Sunday 27 November 2011

Killer Arguments Against LVT, Not (180)

The previous thread has got a bit messy, so I'll start again.

Sobers, who is a master at Home-Owner-Ist DoubleSpeak has come up with more superficially clever but factually incorrect and totally contradictory arguments against LVT, none of which stack up in fact or in logic, and even if they did wouldn't actually be arguments against, but are on the one-dimensional level which appeal to tabloid newspaper readers, they are roughly as follows:

1. LVT will clobber a lot of businesses, i.e. those that use a lot of land (primarily farming, large scale manufacturing), which is A Bad Thing, he singled out Honda in Swindon as an example.

This is simply not true, it's what you might call "an outright lie".

a) A known amount of income tax, corporation tax, PAYE is collected from farming. There is a known amount of farmland, some of which has a low rental value (forests, about £10 an acre) up to tip-top land suitable for growing vegetables (up to £300 according to a farmer I know). We happen to have very good records of this because CAP payments are (or were) paid out at different rates according to the value of the land (so the owner of a forest got much less in subsidies than the owner of tip-top farmland).

So we can deduct the total value of the subsidies from the total tax they pay averaged over the past few years (it's possible that this is a negative figure) and divide this by the total rental value of UK farmland to arrive at a percentage and hey presto, that's your starting figure. As long as LVT on farmland in year one is equal to or less than this, it can't possibly have a negative impact on farming. As it happens, that net tax minus subsidy figure is very low (might even be negative) and the total value of UK farmland is a tiny percentage of the rental value of privately owned urban land, so as far as I am concerned, we could just exempt farmland for the time being and just make farmers pay normal LVT on their housing.

b) I also reminded Sobers that the LVT on Honda's Swindon site would work out at an average of £225 per car (assuming full production of 200,000 cars a year), which is a tiny fraction of what they are paying now in VAT per car. And half of their site appears to be a car park i.e. storage space for finished cars not yet sold, I'm sure they could cut back on this if they were so minded.

c) We can go through business after business after business, and all we establish is that some will pay a bit less tax than now, some will pay a lot less than now, and some will pay barely anything compared to now. The fact that shifting to LVT will benefit some businesses more than others is a minor concern, it all levels out in the end.

d) Just to remind you (i.e. Shiney) of the basic calculation, there are about 2.1 million acres of privately owned residential land and 0.3 million acres of privately owned commercial land (a mere four per cent of the UK by surface area). If we want to replace all taxes apart from duties on fuel, booze, fags and gambling) we'd need to raise £300 billion a year. Now, to head off the Poor Widow In A Mansion nonsense, let's assume that pensioners' sole and main residences are exempt, so reduces the amount of taxable residential land down to 1.7 million (pensioners are one-fifth of the population, 2.1 million acres minus one fifth = 1.7 million).

£300 billion divided by [1.7 million + 0.3 million = 2.0 million acres] divided by 4,840 sq yds/acre = an average of £31 per sq yd per year. That's the average don't forget, and distributions being what they are, two-thirds of land would pay less than this and the median would be about £25 per sq yard, which happens to be Swindon.

e) Reality check: LVT on residential land would raise about £250 billion, about ten times as much as Council Tax currently does £25 billion. So the LVT on an average/median home would be about £10,000 - £12,000 per year. The cost of the core functions of the state is a laughable £60 billion a year so the average net tax per person must be around £1,000 a year. We know that the total Child Benefit/Citizen's income for a median household would be £8,000 - £10,000 per year, which neatly back to a net tax bill (LVT minus CI) of around £1,000 per person.

f) Reality check: Business Rates currently raises £25 billion a year from those 0.3 million acres and the LVT raised from commercial land would be £45 billion-odd, so the impact on business is easy to quantify - it would be like scrapping all other taxes and doubling Business Rates. Seeing as all other taxes on business activity are most of the £300 billion a year mentioned above, I think we'd struggle to find a business which ends up paying more in tax, wouldn't we?

