrants *must* deal with one of the current holders in order to acquire said cash. Those who control production of course have a different, larger advantage.

You can make an argument along those lines for a theoretical MVT, but I have no idea how it would work practically.

Whether share income is unearned or not depends entirely on what it's a share *of*! You don't need to worry about taxing unearned share income if you're properly taxing the unearned source.

Anonymous said...

Let Sobers keep his rents, charge Road Value Tax instead, with yearly access charges about the same as land value for each property. Guvmint built it, why shouldn't they keep the income from it, like any scarce resource?

Anonymous said...

Isn't seigniorage an MVT? If you allowed private currencies (a la Douglas Carswell), is there amy way of taxing them?

Mark Wadsworth said...

Anon: "would you still advocate LVT in a society where land was not scarce"

Yes of course, because there will always be a limited amount of land in the most desirable areas. It may be that the bulk of the land by area is nigh worthless, but that applies to the UK today (99% of the location value is in the <10% of land that is privately owned and urban).

S, don't confuse things by dragging 'shares' and 'money' into it as they represent indirect ownership of other things. They cannot be taxed independently as it all depends what the other things are (it might be land, it might be something else).

And you don't even need to pretend that a building is the same as land as you know perfectly well it isn't. And even if your heirs manage to rent out your car, after five or ten years, its value will have fallen to zero. So it is quite unlike land.

B, F, we're going to have a bank asset tax as well to keep them focussed on doing 'good stuff' and act as a penalty on doing 'bad stuff'. This was a recent addition to the MW manifesto.

Anon, RVT, absolute genius idea. I did muse about that recently in the second half of this post but I missed the obvious conclusion.

Sobers said...

"Earnings of capital are just as much earned income as earnings of labour, because capital is produced"

So if someone buys a house with capital (ie from accumulated earned income), why should it be taxed, any more than if they buy a Grand Master or a gold ingot?

"Locations never can be produced, not even in theory. Physics says so, and it's the fundamental physics that makes land different economically"

Can you produce coal out of nothing? Or iron ore? Or are supplies of them just as finite as land?

Mark Wadsworth said...

S: "So if someone buys a house with capital (ie from accumulated earned income), why should it be taxed, any more than if they buy a Grand Master or a gold ingot?"

In future people will buy all these things out of untaxed income. We could in theory, work out everybody's LVT bill for the last fifty years, work out how much income tax, VAT they actually paid, and send out back demands for the LVT and give everybody income tax, VAT refunds on the other, but I think you'd agree that's a non-starter, so let's just forgive and forget and start with a clean slate.

As I have explained, land is quite different to old masters or gold ingots (please refer to the 24 items on the list and see whether old masters and gold ingots are more like 'cheese' or more like 'land') and there is no reason to tax ownership, purchases or sales thereof.

And if you tried it, you'd find that receipts would be bugger all, and if something doesn't work in practice that's usually a clue that it doesn't work in theory either.

"Can you produce coal out of nothing? Or iron ore? Or are supplies of them just as finite as land?"

These natural resources are also 'land' and most governments make people pay for licences to extract them, so that issue is already dealt with, they already pay a kind of LVT. And if we import the stuff from countries that don't charge, well that's their problem and our good fortune.

Anonymous said...

S - "So if someone buys a house with capital (ie from accumulated earned income), why should it be taxed, any more than if they buy a Grand Master or a gold ingot?"

Assuming we're actually talking about the location rather than the structure, the fact that the transaction occured using earned income is irrelevant. If 'using earned income to purchase' was sufficient criteria, then you could justify the slave trade by saying "but I paid for him with earned income!"

There's a danger in this discussion of coming away with the idea that whether an income is earned/unearned is an economic question, which it is not. While land does behave differently in economic terms (which I believe it was the purpose of this post to demonstrate), it's not that difference per se that makes land rents *unearned*. Earned/unearned is a moral question rather than an economic one.

"Can you produce coal out of nothing? Or iron ore? Or are supplies of them just as finite as land?"

While in theory it is possible to reproduce particular natural resources (we can synthesise diamonds, for example), in practice things that are mined can be considered finite, but note that extraction has to occur where the resources are located (pesky physics again).

As MW has pointed out, it's perfectly possible to charge for extraction rights in a particular location, and as such it's a form of LVT.

MW - "And if we import the stuff from countries that don't charge, well that's their problem and our good fortune."

It's their problem, but it's not our good fortune. The extractor sees a cost reduction, but the market price of the resource won't change just because the host government doesn't charge for extraction.

Mark Wadsworth said...

F, ta for back up. The 'out of earned income' is as you say a complete irrelevance.

In any event, on a practical level, people who buy today with a small deposit will be able to pay off the bulk of the mortgage out of untaxed income; most baby boomers in big houses could and should have paid off their tiny mortgages years ago (so the argument doesn't wash), and Baby Boomer down-sizers who buy houses 'out of capital' are probably using their old house price capital gain as capital, so that wasn't earned either.

