Tuesday, 7 October 2014

Capitalists, Landlords and Owner Occupiers

There’s plenty of stuff in the news about getting rid of Business Rates, which chimes in with the standard fake-Capitalist arguments regarding LVT . That just like any other tax, they harm work and enterprise.

We can easily demonstrate this is all bollocks.

Firstly imagine a landlord(A) who rents out his site (plot A) for £4,000 per month to a Capitalist (A).

Capitalist(A) earns £5,000 per month, of which he keeps £1,000 (including his 10% profit). We can say, that the market has allocated this site to the Capitalist who can put it to its highest productive use, yielding a £4,000 pm productive surplus.

The landlord has no economic function. But, landlordism also produces no deadweight costs (loss of GDP), although those engaged in rent collection add no value (so you can impute a loss i.e. all the wealth they would otherwise be creating if they had proper jobs). What landlords do is increase income and wealth inequality.

So, if you imagine I owned all the land in the UK, and everyone paid me rent, GDP would actually be better than now (see below), but I would quickly become the wealthiest man in history, and everyone else would become poorer.

Now imagine that same site, plot A being owner occupied. We know the maximum income from it is £5,000 pm. The trouble is, this Capitalist (B) isn’t a very good one. He is only earning £1,000 pm from plot A. As an owner occupier, he is both Capitalist and Landlord. As a Capitalist his profit is still the same as Capitalist (A). But, as a landlord he is £4,000 pm down on Landlord (A).

This £4,000 pm is a loss of productivity, i.e. a deadweight cost. By being able to impute his rent (knock if off his costs), Capitalist B is shielded from the demands of the market. This lowers GDP. Capitalist B is a therefore burden on the rest of society.

What we need is the efficiency of market allocation via rents, with none of the inequality. So, let all capitalists be co-proprietors of all land, and let all capitalists only be tenants not owner occupiers. In other words Land Value Tax.

As we can now deduce, LVT cannot produce any deadweight costs. It eliminates them. It also ensures a fair distribution from the value derived from locational advantage. And, far from being a Socialist conspiracy, LVT is about as hard core as Capitalism gets. If you cannot pay the rent, you are a burden on society and can sling your hook.

And, as a bonus, the shared rent can be used to cut/eliminate damaging taxes on work and enterprise.


Lola said...

That's nice and short. Should fit well the attention span o even the most rabid homeownerist.

mombers said...

Well written

Rich Thomas said...

Assuming Capitalist B is aware of the local property market then he will be aware that he could make £4000/month in rent.

He chooses not to. Instead making £1000 per month. He obviously enjoys his work so much he is willing to lose out on £3000/month just to do it.

Now let's consider your scenario. Capitalist B no longer owns his property. Let's assume he remains just as incompetent at his job and just as enamoured by it.

The market rent is £4000/month, he makes £1000. Therefore if he continues working he will lose £3000/month.

As we've already established this is a price he is willing to pay.

He will not change his practice, GDP will not magically increase and we will still be waiting for a tax panacea.

Mark Wadsworth said...

RT, congratulations, you win our "stupid comment of the week" prize.

If B owns the land, he has the (non-cash) rental income to pay for the £3,000 loss.

If B is a tenant, he has to find £3,000 a month out of other resources. He will either change his mind about how much he loves his job or go bankrupt.

Rich Thomas said...

I feel you've missed a crucial point.

Capitalist B in the first scenario has a large amount of capital which he is willing to tie up in an illiquid asset in order to continue pursuing his employment.

In the second scenario if we assume Capitalist B has been fairly compensated for his property then he will have a large sum of capital at his disposal.

If we assume correctly functioning markets then, by choosing an investment with a similar risk profile to commercial property, he will be able to achieve a similar return of £4000/month.

This will pay his rent and give him £1000 to live on.

Exactly the same situation as before your grand intervention.

Mark Wadsworth said...

RT, no you have missed a crucial point.

As you say, it shouldn't make a difference to decision making whether

a) Capitalist B is suffering a notional cost (the missing rental income which he doesn't collect), or

b) Capitalist B sells up and pays £3,000 hard cash each month.

In economic terms, they are the same. But when faced with it, people do behave differently.

For example:

There are plenty of single elderly people rattling around in the large house they own where their family/children used to live.
There are very few single elderly people who continue renting the large house where their family/children used to live.

This is also not just behavioural - if Capitalist B remains as owner-occupier, his £3,000 losses are subsidised by land price gains, he still ends up a bit richer for every year he stays there.

Once he has sold up, he becomes richer by terminating the lease and shutting up his business (or trading from somewhere which costs less than £1,000 rent).

Rich Thomas said...

You've just admitted that economically your plan will do nothing to increase efficiency.

You are basically proposing the abolishment of private land ownership with all the associated costs and legal upheaval that would involve for no technical benefit.

If anything giving people the value of their land will encourage them to stay put, they'll be able to enjoy the money without having to undergo the emotional turmoil of selling a property that has sentimental value.

If all you want to do is nudge inefficient business into vacating their properties to allow new dynamic businesses to flourish then there are probably simpler ways to achieve your aims.

As a final point. Capitalist B in the first scenario is not guaranteed a return on his ownership of the property. If you had bought commercial property in 2007 you'd probably have gone bust shortly after.

He is investing and taking a risk, his investment may rise or fall in value. If it falls in value then it becomes more profitable to be Capitalist A who is insulated from that risk.

Mark Wadsworth said...

RT, you've just come up with a long list of lies.

"As a final point. Capitalist B in the first scenario is not guaranteed a return on his ownership of the property.

If you had bought commercial property in 2007 you'd probably have gone bust shortly after."


You would only have gone bust if you had taken out a large loan to buy it - and paying interest to the bank IS Land Value Tax, it is just privately collected Land Value Tax.

In the original scenario, Capitalist B owns the premises outright, he does not have a large mortgage.

Perhaps you even believe them as a matter of Home-owner-Ist faith, in which case logic and facts are wasted on you.

Such as:

Any country at any time (including the UK) which has nudged its tax system a little bit towards taxing land not earnings has seen significant, immediate improvements on a whole range of economic factors.

Any country which does the opposite sees a significant worsening.

But you will deny that until the bitter end, won't you?

Ben Jamin' said...

@ rt

"You've just admitted that economically your plan will do nothing to increase efficiency."

You've somehow managed to miss the point. Even if someone sells their plot, and buys an annuity to pay the rent, their occupation of that site is being subsidised.

He is using a profitable business to subsidise a loss making one.

Now he is renting, instead of owner occupying this businesses notional cost becomes a real one.

Businesses are in business to make money. Not losses. In the real World.

Hence, in the real World site A would be utilised by a company who wants to maximise their profits, which benefits aggregate production.

A MW pointed above, land rent is free lunch.

Land only has a value based the fact each plot is inelastic in supply. It's price comes not from cost, but depriving other people access.

This is the purest form on monopoly pricing that exists.

If you look up monopoly pricing/subsidies, you will see that they incur a deadweight loss on the rest of society.

Don't take our word for it. This is very basic economics.