tag:blogger.com,1999:blog-63650346395386233082024-02-07T03:09:47.284+00:00Killer Arguments Against Land Value Tax, Noteconomics, taxation, Georgism, land value tax, rents, site premium, citizen's income, citizen's dividend, citizen's pension, welfare,Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.comBlogger26125tag:blogger.com,1999:blog-6365034639538623308.post-5915830134397644222013-01-17T21:09:00.000+00:002017-10-01T14:04:32.255+01:00A. The Poor Widow BogeyThere are dozens of variations on this argument, the most common ones are as follows:<br />
<br />
• LVT [or indeed Council Tax] doesn't take into account ability to pay (i)<br />
• Just because somebody owns a valuable home doesn't mean they have much cash income (ii)<br />
• What about the asset rich/cash poor ? (iii)<br />
• Poor Widows In Mansions will be made homeless (iv) <br />
<a href="http://kaalvtn.blogspot.co.uk/2013/01/a-poor-widow-bogey.html#1">Skip to article</a><br />
<br />
These can all be resolved with a roll-up and defer option. Of course, the deferment/roll-up option is not without its critics:<br />
• Elderly people won't be left with enough equity in their homes to pay for a nursing home (<a href="http://kaalvtn.blogspot.co.uk/2013/01/a-poor-widow-bogey.html#2">skip to article</a>)<br />
• Elderly people will allow their homes to go to ruin if they have no equity in it (<a href="http://kaalvtn.blogspot.co.uk/2013/01/a-poor-widow-bogey.html#3">skip to article</a>)<br />
• The deferment/roll-up option is just like Inheritance Tax (<a href="http://kaalvtn.blogspot.co.uk/2013/01/a-poor-widow-bogey.html#4">skip to article</a>)<br />
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See also: <br />
<a href="http://kaalvtn.blogspot.co.uk/2013/01/b-diagonal-comparison_17.html">B. The diagonal comparison</a><br />
<a href="http://kaalvtn.blogspot.co.uk/2013/01/s-land-owners-create-land-values-land.html#3">S. People have no influence over land values</a><br />
<a href="http://kaalvtn.blogspot.co.uk/2013/01/w-i-want-to-have-my-cake-and-eat-it.html">W. I want to have my cake and eat it</a><br />
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<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="1"></a>1. We can deal with objections (i) to (iv) in one fell swoop:<br />
<br />
<i>i) LVT [or indeed Council Tax] doesn't take into account ability to pay</i><br />
<br />
The "ability to pay" argument highlights that Home-Owner-Ism is Blue Socialism. In a free market capitalist system, everybody has to pay the same for the same services; we can't have a system where the government decides that favoured groups get certain things for free and that others have to pay through the nose; or even worse; favoured groups are given certain rights for free which they can sell on to unfavoured groups for inflated prices and to pocket the difference, but let's focus on The Poor Widow.<br />
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<i>ii) Just because somebody owns a valuable home doesn't mean they have much cash income</i><br />
<br />
This is a statement of the obvious. We are aware of this, although it is also true that <i>most</i> people who own valuable homes <i>also</i> have a lot of other income or assets. And clearly <i>all</i> of them own at least one valuable asset.<br />
<br />
<i>iii) What about the asset rich/cash poor ?</i><br />
<br />
There are far fewer 'asset rich/cash poor' than the Home-Owner-Ists always pretend (<a href="http://kaalvtn.blogspot.co.uk/2013/01/a-poor-widow-bogey.html#5">skip to article</a>), but yes, there are some. <br />
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The short answer to the issue of the 'asset rich/cash poor' (and all similar objections) is that people over retirement age who really want to stay put and realistically cannot afford the LVT will be given the option to defer and roll up the LVT until they die and the house is sold. As explained <a href="http://kaalvtn.blogspot.co.uk/2013/01/a-poor-widow-bogey.html#5d">below</a>, if the tax is about 3% of what each house is currently worth (at 2017 prices), even if house prices were to halve, this still means that on average, a pensioner household will be good for 17 years' worth of deferred payments, collected in arrears.<br />
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<i>iv) Poor Widows In Mansions will be made homeless</i><br />
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This claim is simply untrue, the situation simply does not arise.<br />
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v) Skip to article on the long and ignoble history of <a href="http://kaalvtn.blogspot.co.uk/2013/01/a-poor-widow-bogey.html#7">The Poor Widow Bogey</a>.<br />
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<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="2"></a>2. <i>"Elderly people won't be left with enough equity in their homes to pay for a nursing home"</i><br />
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a) This is rank hypocrisy from the Home-Owner-Ists, because they consider it to be a <a href="http://www.telegraph.co.uk/news/election-2010/7537483/Ministers-must-plug-2bn-hole-in-social-care-budget-warns-Age-Concern.html">scandal</a> that anybody should be "forced" to sell their home to pay for their own long term care anyway, which is rather bizarre - whoever pays for the care, what is the point in keeping a house vacant for years on end if the owner has no intention of re-occupying it? And to the extent that people pay for their own care, why should it make any difference how they raise the money?<br />
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b) For a given standard of care, somebody, somewhere has to pay it; a basic minimum standard of care for all who need it can be paid out of general taxation. The balance has to be paid either by the elderly person needing care or his heirs (whether in cash or by paying insurance premiums earlier in life) - and in fact the two are the same people. Every £1 spent on care means that the heirs inherit £1 less, why should all taxpayers be expected to pay for all nursing home costs to protect the inheritance of the few?<br />
