Thursday 17 January 2013

S. Land owners create land values; land owners have no influence over land values

Another two lines of completely contradictory arguments are advanced:

The first is that:

• Land owners create land values so it's double taxation

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• Larger landowners create their own rental values

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Therefore, the Homeys argue, it is unfair to tax land values, as they are somehow "earned" or the result of individual effort. They are unable to explain the why they think that ordinary earned income (from employment or running or owning a business) is fair game for taxation but not "earned" income from land (to the extent that there is such a thing, which there isn't).

The Homeys then adopt an entirely contradictory line of attack: they argue that land owners are innocent participants in the whole game, buffeted by forces way beyond their control, so they might end up being "forced" to pay for something which they never asked for and don't want:

• Land owners have no influence on land values. Just because a location becomes more desirable doesn't mean that land owners all benefit. (skip to article)
• The government could dictate official land values which are higher than actual land values (skip to article)
• The council influences land values with planning permission/restrictions (skip to article)
• The government would push up land values with wasteful spending on infrastructure; why should I pay for improvements I haven't asked for and don't use? (skip to article)
• The government will push up land values with easy credit and low interest rates (skip to article)
• The government would push up rental values by paying higher Housing Benefit (skip to article)

1. "Land owners create land values so it's double taxation


The first version of this argument is self-defeating; if land values represent "earned income" then why should this not be taxed at the same rate as other earned income?

The second version of this argument goes along with the established fact that the presence of lots of people and the corresponding infrastructure (roads, utilities etc) which create land values, and by and large the more people there are the better.

a) So, the Homeys argue, most of those people are landowners and will have contributed to land values and benefitted from them in equal measure. If you tax them on the benefit, you are making them worse off.

b) Yes, for the average person, it might well be true that it all nets off, and under a system with LVT and corresponding personal allowances, for the average household, the personal allowances more or less cover the LVT liability; the average person will still be in a break-even position.

c) But that does not deal with the issue that the bottom third are tenants and are paying rent to the few at the top who own a disproportionate amount of land. Another third are paying off mortgages to the bank, which is much the same thing. Tenants (and mortgage payers) are people too, they create wealth by going to work and create land values just by being there as actual customers and potential employees.

d) They contribute just as much to land values as their neighbours, and by definition, must be contributing far more than their landlords or the bankers are doing (because there are sixty times as many tenants or mortgage payers as there are landlords or top bankers).

e) The only practicable way to reverse this trickle-up economics is by collecting land rents and dishing them out again as universal benefits.

f) Ah yes, they counter, but you admit that the presence of infrastrucutre adds to land values (in fact, without them settlements larger than a few hundred people could not exist), and infrastructure (utilties, broadband) is (or could be) provided privately by landowners. So those improvements were paid for privately, what right does the government have to take any of it?

For sure. But the electricity company makes a profit by selling electricity, and customers profit because the use value is more than the cost. There's a consumer surplus and a producer surplus. The consumer surplus is measured by how much extra most people are prepared to pay for having a house with mains electricity. The producer surplus depends on how many customers they can sell electricity to using the least amount of cables, so supplying electricity in cities is much more profitable than out in sparsely populated areas. So the cables are just "land" like anything else.

And nobody said that the government should get all the rental value, but far better that rental value to be pooled and put on the table in full view for everybody to argue over in a democratic sort of way than for all the rental value created by others to disappear into private pockets for nothing in exchange.

2. "Larger landowners create their own rental values

This argument is usually advanced by Faux Libertarians than Home-Owner-Ists.

(The Homeys go for the good old-fashioned assertion that some landowners create land, such as Palm Island or Hong Kong airport. No they bloody well didn't, what these people did was acquire land under a few fathoms of water and pile rubble on it. The value is in the location. Had they spent all that money building Palm Island or Hong Kong airport off the coast of Alaska, then the final value would have been nothing, the location is fixed, the benefits of the location can only be enjoyed from that location, even if the price of that is piling up some rubble first. It's no different to building anything else but starting a bit lower down.)

The Faux-Lib argument is something like this: "OK, I accept that if I own a shop, I benefit from the local car park owned by the council because my customers park there. And if I run a car park myself, I benefit from shops in the area because their customers pay to park in my car park.

