James James & Tim Almond mentioned LVT in the comments at Tim Worstall's and got the usual KLN's in response. John B's rebuttals are a model of brevity (mine usually tend to drag on and on, because I always worry that I haven't covered everything).
PaulB, quoting straight from "The Theory And Practice of Oligarchal Home-Owner-Ism":
What's wrong with the LVT? Assuming you're proposing a high enough tax rate to replace a significant part of income tax and VAT revenue, here are a few things:
1) Income tax and VAT are taken out of transactions, which means that you've definitely got the money to pay the tax. Taxing assets is different.*
2) What's the advantage of taxing land value rather than (fixed) property value? The interaction with the laws on planning permission is going to be difficult to manage (and hasn't been properly discussed in any proposal I've seen**).
3) There's a major injustice in changing over from income tax to LVT, in that existing landowners will often have bought their land with taxed income.
4) Proponents of the LVT often claim that it can replace income tax (see Tim A above). They also claim that it will reduce land value, because people won't be keen to hold land they have to pay tax on. So who is going to pay all the tax?
john b deftly knocks those on the head:
@ Paul:
1 is a pseudo-economist version of the Widow Twankee gambit. "Old people can roll it up until they die", sorted, nobody will run out of liquidity apart from people who are about to be bust anyhow.
2 doesn't make any sense. LV includes planning permission V, but not the value of stuff that's been built. That's really easy and is done for all commercial property already (the building is depreciated; the land and permissions are viewed as the land).
3 is nonsense, in that all everything is out of taxed something. People who call "double tax" are silly; your income has been VAT-ed and NI-ed and income taxed, and then when you spend on a thing it's VAT-ed and NI-ed and income taxed again. This is no more unjust than anything else.***
4 oh come on, you can't possibly be that daft. The value of the land falls by the value of the ongoing tax incidence. It's a one-off thing after which the land still has significant value.
* Homeys miserably fail to address the counter-question. Imagine that somebody has evaded income tax all his working life and now lives in retirement in the stately pile he bought with the money he ought to have paid in tax. Should the tax office simply waive his back liabilities on the basis that he is now "asset rich, cash poor"?
** That's an outright lie. The generally accepted definition of LVT is "A tax on the site-only rental value of each site assuming optimum permitted use". That definition applies whether you have planning restrictions or zoning laws or not; and LVT works conceptually or administratively just as well with or without planning restrictions and zoning laws. And nowhere does it say that the tax would be 100% of the annual rental value.
*** That's actually the more sophisticated answer. The simpler answer is: your next year's earned income hasn't been taxed yet and neither has your next year's non-cash rental income. Why is taxing your next year's non-cash rental income instead of taxing your next year's earned income "double taxation"? If they decided to scrap tobacco duty and increased alcohol duty instead, would people argue that it's "double taxation" because they've paid tobacco duty in the past?
No, They Haven’t
36 minutes ago
25 comments:
"The generally accepted definition of LVT is "A tax on the site-only rental value of each site assuming optimum permitted use"."
"And nowhere does it say that the tax would be 100% of the annual rental value."
Right, so if my house can be rented out for about £1250/month (a generous assumption) my LVT could be at the worse £15Kpa? Is that correct? Less in fact because most of the rental value of a plot of land with a house on it is the fact there is a house on it. I doubt the rent on a plot of land with planning permission but with no house on it would be very much.
If so how does it fit with your oft repeated concept of LVT being around 8% of the selling value of ones house? Which in my case would be £24K? Or even greater if one used your 'average value per post code sector' method of valuation, as my house shares its post code sector with a high property value village, and has a larger than average garden?
A 100% tax on rental values would bring in nowhere near the tax revenue that an 8% tax on selling values would. How do you account for the difference?
Sobers: "Less in fact because most of the rental value of a plot of land with a house on it is the fact there is a house on it."
Oh Jesus. You still don't understand the concept of "Unimproved land value." Hint: Unimproved land value doesn't change as you improve the land. The clue's in the name!