<br />
c) People reaching retirement all have to make a realistic assessment of what assets and savings they have and how they would like to spend it. If some choose to "spend" the value of their home on their LVT bills, then that is no different to doing mortgage equity withdrawal and going on holidays or buying new cars. If we have a political objection to people "spending" the value of some assets on LVT (just in case they need long term care later on) then we can apply the same logic to their other savings or pension funds. The government would transfer all such receipts, together with any other assets or savings people have when they retire into an earmarked account and only allow them to be spent on old age care. Which makes a mockery of saving up for a nice retirement and nobody would bother.<br />
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d) People can choose to trade down in to a cheaper home, which frees up some cash to put to one side towards care fees (or care fee insurance) if they think that they won't be happy with the taxpayer-funded basic levels of care.<br />
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e) The cost of being in a nursing home is very high - between £30,000 and £50,000 a year in the UK (2016 prices), and how much of that should be paid out of general taxation is a political decision. Further, most people will never need long term caret; some might spend the last few months of their life in a nursing home; and others might be there for years on end. In the USA, <a href="http://www.nursinghomediaries.com/howmany.php">it is estimated</a> that five per cent of us will end up in a nursing home at some stage, and that half of people over the age of 95 are in homes. <br />
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f) Assuming a worst case ten year stay costing £400,000 in all, how many pensioners have a home that is worth that much (or twice that for a couple)? A few per cent at most, so with or without LVT, the value of housing is a completely unrealistic source of funding.<br />
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g) The cost of long term care is a "catastrophic risk". It does not happen to many people, it happens at random and the costs for an individual are enormous. So the only sensible solution is a compulsory, low-cost mass insurance scheme i.e. for it to be paid out of general taxation.<br />
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<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="3"></a>3. <i>"Elderly people will allow their homes to go to ruin if they have no equity in it</i><br />
<br />
a) We do not know what will happen to house prices if more tax is collected from land values and less from output and earnings (LVT pushes prices down; higher net incomes pull rents up). Quite possibly they won't change much. But assuming an extreme case and house prices halve, an LVT of approx. 3% of selling prices (as at 2017) means that after seventeen years of deferring, the rolled-up LVT would exceed the value of the home.<br />
<br />
b) There might be some people who respond by allowing their homes to go to ruin, but we often see this happen anyway. With or without LVT, it is exactly the Poor Widows In Mansions who allow those mansions to go to ruin because they don't have any current income to pay for repairs and they don't particularly care, as long as the rain is not actually pouring in. You only need to look at a few interior photographs on estate agents' websites and you can tell straight away who lived there.<br />
<br />
c) Everybody has to make their own decision when they retire - stay in a big house which they can't afford to maintain, or trade down and free up some cash, part of which can be spent on keeping the new place habitable. Of course, with reduced taxes on output and earnings, the cost of repairs and maintenance will be lower, so more people will be able to afford to pay for maintenance.<br />
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d) A related argument is that once the rolled-up LVT bill is close to or more than the value of the home, there is no longer an incentive to downsize. That might be true, but you pay your money and you take your choice. Some people will end up regretting their decision to stay put and will be wishing they had traded down, that's life, it is full of good decisions and bad decisions. There are plenty of obvious work-arounds here, i.e. if people want to trade down, a proportion of the overhang of LVT liabilities can be written off or something.<br />
<br />
<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="4"></a>4. <i>"The deferment/roll-up option is just like Inheritance Tax</i><br />
<br />
No it's not.<br />
<br />
a) The deferment/roll-up option is suggested <i>precisely because</i> of the issue of Poor Widows In Mansions. In cash terms, clearly there are some pensioners (far fewer than you think) who would not be able to afford the LVT on the home they are currently living in. If their heirs complain that <i>they will end up paying the tax</i>, then at least that shows up why they object to LVT.<br />
<br />
b) If the heirs want to inherit more in future, then they can take some of their current tax savings (no more National Insurance or VAT) and use that to pay their parents' LVT on a year-by-year basis. That would be vastly preferable all round but is not always a realistic option.<br />
<br />
c) So in reality, the whole of the next generation will be "inheriting" extra amounts every year via their ongoing tax savings and their total savings will be more than the value of housing which a lucky few would have inherited in the absence of LVT.<br />
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<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="5"></a>5. There are far fewer 'asset rich/cash poor' than the Home-Owner-Ists always pretend<br />
<br />
a) A <a href="http://www.birmingham.ac.uk/Documents/college-social-sciences/social-policy/CHASM/briefing-papers/2012/briefing-paper-temp-wealth-tax-sept2012.pdf">study</a> by The University of Birmingham concluded: <i>"... there are actually very few people in this category. Indeed, only 4% of those who were retired in 2010 had both an income below the official poverty line and housing equity over £100,000."</i> The overall position is unlikely to have changed since then.<br />