"But what about a large landowner with e.g. a massive out-of-town shopping centre? They build their own car park. They can charge for parking (because people want to go to the shops) and charge the shopkeepers higher rents (because people will drive there and park there and then go shopping. So the large landowner has created his own rental income out of nothing. It's unfair to make him pay any tax at all"


a) All that means is that they are making optimum use of the site and have chosen the correct mix of retail space and parking space. However big the shopping centre, it is but a pinprick on the map, what they need is people who can access the shopping centre (using public roads) to deliver stuff and go to work and go shopping there. The more people within the catchment area, and the wealthier those people are, the higher the rental value of the shopping centre.

b) All the owner is doing is tapping into that potential rental stream - however expensive it is to build an oil well, it is worth no more than the oil which it can extract - which is (in practice) already being taxed by Business Rates anyway, which can easily be modified into proper LVT, and the amount collected would be much the same as now, to ensure neutrality between residential and commercial uses.

c) And the delivery drivers, maintenance men, shopkeepers and shop workers all earn their money quite happily without owning any of the land at the shopping centre. The architects who design and the builders who build it can do so without owning the land. The cost of the building itself has to be pre-financed, but that is just a loan which can be paid off in time. The shoppers can shop there without owning the land. Why is it necessary for one random group of individuals to collect the land rent privately? What extra purpose does the land owner serve, or what valuable service does he provide? Yes, somebody has to show a bit of vision and get the thing started, but they can get paid for that in the same way as the architects and builders get paid - out of the rental value of the building itself.

d) Again, the analogy of the 100% interest-only, non-repayable loan is useful. Let's assume there's no income tax or LVT or anything, and that some land already has planning permission for something big (an out-of-town shopping centre, an airport, a theme park) and different developers bid for the site. Whoever has the most cunning plan will work backwards from his likely income and expenses and submit the highest bid. And let's assume a finance company offers the winning bidder a 100% interest-only, non-repayable loan to acquire the site. Assuming that our developer/land owner is bestowed with a magical insight and builds exactly the right kind of something big and makes a profit, after paying interest.

It then turns out that he bought the land off the local council and the finance company was also owned by the local council, it never paid itself a penny, it just collects the interest for ever more. How is that a different outcome to having LVT? And why does the identity of the original land owner or the source of finance make any difference?

e) The Faux Lib's then go on to talk about Disney's theme park in Florida. Sorry nope, the same rules apply however big a site is; and 47 sq miles out of 3,717,813 sq miles is still only a pin-prick on the map. What Disney are paying for (via their state and local property taxes) is the sunshine, the security, the road and rail access and nearby airports. As it happens, Disney world is its own local authority, so in that capacity, they get a lot of tax money back for the usual stuff, schools, refuse collection,  road maintenance etc.

f) If you take this argument to the extreme, then if one landowner owned the whole country, he would be able to claim that he created all the rental value himself single-handedly, which is clearly nonsense.

3. "Land owners have no influence on land values. Just because a location becomes more desirable doesn't mean that land owners all benefit."

a) This argument turns the first one on its head and is usually played together with the Poor Widow Bogey and as per usual applies primarily to houses in certain parts of London. They say that the Poor Widow bought a normal house fifty years ago and did nothing to enhance its value and was not seeking to make a windfall gain.

b) It so happens, the area has gone upmarket, local wages are much higher, there's a new Underground station, trendy coffee shops and so on. None of this benefits her, she doesn't work any more, doesn't use the Underground and doesn't visit trendy coffee shops. Therefore it would be unfair to tax her on benefits she doesn't really appreciate.

c) In which case, why does she still live there? If all she wanted was a normal house in a normal area, why is it a problem if she moves? Clearly, there are others who want to move to the area and pay the high tax or rent, and those people will be working for the higher wages, taking the new Underground and visiting the trendy coffee shops etc. So the Poor Widow is placing a burden on that would-be resident by making him live further away. One way of nudging her into moving would be a higher tax.

d) In the alternative, if this is pure windfall gain, and we really think it is desirable for Poor Widows to remain living where they are living for the rest of their lives, then the deferment and roll-up option sorts this all out nicely; a windfall gain is liable to a windfall tax, and the heirs end up with the same as if the Poor Widow had bought a home in an area where rents and prices hadn't shot up a hundred-fold in the past fifty years.

