Tuesday, 7 January 2014

The Regulatory Tax (2)

Continuing Ben Jamin's topic from earlier today.

On Planet Faux Lib, a regulatory tax is defined as follows, DCLG pp22-23:

Recent empirical studies that examine the impact of land use controls measure regulatory restrictiveness in either of two ways. The first measure, pioneered by Glaeser et al. (2005a), is the so-called regulatory tax, which is the gap between prices and marginal construction costs. The second measure is an aggregate index of regulatory restrictiveness based on survey data (see e.g., Saks, 2008; Saiz, 2010)...

They find that the regulatory tax exceeds 50 per cent of condominium prices in places such as Manhattan or San Francisco. This suggests that the regulatory tax in these places is the second most important ‘tax’, only topped by the income tax. At the same time, the authors estimate the regulatory tax on housing to be negligible in places such as Detroit, Pittsburgh, Philadelphia, or Houston.

Jolly good so far, I'm down with that.

The difference between prices and construction costs = land value, location value, the value of the planning permission, the site premium, whatever you call it = a privately collected tax.

I emailed back and forth with one of the academics pushing this line:

So we can split location values into two things:

a) Part is down to the location, so values in London higher than Newcastle anyway, and this is not "regulatory tax" in your view

b) Part is down to planning laws (the amount by which the value would fall in the absence of planning), which is a "regulatory tax".

But how does this principle apply to Hyde Park or other parks in London, which are only there because the government says so (let's assume). In other words this is a planning decision, and part of the value of homes near parks in London is down to the park.

Would you consider this element of the value of a home (The Daily Mail says it is £10,000 to £20,000 on the selling price) to fall under part (a) pure location value or part (b) "regulatory tax"?

His answer was perfectly clear: anything which the government does which pushes up values which a sensible person would consider to be A Good Thing, like parks (or by extension, most things the government or society in general provide: roads, schools, police, old age pensions, flood defences, work, shopping and leisure opportunities, pubs and clubs) is NOT a regulatory tax, only the very marginal effect which quantitative planning restrictions has counts as a regulatory tax, which is A Bad Thing.

My view is, if you can't draw a line, don't bother.


A new town is planned, and for whatever reason they only have a ten mile by ten mile area to play with. They could choose layout A, fill it uniformly with 600,000 small houses, with narrow awkward roads, no parks, no discernible town centre, no industrial or commercial zones, no school or hospital buildings etc. This is shit town planning and the price of a home there would be pretty low (no jobs, no shops etc).

Or they could choose layout B - zone it into suburban residential areas with a mix of terraced, semi-detached and detached houses houses, out of town industrial areas, inner city shops and offices and blocks of flats, wider trunk roads, interspersed with parks, green areas, rivers, bits of woodland etc. Clearly this is sensible town planning and the value of homes here would be much higher, but because so much space is used for non-residential, there would only be 400,000 or 500,000 homes here.

Does that extra price/value using layout B at least partly count as a regulatory tax? Clearly yes, because there are fewer homes, but how much of it - just the element that is down to there being fewer homes, or also the element that is down to the sensible overall mix?

If they don't mind too awfully, I will assume intellectual coherence on their part and stick with their original definition - any part of the price in excess of construction costs is a privately collected tax, end of, full stop. It does not matter how or why it arises, and the amount which relates to planning restrictions is such a negligibly small part of it that we needn't worry about it overly or even bother to quantify it as a separate element.


Ben Jamin' said...

@MW This is a great post.

If landowners pay compensation for their right to exclude, who cares what the mix of welfare losses/gains are? The market sorts it all out for us.

NCE's love Coaseian theory so why not start to apply it to the most obvious case for it?

If NIMBYS are using planning for their own devious ends, or are harmed by development LVT internalises ALL the externalities via the market.

Job done. And we get nice compact cities and affordable housing.

Kj said...

Well yes and no Mark. In B you rightly attribute higher values to allocation of land outside of residential. But it might be possible to envision that the restrictions planning put on use of the residential space counts as a regulatory tax, that is regulations on whether to build detached or semi detached, put up an infill, or even build flats, causes disrepancy between supply and demand at any one time. Aren´t we Georgist saying that LVT should cause more efficient use of land?

Kj said...

- if there´s a market for denser housing ofcourse.

Mark Wadsworth said...

BJ, thanks.

Kj, in this example you cannot describe anything as "restrictions" because Town A and Town B are completely new towns being built in an empty area.

"Aren´t we Georgist saying that LVT should cause more efficient use of land?"

Yes, but I prefer to say that "LVT will lead to more efficient use of existing developed land and buildings".

So the PWIM changes places with the young couple in the small flat, empty buildings are brought back into use, buildings in poor condition are repaired etc.

Kj said...

MW: fair enough, the new town is developed, either with a private or public entity deciding the mix and density. Restrictions and the cost become relevant when needs change, that´s where I would stop exonerating planning regulations. Demand can change considerably in a period of just ten years. You use to say that planning regulations only matters on the margins in relation to housing costs. Well the margins matter, because the margins is where the demand change is noticed.
You are right that there is scope for adapting to demand changes within existing buildings, so internal use restrictions should go. But there is even more scope for responding to demand changes in allowing footprints to change (except for common sense stuff like height and offset restrictions).

Bayard said...

AFAICS, all these attackers of planning regulations are shills of the developers, who want to be able to build anywhere they like and, especially, build on land they have acquired at values artificially depressed by the very planning regulations they seek to remove. No matter that this is killing the goose that lays the golden eggs, this year's profit and bonuses is all that counts.
This is why these people seldom listen to reason: the object of the exercise is not to produce some sort of coherent land use or taxation policy, it is to show that planning regulations are a Bad Thing and that we (meaning them, but implying all of us) will be better off without them.

Kj said...

Bayard: well, sort of agree, but I don´t think developers are that much against planning, as they wouldn´t be able to pick up dirt-cheap land and turn it into gold through planning consent.

Kj said...

To say differently an above sentence: the margins is where individuals can adapt to demand changes. Find that increased rents because of rapid growth is making your house unaffordable? Well, you can either let out some rooms/split the existing house in two and halfe your bill, or you can extend and turn your house into a duplex, halging your tax bill without halfing living space. It´s letting people/property owners adapt to changes in rents in a real sense, not just have the option of moving to a lower rent place, of which the supply is fixed because of restrictive planning.

Bayard said...

Kj, considering how few people appreciate that planning restrictions hold the price of land down, not put it up, I'm not sure if yer average landowner has thought that far into the subject.

Kj said...

Bayard: Maybe the shills haven´t, but I´m quite sure the developers have. Yes, we´ve discussed this before, planning keeps the price of farmland down, and the immediate surrounding land up, but has neglible effects on the overall rental value of land. With LVT, you can still keep this arrangement, but there would be no planning gain at the conversion. Best of both worlds.