<br />
b) Seven million pensioner households (about 4 million couples and 3 million widows/widowers) own about a quarter of UK homes, so the total LVT to be collected would be about £50 billion a year (only slightly more than pensioners spend on tourism - <a href="https://www.theguardian.com/money/2015/jun/22/economics-of-retirement-power-pensioner-spending">£37 billion</a>). This means £7,000 per household against average gross income of retired households of £29,000 in 2016 (<a href="https://www.ft.com/content/1549789a-7c42-11e7-9108-edda0bcbc928">FT August 2017</a>). There is of course a disparity between pensioner household incomes, but there is a similar disparity in the value of their homes and the two largely overlap.<br />
<br />
c) Collectively, pensioner households can easily afford the £50 billion LVT (especially as other goods and services will be cheaper). Half can easily afford it; a third will break even and maybe one-sixth of pensioner households would would be "forced" to take some sort of evasive action, such as trading down; taking in a lodger (presumably a family member); asking their family or heirs to contribute; using up their savings; and most importantly, agreeing a deferment/roll-up with the council.<br />
<br />
d) Quite who ends up better off and who has to take evasive action depends on how much a pensioner household's income is and how much their house is currently worth. By and large, most pensioner households in lower quartile housing and most pensioner households in the upper quartile of the pensioner income distribution would be better off. For every 'asset rich, cash poor' pensioner household there are three 'asset poor, income rich' pensioner households.<br />
<br />
<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="5d"></a>6. The roll-up option<br />
<br />
It cannot be beyond the wit of mankind to have some relieving or transitional measures to phase in the tax and find some trade-off between good economics and good politics.<br />
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a) Evicting pensioners for non-payment is a political non-starter, so the next solution is to deduct any LVT due from state pensions or private pensions at source. <br />
<br />
b) Politically and practically, the deduction at source would have to be restricted so that each pensioner household receives at least a bare minimum to live on.<br />
<br />
c) Big picture-wise, a 100% LVT on current site premiums would mean that pensioner households have to pay £50 billion a year out of gross state, occupational and private pensions of £200 billion a year (£29,000 x 7 million), so the bulk could be collected and the rest rolled up and paid on death.<br />
<br />
d) Clearly, some of the deferred LVT would never be collected if it ends up exceeding the value of the home, but this will be relatively small amounts.<br />
<br />
e) Or we go for an economically nonsensical but politically acceptable solution and simply exempt pensioners' homes entirely and impose a higher rate on everybody else. The upside of this is that house prices would be pushed even lower, so first time buyers would not be hurt; it would be the Baby Boomers who end up paying because a) they own a disproportionate amount of housing and b) their inheritances will be all the smaller.<br />
<br />
f) In the medium and long term of course, good economics and good politics are the same thing. It is estimated that 1% on VAT costs <a href="https://www.accountingweb.co.uk/tax/business-tax/vat-impact-on-unemployment-not-clear-cut">100,000 jobs</a>, so getting rid of that means another two million private sector jobs. National Insurance raises £120 billion a year and is probably not quite as damaging as VAT, but getting rid of that might mean another million private sector jobs. So that's three million people back in work and higher net wages for those who are already in work. Every £1 by which house prices fall means that the next generation of first time buyers saves £2 in interest and mortgage repayments. <br />
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Is it really good politics in anything but the shortest of short term to stick with a tax system which uses Poor Widows in Mansions (one or two per cent of the population!) as a human shield to justify poverty for untold millions of others?<br />
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g) Why would nudging Poor Widows out of their Mansions be good economics, you might ask. Look at London, which is where ninety per cent of the £1 million-plus homes are. Who's queuing up to buy those homes? It's rich foreigners, who'd be delighted to take advantage of our low income tax rates and who could easily pay the tax (house prices will adjust downwards in compensation). If half a million wealthy foreigners and their families came to the UK and each spent £200,000 of their foreign-earned income here each, that would increase our GDP by 5% and wipe out the balance of payments deficit. But who lives in those houses? Poor Widows, allegedly, so all the foreigners go elsewhere (like New York or Switzerland, where they have swingeing property taxes, as it happens).<br />
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<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="7"></a>7. <i>The "Poor Widow" Bogey</i><br />
<br />
a) She is a timeless classic of the genre, Winston Churchill (when he was a pro-LVT Liberal MP) got sick and tired of hearing about over a century ago. From <a href="http://web.archive.org/web/20010728120002/http://home.vicnet.net.au/~earthshr/winston.html">here</a>:<br />
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<i>But when we seek to rectify this system, to break down this unnatural and vicious circle, to interrupt this sequence of unsatisfactory reactions, what happens? We are not confronted with any great argument on behalf of the owner. Something else is put forward, and it is always put forward in these cases to shield the actual landowner or the actual capitalist from the logic of the argument or from the force of a Parliamentary movement.<br />