If you want to rent a plot of land without a house on it in order to live there, you need to build a house, in which case you need to pay (Land Price + Build Cost). If you want to buy a plot of land with a house on it in order to live there, the owner won't give the house away. What will he charge? Probably the (re)build cost again! Re-arranging both equations gives you Willingness to pay - rebuild cost = land price. That's true whether there's a house on the land or not.
Sobers, your maths is quite correct up the point where you overlook the circularity.
1. Let's assume total land rental value (excl. bricks and mortar) in the UK is currently £150 billion per annum.
2. We know that rental values are a high fraction of post-tax income above and beyond a "basic minimum" level.
3. So what happens if we collect that £150 billion rental value as tax and (say) scrap VAT and NIC? Then people's post tax incomes go up by +/- £150 billion and hence rental values go up by +/- £150 billion.
4. So our new potential rental value is now +/- £300 billion, so with the extra £150 billion we can e.g. eliminate income tax.
5. Same as 3 and 4, our new potential rental value is now £450 billion etc.
6. Clearly, rental values cannot rise to infinity, about a third of GDP seems to be the upper sort of limit, i.e. £500 billion odd, which is by and large the total revenues from all taxes (excluding fuel, booze and fags duty).
7. So you might as well start with £500 billion and divide it by the total current selling price of all UK land and buildings, which gets you to about 7%.
8. Common sense says that if average household can pay £17,000 total a year in various taxes (£500 billion divided by 30 million) then it can afford to pay up to £17,000 a year in LVT, of which most will be on the house they live in (say about £12,000) and the rest on the office or factory where they work and on the shops and cinemas they spend their money in.
RA, don't make it so complicated, we can strip out the bricks and mortar rent using like-for-like equations and cancelling out the known figure.
Sobers has fairly standard large semi, he reckons total rental value is £15,000. We know that the rental value of a similar large semi in the cheapest area of the UK is (say) £5,000 (and that the location value of this house is £zero), therefore, out of Sober's rent of £15,000 p.a., £10,000 is pure location value (this figure is depressed by the income tax etc which his potential tenants would pay).
Less in fact because most of the rental value of a plot of land with a house on it is the fact there is a house on it.
Still got your eyes firmly screwed shut, eh Sobers?
The whole point is that the very truthfulness of your statement *depends entirely on where this house is*. If your (for sake of argument) 3-bed detached is in antarctica, you would be very right (let's say 99% of the value is structural). Take the exact same structure and plonk it in the Square Mile, and the opposite would be true.
This really isn't that difficult. Why you think you can criticise a location-based tax while ignoring location is unfathomable.
If so how does it fit with your oft repeated concept of LVT being around 8% of the selling value of ones house?
You've been here long enough to know that MW's 8% figure is not equal to 100% rental value, but rather to current UK government revenue, i.e. to replace current taxes. It's like you're not trying anymore...
Ah, but theres a big difference between saying we are going to tax x (x being the rental value) which will then change as the taxes on income are reduced and the tax on x will slowly rise over time, and that we are going to tax y (the capital value) right away, because its where taxing us x will eventually get us. Because rental values are pretty much distributed with income levels (you can only pay rent out of income you have) whereas capital values are not distributed in line with income so much. There are many more people living in houses they could not afford to buy than there are people living in houses they could not afford to rent. Thus taxing rental values is less socially destructive than just saying 'You have to pay 8% of your house value in tax right now'.
The two concepts might be mathematically identical (eventually), but they do not have similar consequences for millions of people. You do not seems to have any care for the social upheaval that any implementation of LVT would have. You just look at the maths and nothing else.
@Richard Allan: You are talking nonsense. Its nothing to do with rebuild costs. The plain fact is that the rental value of a plot of land with planning permission but no house is x, and the rental value of an identical plot of land with a house on it is several times X. What you do with your unimproved plot of land once you've rented it is up to you. You could build a house if you like (pretty stupid really) or live in a tent, or a caravan or whatever. But the reality is that the rental value of a house is mostly down to the fact there is a house there to use. No house = much lower rental value.
