Thursday, 17 January 2013

M. LVT is anti-free market

• The government will effectively own all the land and thus own everything (skip to article)
• Land use and land ownership are best left to the free markets (skip to article)
• Landowners compete with each other and there is a free market in land (skip to article)
• Landowners are doing us a favour by keeping some land out of use and/or deciding how it should be used (skip to article)

1. "The government will effectively own all the land and thus own and control everything"

Nonsense on several levels:

a) Society as a whole via the government, already imposes massive restrictions on what can be built where and how the finished buildings can be used.

It is particularly hypocritical when land owners say in one breath that they don't like having restrictions imposed on what they do, and in the next breath to say that other people shouldn't be allowed to do what they want (NIMBYs).

It is a separate topic whether planning laws are too strict or not strict enough, let's assume that they are "about right" but whatever your view, it is clear that there is no free market (i.e. non-governmental) solution to balancing the competing interests of neighbouring landowners or of charging for external costs. So planning is only given if there is some vague kind of democratic majority in favour of it - the problem is that there are different constituencies.

For example, the whole town benefits from having a sewage works, but only a small number of landowners bear the burden (the occasional smells when wind and weather are unfavourable). Should we shut down the sewage works for the marginal benefit of the minority if this causes a far greater loss to the whole town?

b) By collecting LVT, the government acts as a kind of landlord collecting ground rents. That does not mean that they have to decide what goes on any more than a private landlord tells his tenants what kind of job they have to do or what kind of business to run. Landlords are quite happy if they can collect the maximum rent and are indifferent as to how their tenants make a living.

c) How is LVT worse than income tax?

If it were true that LVT is "nationalisation of land" (it's not of course, it is nationalisation of the rental value of land), then income tax etc. is the nationalisation of labour, enterprise and capital.

Only it's not, is it?

Even if the overall average tax rate on earned income is 40%, then it must be pretty clear that the government does infinitely better by allowing everybody to decide how to earn their living five days a week and then taking 40% of the cash income (to spend on policemen, teachers, nurses) than it would by allowing everybody to work for themselves tax-free for three days a week and then for two days a week to be forced to report for compulsory service as a policeman, teacher or nurse.

d) There must be plenty of people who rent their homes from the council or a housing association, send their children to state schools, only use the NHS and work in a business which rents its premises from some arm of the government (council, Crown Estates etc). Such people survive perfectly well without being the freeholder of any land whatsoever. Surely it is better to reduce their income tax bill rather than their rent bill?

2. "Land use and land ownership are best left to the free markets"

Nonsense on several levels:

a) Land is not and never can be a free market - it is a monopoly or a cartel (see below).

b) It is of course vitally important that people have the right to exclusive possession of certain bits of land, for agriculture, for living on and for their places of business.

This does not mean that people can't be expected to pay for this, and indeed tenants and people with mortgages are paying for this. But ultimately, what underpins anybody's right to exclusive possession? It is the whole of society which underpins it by mutually respecting each others rights, and by paying taxes towards the police and courts system to protect this right against burglars and trespassers.

Tenants and people with mortgages are paying full market value for exclusive possession, but not landowners in their capacity as landowners. The majority of landowners, i.e. the working population with one main residence, are actually paying more in income tax etc than they would have to pay in LVT, but there is little relationship between the amount of income tax etc. they have to pay and the benefits they get qua landowner.

So the fact that some people have to pay full whack for something actually provided by the whole of society; and others pay nothing or are collecting full whack is surely a massive market distortion?

c) I trust you are familiar with the concept of "ransom value". The developer of a larger scale project has to buy materials and hire labour, all of this is done at market prices. No supplier or worker can demand more than the market price, because the developer will just go elsewhere.

But if that same developer needs to buy up more than one plot of land ("site assembly"), then the owner of each individual plot, however small, can demand a huge premium, the "ransom value", because each one knows that without their plot, the whole larger project cannot go ahead.

Conversely, the value of the plot in isolation might be very low or negligible. Is this not a massive distortion of the free markets?

d) And isn't all land value ultimately "ransom value"? Everybody has to live somewhere and all businesses have to be carried out somewhere (just like everybody needs air to breathe); they can negotiate freely with all other counter parties, and where one type of business looks particularly profitable, there will be new entrants. But once all locations are owned, there is a complete monopoly in place, and no new ones can be created. As the saying goes: "If you owned all the money in the world and I owned all the land, how much would I charge you for the first night's rent?"

3. "Landowners compete with each other and there is a free market in land"

a) Landowners pretend that land is a free market by pointing out that everybody can buy land, provided he offers a high enough price, and that a million homes change hands every year. That proves absolutely nothing. Imagine a business (let's say, a water company in a country without price regulations). Clearly, it will try and charge the profit-maximising price (which would be several times as much as what water companies in the UK are currently allowed to charge), and will make super-profits which bear no relation to its costs.