So Sobers realised he was on a hiding to nothing with that one and did a volte face; he took my facts and then invented some more arguments against:

2. LVT will favour businesses owned by foreigners, so if we stop taxing their profits, they will remit all their profits overseas again.

No they won't. Why would people take money out of tax-free country like the UK?

3. LVT will favour businesses over households. Most businesses are owned by rich people. Therefore rich people will get even richer. This will be unpopular.

This is not actually true, most of most businesses are owned by small shareholders, usually indirectly via pension funds. Secondly, most of the people near the top of the Times Rich List are oligarchs, bankers, land owners, property developers, owners of patents and other monopolists - they live off government-protected unearned income. LVT (and related taxes) are taxes on monopolies, so the chances are, most people on that Rich List would end up slightly less obscenely wealthy. And I've never been particularly interested in inequalities between people's non-state protected earned incomes - brain surgeons and barristers will always earn more than brick layers or bus drivers - that's just one of those facts of life which we can't do very much about so there's no point worrying about it. The best we can do is allow people to keep all their earned income by scrapping income tax etc and give everybody a share of the unearned income which everybody generates and have done with it.

4. LVT will favour businesses which use hardly any land, such as banks. Sub-text: people hate banks and want to see them taxed more highly.

That's not true either and irrelevant anyway - because most of banks' income is interest on mortgages secured on land, i.e. they are collecting rents. Once the rents are collected by the government and redistributed, banks will only be able to earn money by lending for investment in productive stuff. They won't be able to blow asset price bubbles, so their income will fall. The fact that they will be paying little in corporation tax is irrelevant.

Having explained the impact on banks, we hereby neatly turn a full circle and go back to the more traditional Homey argument which is more or less the opposite of argument 4:

5. If we had LVT, then land prices would fall (yes, this is true) and so all the banks would go bankrupt. Sub-text: we like banks and want them to have more of our money.

If you can bothered to look at the distribution of loans to value and so on and crunch the numbers, we'd know that banks wouldn't go bankrupt, even if house prices halved and everybody in negative equity lost their job, defaulted and declared themselves bankrupt. That's a simple mathematical fact.
----------------------------------
That's why you can't win an argument with a Home-Owner-ist or Faux Libertarian, they have no respect for facts or logic and are quite willing to hold two diametrically opposed views at the same time and flip back and forth between them more or less at will, and if all else fails, they will concede on the facts half way through and then rehash the same old lies again later in the debate.

For them, there are no grey areas which the free markets will sort out, there is black (LVT will mean higher tax bills for some people - choose a few tear jerker categories, Widows In Mansions, the disabled, vulnerable children blah-di-blah, so is bad) and white (LVT will mean lower tax bills for some other people, if we choose a few hate figures who will end up better off, we can persuade the gullible population to stick with the present system).

19 comments:

Shineymart said...

Mark

Tx for the clarification on the numbers.

But... (and its a big but) I guess LVT will never fly while we're in the EU, so we'll have to leave. Oh thats another positive for LVT - lets do it now!

Can you enlighten me - is LVT UKIP official policy?

Shiney

Mark Wadsworth said...

Shiney: " I guess LVT will never fly while we're in the EU, so we'll have to leave. Oh that's another positive for LVT - let's do it now!"

Agreed. To be fair, most sensible policies start with the preface "Well, once we've left the EU, we'll be able to ..."

"is LVT UKIP official policy?"

I'm afraid not. For all the good things I can say about UKIP, I must admit that they are rabidly Home-Owner-Ist, but hey, no party is perfect. But the more of us there are in UKIP, the better the chances of changing this and grabbing the millions of votes of young people, say I.

Anonymous said...

most of banks' income is interest on mortgages secured on land, i.e. they are collecting rents.

Sorry a bit confused here. Are you saying that the bank will have to pay LVT on the share of the house that the mortgagee hasn't paid off? Or because the owner has to pay LVT, the bank won't be able to charge as high interest on the mortgage?

Mark Wadsworth said...