If this isn't the case I don't know why house builders bother building houses. They might as well get planning permission and just rent the plots out at the same rent they could get for one with a house, for a lot less expense and hassle.
F, by a happy coincidence, that 7% (or 6% or 8% or whatever the figure is) would be approx equal to the total rental value of UK land if all other taxes were scrapped and at least half of revenues dished out as Citizen's Dividend.
Mark, there are two related things that I think you've dismissed too hastily in the past.
1. If you improve your land before everyone else (e.g. you build a towerblock while everyone else has bungalows), then you benefit. You're using the same amount of land and so paying the same LVT, but getting much more rental income than your neighbours.
Whereas if everyone else improves their land and you don't, you're screwed. If your neighbours all build skyscrapers and you still have a bungalow, your LVT bill goes up as much as your neighbours.
So far so good.
But this means that you can't just calculate LVT as a percentage of the site+building value.
2. You need to take more seriously the objection that two plots of land right next door to each other can have hugely different values.
These problems can both be fixed with a careful VOA database, but you need to take them seriously.
S,
1. You know perfectly well that the 7% figure is just there as a rough guide.
2. Your argument about rents vs capital values is irrelevant. The Homeys squeal blue murder even if their council tax goes up by 0.1%. The crappy old "ability to pay" and "it's my land" bullshit applies however demonstrably fair or equitable the LVT is apportioned or calculated. And I am long past giving a shit what Homeys think.
3. Whether it would be cleverer to just implement LVT overnight and leave the losers to sort themselves out, or whether to do it piecemeal as a long drawn out process, is a separate debate.
I have noticed, in real life, that people squeal equally loudly whether they are losing £100 a year or £10,000 a year, so to my mind it makes sense to implement it quickly and get it over with.
Poor Widows In Mansion can only be Forced To Downsize once, and they'd do this whether LVT is
a) very modest to start with (but with the clear plan to increase rates in the near future) or
b) absolutely full-on to start with.
Once everybody has moved to somewhere that he is able to afford under full-on LVT, well, what's the point in hanging around?
JJ, for the dozenth time, I have never said that LVT would be calculated as x% of what your house is currently worth, full stop, end of discussion. That is just a rough guide.
Enough people have asked me, go on then, tell me, under full-on LVT, how much tax would I be paying?
Short of that person providing me with tonnes of information about rental values and rebuilt costs and plot sizes, or me waffling on about how affordable it would be, the most honest answer is "about 7% of what your house is now worth", that gives us some idea of the numbers.
2. I do take it seriously. I repeat: it's a tax on annual rental value (as I explained in an earlier comment in this thread, it's a piece of piss working it out) assuming that the owner is making full use within permitted planning.
If the bungalow owners have no permission for skyscraper, then they pay tax on [the planning value of a] bungalow and the skyscraper owenr pays tax on [the planning value of] the skyscraper.
If everybody has the same planning permission and some use it and some don't, well then they all pay the same amount (being some sort of weighted average of a bungalow and a skyscraper). Clearly, if nobody else is building a skyscraper, then that is not the optimum use, it may be that the skyscraper owner has over-developed and is losing money.
"If this isn't the case I don't know why house builders bother building houses. They might as well get planning permission and just rent the plots out at the same rent they could get for one with a house, for a lot less expense and hassle."
S, I'm sure you've had this explained to you before, but here goes again: The purchase price of a piece of land, or a house on a piece of land, is directly proportional to the rent achievable on that piece of land or that house. Therefore, the only difference between buying a piece of land, getting planning permission on it and selling it (which people do all the time) and doing the same and renting it out is that if you sell it, you get all the money up front, which helps with the cashflow. Developers do rent out unimproved plots: the Duke of Westminster's family got extremely rich doing just that.
B, you and S are in the trade, as was Lola's dad and as are a lot of my clients. We all know full well the real money is made by buying cheap land without planning (or with very restrictive planning) and then getting (much more generous) planning and then selling it.
