1. It's pretty clear that many arguments against Land Value Tax are based on a complete absence of understanding or appreciation of how free markets work, which is how they end predicting a variety of apocalyptic outcomes if we were to abolish taxes on income and output and just make everybody pay the same price for occupying land in any area, regardless of the use to which it is put (commercial or residential). As far as land use is concerned any changes would be fairly marginal, incremental and all beneficial (there'd be more efficient use of land).
2. Despite all the distortions introduced by the system of land ownership and subsidies to land ownership and NIMBY imposed planning restrictions and the abuse thereof by e.g. certain supermarket chains and 'home builders', things still tend to level out in the end. For example, I live in a commuter suburb with one Tube station where 95% of the land is used for housing and the rest for shops and schools. The 'catchment area' of the Tube station is larger than comfortable walking distance, so there is demand for a car parking places at the station.
3. There must be some optimum ratio of car parking spaces-to-housing/population, but what is the best way of working out whether we have too few, enough, or too many parking spaces? Surely, the best way is to compare the rental income (expressed per square yard) you can earn by using one square yard of land for a car park with the same the rental income you can earn by building and renting out a house.
4. If there were too few parking spaces, then the rental income from the car park would exceed the rental income from housing, and it would make commercial sense to buy up some more houses near the station, knock them down and expand the car park. This would reduce the clearing price for parking spaces, and it would make sense to continue with this policy until the rental value of the car park falls to the rental value of surrounding housing.
5. Conversely, if there were too many parking spaces, the reverse would apply and it would make sense to use part of the car park for residential housing etc.
6. As it happens, the population of the suburb is 10,000 and there are fifty car parking spaces at the station. We can safely assume that this is a fairly optimum ratio because we know that the rental values of car parking spaces and of housing is about the same (about £45 - £48). It may be that the town planners or Transport for London decided the number of parking spaces abitrarily, or on the basis of what happens elsewhere, but that does not matter, because with LVT there would be no need for such detailed planning.
7. I haven't adjusted those rental figures for the relative cost of building/maintaining a house and building/maintaining a car park, but part of the cost of the latter would involve buying up existing houses and knocking them down (which would wipe out any incremental gain). There is however one big distortion in the tax system: the car park is liable to Business Rates which takes about thirty per cent of the gross rent, and the houses are only liable to Council Tax, which only takes about ten per cent of the gross rent. If both uses were liable to tax at exactly the same rate, and any further income generated from the improvements not taxed at all, then surely we are far more likely to get the optimum number of car parking spaces (which might be seventy or eighty, I do not know).
8. So, let's get the Killer argument in question which has been bugging me for a while, it was Sobers, here, who said:
"if a postcode has a land usage in it that is very high in value - a supermarket say, that the LVT value per sq ft is going to be very high in that postcode? So any other business that shares the postcode with the supermarket will have to pay a massively higher LVT as a result?"
9. He has no evidence to suggest that supermarkets can generate a lot more in income/profit per square yard than other uses, but let's assume that they do, and let's start with a clean sheet. So, we draw up our rough plans for an entirely new town, say where the station, the roads and the parks will be and give an indication as to what we expect the population to be.
10. We could auction off the land and not collect any tax at all; or we could give away the land for free but make it liable to LVT. Either way, we invite applications from people who want to build or own houses or supermarkets or offices etc. If we set the rate too high, then we won't get our town filled up and if we set it too low, we'll be losing revenue, but by some sort of auction process, we'll arrive at the right figure.
11. Now, it may well be the case that a supermarket can generate more income than other uses, but there are diminishing returns to increasing the size of a supermarket, once it has reached a certain size (largely dictated by how big the population of the town will be), the marginal return from occupying another square yard of land would be less than the cost of occupying that square yard and that puts the free market upper limit on the size of the supermarket.
12. And all other users will be paying the same rate, entirely voluntarily (OK, in practice we'd have at least three rates, one for town centre and one for suburban and one for industrial estate, the bit near the motorway junction, along the railway tracks or near to sewage works). Those who can earn the most money from living or doing business there will of course end up better off than those who earn least, but even the people who are earning least will be able to afford to live there, because the price (the selling price of LVT rate per unit of land) is set by the amount lowest successful bid. And low-value added or specialist businesses will be able to make do with smaller premises further off the beaten track, if they aren't willing and able to make enough money to pay the bare minimum, then the town would be better off if a more profitable business took their place.
13. Similarly, most people think it's nice to have a big back garden rather than a postage stamp, but again, there are diminishing returns to scale. There is a huge net increase in enjoyment by having fifty square yards rather than none, so people will pay a lot extra for fifty square yards; it's a lot nicer having a hundred rather than fifty; it's a bit nicer having a hundred and fifty rather than a hundred and so on. But once you are past a certain stage, having a larger garden becomes a burden to the owner rather than a benefit.