Anon 19.34.

Long run, the logic is like this: at present, an average house costs (say) £200,000 and the mortgage takes 25 years to pay off at £1,182 a month (assume 5% interest rate). The bank earns £155,000 in interest from each purchaser.

Under LVT, the average house will only cost £100,000 (the rebuild cost), so assuming our purchaser is prepared to chip in £1,182 a month, he can pay off the mortgage in 9 years and the bank only earns £27,000 interest from each purchaser.

So this source of income falls by about eighty percent!

Short run, of course borrowers are stuck with the mortgages they have already taken out.

Some people say that the LVT should be split up pro rata between bank and borrower, but we know that the banks will just hike their interest rate to cover it, so that strikes me as pointless.

Hence and why we have a cunning back up plan - banks would no longer have to pay corporation tax, PAYE once these are scrapped, so we just slap them with a bank asset tax of 2% of gross financial assets every year instead. They simply can't pass on that tax because it is a tax on the rental element of their income. And the good news is that the revenue maximising rate is also the rate which keeps the volume of bank credit down to the optimum level, not too little, not too much.

Mark Wadsworth said...

And in case you think my estimate of an eighty per cent fall is far fetched, let's remember that fifteen years ago when houses were dirt cheap, the banks' gross interest revenues were about two per cent of GDP and at the peak of the bubble they were ten per cent.

Sobers said...

Erm, now you say LVT will halve average house prices?

Why? If anything they will go up (at the bottom at least, which is where most people are). It stands to reason. If everyone at the bottom is going to better off, what are they going to do with the money? Bid up house prices thats what. Now of course LVT would have a dampening effect, but nonetheless, if lots of people suddenly have lots more income, they are going to want to invest some of it in housing. So far from the average house going from 200K to 100K, its more like 225K at least.

House prices are derived from the amount of income people have to spend on them. Average people are (according to you) going to be considerably better off after LVT, so why on earth would the amount spent on housing fall as income rises?

You're making this up as you go along.

Mark Wadsworth said...

S, as I have said before, there are two opposite forces at work here:

1. The income tax cuts, the boost to the economy and the Citizen's Income, which tend to push up rental values. Whether this impacts more on lower value or on higher value homes is unknown.

2. The LVT, which takes a chunk of that slice of rental values which would otherwise go into higher purchase prices. Whether this impacts more on lower value or on higher value homes is also unknown.

As we know, for most people, their future LVT bill will be +/- ball park twenty per cent here or there equal to their current income tax, VAT, council tax bill.

What we also know is that with a 100% full-on LVT, the selling price of houses would be little more than the rebuild cost/value of the bricks and mortar. This is by definition so - the selling price of land is merely the capitalised value of future net rents which the owner could collect, or which the purchaser would otherwise not have to pay.

I am not making this up as I go along, I have never claimed to be able to say how 1. and 2. interact if we merely pitch our LVT so that it raises enough replaces existing taxes. And I don't particularly care, the free markets will give us the answer and then we busk it from there.

But as a Master Of DoubleThink, you will no doubt argue that house price falls are bad and with the next breath that house price rises are bad. I just argue that private collection of ground rents is bad, full stop.

You also ignore dynamic effects of free markets. Perhaps the price of smaller houses gets pushed up, and fewer will want to live in a big house.

So big houses will be sub-divided into smaller houses (either literally, or by knocking down five big houses and building ten smaller ones instead). So then there are more small houses (pushing down the price) and fewer big ones (pushing up the price). I have faith in the free markets to sort all this out. And you?

Sobers said...

Well if you don't know what the hell will happen to house prices, why make the statement that they will halve (for the average house) and banks will lose x years of mortgage interest then?

"the selling price of land is merely the capitalised value of future net rents which the owner could collect"

Rubbish. Its what someone is prepared to pay for it. It not some absolute value. I might value a house at considerably more than someone else, or vice versa. Its all down to how much money I have vs what I want. If I have lots of money and really want a particular house I might pay well over the 'true' value in order to get it.