Once you've got planning, you've banked 80% of the total profits, actually building houses to squeeze out the last 20% of the profits is the difficult and risky bit.
JJ, having re-read this thread, my reply to you above was perhaps unnecesarily brusque, apologies for that, but you know as much about all this as I do, you'll have to forgive me if I simplify it all a bit.
"We all know full well the real money is made by buying cheap land without planning (or with very restrictive planning) and then getting (much more generous) planning and then selling it. "
But why do people pay more for a plot with planning than for a similar sized plot without planning? Because they can build a house on it if they buy it. But they can't (or won't if they have a brain) rent it and build a house on it. Ergo the site only, unimproved rental value of land (even with planning permission) is little more than that for agricultural land. What else can you do with a plot of land that you are renting? Keep sheep on it? Grow vegetables? Live in a caravan or tent perhaps?
Rental values only rise once you have improved the land. The rental value of an unimproved plot with planning is the same as bare land without planning. Its capital value is completely different, but only because the State has said 'Here you can build a house if you want' vs 'You can't build a house here at all'.
The value of a plot of land with planning is not the sum of all the rents into the future of the land without a house. Because that would be the same as the plot without planning, ie agricultural rents. Its the assumption that the permitted house will be built by the new owner of the land and then the rental value will rise as a result that gives rise to the capital value. Its a basic sum - once the house is built it'll be worth x, it costs y to build, ergo the plot is worth roughly x minus y = z. And while the value x is determined by the sum of all the rents into the future, the value z is not. Its a calculated value, not one dependent on sums of rental values. If someone invented a robot that could build a house on its own for half the cost of a builder what would happen to the value of plots of land with planning? They would rise is value suddenly, because your £200K house could now be built for £50k. The rental value of the bare plot would not have changed. No-one would be prepared to pay extra rent for a bare plot of land, if they were prepared to rent it at all.
Ask some house builders what they do with their land when they have planning permission on a large development. They will often rent out undeveloped fields to local farmers to keep cattle on,or make hay/silage etc, for agricultural rents, until they are ready to build houses on them. Until they improve it, no-one is prepared to pay more than agricultural rents.
I therefore contend that the unimproved site only rental value of any land is agricultural rents only. Good luck with getting enough tax out of about £40/hectare across the country to fund the £700bn the State currently costs - if my maths is correct that equates to about £6bn in tax revenue.
If someone invented a robot that could build a house on its own for half the cost of a builder what would happen to the value of plots of land with planning? They would rise is value suddenly, because your £200K house could now be built for £50k.
Keep churning out arguments for LVT; technological progress makes land even more valuable. Good to see you are aboard.
If you buy a 100K plot with planning permission, it doesn't matter that you can't rent out your newly aquired plot for more than ag rents, through purchase price and (perhaps) a bank loan, someone is happily collecting rents from you.
"Because they can build a house on it if they buy it. But they can't (or won't if they have a brain) rent it and build a house on it."
Just because this is not done much nowadays, doesn't mean that it can't be done or wasn't done in the past. Whilst all their peers with land round London in the C19th were making a one-off windfall gain selling their land to builders, the Grosvenors, cannily sold leases instead, i.e. rented the land out. They didn't build anything. So it can be done, it has been done and thus it is perfectly possible to determine the rental value of a plot of land with planning permission on that basis to be more than that for agricultural land.
"Until they improve it, no-one is prepared to pay more than agricultural rents."
This is a complete red herring. Of course no-one is going to build a house on land that they are renting on a six monthly tenancy or even on a three-yearly tenancy and I bet none of these developers was trying to rent the land out on a 99 year lease.
Sobers is confusing "RENTing a house" with land RENT.
S, you know perfectly well what LVT would apply to and why, if you can think of a snappier definition, then feel free.
Kj, good riposte.
B, yes, 99 year leases is a good example or even 30 year leases in HK.