And let's further imagine that this is a publicly listed company, whose shares can be freely bought and sold on the Stock Exchange. Does the fact that anybody can buy some of a restricted number of shares in the monopoly mean that the company does not have a monopoly, or that all its shareholders taken together do not have a monopoly? Of course not. Owning land is not like purifying and selling water, it is like owning share in that company. There are only so many shares in total and hence a limited number of co-owners of a fixed cake monopoly.

b) In day-to-day terms of pricing (rents or selling prices), landowners can do something which otherwise only monopolists (or a cartel) can do, which is called first degree price discrimination. What this means is that people who are willing and able to pay the most get charged a much higher price than those willing or able to pay least. So in pre-NHS days, the village doctor would charge the grand lady in the mansion house £10 for a treatment and a worker in a cottage 10 shillings for the same treatment. As long as the medicine etc needed cost 9 shillings or less, the doctor is making a good enough profit from the worker and a super-profit from the grand lady.

c) This is because by and large, most households only rent or buy one house at a time. Each household has a different budget and different tastes. And there is only a limited number of broadly suitable houses available to rent or buy in the area they want to live, and there will be an equal number of potential tenants or buyers chasing those houses.

d) So the nicest house will go to the highest bidder, and he drops out of the market. The second nicest house goes to the highest bidder from those remaining, and so on. Each house can only be sold or rented to one person, and each time, it goes to the highest bidder.

e) This is just like the monopolist doctor maximising his income by charging either £10 or 10 shillings depending on who his patient is. The grand lady and the worker cannot game the system by him paying for two treatments and selling one to her for 15 shillings. The household who bids the highest amount for a house cannot game the system by sub-letting or selling-on to an even higher bidder (because there simply isn't one). And, like the doctor who pays the same for the medicine regardless of how much he charges for the treatment, the cost of the landowner of providing a house in an expensive area is much the same as the cost of providing a house in an expensive area. Everything over and above that actual cost (a few thousand pounds a year, if truth be told) is pure monopoly income.

f) And so we conclude that when prices are set, it would't make any difference whether all the houses which are on the market at any one time belong to lots of different people or whether they all belong to the same person. For example, when a home builder builds an entire new estate with hundreds of homes, can he sell them all for a higher price simply because he owns them all? No of course not, because the first wave of purchasers aren't prepared to pay more for them than what they reasonably be able to sell them for 'second hand' (when there will be diffuse ownership, but only a few on the market at any one time).

The price setting mechanism for each home is thus a separate, discreet one-off transaction which has little impact on the others (apart from setting general guide prices). In fact in some respects, it might lead to a less-bad outcome if they all did belong the same person, but that's a different topic. So all landowners act as a monopoly or a cartel. Which is yet another indication that land is far from being a free market.

4. "Landowners are doing us a favour by keeping some land out of use and/or deciding how it should be used"

This is a fairly insane theory put about mainly by Faux Libertarians, the argument goes thusly:

- Land owners are bestowed with some particular gift of foresight which enables them to tell exactly how land should be used; by putting the land to that use, they are adding value to society (despite they are clearly keeping most of it for themselves) and if any of their corresponding rental income is taxed away, then this will lead to sub-optimal decisions or take away the motive for developing at all.

(Nonsense - yes of course, in some situations, it can require a fair amount of judgement, skill and 'vision' to see through a particular big project, but this work will be done by employees or sub-contractors (architects etc) of a land owning corporation, who have no proprietary interest in the land whatsoever. The real owners of the land - the company's shareholders - are not, and do not need to be, bestowed with any vision or foresight. In terms of incentives, why reward the shareholders with 90% of the gains and give the employees 10%? Would it not lead to the same outcome if the employees and sub-contractors just get their 10%?)

- Conversely, there is some marginal or sub-marginal land which should be left undeveloped or used as farm land. If this is taxed, it will "force" our long-suffering landowners (bestowed with all that foresight and vision, of course) to over-develop to try and get enough money to pay the tax.

These arguments are nonsense and cancel each other out anyway.

a) Most land which is worth developing is already developed, and to the extent that land is developed, LVT encourages owners to put the land and buildings to their optimal use, i.e. to keep the buildings in good repair and get some tenants in or sell it to an owner-occupier.

b) It is the users of land (ordinary people and businesses) who decide what optimal use is, which is easily determined by looking at market rents and prices. So if premises on a busy and noisy high street can be rented to a residential tenant for £500 a month but a business user is happy to pay £800 a month to use them as an office or shop, then the business user wins. All the landlord has to do is rent the premises to the highest bidder.

c) With undeveloped land, nine times out of ten, the best use is simply to do whatever the neighbours are doing. If its a vacant plot in a residential area, build housing, if it's a vacant plot on an industrial estate, build an industrial unit, if it's farm land in the middle of nowhere, rent or sell it to a farmer. The owner can cast the net wider; if there are no shops for miles around in a residential area, the best use might be to build a shop, but the developer can hedge his bets by building a building which could be used for retail or residential, or retail on the ground floor and residential above.

d) And the tax rate on marginal land, which to all intents and purposes is the 80% of the UK by surface area which is forestry, farmland, marshes, flood plains etc will be very low (between £0 and £20 per acre per year at most) to take account of the fact that the income from the most profitable use (forestry, farmland, doing nothing) is also very low or nil.

Even if a farmer in the middle of nowhere could get permission to build a few houses, then he would be stupid to build them as the rental value would be very low (no mains water, electricity, no broadband, miles from jobs and schools etc). The most profitable use for those fields is quite simply farming, with or without a tax.

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