14. So the free market discipline of making the land available for a uniform price would encourage people to choose the optimum size for their back gardens as well. Whether that comes out at five or ten or twenty houses per acre does not matter. And those who aren't interested in back gardens (or can't afford one) will make the corresponding tax saving by not having one or living in a block of flats.
15. The BIG difference between selling off the land tax-free and giving it away subject to LVT is that with a sale, the original optimum position is frozen for all time and if demand changes, then supply does not adjust and there will be windfall gains and losses in future, but with LVT the auction process and optimisation process are a permanent: actual use of land will respond much more quickly to demand and there is little downside risk; if the new town project is a failure, then the LVT rate will fall but at least you paid nothing for the land. If it is a success, then people will be willing and able to afford a higher LVT rate. Those who aren't will quickly be replaced by people who are.
That didn't take long
54 minutes ago
24 comments:
I wasn't convinced about LVT at first but now I see some logic in it. Ignoring all the more technical points (I'm a simple sort), land is a limited resource and while freeholders think they own it, they are in effect renting it from the UK or the Crown or whatever.
I also see that it is artificially limited by planning permission tomfoolery.
SS, I wasn't convinced about LVT at first either, it's just that I've never seen a coherent argument against it. Hence this whole series.
"freeholders... are in effect renting it from the UK or the Crown or whatever."
Correct. They are renting from 'whoever'. Land ownership and some sort of stable legal system are two sides of the same coin, you can't have one without the other.
The point is that 'whoever' is 'everybody else' or 'society in general' or 'everybody who is prepared to respect the rights of land owners to exclusive possession', so really, we are all renting land off each other.
I opted for 'whatever' as I didn't know whether the correct form would be whoever or whomever.
As for the rest of your reply, yep. But I know that such concepts are beyond the majority.
Sadly, I expect if ever LVT were to be implemented it would not replace any other taxes & simply be another layer on the tax cake.
Arguably all other taxes reduce LVT revenue on a pound-for-pound basis. I haven't been able to prove this myself but I believe it's more true than not. Thus even if LVT did become another layer on the tax cake, suddenly it'd be in the govt's interest to reduce all the other taxes.
@Fuckov
what's your point?
Yeah, your home is yours..
But your land is taking something away from someone else. Perhaps someone (planning permission allowing of course) who could add value to the economy, you know like running a business?
The fact that you are so moody over the issue just proves the point, land has a significant value!
Sobers is looking for infinite evidence by using marginal cases. Good luck
SS, probably best to avoid 'whomever', I've tried it and was out-pedanted.
RA, other taxes clearly reduce potential LVT receipts by at least 2/3, but LVT doesn't reduce other taxes much, therefore, the govt. probably could increase total revenues if it had LVT on top.
Comrade F, as you still haven't answered the question, I've deleted your comment. Those are the rules.
And I don't suppose that you can explain why the precious contract between you and the previous owner is suddenly binding on 'everybody else'?
Have you not heard of privity of contract? That contract which you rely on was originally between the vendor and 'everybody else' and what the vendor did was sell you his rights as against 'everybody else'. So the contract is now between you and 'everybody else'.
See here for lengthier explanation.
RS, Sobers doesn't want infinite evidence, he has managed to convince himself that LVT is a terrible idea and would lead to mass homelessness etc, and that is the end of that.
Sobers's point highlights what I see as a genuine problem with LVT, the other side of the "free rider" effect so often highlighted on this blog (e.g. railway company spends millions of pounds opening a new station and everyone in the vicinity benefits from the increased and value without having to do a thing). This happened in a town near me, where a run-down market town was transformed over a few years into a thriving, happening place by the efforts of a group of shopkeepers and other traders. They invested their time and money and suffered reduced profits to build the place up and, for a while, reaped the reward. Then, of course, rents in the town started to rise and so business rates went up, and much or all of the increased profit disappeared in the higher rates. Or, to take a more extreme example, on many landed estates in the C18th and C19th, it was not worth the tenents doing anything to improve their farms, as the resulting increase in revenue would be entirely clawed back by the landlord in increased rent.
http://www.express.co.uk/posts/view/283260/EU-rules-to-slash-house-prices
some priceless quotes from your fellow UKIPpers there
B, I've seen that argument before, I dealt with it here, I don't see it as a big problem.
Anon, thanks, all very embarrassing.
"B, I've seen that argument before, I dealt with it here, "
Not as far as I can see you didn't. We are, by and large, not talking about landowners here, we are talking about tenants. Tenants don't give a stuff whether their rented property goes up in value, EXCEPT that they get to pay higher rent or LVT (business rates). They put in all the work and then get penalised for it.