<br />
Sometimes it is the widow. But that personality has been used to exhaustion. It would be sweating in the cruellest sense of the word, overtime of the grossest description, to bring the widow out again so soon. She must have a rest for a bit; so instead of the widow we have the market-gardener...</i><br />
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For a lengthy account of how often the Poor Widow is invoked as an argument against land taxes in the USA, see <a href="http://centralresearchgroup.org/georgist-economic/suozzi-commission-contributions-2009/the-poor-widow-argument-addressed/view">here</a>. <br />
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b) It is the height of cynicism that the Liberal's "People's Budget" of 1909 was vetoed by the landowners in the House of Lords (when 80% or 90% of the population were private tenants) who used The Poor Widow as a human shield for their own interests and then a few years later merrily sent off millions of men to the trenches in France, where 670,000 were killed and 1,640,000 were wounded, so while the Poor Widows were spared the ignominy of trading down, many of them will have sons or grandsons killed or injured in battle.<br />
<br />
c) Today's Poor Widows In Mansions weren't even born when Churchill made that speech. For sure, any transition is going to be a bit messy, being a trade-off between good economics and good politics, but surely it is not insurmountable? If we had devoted half the lives and materials wasted in the 1914-18 war to dealing with the transition to LVT instead, then by now this would be a normal part of financial and retirement planning and there simply <i>wouldn't be</i> any Poor Widows In Mansions.Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com7tag:blogger.com,1999:blog-6365034639538623308.post-58816241966343472992013-01-17T21:08:00.001+00:002017-10-01T14:08:13.002+01:00B. The diagonal comparisonAnother favourite gambit is the following bald claim:<br />
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• "The Poor Widow In A Mansion would end up paying tax more than the millionaire in the flat next door" <br />
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For a classic of the genre, I refer you to Boris Johnson's article in <a href="http://www.telegraph.co.uk/comment/columnists/borisjohnson/9876396/Mansion-tax-Labour-shows-its-true-colours-with-this-spiteful-tax-on-homes.html">The Telegraph</a>:<br />
<br />
<i>What about someone who owns several houses, all of them worth £1.9 million: why should he or she pay nothing, while someone who owns just one pricey home gets totally clobbered? <br />
<br />
What about someone who lives in a home worth a million, but happens to have a load of Van Goghs and Cézannes on his kitchen wall, or gold bars under his bed? Why should he get away with paying nothing, while the taxman pulverises the little old lady still living in the former family home next door?</i><br />
<br />
1. The scientific approach to experiments is to keep all variables constant apart from one, which you change, and that gives you a meaningful comparison and hopefully a meaningful result.<br />
<br />
So for example, it is reasonable to ask <i>"Is it fair that a single-earner couple with a modest income and two kids pays the same for their house as a two-earner couple on high salaries with two kids in an identical house next door?"</i><br />
<br />
All variables are kept constant apart from their earnings. And the answer is <i>"Yes of course; each household is using the same amount and value of land so they'd have the same mortgage repayments and pay the same in LVT."</i> By the standards of their peers, two-earner couple has a modest house and the single earner couple has a nice house. <br />
<br />
So it's the same as asking <i>"Is it fair that a single earner couple with a modest income and two kids pays the same for a two-week holiday in Chalet XYZ as a two-earner couple on high salaries with two kids who book the identical Chalet next door?"</i>, to which the answer is also <i>"Yes."</i><br />
<br />
2. Or we could reasonably ask: <i>"Is it fair that a widow on a modest state pension who lives in a large house pays three times as much as another widow on the same modest pension who lives in a small flat a few streets away?"</i>. All variables are kept constant apart from their choice of home, and the answer is also <i>"Yes of course. If the widow in the large house wants to knock two-thirds off her LVT bill, she can move into a flat in the same block as the other widow. The latter can manage, so why not the former?"</i><br />
<br />
And so on. <br />
<br />
3. But that is not how the Home-Owner-Ists play the game. <br />
<br />
What they like to do is to change every single variable and make diagonal comparisons, for example: <i>"Is it fair that a widow who has worked hard as a low-paid nurse all her life and whose pension was stolen by Gordon Brown but lives in a large house full of treasured family memories should pay three times as much tax as a drug dealer/footballer/merchant banker/Saudi-funded radical Islamist preacher/[insert wealthy hate figure du jour] who lives in a small flat a few streets away and has no links to the local community?"</i><br />
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You might as well ask: <i>"Is it fair that the widow in the large house who likes her sherry/smokes pays infinity per cent more alcohol duty/tobacco that the Saudi-funded radical Islamist preacher who doesn't drink/the footballer who doesn't smoke?"</i> Well yes, she drinks/smokes, the others don't.<br />
<br />
So the answer is <i>"Yes, it is fair"</i>, but of course that allows them to paint you as a shill for footballers/drug dealers/merchant bankers/radical Islamist preachers etc. <br />