4. "The government could dictate official land values which are higher than actual land values"

No they can't. LVT is a tax on rental values set by the market in the same way as income tax is a tax on your wage, which is to a large extent set by the market. Ratings for Business Rates and bandings for Council Tax are publicly available and the same would apply to LVT assessments.

If the government wants to collect more income tax, it does not need to change the definition of the tax base, all it does is increase the income tax rate. It doesn't simply delcare you to be earning more than you are and apply the old lower tax rate.

This loophole is firmly shut with LVT once the rate is close to 100%. People know reasonably well to within plus/minus ten per cent what rental values are, the government can't just declare assessed values to be higher than real ones.

And even if the government collects £7,000 tax from a house with a site-only rental value of £6,000, well, that's still no worse than a 25% income tax on the income from the bricks and mortar; it's not a good tax but not as bad as normal income tax.

5. "The council influence land values with planning permission/restrictions"

a) Yes, there is only so much rental value to go around, in the same way as only so much rain falls from the sky. By having power over land use, the council can influence which bits of land benefit and which don't, in the same way as we can build dams, canals and irrigation channels and influence which bits of land get more than their natural amount of rainwater and which get less. But the council does not create that value any more than the dam builder or canal digger creates the rain.

b) But so what anyway? Whether land use is restricted and dictated by natural features; by economic limits; by man-made features; or by planning regulations, some bits of land have high rental values and others don't. It doesn't matter whether some land has a low rental value because it's teetering on the edge of a steep cliff; because it's miles from anywhere; because it's under a motorway flyover; or because the planners have decided that it is Green Belt. It has a low rental value and so it has a low or indeed no LVT liability.

c) And vice versa. It doesn't really matter why your land has a high rental value, it might be because you got lucky with the planning department, ultimately at somebody else's expense, in which case you pay higher LVT.

6. "The government will push up land values with wasteful spending on infrastructure; why should I pay for improvements I haven't asked for and don't use?

a) Underlying the first KLN is the assumption that the government (as an abstract entity) acts like a landlord in a free market and wants to collect as much LVT as possible. Let's assume that this will indeed be the case. And landlords have to spend some of their rental income on maintenance and improvements.

b) Now, where does a landlord spend money first? On the things which give a quick return or a high return; or on things with a low or negative return?

c) If the government notices that low crime areas have higher rental values than high crime ones, where will it employ the extra policemen? In the high crime area, because that's the quickest win and the most-crimes-prevented-per-extra-bobby. There's no point having another bobby on the beat in the low crime area, the additional crime reduction will be close to nil.

d) If the government can choose between spending money on some white elephant statue monument thingy (which does nothing to enhance rental values) or on a new bypass, or underpass or fixing pot holes or something useful, what does it do?\

We have a real life example of the second one. In May 2018, Transport for London announced that they wanted a windfall tax on owners of homes near the new Crossrail stations. This is like a crude LVT - it takes back some of the unearned windfall gains; it pays towards the cost of the new line; and so reduces the tax burden on the 99.9% of people in the UK who won't benefit. Whether it will ever happens is another question.

The Homey responses in the comments were entirely predictable. Simple answer - if you don't intend to use the new service and don't want to pay the higher tax, then just move somewhere else. There are clearly plenty of people who will want to use it, and they will move to those areas, happy to pay a bit extra to shave a couple of hours from their weekly commute time. Hey presto, more efficient use of the new transport links - those commuters can walk to the station instead of taking the car or bus first = even shorter commute times.

7. "The government will push up land values with easy credit and low interest rates"

People who say things like this have completely missed the point.

LVT is on rental values, not selling prices. Interest rates have very little effect on rental values because rental values are fairly fixed and stable. Interest rates only have an effect on selling prices (any effect on rental values is minimal), perhaps easy credit pushes up rents slightly, because people spend more on everything, but it still a negative sum game for the government; the cost of subsidising interest rates is more than any marginal increase in rental values. So why would they do it?