I'm not even sure that you've proved your point in your case with owner-occupiers gentrifying an area. You say that they all buy their houses for £80K, spend £40K on them and end up with a house worth £150K and then blithely assert that the extra £30K is unearned, as the others in the street have seen their houses also go up to £110K. Quite apart from the fact that these figures are plucked out of the air, it is the case that much of what you spend on your house never covers its costs in increased value. There are a few things you can do, which involve major disruption, like rewiring, replumbing or re-roofing that increase the value by more than they cost, but generally, if you spend £40K doing up a house and its value increases by £40K, some of that increase in value is due to gentrification or property price rises. Some time ago, I used to watch "Homes under the Hammer", a property porn programme, and it was instructive what a miserable return most people got for their efforts and expenditure, once the general property price rise element was stripped out of the increase in value of the improved property.
>but LVT doesn't reduce other taxes much
It reduces "private taxation".
AC1
B, look, I had to use some figures. Feel free to make up your own.
It is quite clear that if one individual home owner carries out improvements, depending on how intelligently he does it, they might or might not increase the value of his house £ for £.
But remember the estate agent's mantra: "It is better to buy the worst house in the best street than the best house in the worst street".
It is clear that the biggest gains you get from owning a house (apart from inflationary/bubble gains) is if an area becomes gentrified. So if you buy one house in a run down area where some of the houses are boarded up and empty, and do it up nicely, you are unlikely to get your money back.
But maybe another person does the same, and another and another. Once enough 'other people' have spent money on renovating their houses, all of a sudden the area become gentrified and that is where you make your money; so by and large, you don't make money by improving your own house (earned income) but because everybody else does up theirs (unearned income).
This is clearly unearned income from the point of view of any individual owner, because e.g. the last few owners still haven't spent a penny on their houses but the value still shoots up. And the last few people to buy will no longer pay the same low price as the first person to buy cheap and spark off the gentrification process; they will pay a much higher price being [value of house in gentrified area] minus[ known cost of necessary improvements].
MW/SS etc,
I arrived at LVT from the other direction. I have long realised that tax on labour and capital was inquitous and destructive (of wealth creation), and I had decided long ago that no state functionary paid any tax at all, and if you add in their pension entitlements were actively subsidised. But, the 'state', or perhaps society, needs an income to provide the core responsibilities of defence (I actually prefer the less euphamistic term of the ability to wage war when required) and a legal system to protect property rights and stop private coercion/violence. So what can the state tax that can raise revenue but not distort the economy? Also I had realised that landlords seemed to capture all the profits of wealth creation. The trick was to learn that using LVT in combination with a citizens dividend answered all these questions.
To be open, I would likely initially suffer under LVT as my home is relatively highly priced compared to our income, but, I absolutely know that I can make my business go like a rocket if it is not strangled by excess confiscatory taxation on my capital and my labour. Combine this with savage cuts in goverment employees and regulation and bob's your auntie.
What's not to like?
MW @ 14:57. Worse than that, someone who does nothing at all to his house as the street is gentrified makes the same/very similar gain. The end result is an unearned capital gain, which I think is socially divisive, as BtL landlords use tenants purley to cover the financing costs as the capital value appreciates. From outset the tenants have, implicitly, zero security of tenure, and, they know how they are being exploited for another's unearned capital gain. This alos fuels the lunacy of 'getting on the housing ladder'. If as I suspect LVT stabilises house prices (as long as there is parallel banking reform - which does not mean more lending restrictions by capricious bureaucrats) then everyone, except land speculators, will be winners.
L 14.58, that's as good an explanation/justification as anybody else has ever come up with. LVT does not mean 'big government' or 'small government', that is an entirely separate debate, and even if you go for 'small government' (which I do) there is still a choice between a) not collecting all the land rental value in the first place for a constant low level of govt spending (which is what we did until the C19th or so) , or
b) collecting as much of the rental value as possible, spending as little as possible on 'governing' and dish out as much as possible in CI.
I prefer (b) to (a), but anywhere in between will do me just fine.
MW. The Really Good Bit that any party that says it wants to raise LVT will instantly lose upwards of 60%+ support, whereas the party that says it can govern and collect less LVT will gain those same votes. LVT forces he state to act like private business and seek to do more for less everyday. Plus, I have only met very few pacifist nutters or anarcho-libertarians that seek to scrap the militray and the police respectively. In fact I suspect that defence spending will increase both absolutely and relatively as we equip ourselves to police our trading routes. "Whadyawant?" "More frigates" "When do you want them?" "Now".
L, yup. LVT is a completely open and transparent tax so the political/democratic pressure would usually be downwards, unless you can convince people that the entire extra income would be paid out again as CI, which mathematically would normally produce more winners than losers.