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4. The Poor Widow still wouldn't pay three times as much tax as the merchant banker of course; under current rules, he is paying £100,000 income tax and NIC each year and £800 Council Tax; she might be paying £0 income tax and £2,400 Council Tax. Under the tax system proposed here, the merchant banker would still be paying more tax overall than the widow.<br />
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5. So when people come up with these diagonal comparisons, remind them that they are meaningless and ask them to change just one variable. And if they are wailing about Council Tax, remind them that working households pay ten or twenty times as much income tax, NIC, VAT and so on as they pay in Council Tax.Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com6tag:blogger.com,1999:blog-6365034639538623308.post-74139225797573053062013-01-17T21:07:00.003+00:002017-10-01T15:18:38.414+01:00C. Land doesn't generate incomeThese arguments are usually presented in conjunction with the Poor Widow Bogey, but let's treat them as a separate category:<br />
<br />
• There's no cash to pay the tax; you can't pay tax in slices of land (<a href=http://kaalvtn.blogspot.co.uk/2013/01/c-land-doesnt-generate-income.html#1>skip to article</a>)<br />
• Taxes on land are "dry taxes"(<a href=http://kaalvtn.blogspot.co.uk/2013/01/c-land-doesnt-generate-income.html#2>skip to article</a>)<br />
• People will be forced to sell or rent out their land (<a href=http://kaalvtn.blogspot.co.uk/2013/01/c-land-doesnt-generate-income.html#3>skip to article</a>)<br />
• People will be forced to try and generate income from their land, even if that is a sub-optimal use (<a href=http://kaalvtn.blogspot.co.uk/2013/01/c-land-doesnt-generate-income.html#4>skip to article</a>)<br />
• It would be OK to make landlords to pay more but why should I pay tax on my own home? (<a href=http://kaalvtn.blogspot.co.uk/2013/01/c-land-doesnt-generate-income.html#5>skip to article</a>)<br />
• If they tax us on land, they might as well tax us on fresh air! (<a href=http://kaalvtn.blogspot.co.uk/2013/01/c-land-doesnt-generate-income.html#6>skip to article</a>)<br />
<br />
<a name="1"></a>1. <i>"There's no cash to pay the tax; you can't collect/pay tax in slices of land"</i><br />
<br />
People only say this because they have become used to the socialist idea that taxes are primarily assessed on earned income. But there are two different types of "tax" (i.e. sources of revenue to fund government):<br />
- taxes calculated as a percentage of cash or near-cash income (whether called income tax, corporation tax, National Insurance or VAT, a tax on turnover/gross profits), and <br />
- user charges (Business Rates, council tax, fuel, tobacco and alcohol duty).<br />
<br />
LVT is actually a user charge for the benefits (net of dis-benefits) accruing to each plot of land and collected or enjoyed by the owner (or the bank in the form of mortgage interest), it is conceptually no different to any other duty. You can't argue against fuel duty on the basis that <i>"my petrol doesn't generate income for me, I can't pay petrol duty in pints of petrol"</I>, it is there because otherwise roads would be even more hopelessly over-crowded.<br />
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As to "slices of land", taxes (and rent or mortgage interest) are supposed to be paid in cash, but if a tax evader (or a rent or mortgage defaulter) runs up a large enough debt then his property (whether that is cash, physical assets or land and buildings) will be seized and sold off to pay the tax (or rent or mortgage arrears).<br />
<br />
A 90% - 100% LVT on current site premium (definition see <a href="http://kaalvtn.blogspot.co.uk/p/valuations-and-potential-lvt-receipts.html">here</a>) would be approximately 3% of the total selling price of each home (at 2017 prices). Even if house prices were to halve because of the LVT, that still means that any homeowner could run up 17 year's worth of arrears before there was a shortfall in collection.<br />
<br />
Just because land itself does not spew out coins and notes, that does not mean that the tax can't be collected. Very briefly, on an administrative level, everybody will fall into one or more of the following categories, and all the collection methods would be administratively easy:<br />
<br />
- Pensioners - tax can be deducted from state, occupational and private pensions (just like PAYE) with any deferred amounts being collected <a href="http://kaalvtn.blogspot.co.uk/2013/01/a-poor-widow-bogey.html">from proceeds of sale of house on death</a>.<br />
- Social tenants - tax can be collected as part of the rent (the rent includes LVT, by definition)<br />
- Private tenants - tax would be collected from landlord (or withheld from Housing Benefit Payments)<br />
- Households in lower-value homes - tax would fall below personal allowances/Citizen's Income entitlements.<br />
- Households with mortgages - any tax exceeding personal allowances could be added to mortgage payments or collected via PAYE/Self Assessment returns.<br />
- Public sector workers - as above, can be deducted directly from wages.<br />
- Mortgage-free households - any tax exceeding personal allowances could be collected via PAYE/Self Assessment returns.<br />
- Owner-occupier farmers and small holders - tax would probably fall below personal allowances, balance collected via Direct Debit/Self Assessment.<br />
- Vacant premises and unregistered land. If the owner does not pay, a charge to cover arrears is taken over the land and if he does not come forward within twelve years, his title is void anyway under normal English land law (different in Scotland).<br />
- Land owned by offshore trust etc. - if tenanted, then tax is collected from tenant. If vacant, see above.<br />
<br />
<a name="2"></a>2. The Taxpayers' Alliance, which is funded by large landowners and the financial services industry coined the term <i>"dry taxes"</i>, which adds nothing new to the debate.<br />
<br />
<a name="3"></a>3. <i>"People will be forced to sell or rent out their land"</i>. <br />
<br />
This is nonsense of course and even if one alternative is correct then the other isn't. Nobody would be forced to sell anything, if you own land and buildings, then under LVT, even under 100% LVT, you will still be able to make a profit by renting it out, as the LVT only taxes the site premium and not the income which is derived from the buildings and improvements or other services provided.<br />
