Friday 11 September 2015

Tax incidence: fail

BenJamin stumbled across an article at thismatter.

Lovely, it's got all the charts explaining that taxes are borne by whoever is less price sensitive - the consumer or the producer. So taxes on tobacco are borne by smokers and taxes on petrol are borne by motorists - but general sales taxes on everything (like VAT) are mainly borne by the supplier/producer.

Obviously, some things are completely price insensitive because they are fixed in quantity, such as the supply of land. So we get this:

Property Taxes

Buyers can choose what property they want to buy, but sellers have no choice other than to sell the property that they own. Since most buyers consider how much tax they will have to pay on the property when making offers, the tax burden will most often fall on the seller of the property.


Yup, agreed.

For sure, we can increase the amount of usable land by building more roads and building more buildings, but the supply of each individual plot as regards a transaction between the owner and a potential purchaser or tenant, supply is 100% fixed. If the total amount usable land were to increase, then the demand curve would shift. So the landowner might get a lower or higher price/rent for a pre-existing site in future, but the burden of taxes will still fall on the landowner.

Then they completely contradict themselves:

However, if the property is rented out, then the landlord can easily pass the cost of taxes on to the tenant.

WTF? Why did they not just paraphrase the first part, to wit:

Tenants can choose what property they want to rent, but landlords have no choice other than to rent out the property that they own. Since most tenants consider how much tax they will have to pay on the property when renting in future and will adjust down the rent payable to the landlord accordingly, the tax burden will most often fall on the landlord.

They then keep digging:

A business that serves a locality can also usually shift the cost of property taxes on to consumers, since property taxes are part of the cost of providing the product or service and the same tax rates are usually assessed.

We know that this is not true - even though occupation costs per square foot are much, much higher in city centres than in small villages (rents are higher and Business Rates are higher, the two together = the true rental value), the selling price of consumer goods is more or less the same across the whole country. It is the higher sales per square foot in city centres which drive up the rental value, I don't see how anybody could argue the vice versa.

Further, in the USA there are also quite different levels of general Sales Tax in different states, but selling prices are still more or less the same everywhere, because, as mentioned above, the tax (and indeed rent) is borne by the supplier.

UPDATE: At Derek's prompting, I emailed them and got a reply a few hours later saying "It's all very tricky, so we have removed that section." Ah well, one can but try.

10 comments:

Derek said...

Lower down the page there's an address that you can send suggestions or corrections to. It might be worth Ben following up with an email. Or perhaps he already has.

Mark Wadsworth said...

D, I couldn't find the email address :-b I have now fired off a response - this post minus the insults and swearing.

Bayard said...

"Then they completely contradict themselves:"

I think at this point the Grand Inquisitor tapped them on the shoulder and said "My son, you are writing heresy. Desist!"

benj said...

It is a classic :))

You can't even allow they are only talking about marginal location, as pointed out, they've contradicted themselves. Trouble is, this is what most people want to believe, even though common sense/easily observable fact says otherwise.

Rich Tee said...

The landlord is usually in a stronger position than the tenant because the landlord already has a home to live in but the tenant does not. The landlord is only in a weaker position where there is an excess of supply over demand in rented properties.

Tenants will absorb rent increases for a while by cutting back on other things like running a car or going on holiday, but if the rent becomes too expensive they try other things like moving back in with their parents. So there is a rent ceiling.

Mark Wadsworth said...

RT: the landlord is only in a stronger position because the legal system says so. Actually he is in a much weaker position.

But nonetheless, this is typical politician: "The landlord is only in a weaker position where there is an excess of supply over demand in rented properties."

There is never an excess of demand or of supply in a normal market, because the price adjusts up or down to a point where people are indifferent between paying it or not.

But with land, the "rent ceiling" is quite simply the average of all potential tenants' incomes minus normal living costs. We've done that one dozens of times and there is plenty of evidence to back it up. The landlord cannot charge more than that and he is unlikely to charge less.

And in any event, the landlord always bears the tax. All logic and all evidence tells us this.

I don't know what's contentious about this and I don't know why the Homeys keep denying it. Their whole reason for opposing LVT is because they would bear it, so why not be honest and say "We oppose LVT because we would pay it"?

Rich Tee said...

"the landlord is only in a stronger position because the legal system says so. Actually he is in a much weaker position."

I disagree, and most legal systems in developed countries have more rights for tenants because they recognise that the tenant is in a weaker position.

The tenant is always in a weaker bargaining position because the landlord has a home to live in but the tenant does not. If they don't reach an agreement then the landlord may have to stomach a loss on the property but he still has somewhere to live. The tenant, on the other hand, is homeless.

Mark Wadsworth said...

RT, , you are now making it up as you go along.

The landlord's "rights" depend 100% and entirely on what rights the state, the legal system etc will give him. So the landlord's power is not economic power (down to skill or capital) but political power (they run the government).

Landownership and the state are synonymous and two sides of the same coin. You cannot have one without the other.

But even if you don't accept these simple truths, it has bugger all to do with who bears the tax.

Is your twisted logic somehow supposed to persuade me that black is white, up is down and the tenant bears the tax?

Mark Wadsworth said...

RT, if you want concrete examples, there are some countries which do no allow foreigners to buy or own land, and the UK, for example, says it is illegal for landlords to rent to illegal immigrants. I own a house but would not be allowed to have loud parties every night or replace it with a ten storey block of flats. And neither are my neighbours, which suits us all just fine. Some countries have rent controls, others don't.

Assuming that these things are actually enforced, we can see that a landowner's rights are precisely limited by the government. They are like welfare claimants. They get as much as the politicians say they can get.

At the other extreme, try as governments might to make drugs and prostitution illegal, these things will always be there. A drug dealer or prostitute has little or no legal rights in most countries, but so what? These things are still supplied and consumed.

Bayard said...

"If they don't reach an agreement then the landlord may have to stomach a loss on the property but he still has somewhere to live. The tenant, on the other hand, is homeless."

Why is he homeless? It can only be because the landlord has been able to invoke the law to evict him from his home. Without that law, the landlord cannot evict the tenant. Sure, he can turn up with some heavies and physically throw the tenant onto the street, but now he is breaking the law.