P, don't worry, Sobers is not confusing anything, he is just pretending to be stupid to annoy us.
Mark, it would have been polite to tell me you were posting this.
Anyone who thinks johnb's arguments "deftly knock mine on the head" should read the rest of the comment thread on Tim Worstall's blog. By the end of it johnb has admitted that the tax would have to be imposed not on the market value of the land but on a notional market value - "what the land value would be without the tax". A less workable proposal it is hard to imagine.
PaulB: "johnb has admitted that the tax would have to be imposed not on the market value of the land but on a notional market value - "what the land value would be without the tax". A less workable proposal it is hard to imagine."
Those are your words not his and John B is a lot smarter than that, unfortunately, he cannot make other people clever, especially if they want to be stupid. LVT would be a tax (and not necessarily at 100%) on the "annual rental value of each particular plot, assuming optimum permitted use".
(To save argument, let's assume that the NIMBYs and town planners are right and every plot is being put to its optimum permitted use and that no further planning will be granted for the time being, so we can assume actual use = optimum permitted use)
If a bog-standard 1930s or 1950s semi-detached house in a poor/cheap area can be rented out for £5,000 a year, and in a rich/expensive area a more or less identical house can be rented out for £15,000 a year, that difference of £10,000 is purely down to the location value and that is the basis for charging the tax (so if the tax on the first house is £nil, the tax on the other house is x% of £10,000).
We can do the same for lots of other fair comparatives (one bed flats, 3-bed Victorian terraces, light industrial units, city centre shops, car parks, supermarkets etc) and thus cover 99% of all land with buildings on it and extrapolate the other 1%.
There is no "notional" about it, you can do it with real figures, it is entirely workable and do-able. Sure, there's maybe a +/- 10% margin of error, but so what? If the LVT is less than 80% of the actual annual rental value, then nobody pays more than 100% and no harm done.
If you use capital values (which works fine at lower rates like 1% or 2% on capital value but not at higher rates) then there is some circularity involved - unless of course you apply common sense and estimate the annual rental value as [existing tax liability + % of residual capital value].
Mark, you're mistaken. I quoted johnb verbatim.
PB, trying applying logic and commonsense.
Whether John B said "two times two is four" or "two squared is four" comes to the same thing, don't pretend that these are different definitions.
And what do you mean by "market value of land" anyway? Its current selling price as a bare building plot with planning for exactly what is built? The current value of the land + building minus rebuild cost/value of the building? (which are very similar)
Or do you mean "rental value"? We know (or at least, people who know about this stuff know) that rental values are surprisingly stable but selling prices go up and down a lot because of interest rates, credit bubbles etc. So if we are using selling prices, LVT only makes sense if we look at RELATIVE selling prices and not ABSOLUTE selling prices.
But then understanding the difference between RELATIVE and ABSOLUTE values also requires an understanding of basic maths, which underpins any system of taxation. If you can't understand maths, or that one equation can be expressed in a number of different ways to arrive at the same answer, then this debate is meaningless.
Whoa. Where's the apology for accusing me of misquoting johnb when I hadn't?
If you're concerned about my understanding of mathematics, read my blog. You'll find sufficient evidence that it's more than adequate.
I'd like to engage in a civilized discussion about the merits of a Land Value Tax. Feel free to get in touch when you'd like to have one.
PaulB, but can you do commonsense as well as maths? Do you really believe that it is impossible to calculate LVT to within a tolerable margin of error so that the relative bill on different plots is "fair" bearing in mind the differences in relative "value" of those plots? How would you calculate it if you had to?
Ironing out the practicalities is quite a different topic to the actual merits of LVT as compared to taxes on incomes and output.
Now, if you are a Faux Lib or Homey and oppose LVT in principle, that's a different topic, but trying to pretend that there are great practical difficulties is being silly, as there aren't. How do you think they do Business Rates?
and I'm not apologising because you misquoted JohnB quite maliciously. He explained the maths of it - which is perfectly workable, as you surely know - but you then claimed that this made it unworkable.
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