And LVT (however calculated, even if it is on selling prices) acts like a higher interest rate and pushes down prices. And by and large, you are better off paying more in LVT and less in interest anyway; i.e. you are better off buying a house with 4% LVT on selling prices and 2% interest than buying one with 2% LVT on the selling prices and 4% interest.

8. "The government will push up rental values by paying higher Housing Benefit"

I saw this one recently, this is real hard core stuff.

Yes, we know that Housing Benefit pushes up private rents, it's a subsidy to landowners and hugely expensive for the taxpayer and for people who have to pay higher rents or house prices.

But it's the opposite of LVT. It would be physically impossible to boost LVT receipts by more than the amount of HB paid out. The government would be losing money on the deal.

Further, as a matter of practicality, with LVT, the amount paid out does not matter, because LVT would be netted off at source. The landlord can demand a rent of £100,000 a year for a crappy little house if he likes; the council happily pays this to him, net of the £97,000 LVT which would be due on a little house with a rental value of £100,000, so the landlord gets a cheque for £3,000 every year, being a fair return for his actual physical asset, the house.


  1. What about section 106, i.e. a developer might have contributed money already toward roads or schools?

  2. Anon, the commonsense approach is to give developers credit for that, assuming they still own the land and buildings concerned, amortised over thirty years.

    So e.g. if they paid £300,000 ten years ago to pay for roads etc, for the next twenty years, they get a £10,000 annual credit/reduction against LVT bills.

    Same goes for people who bought their own council house (and still own them). If they paid £30,000 twenty years ago, they get a £1,000 annual credit for the next ten years.

  3. " And by and large, you are better off paying more in LVT and less in interest anyway; i.e. you are better off buying a house with 4% LVT on selling prices and 2% interest than buying one with 2% LVT on the selling prices and 4% interest."
    Could you clarify you reasoning on this please. I'd have thought that given most people don't have a 100% mortgage and that some people continue living in houses they buy after the mortgage is paid off then, all other things being equal, the amount of household income paid out on the combination of LVT and mortgage interest would be lower with 2% LVT and 4% mortgage interest rates.

  4. TR, it has got to do with various mathematical/economic effects:

    1. Capitalisation of land rents.
    2. LVT is a substitute tax for taxes on income.
    3. Higher LVT pushes the price down.

    So every £1 extra in LVT saves you approx. £1 on your mortgage (or cuts £33 off the purchase price if you pay cash) and that £1 LVT also saves you £1 in income tax.

    When you've paid off the mortgage, you are at worst breaking even, you pay £1 LVT and save £1 income tax. But because you can pay off the mortgage in ten years instead of twenty-five, you save another fortune in interest.

    It's a marginal comparison, and I didn't say that absolutely everybody under all circumstances would be better off, but probably nine out of ten.

  5. Hi Mark,
    I get that we’re substituting LVT for income tax but I don’t’ see how the trade-off indicated in the paragraph quoted between LVT and interest rates relates to that. If we set a level for LVT that allows for income tax(es) to be reduced to zero surely that’s independent of any interest rate decision. Of that trade-off we can only say that each £1 extra in LVT saves you £1 x Y (where Y is the loan to value on your mortgage) which will nearly always be lower.
    Would higher LVT depress prices more efficiently than higher mortgage interest rates in your assertion that 4% LVT and 2% mortgage interest is better than the other way around we’re comparing 6% with the same combined figure made up differently.
    I’m just trying to understand here, I don’t disagree with the contention that LVT is a more efficient tax than taxes on income.
    Having said that I am one of those that would be significantly financially disadvantaged by it. I live in a relatively expensive house and have relatively low income. Not being a poor widow I suspect I’d struggle to get anyone to accept a deferral on LVT and at 3% LVT I’d be looking at an annual tax bill of around 170% of my current income, which would pose some short-term difficulties for my household.

  6. TR, to be honest, I shouldn't have used the 2%/4% interest rate comparison, that raises more questions than it answers. I'll have to re-write that bit.

    But the £1 more LVT = £1 less on your mortgage payments is a true observation of real life.

    See here.

    And by definition, £1 more in LVT = £1 less in income tax.

