Thursday 17 January 2013

Z. LVT is a sledgehammer to crack a nut

This all leaves us with a rag-bag of arguments, some of which are good ideas in and of themselves, with or without LVT:

• Rent controls (skip to article
• We can sort out housing problems with more social housing (skip to article)
• We can sort out the house price bubble with sensible bank regulation/money reform (skip to article)
• We could make a modest start by having a Council Tax revaluation and more Council Tax bands (skip to article)
• We can sort out the house price bubble with more new development (skip to article)

... and some of which miss the point or makes things worse:

• We can sort out the housing shortage by stopping immigration (skip to article)
• We can sort out the house price bubble with a 100% capital gains tax 

(skip to article)
• We need higher Inheritance Tax to redistribute wealth (skip to article)

1a. "Rent controls"

This is probably the idea with the best track record; it works in practice much better than in theory.

The point is that the whole of society generates land values, and those land values can go three ways:
- the worst possible use is to allow them to be collected by landlords and banks (as mortgage interest)
- the best use is to collect them in tax, instead of taxing earned income (arguing over how total tax revenues are spent is a separate topic).
- the compromise position, which was prevalent in the UK for most of the 20th century is to prevent landlords from collecting them by simply capping rents. Inevitably, the quantity and quality of rented accommodation falls, but so what..?

People who might otherwise have rented just become owner-occupiers instead. They can put the rent saved towards a deposit and are no longer outbid by cash and asset-rich buy-to-let landlords when homes are up for sale. So while rent controls are ostensibly pro-tenant, what they actually do is push up owner-occupation rates.

In the UK, for most of the 20th century, there were quite strict rent control, and the outcome is entirely predictable: owner occupation rates increased from around 23% in 1918 to 60% by 1983, even before the sell-off of council housing gave a short term boost of a further 8%.

Rent controls have two downsides (besides the obvious ones of not generating tax revenues to replace damaging taxes on output and employment):
- The lack of reasonable quality rented accommodation means that more social housing is required, but that in itself is a good idea and was mainstream thought in the UK until the 1970s.
- To prevent banks from simply collecting the rents which landlords can no longer collect, there have to be mortgage restrictions to prevent potential owner-occupiers outbidding each other. Again, this is in itself a good idea and was the mainstream consensus view in the UK until the 1980s when the Thatcher government decided to let the financial sector do what the Hell it wanted.

1. "We can sort out housing problems with more social housing"

Yes, agreed. Social housing is a useful sticking plaster for a whole load of issues, which include some of the few social-economic problems which sorting out the tax and welfare systems, and is in fact Georgism by the back door.

a) Local councils currently only charge a rent sufficient to cover the bricks and mortar and maintenance costs and don't charge for the location value, so the average headline rent is currently £83 a week(this amount is adjusted for local average earnings and size of home, explanation here). This is much the same as councils acting as a private landlord and charging full rent (i.e. charging for the location value and not just the bricks and mortar cost) and then distributing the extra amount collected as a Citizen's Income - the average net rent actually paid/collected would be much the same.

b) Thought experiment: A century ago, ninety per cent of people were private tenants and this is when council house building first took off on a large scale. What if the government had embarked on a massive house building programme so that it was always slightly cheaper to rent a council home than to rent or buy a private one? In which case, ninety per cent of us would be living in council houses and very little ground rent would be collected privately. It wouldn't make much difference whether councils charge full rent, the government pools the excess of full rent over bricks and mortar cost and dishes that out as welfare or just charges the lower bricks and mortar rent.

c) Or put it this way, if the government/councils owned ninety per cent of housing and just charged an average rent of £7,000 a year, that would be sufficient to pay the bricks and mortar cost and leave enough over to pay for the core functions of the nation-state (law and order, defence, roads, refuse collection etc). The government would need to collect any other taxes, so our disposable incomes would be at least double what they are, no wealth would go the landowners, bankers and other monopolists and we'd all have lived happily ever after.

2. "We can sort out the house price bubble with sensible bank regulation/money reform"

Yes, sensible bank regulation is a good thing in and of itself, with or without LVT. It's not actually that difficult, we managed during the 1950s and 1960s.