Value is subjective, not absolute.

Mark Wadsworth said...

S, I do know what would happen to house prices in the longer run, I can't tell you what will happen from year to year.

Yes of course values are 'subjective' in the sense that a house is a consumer good just like a car or a fridge or a theatre ticket, different people have different budgets and different preferences. And because housing is a monopoly, the market clearing price is that which the single highest bidder is prepared to bid. But so what?

That is far from saying that houses, cars etc do not have an 'absolute' market value at any time, and that this market value can be easily established.

In the case of housing, the underlying variable is the rental value and prices are a multiple of that. For sure, the multiple changes, but it's about twenty at present.

Furthermore, LVT is based on relative values not absolute values.

So rather unsurprisingly, if we were to take all the houses in the village and rank them in order of how much they could be rented out for, and then rank them in order of how much they could be sold for, the two lists would be very, very similar.

Anonymous said...

sobers - for what its worth - I can't afford a big house. I can (or could before I got made redundant this week) afford a house just big enough for my family. If LVT were introduced I would not be interested in buying a house of a different size anyway. Why would anyone spend more on a house for the privelege of paying more taxes? And if there were people like that surely it just benefits the ones that are happy not to pay unnecessary tax?
inbreda

Sobers said...

"Why would anyone spend more on a house for the privelege of paying more taxes"

Inbreda, I don't know. But part of MWs argument is there are loads of people who live in small houses now who would want to trade up to bigger ones if they ended up better off after LVT was introduced. Maybe they would, maybe they wouldn't, I don't really know.

But I do know one thing - all the people who currently live in big houses, and would be faced with large LVT bills they couldn't pay would be desperate to sell their big houses and downsize. But the number of people wishing to trade down would be larger than those wishing to trade up. Some people who were better off after LVT would be happy to stay put. But all those worse off would want to trade down. You would also have additional demand for low end houses from all the first time buyers who currently can't afford one.

This massive imbalance of demand can only be solved in one way - prices need to move and move massively. Currently expensive houses would have to drop by a large amount to entice people to trade up and houses at the bottom end would have to go up to price out some of the first time buyer demand, and raise the LVT to a level that forced people to stay put. Thus you would get an equilibrium where the gap in price between different types of house (4 bed detached vs 3 bed semi for example) wasn't that great in cash terms, but people wouldn't trade up because the extra LVT makes it uneconomic to do so. House prices would become squashed into a narrow band, which logically they must, because under LVT house prices must reflect the income distribution of the population, which itself narrowly spread.

My feeling is that LVT would result in a massive drop in expensive house prices, and a significant rise in cheaper houses to compensate, but less of a rise in % terms than the fall at the top end.

When the whole thing had settled down , most people would be spending exactly the same on housing costs as % of income as now, though some would be in bigger houses and some smaller, and many of the people who currently can't afford a house would still not be able to do so.

So a lot of upheaval for little or no advantage as far as I can see.

Mark Wadsworth said...

Inb, sorry to hear about redundancy.

But clearly there are people who are prepared to rent or buy a much bigger house than is in any way 'necessary' for normal standard of living, it's called 'conspicuous consumption' or 'showing off'. This is basic human nature, and as long as a third of the population are willing and able to pay to live somewhere bigger and swankier and more expensive than everybody else in order to get bragging rights, then the whole LVT system will work fine. Musings on this topic here.

Mark Wadsworth said...

S: "all the people who currently live in big houses, and would be faced with large LVT bills they couldn't pay would be desperate to sell their big houses and downsize."

it is true that SOME people in big houses would trade down, to claim that ALL of them would be 'forced' to trade down is ludicrous.

And you can have gut feelings about house prices all you like, the fact is, if LVT were taken to the logical conclusion, house prices would be no more than the rebuild cost/value, and it would be the LVT which is higher or lower depending on where the home is.

This has relatively little impact on the first time buyer and young people, because anything extra payable in tax means the purchase prices comes down accordingly. So they're not complaining, they'll manage just finfe.