As to frigates, we already sort-of have LVT for ships. If you want protection from Royal Navy you need to be a UK registered ship, so there's a fixed fee for registering your ship as British, known as the tonnage tax.
Different European countries have a similar tax, so it's a question of choosing the best protection-to-cost ratio, I don't imagine that Switzerland would be able to collect much, but the UK and France would be quids in.
And because one navy with a hundred ships gives better global coverage than two navies with fifty each, there'd be every incentive for British and French navies to split their responsibilities geographically and then offer a combined service which guarantees you the protection of both navies etc. How the UK and France then divvy up the extra income is a trickier matter.
MW - Ho Ho. Co-operate with the French? Their Navy is a dreadful state, and in any event they have always looked East and South and North - they are a continental power, not a seafaring one. Algeria was really their best effort - and Canada, which they then messed up. Even Boney sold Louisana to the Americans to finance his war against us. Trouble is a British Bank, Barings, organised the bond issue for the US to finanance the purchase. Trade triumphs over militarism, yet again. I'd rather have an RN of 100 ships and do it ourselves. Allies are always capricious. It was bad enough trying to keep the US on track in WW2, but look what happened to the French? Anyway they've never forgiven us for shelling their fleet at Oran.
L: "I'd rather have an RN of 100 ships and do it ourselves. Allies are always capricious."
For sure, but why shouldn't navies be exposed to the same free market competition, which might entail mergers, as anybody else?
Nationalism aside, if you are shipping goods from China to Northern Europe via the Suez, then ultimately you would end up paying the Chinese navy for the first part of the voyage, the Indian navy for the Horn of Africa, the Italians for the Eastern Mediterranean, the French for the Western Mediterranean and the Royal Navy for the Atlantic.
So you pay £1m "insurance" for the voyage, and these various navies divvy up the proceeds somehow, in the same way as you pay £20,000 for a new car and somehow this £20,000 gets split up between the dealer, the manufacturer, his employees and the people who produce steel or rubber.
We'd get interesting spats between e.g. the Chinese and the Indians as to where the handover line of responsibility is, which might involve their ships shelling each other every now and then, but because of supply lines, there will be natural areas of control.
And the grand committee which divvies up the proceeds will then just say "You Chinese and Indians waste too much time shelling each other and not protecting commercial shipping, so people will only pay £900,000 per ship and not £1m insurance, so you shares are going to be reduced by £50,000 each until you sort yourselves out".
I mean, somehow or other, the UK and Norway managed to agree how the North Sea will be divvied up for oil extraction/taxation purposes, so it's not impossible.
Well, yes. I thought that that was how the RN started anyway - privateers, East India Company, Hudson's Bay Company and the rest of them. Wasn't Cecil Rhodes given similar private military powers to expand the British Empire in Africa in the same way.
Nevertheless, personally, I like the concept of the military being the servant of the people. That does not exclude the use of mercenaries (the Ghurkas for example) and it keeps the military in its place in a democracy.
L, yes, that's how it started. If two countries are at war, there is no distinction between the enemy's navy and pirates generally.
When peace breaks out, navies are just the flip side of pirates, the two go hand in hand. In other words, you either run a 5% risk of paying £20 million ransom to some pirates or pay official navies £1 million for a guarantee of safe passage.
If Somalia had any sense, it would clamp down on its own pirates, which are of negligible benefit to their economy as a whole, instal a proper Navy at a cost of £x billion and then charge each ship £y0,000 for safe passage through their territorial waters.
where a run-down market town was transformed over a few years into a thriving, happening place by the efforts of a group of shopkeepers and other traders. ...and so business rates went up, and much or all of the increased profit disappeared in the higher rates.
B: Economically speaking, their business profit is just the same with LVT/BR as without, but their potential capital gains from owning the properties are reduced. When rents go up, whether through the effort of the traders or not, the increasing rents, even if they own the premises, represent the corresponding increasing opportunity cost of instead letting the building out to someone else, or realising capital gains by selling.
By untaxing income and moving over to LVT, the actual trading bit is more profitable, and there is still the same reasons to improve, even if it creates positive externalities you don't reap.
It's just like any other business, you invest and improve something, gain a foothold in the market and make a profit, but in the end, someone will compete with you and reduce these profits.
-Kj
Kj, good stuff, which leads me on to a further point: by and large, under current rules, land rental income and gains are taxed at lower rates than earned income, but the economy still limps along somehow.
All I'm proposing is that land rental income and gains are taxed at (much) higher rates than earned income (which ideally wouldn't be taxed at all).
So that gets rid of the disincentive to go out and provide goods and services with your own efforts, which is what really drives the economy. The land rental income and gains will arise in exactly the same way - and probably more so - it's just that theses will be siphoned off to pay for public goods, which in turn boost the real economy, which in turn drive land rental values higher etc in a virtuous circle.
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