Killer Arguments Against LVT, Not (472)

From a Georgist forum:

Hello, I have a question. I know this has been addressed before but I forgot and can't solve it on my own.

If the land market price is the capitalization of the annual rent, and a 100% LVT thus makes market price 0, how would rental values be known in the future?

If people knew the rental income will be zero, what is the floor from which to bid for land, and why would the owner sell to the highest bidder, if he knows he will see nothing of that rent bid? He could just give it to the first comer and it would be the same for him.

1. The amount of rent that somebody is willing to pay for exclusive occupation of somewhere is unaffected by how the legal owner has to divvy up the rent payments - he pays some to the government in tax; some to his bank if he bought with a mortgage; maybe he has to pay some to his ex-wife in maintenance payments. The tenant doesn't care.

As it happens, there are plenty of buildings in the UK or any country where the location rent is zero anyway. There is still a functioning market in buying and selling; or owning and renting out homes or business premises. The rent payable, by definition, relates purely to the actual building and other improvements. Introducing LVT would just make all areas of the country like this, but markets would still function.

2. As to buying and selling, it is not difficult to imagine somebody buying an average UK home, worth about £250,000 with a £100,000 cash deposit (equal to the value of the bricks and mortar) and an interest-only mortgage of £150,000 (equal to the value of the land).

On paper, he has borrowed £150,000. The economic reality is, he owns the bricks and mortar outright and is paying £300 a month in land rent (disguised as mortgage interest payments). House prices don't change much and he then sells the house, the mortgage disappears in a puff of smoke and the vendor ends up with his £100,000 back, if he has kept the house in reasonable condition. If he has let it fall derelict, he gets back less than £100,000. If he has made sensible improvements, he gets £100,000 plus value of improvements, and might make a cash profit overall.

Under LVT, the cash position is no different. Our hero buys the house for £100,000 and takes on monthly LVT payments of £300 until he sells. (Sure, if the area becomes more desirable the LVT creeps up; which is the same as the bank's mortgage rate increasing, equally both could go down). When he sells, he gets £100,000 for the house (or more or less, depending on condition) and is no longer liable to pay the LVT in the same way as he would be no longer liable to make monthly mortgage payments.

3. Clearly, the government has to get a reasonable sample of up-to-date rents paid and selling prices in each area, and to update LVT assessments accordingly, in absolute and relative terms, but that is a purely administrative issue and not difficult to deal with.

UK employers have to report tens of millions of wage payments for PAYE purposes every month, and millions or billions of VAT-able transactions every quarter; millions of individuals have to submit tax returns and the tax paid figure has to agree to the PAYE deducted figure.

So keeping tabs on a few million new rental agreements and about one million sales of land and buildings every year (which HM Land Registry and HM Revenue & Customs already do) is a doddle in comparison. Outliers will be easy to spot and investigate; or they can simply be excluded from the averages.