  7. "But the £1 more LVT = £1 less on your mortgage payments is a true observation of real life."
    I don't have any mortgage payments. I don't suppose that'll make me exempt from LVT will it?
    "And by definition, £1 more in LVT = £1 less in income tax."
    Not for me. As mentioned above £1 more in LVT will equate to about £0.10 less income tax if levied at 3% of current selling prices.
    If I try to avoid that by selling the house and moving my family away from their friends and the childrens' schools and grandparents and myself somewhere inappropriate for my business and other interests, I'll be making a massive capital loss because the introduction of LVT will wipe large chunks of value off my house before I can get shot of it. The house was bought with cash saved from earnings and the gain made on the sale of a business, both of which were taxed at the time they arose, that those sources of tax will no longer be subject to tax won't help me. Introducing LVT will either cause me to sacrifice the amenity that I gain from a home that I own by virtue of spending taxed income on its purchase or cause me to go forward paying tax that far exceeds my income. It will be some solace to actually agree with the principles behind such a change were it to ever happen, but I'm not sure my wife will see it that way.
    Aside from the difficulties in finding an equitable way of phasing in such significant changes I guess the point is that whilst it might be true that "by definition, £1 more in LVT = £1 less in income tax" across the economy as a whole it will certainly not be true for every agent within that economy and whilst my position may be extreme one can hardly be surprised if those on the wrong side of the calculation would end up feeling a little aggrieved.

  8. TR, then you are one of the few corner/hardship cases. I've never denied that they exist.

    But in order to preserve your lifestyle (deserved or undeserved is irrelevant), nine (or ninety-nine or whatever) other perfectly deserving people are going to be enslaved by high taxes on income and high rents for ever. Why shouldn't they feel a bit aggrieved? Why should they put up with it?

    I'm slightly surprised that you are worried about having to move away from your 'business interests' but also that you have practically no income. Surely it's either one or t'other. And no, my Mrs doesn't think LVT is a good idea either :-(

    1. And no, my Mrs doesn't think LVT is a good idea either :-(

      Strange that, that's my experience as well. I'm reluctant to ascribe a cause to this observation, but few women I talk to seem to agree with the concept. Hell, very few women are LVT proponents at all. If I could make a sweeping generalization; Economic rationalist arguments does not work that strongly on women voters. "Causes" are more interesting.
      While I would be perfectly happy to downsize, awaysize, upsize, whatever the economic conditions dictates, that's not the case for the other half. Maybe it's true that men would have no problem with sleeping in cardboard boxes if we were left to our own devices... ;)

  9. Heading out the house right now but to be brief in answer to:

    "I'm slightly surprised that you are worried about having to move away from your 'business interests' but also that you have practically no income"

    Having sold a business and bought the family home, a new business has been started and as an embryonic employer of, now, 30 staff it still can afford the business owner little income for himself while (hopefully) it grows, perhaps by the time LVT arrives it will be able to pay me enough to cover my tax bill, who knows.

    And I don't want to deny those who would gain at my expense, that's why I agree with the principle.

  10. Kj, I don't want to sleep in a cardboard box either, nobody will have to sleep in a cardboard box!

    We'll have more houses and nicer houses and have higher incomes, so people who want to live in the best ones will have to work the hardest and pay the tax (just like if they want the nicest car or nicest holiday).

    And cast majority of people who are happy to live in average housing will pay very little tax at all (because of the personal allowance/Citizen's Dividend), so they'll have more money to spare for interior design, handbags, shoes, holidays etc.

    1. Don't mistake me for saying anyone would need to sleep cardboard boxes! That was a flippant comment on preferences, or lack thereof.
      The point is that the idea of downsizing particulary in housing is simply very unattractive to many. At the same time, HOist's have not got any problem telling people to stay within their means, as long as it's not to do with land, which is considered an earned right that you never should need to adjust.

  11. Kj, relatively few really have to downsize. Pensioners get deferment roll up option.

    As to the rest, here's a simple example:

    in a small village there are only two houses. A HOist low earner lives in one and three young couples in good jobs share the other (it's divided into flats).

    HOist complains it's "unfair" to make him pay 50% of the LVT and the other people only 8.3% each.

