Killer Arguments Against LVT, Not (357)

MBK emailed in this one from Forbes to add to the collection:

If you take an empty city block and fill it with dense, beautiful buildings, nice restaurants and bars and other sources of entertainment then the value of the land will go up. This reflects the reality that there are a significant amount of spillovers in local real estate investment. Land value is not just capitalized value of publicly provided public goods, but of nearby privately provided positive spillovers.

It’s widely recognized that when individuals clean up a property, or open a popular business, there are often spillover values in the neighbourhood. Urban economists recognize that the collective value of these spillovers is huge, and in fact makes up a significant amount of land value... The fact that private amenities have positive spillovers suggests that they will be underprovided by competitive markets.

All good and proper so far.

However, by allowing some of the value of spillovers to be captured, higher land values provide real estate developers, businesses, and even households with incentives to create them.

1. Even if that conclusion were correct (which of course it isn't), taxing such uplifts discourages economic activity a lot less than taxing earned income.

2. LVT assessments do not work on a plot-by-plot or street-by-street basis, they work on the basis of averaged out values for a whole area, which one individual land owner can only influence very marginally.

So if you own one out of a thousand buildings/plots and you manage to increase the rental value of yours and a few surrounding ones by a thousand pounds a year, the average increase in your LVT bill is only a few pounds.

The same applies to everybody else. And if you allow yours to fall derelict the reverse applies, but few people will be able to afford to allow a building to fall derelict, so they won't. The overall incentive is to improve or at least to maintain, unlike the current tax system where the incentive is to piggy back on what everybody else is doing.

3. We could do this with income tax as well, of course. If everybody has to report and pay tax on his personal income, that's a disincentive to earn more and an incentive to lie. But what if we averaged out everybody's income in the area and everybody paid income tax on the average? There is very little disincentive to earn more and barely any incentive to lie, because if you dutifully report a £10,000 pay rise, that only pushes up the average income in your area and hence your personal tax bill by a couple of pounds.

4. So with LVT we quickly reach a steady state in each area i.e. all the buildings in any area will be done to a similar standard, whatever is appropriate for that area, job done. It would be the same with averaged out income tax; low earners would end up living in some areas, medium earners in others and high earners in others. High earners would be prepared to pay more in return for living in nicer areas, so ultimately the effect wouldn't be very much different to LVT.

UPDATE 5. Mombers reminds us that LVT doesn't need to be 100% anyway, very few people ever said that. But this is typical Home-Owner-Ism - when you mention LVT they always attack it with the same venom, whether you suggest very modest LVT or 100% LVT.