Killer Arguments Against LVT, Not (Farming edition)

A hysterical commenter at Left Foot Forward, who is ostensibly a hard-core Socialist but may on closer inspection be a Poor Widower In A Mansion, asked...

"How will you handle agricultural land so as not to inflate food prices?" To which I replied "All easily solved if you apply common sense... The rent of farmland, and hence the LVT is dictated by food prices and not vice versa. In any event, the rental value of farmland is so low that the tax would be less than the income tax etc which farmers currently pay. This all stands to reason, or else tenant farmers would not be able to make a living.

Economics is not his strong point, and he made this bold assertion: "So basically, you're willing to accept a huge rise in food prices. The values I have seen proposed for farmland would cause, cause a 50-60% rise."

OK, simple economic logic is not good enough for him - the question can be answered by comparing the prices which three different farmers charge for their output; an owner-occupier; a tenant farmer who rents from a private landlord; and a tenant farmer who rents land owned by the government (Crown Estates is run by the government, not by or for the benefit of the royal family). Land rent and tax is the same thing, so to all intents and purposes, we could say that the government lets him have the land for free on the condition that he pays an annual tax equivalent to the rental value.

They all charge the same prices, obviously. Taxing the rental value of farm land, even at 100%, would put the first two farmers in the same position as the third farmer and there would be no change in prices.
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But sod economic theory, let's look at actual numbers, they are dwindlingly small:

1. Going by Defra's figures for 2009 (the most recent available), total consumer spending on food in shops is £65 billion a year, and that income/turnover is shared as follows:

Agriculture and fishing - £7 bn
Food and drink manufacturing - £ 25 bn
Food and drink wholesaling - £9 bn
Food and drink retailing - £24 bn.

So out of £1 you spend in the shops, farmers only get about ten pence. Even if farm gate prices were to increase by half as a result of tax changes (which they wouldn't) and assuming competitive manufacturing, then that would merely mean that retailers' and wholesalers' share of total income would go down by a tenth (these sectors are the closest to being a monopoly, and so bear all costs and rake in all super-profits) and prices paid by consumers would stay constant.

Even if that extra £3.5 bn extra income for farmers were magically passed all the way up the chain to consumers, then shop prices would only go up by five per cent as a result. Seeing as we are constantly being told that we throw away at least a fifth of the food we buy, then maybe the result would be that we buy slightly less and throw away slightly less. Nothing terrible would happen.

2. A fair LVT system would mean that no productive business would pay more in tax than it does now, so how much tax does the farming sector pay? That £7 bn income is taxed at an average rate of say 30%, so that's £2.1 bn tax. There are about half a million farmers and farm workers who live in a quarter of a million houses paying £1,500 council tax, that's another £0.4 bn, with maybe as much again for Business Rates on agricultural buildings, let's call it £3 bn a year, all in.

3. That £3 billion is more or less equally offset by agricultural land subsidies, which were £2.3 bn a year in 2009.

So in net terms, farmers and farm owners paid net £0.7 billion in tax.

4. In the interests of fiscal neutrality, our starting point is thus that the current tax take (income tax, NIC, Council Tax, Business Rates) net of farm subsidies is only £0.7 bn a year.

a) To raise that much in LVT, all you'd need to do is put a flat tax of £2,800 a year on each farmhouse incl. outbuildings, or a flat tax of £16 per usable acre per year (or some combination of the two), and have done with it. Thus reinstating 'Agricultural rates' which we had for about three centuries without anything terrible happening.

b) The average annual market rent is £50/acre for arable land and £35/acre for pasture land, so £16/acre in 'Agricultural rates' looks perfectly reasonable. Income and gains from forestry is currently more or less tax free (although they still have to deduct PAYE from wages) and receives little in cash subsidies. The rental value of forestry land is practically nothing, £5 or £10 per acre per year perhaps, so that'd continue to be exempt.

c) Or, to save bickering over whether a particular house qualifies as a farmhouse or not, or carping over whether an outbuilding is used for 'farming' or for 'food processing and manufacturing', it's even easier just to exempt the bare land itself, charge tax on all the land used for farm buildings at full LVT rates and pay farmers and agricultural workers their normal Citizen's Income/Pension, which would net off to receipts of about £0.7 billion a year, which is exactly the same as what they are paying now (from 3. above).

5. To sum up, anybody who says that it would make a big difference if we scrapped farm subsidies and replaced existing taxes and collected the same amount in LVT instead is an idiot. Fact is, it wouldn't make much of a difference, and whether farmers' overall tax bills go up or down slightly is uncertain. In fact, they'd probably go down, or at least, it could be easily engineered to achieve that, by scaling down the figures I suggested in 7 a).
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Footnote re agricultural subsidies:

We are often told that supermarkets have such monopsony power that farm gate prices are pretty much cost-price. I suspect that farmers' costs include the value of their own labour, but farming itself is not particularly profitable. Therefore, we can assume that in the absence of farm subsidies, the rental value of farm land would be more or less nothing.

Actually, it's ever so slightly more than nothing, because most of the £2.3 billion in subsidies pushes up rents. If we multiply up land use statistics from here by average rental values from here, the total rental value of all UK farm and forestry land is about £1.7 bn a year.

We can also safely assume that the £1.7 bn rental value is merely the two-thirds of the agricultural subsidies which accrue to land owners (supermarkets get the other third by pushing farm gate prices down to below cost.