    Fine, so let's build another two houses, bigger and nicer than the existing HOist's one. So the two highest earning couples get the two new houses and pay 30% of the LVT each, the remaining couple converts the flats back into one house and pays 20% of the LVT and the HOist now only pays 20% of the LVT, simply by allowing the young couples to "achieve the dream".

  12. Exactly, or the HOist could move to one of the flats, or build a duplex out of his own house. In the stylized example, there is land available to build new houses. In real life, there isn't, at least not where the people in question wants to live. The correct thing to do is then to extend the use of the land, reducing your LVT bill by sharing it with others. Which is the exact opposite of what is being done, when you in fact gain from limiting the sharing of rent by others.

  13. "Land owners have no influence on land values" - It's easy to see that the Poor Widow type arguments are no problem for LVT. But what about a bunch of people who start a farm on farmland not too far from a town, put masses of time, energy, and capital into making it a good farm (making the land more fertile, putting in infrastructure, planting the right sort of trees, etc), then find thirty years down the line that their farmland is now residential land, with a hefty tax bill attached, that they can't pay by income from farming, but they really want to continue farming, not just anywhere but on their farm, which they've spent the last thirty years developing. Would they not have reasonable grounds for complaint?

  14. Anon, I'm afraid that's a complete non-argument.

    Once upon a time ALL land was farmland, so everybody could advance that argument. So if you want to start a farm and not have the risk of the land value increasing, don't start it near a town, simples.

    That said, LVT is based on optimum permitted use, so if the owners of that farm are happy to continue farming, they just wouldn't apply for change of use.

  15. Yes, but someone else might apply for a change of use, I think anyone can do that can't they? And in a country the size of England, perhaps its not that easy to start a farm anywhere other than near a town. The fact that once upon a time all land was farmland doesn't undermine the argument. It might just be that LVT over a long period of time will be likely to prevent people from using their land in the way that they want to use it. I'm not saying that LVT isn't the least worst tax option, just that there are genuine problems with it.

    1. "Yes, but someone else might apply for a change of use, I think anyone can do that can't they?"

      Look, I've heard it all before,that's why I wrote this blog. Read the sections on planning and development.

      Fact is, if somebody applies for planning on your land and you turn up to the hearing and oppose it, the chances are that the councillors will listen to the current landowner (and his neighbours) before they listen to the usurper. Even if he gets planning, he's still got to buy your land.

      "And in a country the size of England, perhaps its not that easy to start a farm anywhere other than near a town."

      Of course it is, read the sections on agriculture or land use statistics. Greater London is twenty miles across or something and it's taken a thousand years to grow that big. You buy land five or ten miles from the nearest big town and you are pretty safe from being engulfed for the next few centuries.

      "It might just be that LVT over a long period of time will be likely to prevent people from using their land in the way that they want to use "

      Yes, well I personally would like to use half an acre of Hyde Park to have as my back garden with my house on it. Ain't gonna happen.

      Why the sudden concern for orchard farmers? It was the EU who did for them, not the tax system. Even if occasionally an orchard does become developed, there'll still be plenty of orchards left.

      "I'm not saying that LVT isn't the least worst tax option, just that there are genuine problems with it."

      Agreed. Now try listing the genuine problems associated with the current tax system. That system puts million of people on the dole, permanently. Is it so terrible if occasionally an orchard farmer is compulsorily purchased, given fair recompense for his trees and expected to move elsewhere? That's maybe a dozen people a year affected, not millions.

    2. In case you can't find it, I explained it here

  16. What about the case of an institution, like a university, that sets up in a low rent area, and then because of the jobs created by the university, rents rise. Wouldn't that mean that the rise in rental value was generated by the university, and would it then be fair to make them pay more tax because of this?

    1. @ Gavka

      Assuming the university is private, I refer you to sections 1 and 2. It is always better to tax the private university on its rental income than on its earned income.

      That means it is entirely tax exempt until and unless it actually takes off as a success - at which stage the LVT won't hurt it. If it fails, it never pays anything.

      if the university is state-funded, then why on earth should the state not collect the increase in land values in the surrounding area? Yes, the university, as a branch of the government will be "paying back" a higher amount in LVT, it is then the government's decision whether to increase the funding to that university (i.e. to give it an indirect LVT rebate).