<br />
The next question is, to whom would land and buildings be sold or rented, and where would they get the cash from? If a tenant can rustle up the cash to pay the rent on where he lives inclusive of the tax, then why not the current owner, who only has to pay the tax but nothing extra for use of the buildings and improvements?<br />
<br />
<a name="4"></a>4. <i>"People will be forced to try and generate income from their land, even if that is a sub-optimal use"</i><br />
<br />
The bulk of UK land and buildings by value is housing and by and large, people are paying for the enjoyment value, they do not derive cash income from their home any more than they derive cash income from any other goods they buy or the services they pay for. <br />
<br />
So that's like arguing, <i>"If supermarkets start charging me for the food I need, then I'd have to re-sell the food at a higher price to be able to pay for it."</i> or <i>"If we have a road fund licence, fuel duty and VAT on car use, then instead of using their cars to commute for work or for leisure activities, everybody will be forced to become a courier or mini-cab driver to generate the income to pay the taxes."</i><br />
<br />
One of the main determinants of rental values is the level of local earnings. For example, although average earnings in London are £10,000 higher than in the rest of the UK, average annual rents are also £10,000 higher. Study after study (see e.g. <a href="https://www.retail-week.com/analysis/data/data-the-uks-top-40-disposable-income-goldmines/7025087.article">Retail Week, August 2017</a>) has shown that although there is a large wage differential between different regions of the UK, there is a similar difference in housing costs, so actual disposable household income after housing costs is quite similar across the UK (being almost exactly the same in London as in the North East).<br />
<br />
The higher rents in higher wage regions are the entry fee which landlords charge, and which tenants are willing to pay, for the right to earn more money. Those tenants are already putting their homes to their optimal use by using them as a base from which to earn the higher wages. <br />
<br />
These tenants go out to work, earn £20,000 net salary after tax and pay £10,000 in rent. From their point of view, this is just as good as living in a low wage area, earning £14,000 after tax and paying £4,000 in rent. Very few of them are going to move to a high wage/high rent area and then decide to start working from home on the basis that they have to generate income from the asset for which they are paying rent.<br />
<br />
<a name="5"></a>5. <i>"It would be OK to make landlords to pay more but why should I pay tax on my own home?"</i><br />
<br />
To which the rhetorical counter-question is: <i>why should a tenant pay anything to have a roof over his head?</i> <br />
<br />
Answer: <i>because he's getting something of value to him, or else he wouldn't pay it.</i> <br />
<br />
The total rent which any tenant pays can be split into two things: 'the rental value of the bricks and mortar' and 'the site premium'. With LVT, the landlord keeps the rent from the bricks and mortar and passes on the site premium to the government as tax. However the tax bill is split between them (the tax can only be paid out of the total rent collected), the landlord and tenant taken together are enjoying the benefit of exclusive occupation of that site. So far so good.<br />
<br />
Good taxation involves taxing substance rather than legal form, because taxing legal form makes avoidance and evasion far too easy and erodes any underlying principles. <br />
<br />
What if the landlord decides to get out of the rental business and sells a home to the sitting tenant? It would be the same person enjoying the same exclusive occupation; all that has happened is that they have swapped cash for bricks and mortar. The new owner continues to pay the site premium element to the government directly as tax and pays a smaller amount for the actual bricks and mortar. <br />
<br />
To the outside world, nothing has changed. Why should the tax now fall to £nil merely because of a change in legal form?<br />
<br />
<a name="6"></a>6. <i>"If they tax us on land, they might as well tax us on fresh air!"</i><br />
<br />
This has been seriously advanced on several occasions, but that's the whole point isn't it?<br />
<br />
i. Air is a natural resource, provided for free by nature (in which the Clean Air Acts help) and nobody has to pay for the act of actually breathing. Not even the most powerful government or landlord can make people pay for the act of breathing (although a Poll Tax comes close).<br />
<br />
ii. Land (or location) is another natural resource provided for free by nature, but we have been conditioned to accept it as normal that landlords (or banks) charge us for the right to occupy it or acquire it, which includes the right to breathe the air from any particular site.<br />
<br />
iii. Luckily, nobody can claim exclusive possession of the air: however much we breathe there will always be plenty left for everybody else, so while fresh air is of almost infinite value (without it we'd suffocate within minutes) nobody can privatise it and charge us for breathing it, so fresh air has no market value. <br />
<br />
iv. Everybody needs exclusive possession of small patches of land to have their homes (or businesses) on, and there's a limited supply of good patches, which gives land its market value. Once all the land is registered as belonging to somebody, ever future individual in all eternity is forced to pay large amounts of money for the simple right to have a reasonable lifestyle (the only alternative is sleeping rough). What the Normans took by force in a few years is still paying their descendants handsome dividends.<br />
<br />