So what are older people whining about?

Or could older people at least be honest enough to admit that the tax system, planning system, everything, is deliberately skewed in favour of old people and to the disadvantage of young people?

Anonymous said...

Or could older people at least be honest enough to admit that the tax system, planning system, everything, is deliberately skewed in favour of old people and to the disadvantage of young people?

I'm 25, as I was going home today there was an elderly gentleman (at least 60) standing outside the entrance to the building I was in, and he was trying to get us to sign some petition for "fairer pensions" or something like that. I can't think what he was hoping to achieve with us youngsters..

Sobers said...

"Or could older people at least be honest enough to admit that the tax system, planning system, everything, is deliberately skewed in favour of old people and to the disadvantage of young people"

Of course it is, because people who have been around a bit longer have (usually) managed to acquire a bit more income and wealth, and thus can out bid younger people who are just starting off. That's how life works. We all get to be old one day if you haven't noticed, so if the system is biased in favour of the old, we'll all get our turn.

You seem to want to create a world where someone comes out of Uni and can immediately have exactly the same as someone who's put in 25 years at the grindstone. Not how things should be in my view. Young people have far to much entitlement attitude already these days without you giving them even more.

Mark Wadsworth said...

S, OK, let's judge today's old people by their own standards: are they treating today's young people better or worse than they were treated when they were young?

Answer: far, far, worse.

"people who have been around a bit longer have (usually) managed to acquire a bit more income and wealth, and thus can out bid younger people who are just starting off."

Woah! More DoubleSpeak - aren't you always pointing out that 'millions' of old people in big houses will be 'forced' out of their homes (by younger, higher earners, presumably) and now you are telling me that older people earn more than young people? Huh? In which case, shifting from income tax to LVT would favour old people, so what's the problem?

I think we are agreed that a lot of older people don't have much in the way of income or wealth, especially once we remember that land is not really personal wealth at all any more than entitlement to welfare payments are personal wealth.

"Young people have far too much entitlement attitude already these days without you giving them even more."

I refer you to Anon's comment re 'fairer pensions', see also 'free home care', 'council tax discounts' etc etc. Stop doing this black white stuff, that's how women argue.

I never said that young people should be handed everything on a plate. If they want the nice houses, they'll have to pay just as much as an older person who wants the nice house, that's all I said, no more and no less. This is just about levelling things off again.

PS, I am old, I can remember what it was like being young and it was much better than it is now.

Mark Wadsworth said...

S, on re-reading this thread, it strikes me that you have just done the usual Home-Owner-Ist tactic of never conceding a point (that all businesses would be vastly better off under LVT-only system) and simply going off on another tangent.

Anonymous said...

MW: on the last thread as well. Total avoidance of every point argued against.

On another note, I think the term conspicuous consumption should be reserved as only one of several reasons to live "above the average" in terms of housing. Locationwise there are lots of economic and personal reasons to live where people live, and people will not avoid living where they want or need, if they can afford it, just because LVT is applied to replace a portion of land costs (same as with businesses). AFAICS the one motivation for putting money in housing that would change, would be the propensity to "save" in housing because of it's tax favoured status and expectations of capital gains. That could perhaps be a significant change for all I know. Witness the current situation where every single adult person I know will max out their worth in credit in housing as the default.

-Kj

Mark Wadsworth said...

Kj, yes, there are two reasons why people live in above average houses:

1. Because they live in a high wage area, where even the rent/purchase price of a physically modest house or flat is very high.

2. Because they want to show off. So while a four-bed detached in Liverpool costs less than a two-bed terrace in London, the former is showing off the latter is not.

The Homey/Faux Lib notion that all the wealthy people who can afford to live in nicer houses will rush to move into one-bed flats is of course complete nonsense.

Buying to let will still be a good investment though, because although the cash return might fall compared to now, prices will also fall accordingly, so that your return on investment stays the same, and while there's little hope of capital gains there is no chance of capital losses either.