And whether we justify LVT using morals/religion, economics, practicalities or even environmental concerns doesn't really matter to me, they all point in the same direction.

Anonymous said...

"Baby Boomer down-sizers who buy houses 'out of capital' are probably using their old house price capital gain as capital, so that wasn't earned either."

The problems come when people try to pretend that something is capital when it is not. Slavery is when you treat labour as capital. Homeownerism is when you treat land as capital.

Mark Wadsworth said...

F, yes, on closer analysis, land values are neither 'wealth', 'property' nor 'capital' any more than the income of a welfare claimant or pensioner is 'wealth', 'property' or 'capital'. In other words, taking the nation as a whole, they are a small negative, not a positive.

But I'm afraid that's how distorted our language and thinking has become. Quite deliberately, presumably.

Sobers said...

It wasn't me that brought up the earned/unearned division, it was MW on 18/9 at 21:08.

Look I kind of have sympathy with the 'big houses price rises give money to certain sections of society for nothing' argument. But LVT is a sledgehammer to crack a nut. It would be far simpler merely to put CGT on personal property. That way society ends up getting some of the extra 'value' it has created, people who want to retire and live out their days in their family home could do so without huge LVT bills, people who bought a house 4 years ago and are sitting on a loss wouldn't be paying any tax at all (to be honest I hardly see how its fair that LVT takes no account of how much debt you have on your home - why does it tax you the same if you are in negative equity, vs as if you bought your house for peanuts 40 years ago?), stupid speculation in houses would be reduced as you would have to pay the tax every time you moved.

And all for zero upheaval. With house prices depressed now would be the perfect time to start. You could even do what Geoffrey Howe (or possibly Nigel Lawson) did in the 80s and say everyone can call todays values as their base value, so there is no big losers straight away. But any house price increases in the future would attract CGT.

Mark Wadsworth said...

S, I'm opposed to CGT for the same reasons I am opposed to SDLT (or indeed IHT). While having some superficial appeal, it will be just as wildly unpopular as LVT, would raise naff-all revenue and introduces even more distortions (and be an administrative nightmare, take it from me).

"Why does LVT tax you the same if you are in negative equity, vs as if you bought your house for peanuts 40 years ago?"

Because both are getting the same benefits from living at that location.

In any event, this is just the Poor Widow Bogey turned on its head, it's one or t'other, not both. For sure, recent purchasers with big mortgages will be a bit p-ed off, but all their future earned income will be tax free (or at least taxed at much lower rates) so over a lifetime, they will still end up better off.

In the same way as we'll have to sort something out for Poor Widows In Mansions (exemption, discount, deferment, higher state pension), I'm sure we can sort out something for those stuck in nequity through no particular fault of their own.

Hollando said...

Fraggle:
"Locations never can be produced, not even in theory."

I'm not sure that's true in practice, what about times past when swamps were drained etc?

What would the impact of an LVT be upon land reclamation projects, e.g. Hong Kong Airport?

Mark Wadsworth said...

H, swamps are complete red herring, the physical condition of the land is a red herring, it's the LOCATION which matters. If you inherited an acre of swampland in W London prone to flooding by The Thames, then you'd happily pay £5 million for the flood defences because the finished site is worth £30 million. So that swamp is worth £25 million.

Conversely, if you inherit an acre of swamp at the mouth of the Humber, there's no point spending £5m on flood defences because the finished site is only worth £1 million (or whatever).

HK has LVT (by a roundabout and circuitous route) and the same logic applies. Why do you think they are building like topsy? Because the govt sells off out planning permission left right and centre for slightly less than its market value, developers happy, potential tenants or buyers happy, income tax payers happy.

Sobers said...

'"Why does LVT tax you the same if you are in negative equity, vs as if you bought your house for peanuts 40 years ago?"

Because both are getting the same benefits from living at that location.'

Well if its the benefits of living in location X thats being taxed, why is LVT levied on a) empty houses and b) levied on landlords not tenants?

Mark Wadsworth said...

S, re empty houses OK, rephrase that "The potential or actual benefits". You could argue that vacant houses should be taxed at higher rates, as they depress the value of surrounding houses, attract squatters, vandals, rats, don't look ncie etc.

As to landlords/tenants, clearly the rent will always be far in excess of the LVT, the LVT is like income tax on the landlord. Let's imagine that rental income were henceforth declared to be income-tax free, what would happen?

a) Landlords pass on the tax cut in lower rents.

b) The prices paid by BTL landlords go up?

Don't forget, in real life, part of the reason for the increase in owner-occupiers until the 1970s was because of strict rent controls and because rental income was taxed at a savage rate.