v. Most households only own tiny patches of land, but in doing so, they are each placing a tiny burden on 'everybody else' who then has to use a less favourable plot. The sum total of all these tiny burdens is, mathematically and logically, equal to the rental value of any plot. And in turn, everybody (landowner or not) has a tiny burden placed on him by everybody who occupies a more favourable plot and so on.<br />
<br />
vi. Imagine that there was a limited amount of air, and I'm a big fat bloke who burns through 6,000 calories a day, goes jogging and plays rugby; I drive a massive car and I love to have a roaring fire in the hearth. As a result of this, some other citizens are suffocating because I've used up more than my fair share of air. In that case, would it not be fair to levy a tax on fresh air to encourage me to use a bit less and use the fund to compensate people who are suffocating or whose cars won't start in the morning?<br />
<br />
vii. So the only fair way of dealing with land rents is for all that land rental value (or site premiums) to be paid into a single pot and for the money in the pot to be dished out again to, or spent for the benefit of, everybody as equally as possible. So again, it's basic maths that the average household occupying the average plot would pay as much in LVT as it receives in cash or in kind, and would thus be effectively occupying land 'for free' in the same way as they can breathe air for free.Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com49tag:blogger.com,1999:blog-6365034639538623308.post-74586051141507786762013-01-17T21:06:00.003+00:002021-02-10T15:29:29.205+00:00D. Local taxation and the only fair tax is...Here are another two myths, some nonsensical statements, a meaningless question an one argument that has been superseded by events:<br />
<br />
• MYTH: I pay for local services out of my Council Tax (<a href="http://kaalvtn.blogspot.co.uk/2013/01/d-local-taxation-and-only-fair-tax-is.html#1">skip to article</a>)<br />
• MYTH: The UK collects more tax from land than any other OECD country (<a href="http://kaalvtn.blogspot.co.uk/2013/01/d-local-taxation-and-only-fair-tax-is.html#2">skip to article</a>)<br />
• The only fair tax is Poll Tax, income tax or sales tax/VAT (<a href="http://kaalvtn.blogspot.co.uk/2013/01/d-local-taxation-and-only-fair-tax-is.html#3">skip to article</a>).<br />
• Will LVT be a national tax or a local tax? (<a href="http://kaalvtn.blogspot.co.uk/2013/01/d-local-taxation-and-only-fair-tax-is.html#8">skip to article</a>)<br />
• We have to have VAT because the EU says so (<a href="http://kaalvtn.blogspot.co.uk/2013/01/d-local-taxation-and-only-fair-tax-is.html#9">skip to article</a>).<br />
<br />
<a href="http://www.blogger.com/blogger.g?blogID=6365034639538623308" name="1"></a>1. MYTH: <i>"I pay for local services out of my Council Tax."</i><br />
<br />
We can dismiss this one straight away, because whatever the logic of it (and it has no relevance to the merits or demerits of LVT), it is simply <i>a downright lie.</i><br />
<br />
We know for a fact that Council Tax currently raises £32 billion a year (before deducting Council Tax benefit), which is only about five per cent of all tax receipts. To be able to make such a statement, you would then have to say what you mean by <i>"local services"</i>.<br />
<br />
The last time I looked, apart from defence, paying debt interest and maintaining embassies and consulates abroad (and ignoring corporatist subsidies, theft and waste), everything the government does is <i>"local"</i>. It spends about £150 billion a year on the NHS and the state school system alone. There's plenty of other stuff on top of that which is clearly <i>"local"</i> (road maintenance, police, law and order, refuse collection, street lighting, social workers etc) which brings the bill to £200 million.<br />
<br />
Suffice to say, Council Tax covers barely one-seventh of the cost of such <i>"local services"</i>. <br />
<br />
And you could just as well argue that welfare and pensions spending are local services, because they are paid to people who all live somewhere, and wherever they live is <i>"local"</i>, and every bit of land benefits from the fact that we have these non-local services (defence, paying debt interest), in which case Council Tax only covers a twentieth of the cost of <i>"local services"</i>.<br />
<br />
<a href="http://www.blogger.com/blogger.g?blogID=6365034639538623308" name="2"></a>2. MYTH <i>"The UK already collects more tax from property than any other OECD country"</i><br />
<br />
The OECD's <a href="http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=ECO/WKP(2015)23&docLanguage=En">latest report</a> (2015, overall very much in favour of taxes on land values) says :<br />
<br />
<i>The size of the property tax take varies strongly across countries, both in terms of percentage of total tax revenue and in per cent of GDP (Figure 1). Overall, its significance is modest. Across the OECD, taxation of immovable property makes up around 2½ per cent of the total tax take and a bit more than 1% of GDP. Countries with a high property tax-to-GDP ratio include the United Kingdom, Canada and the United States, while the ratio is almost nil in countries such as Luxemburg, Greece and Mexico. The property tax is more prevalent in Anglo-Saxon countries…</i><br />
<br />
The OECD takes a very wide view of what constitutes a tax on immoveable property. It is true that the UK's Business Rates is very high by international standards, as is Stamp Duty Land Tax, but Council Tax is quite low.<br />
<br />
If you add these together, the UK is at the top of the table (it wouldn't be if Hong Kong and Singapore were included), but out of the £80 billion-odd in such taxes collected in the UK, how much is actually an annual tax on the rental value of land?<br />
<br />
- Business Rates (£30 billion), is quite similar to LVT (and high by international standards).<br />
- Stamp Duty Land Tax (£14 billion) is a tax on certain transactions in land and buildings, it relates to land values and is highly progressive but is not proper LVT (it is a very crude LVT payable in advance).<br />
- Inheritance Tax and Capital Gains Tax (£14 billion) are general taxes which apply to lots of other things than land. A fair chunk of estates and capital gains affected relate to land values, but these are not LVT (they are a very crude LVT payable in arrears).<br />