But it is the bankers who oppose LVT and they also oppose sensible bank regulation and will always find ways round it - there's a revolving door between bankers and bank regulators. So it is going to be just as difficult to get LVT as it would be to get sensible bank regulation, why not go the whole hog? With house prices low and stable, there will be much less need for bank regulation, they will regulate themselves.

2b. "We could make a modest start by having a Council Tax revaluation and more Council Tax bands"

Yes of course, and amen to that, especially if:
- valuations were based on site premiums rather than selling prices;
- there were lots more bands, why not twenty or thirty;
- the total amount collected were much higher and other taxes were reduced.

Clearly, under current rules, your Council Tax is much the same whether your home is worth £300,000 or £3 million. If we had enough bands, then the Council Tax on a £3 million home would be ten times as much as on the £300,000 home. But under current rules, Stamp Duty Land Tax and Inheritance Tax are already much higher on the £3 million home than on the £300,000 home, so it strikes me that those would taxes would have to be scrapped as part and parcel of this so that people's overall lifetime tax bills stay much the same.

3. "We can sort out the house price bubble with more new development"

There are two sides to this: selling prices and the rental value of land.

a) As to selling prices, to some extent and in the long term, yes, more new supply will reduce selling prices, provided there is a credible threat of there always being enough new construction to keep rents and house prices down and provided there is sensible bank regulation. That's lots of "ifs". Simply dishing out carrots (planning permission) without using the stick (LVT on plots with planning permission) does not increase construction at all.

But NIMBY resistance to new development is just as entrenched as their resistance to LVT, so again, why not go the whole big?

b) As to rental values, having more new construction completely misses the point. There are (let's say) 27 million households in the UK in 27 million main residences with a total site premium of (say) £200 billion a year. If an additional million homes were built where demand is highest, then those 27 million households will end up living in 27 million most advantageously located homes. People will only move home if a home becomes available in a more favourable location, so the total rental value/site premium of the 27 million best homes out of now 28 million homes will be, if anything, higher than the rental value/site premium of the existing 27 million. And there will be a million empty homes with a rental value of, by definition, nothing because nobody wants to live there any more (which is a waste of bricks and mortar - it is far easier and cheaper to do something to make the currently marginal areas more attractive).

Or perhaps some households will split up; adult children will leave home; some groups of people who were sharing a house will now go their separate ways and have a home each, but the total rent they will be paying will increase. Once the homes are built, the bricks and mortar are a sunk cost, so by over-large households splitting up and paying, overall, more rent than before, the total "site premium" will increase.

4. "We can sort out the housing shortage by stopping immigration"

a) Complete and utter red herring, immigration is a social issue more than an economic one. It is galling to people who have been on the council house waiting list for ages when recent arrivals to the country leap frog them (and to some extent they do - just because the racists say it doesn't make it untrue). And we know that immigration tends to be good for the already-wealthy (the employers and people who employ domestic servants) and bad for lower earners (whose wages are pushed down), but that's not to say that immigrants don't boost the economy overall, but it's a larger number people sharing it and the overall picture is hard to determine.

b) One country's immigrant is some other country's emigrant, so if the underlying assumption were true, then house prices would have risen in net-immigration countries (like the UK) and fallen in net emigration countries (eastern Europe, new Commonwealth countries etc).

Quite clearly, they didn't. By and large, house prices went up everywhere. High house prices are a function of easy credit, low new construction, high taxes on real work and enterprise which encourage leveraged speculation, subsidies to landowners etc etc, it's always some combination of these factors at play, immigration and emigration themselves only play a minor rôle.

5. "We can sort out the house price bubble with a 100% capital gains tax


Superficially, if there were a 100% capital gains tax on owner-occupied housing, there would be no incentive to pushing up house prices, and/or people would be happy to sell for lower values as they would not benefit from selling at a profit.