And there is a difference between legal and economic incidence, if landlords want to agree, privately that they charge a net rent and add the LVT on top, they are free to do so. Landlords can express the rent as "£200 a week plus an extra £10 for every goal which Chelsea concede in a home game" if they so wish.

Whether a tenant pays "£10,000 all in" or "£6,000 net rent with £4,000 LVT on top" is neither here nor. And as income tax, VAT etc is cut, gross rents will go up and LVT will go up to match, the tenant is benefitting from exclusive use of that location so clearly he will end up the one paying it.

Mark Wadsworth said...

S, as an afterthought, if we are to do rebasing, then that leads us back to DBC Reed's compromise solution, the modified JS Mill Sentinel Tax, i.e. LVT is only levied on values above today's values.

So we work out a figure for value of every plot and set the tax to £nil. We then merrily cut and simplify taxes, reduce interest rates and so on, and inevitably, future buyers/tenants with more disposable income will bid up house prices or rents (that is a natural observable law).

Worst case, people hate the idea of bidding up rents or prices so much that they refuse to offer anything more than the 2011 value, and the tax raises not a single penny, so what? At least we've got stable house prices and rents for evermore.

Anonymous said...

S - "why is LVT levied on a) empty houses and b) levied on landlords not tenants?

a) The owner of the empty house is actively preventing someone else from enjoying the benefits of the location.

b) Tenants as it is already pay LVT to landlords. If it was to be explicitly charged to tenants, landlords would find they would have to reduce their rents by the LVT amount in order to maintain occupancy. It doesn't actually matter who is charged economically, but in practical terms it's less hassle to charge the landlord as opposed to the tenant.

H - "I'm not sure that's true in practice, what about times past when swamps were drained etc?"

The location existed before and after the draining. Costs of site clearance/amendment are analogous to costs of construction for sites being sold with planning permission.

Bayard said...

"B, F, we're going to have a bank asset tax as well"

Why not have a Usury Tax? It would encourage moneylenders to invest in businesses (tax free) instead of simply lending them money secured on land or assets. An asset tax would be neutral in this respect, as shares in a business would be taxed as heavily as loans.

Sobers said...

I could agree with a LVT that started from now, and taxed any increase from in house prices in the future. Because you've not putting people in a position of turning their lives upside down and past decisions made under a totally different system aren't penalised.

Presumably there would have to be a legal presumption that any revenue raised can only be used to reduce other taxes. That way if house prices do rise steadily over time other taxes would be reduced and eventually you would arrive at the LVT nirvana you seek. It would just take a few decades at the very least, maybe 50-100 years.

Mark Wadsworth said...

F, re your answer a), the way I explain it is, imagine you book a hotel for a holiday in Ibiza for a few days, and, things being what they are, on some of those days you don't actually set foot in your room as you are out all night partying and sleep it off on the beach, or you cop off and sleep in somebody else's room. Can you then go to your hotel and demand a refund for those days?

B, "usury" is an emotive term, a bank asset tax will do the trick.

S: "there would have to be a legal presumption that any revenue raised can only be used to reduce other taxes"

A government can't bind future governments, but the trick is, by simply cutting other taxes, the (gross) economy will grow and the rental value of UK land (and the selling prices of land and buildings) will grow disproportionately.

So in extremis, we introduce the Sentinel Tax, scrap all other taxes, cut interest rates to zero and helicopter money (not 'targetted grants' a straight award of free cash for every citizen). Some of this will go into growing the economy (hooray -> higher rents and selling prices in future) and what doesn't will go into higher rents and selling prices NOW, so most of the tax cut will come back by itself. It's basic DBC Reedonomics/Modern Monetary Theory.

Hacking the government down to size would help enormously, of course, so the government then has a clear incentive to stop fannying about (e.g. scrap smoking ban -> doubles rental value of pubs).

Bayard said...

"B, "usury" is an emotive term, a bank asset tax will do the trick."

Ok, call it an interest tax (I was being inflammatory). It still would have the advantage of encouraging investment over straight lending. Look how the banks manage when they are forbidden to charge interest (Sharia compliance).

Mark Wadsworth said...

B, I don't think that the actual interest rates which banks charge are particularly high, it's not the interest rate which worries me, it's the sheer volume of lending.

If you cast your mind back to 2005 or so, banks were offering mortgages as loss leaders; they were paying more interest on savings accounts than they were charging on mortgages. Which was bound to go horribly wrong.

A 2% bank asset tax would have killed that stone dead.

Robin Smith said...

Whom is saying this?:

because there are those who say that merely because something works in practice does not prove that it works in theory

Are they living in a fairy tale?

If something works in practice the theory has to show it working too. Else the theory is evidently wrong, by observed fact.

I will allow exemptions for professors of economics, landowners, mp's, bankers(landowners) and so on