Reading this post at Tim Worstall´s, and the first comment by Neil Craig:
Then add Heinein’s twist – that the owner gets to set the value of his land – on condition that anybody who wants can buy it t 3 times the owner’s valuation.
- got me thinking about the whole valuation thing.
MW reminds us often enough that it´s absolutely within the grasp of professionals to do reasonably good valuations. That´s fine. But let´s slip into utopia-mode, and devise a system where this can be done in a transparent way. Where rental value of land can be derived as a direct result of market transactions (preferably purchases), instead of a system of assessing the whole of market transactions/rents*, that can be "hidden":
• We want a system where the full value of the land can be collected, and the full value of improvements, as judged by willing sellers and buyers, to belong to those who own them.
• We, or I anyway, wouldn´t want a system where any landowner is obliged to sell anything, as opposed to some of the self-valuation schemes that people have proposed.
• Bids: can a correct price for both rental value of land, and capital value of improvements, be achieved in a system where both the improvements and the rental value of the land is bid for separately? How would such a system look like without a tendency to overbid one or the other? Or underbid for improvement values if land values is what wins out.
Just thinking out loud. Anyone with ideas/links for a conceptual scheme is welcome to put it out there.
* Obviously, for rental value on land to move on properties not "on the market", other market transactions would still have to affect those land values.
Thursday, 19 September 2013
Low tech valuation
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11 comments:
That's the problem isn't it?
Such a reverse auction system works fine when valuing the entire plot-plus-improvements for sale purposes, and if the tax is on the whole selling price value, it works.
But this doesn't really get us any closer to finding out what the annual the site premium is in terms of rental values, the closest you can get is averaging and comparing.
And who says rents can be "hidden"?
We just pass a law that says no rent is payable on unregistered tenancies at all, and if the tenancy has been registered by tenant or landlord, then whatever figure is shown as the rent is the rent actually payable.
So if the rent is £600, the tenant might gamble on the landlord not registering and he puts in a form saying £500. A copy of this goes to the owner (the personal liable to pay the tax). So he has every incentive to register it at £600.
Similarly, the landlord might gamble on the tenant not registering etc.
Therefore, most tenancies will end up being registered at the correct rent, and that is our tax base.
Remember - that average assessed rental value applies to all homes, whether the tenancies have been registered or not, or if it is owner-occupied.
Yes, agreed. Where assessments need to be done rents and purchases must be registered. But that´s not visionary stuff! Is there a auction method or self-assessment with incentives to arrive at true value that could be applied?
Kj, your other problem is this:
Assuming full-on 100% LVT, then all homes would sell for similar amounts of money, land would cost nothing to buy.
At that stage, you know that you have got the LVT correct, but selling prices are merely an indication that the LVT is correct, and not an indication of how much the site rental value is.
And returning to my second comment, that is the argument for not taxing individual rental income or capital gains on sales etc.
If you tax individual rental income, landlords have every incentive to lie and cheat and understate income or profits.
If you tax all landlords as if they are receiving the average reported rent in the area (whether they are getting more or less does not matter), then if one landlord cheats and lies and reports a low rent, then
a) He hardly benefits - his is only one out of thousands of homes in the area, so if he understates the rent by £10,000 a year, that only pushes the average rental value down by £5.
b) He still faces the full risk of prosecution etc.
c) His tenants can look up the official reported rent for the home they live in and just pay that much - he cannot evict them for arrears or underpayment because they were paying the official amount.
"His tenants can look up the official reported rent for the home they live in and just pay that much"
If he's got any sense, he'll square it with the tenants and give them a cut of the tax savings as a rent reduction. That way, if they report him, both sides lose.
I think rent registration would largely work. The same way we somehow manage to collect all sorts of info from companies and individuals these days through income tax. That´s fine.
BTW I think already Adam Smith pointed out the need for a rent registration scheme already in WoN.
Anyway, the post was a call for more novel ideas I guess. But I´ll admit I find it hard, if one doesn´t set the term of no forced sale by self-assessment or something.
At that stage, you know that you have got the LVT correct, but selling prices are merely an indication that the LVT is correct, and not an indication of how much the site rental value is.
Exactly, but annual LVT payments could still be subject to a bid even if the capital value is zero. The problem is how you could structure an auction so that someone would bid the "correct" value for both rental vaue of land and capital value of improvements.
B, I think you've missed the point.
Under-reporting and splitting the difference works fine if rents are taxed on the basis of cash received by each individual landlord.
But let's assume the only tax on rental income is LVT, based on average reported rents for the area. There is no income tax on actual cash income.
So if 3,000 homes are averaged out to arrive at the average rent of (say) £10,000, then if one landlord persuades his tenants to agree to co-report a rent of £8,000, this only depresses the average rent for the area by £3 a year - not much of an incentive to lie.
And having reported £8,000, the tenants now only have to pay £8,000. If the landlord sues them for arrears, he would have to admit that he under-reported in the first place and gets sent to prison.
Kj: "how you could structure an auction so that someone would bid the "correct" value for both rental vaue of land and capital value of improvements?"
I don't know, and I've thought about it long and hard enough.
B, not £3 per year, 67 pence per year.
Actually total rental value 3,000 homes x £10,000 = £30 million. Divide that by 3,000 = £10,000.
One landlord under-reports rent at £8,000, total registered rental value now £2,998,000. Divide that by 3,000 = £999.33.
It is simply not worth the risk of a prison sentence to save potentially 67p a year in LVT and risk losing £2,000 rent a year.
The tenant who wilfully under-reports the rent would also go to prison. Fuck 'em.
B, further, a sensible system based on local averages would also ignore the top and bottom five per cent of reported figures.
Even ignoring tax, some reported rents or selling prices will be lower than market value, for innocent reasons (let or sold to a friend or family member) or foul reasons (hiding assets on a divorce or bankruptcy).
Similarly, some reported rents or selling prices will be higher than true market value (mortgage fraud).
So the person reporting is free to tick a box saying "This rent or selling price is not at market value" (the reason might be quite innocent) and those values get ignored anyway.
So not only does our shit of a bullying landlord risk a prison sentence and losing £2,000 a year in rent, he hasn't even budged the official figure.
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