If you think about all this for a few minutes, you'll realise that it wouldn't work as intended.
- Home-Owner-Ist resistance to this would be just as much as their resistance to LVT.
- Such a tax discourages transactions. So turnover in the housing market would halve; instead of selling your old house when you move, you'd be better off renting it out. So this would concentrate land ownership in ever fewer hands.
- What about people who move to another home of similar value (for job-related reason etc), they would have to be given some sort of hold over relief, which would make the record keeping even murkier.
- The record keeping and calculations for CGT are more complicated than you think - would you allow indexation with inflation? Which type of improvements are allowable as additional base cost and which aren't?
- The opportunities for evasion would be enormous. Vendors would choose to take £10,000 in a brown paper envelope rather than sell officially for an extra £15,000.
- According to HMRC static calculations, the revenue "shortfall" from exempting main residences from CGT is about £10 billion a year.
- HMRC's footnote explains: "The estimated cost of this exemption from capital gains tax does not represent the yield if this exemption were to be abolished, as consequential behavioural effects would substantially reduce yield." The value of the relief is calculated at rates of 18% and 28%. I happen to know that the Laffer-maximising CGT rate is closer to 10%, so this would not raise much money at all.
- CGT completely misses the point. If it "worked" and house prices were low and stable, then the yield would be nil: we wouldn't be able to reduce other taxes and landowners would never pay a penny for the benefits they receive from society in general.
- There has to be symmetry in the tax system. If profits are taxed, then there has to be relief for losses as well. So this means that some people would overpay, as they are insured against any subsequent losses.

6. "We need higher Inheritance Tax to redistribute wealth"


a) The total yield from IHT (main rate 40%) is less than £3 billion a year, it raises less than the TV licence fee, or about £100 per household. If the rate were raised to 100%, then there is no reason to assume that the total yield would increase because of "tax planning". There are also a lot of exemptions for IHT, from the sensible (the value of family owned businesses) to the idiotic (exemptions for aristocrats, i.e. farm land and 'national treasures' such as stately homes and paintings, provided they are made available for public viewing).

b) IHT is itself a sledgehammer to crack a nut, as it taxes personal/private wealth as much as it reclaims privately appropriated national wealth.

c) With LVT and a deferment/roll-up option for pensioners' sole and main residences, the yield from LVT on this "asset" alone would be more than £30 billion a year. That is as much as can ever be raised.

d) One large asset class which is untouched by IHT is pensions wealth (whether private, occupational or public sector), because by definition, little or none of these assets pass on death.


  1. Regarding rent controls. The main downside is, that if people are not paying market prices, this causes a deadweight loss. So, rented accommodation will be mis-allocated and over consumed. Something that afflicts the owner occupied market for the same reason.

  2. BJ, yes, but the biggest weakness is that while they will dampen demand from landlords, they will increase demand from owner-occupiers by the same amount, so in themselves will not do much to dampen prices.

    So there also have to be mortgage restrictions for owner-occupiers.

  3. Have you considered whether or not LVT might just increase income inequality and not reduce wealth inequality either? High earners would use their increased income to buy non-housing assets instead and thereby increase wealth inequality in a different way. You should also consider that home owners on modest incomes use the increased equity value of their homes as a way to share in the general prosperity generated by the high earners of society. In a flat income tax and LTV world the poor could never escape being poor because they would always be low earners and could never benefit from any unearned wealth (capital gains). The tax breaks of home ownership give modest earners the chance to build the equity they need to become wealthy asset owners over time. Home ownership thereby encourages social mobility. Margaret Thatcher turned some of the working class into property owning middle class when she encouraged people to own rather than rent.

    1. Paul, yes of course I have considered all your points and they are all unsubstantiated drivel of the highest order. You seem to say the best way out of poverty is remortgaging after a house price bubble which is the worst kind of economic system of all.

  4. So Mark..Tell me how LVT and a flat rate of income tax are going to help reduce income or wealth inequality. What exactly is it that drives your moral crusade for LVT? By the way, leverage is used routinely by businesses to expand and drive economic growth so I don't see why private individuals shouldn't be encouraged to use the leverage that mortgages provide to grow wealth too. It works.

  5. "I don't see why private individuals shouldn't be encouraged to use the leverage that mortgages provide to grow wealth too"

    Did you miss the last financial crisis, which was caused by home-owners producing less, consuming more and constantly taking out bigger mortgages?

    Would you like to perhaps Google it and do a bit of reading to bring yourself up to speed?