- Council Tax (£32 billion before rebates) is closer to a Poll Tax than LVT (although administratively could easily be made much more like LVT). It varies depending on what a home was (or would have been, had it existed) worth in 1991. In 1991, house prices were much flatter around the UK and values were closer to the "bricks and mortar" value, so you could say that it's a tax of about £300 for each room in a home, if you have more than nine rooms, the rest are tax-free.<br />
- The OECD ignores subsidies to land ownership, such as the £10 billion paid to private landlords as Housing Benefit or the £4 billion paid to owners of farmland (a kind of negative LVT).<br />
<br />
So actual quasi-LVT (Business Rates) is less than 5% of UK taxes collected, not the 12.5% given by the OECD (<a href="https://stats.oecd.org/Index.aspx?DataSetCode=REV">tables</a>). <br />
<br />
The amount of quasi-LVT (ad valorem annual property taxes) collected in the USA and Canada is much higher in the UK; the bulk of their property taxes are annual taxes pro rata to the value of each home, with no upper limit in most states (some apartments on Manhattan cost over $100,000 a year); and their Stamp Duty Land Tax equivalents are much lower.<br />
<br />
<a href="http://www.blogger.com/blogger.g?blogID=6365034639538623308" name="3"></a>3. <i>"The only fair tax is a Poll Tax, income tax or sales tax/VAT"</i><br />
<br />
The distinction between 'local' and 'national' services is highly artificial, to all intents and purposes, the UK has one single national tax-raising system; even supposed 'local' taxes like Council Tax or Business Rates are dictated by UK-wide rules (these are diverging slightly for Scotland). Simply putting the word 'local' in front of a tax or earmarking it for 'local' spending adds nothing to the merits or demerits of the tax.<br />
<br />
When arguing against LVT, people's stated preferences is usually based on whatever system they think will mean that they pay less than now (and everybody else will pay more. People with high incomes like the idea of a Poll Tax; people with low incomes like the idea of income tax; and people with a modest lifestyle like the idea of Sales Tax (such as Value Added Tax). The arguments for a Poll Tax are the opposite of the arguments for income tax, Land Value Tax sits comfortably between the two.<br />
<br />
The actual economic or practical advantages or disadvantages of all these taxes can be summarised as follow. A Sales Tax is even worse than Income Tax, and starts to take on some of the disadvantages of a Poll Tax (but without the advantages).<br />
<br />
Land Value Tax comes out the best when judged by objective criteria, with income tax in second place.<br />
<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjYXRNux5LU3_mQWT-u38RtNU97ZzaJ2VQJtLlU0ahUVrmOX9jK_Q9iqn-bMMtIZkCFcnoITY-MvAmNntPx7Qppe_2asqx3mhQuR34kl3kLMW195rm1xrLcbeai9C0fZynZidaTpmJYcLA/s1600/Poll+tax%252C+LVT%252C+income+tax+and+sales+tax.png"><img border="0" data-original-height="525" data-original-width="607" height="443" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjYXRNux5LU3_mQWT-u38RtNU97ZzaJ2VQJtLlU0ahUVrmOX9jK_Q9iqn-bMMtIZkCFcnoITY-MvAmNntPx7Qppe_2asqx3mhQuR34kl3kLMW195rm1xrLcbeai9C0fZynZidaTpmJYcLA/s640/Poll+tax%252C+LVT%252C+income+tax+and+sales+tax.png" width="512" /></a><br />
<br />
<a href="http://www.blogger.com/blogger.g?blogID=6365034639538623308" name="8"></a>4. <i>"Will LVT be a national tax or a local tax?"</i><br />
<br />
The answer is "both". Ideally, it will be set at a national rate (as is Business Rates at present) and collected locally. To keep per capita spending the same, areas with high land values will receive less from central government out of general taxation and areas with low land values will receive more.<br />
<br />
The whole topic of local government finance is currently nigh impenetrable. It is a mixture of a small amount of locally collected national taxes (Council Tax and from <a href="https://www.gov.uk/a-plain-english-guide-to-business-rates-retention">since 2013</a>, a proportion of Business Rates) and hundreds of different adjustments to and fro to say how much money each council, local NHS, local education authority etc gets from central government out of national taxes. And of course there are different layers of local government: town and parish councils, local boroughs, county councils, unitary authorities and regions such as Scotland, Wales and Northern Ireland.<br />
<br />
Officially, only about one-quarter of total government spending is "local", but you could easily classify two-thirds of UK government expenditure as "local", i.e. anything that can reasonably said to be spent in a particular area. So in the wider sense, this includes an NHS hospital, a state school or university, roads, the local police, refuse collection, Housing Associations and of course pension and welfare payments to people in an area. Truly "national" stuff is only defence, immigration control, foreign embassies and consulates, debt interest and so on.<br />
<br />
If some councils decide, for political or ideological reasons, to collect less than what they are entitled to collect and cut back on "local" spending accordingly, well, that is their decision; their grants from central government would not be increased to make up the shortfall. Clearly, central government grants would have to be re-assessed regularly and tapered gently so that local councils are incentivised to improve their areas as best they can, because they can keep any increase in rates receipts in the medium term. No system is ever going to be perfect but you could hardly make it worse than it already is.<br />
<br />
<a href="http://www.blogger.com/blogger.g?blogID=6365034639538623308" name="9"></a>5. <i>"We have to have VAT because the EU says so"</i><br />
<br />
This was quite true, but now that the UK government appears to have accepted the narrow majority for "Leave" in the 2016 Referendum, we are free to reduce the headline rate and preferably scrap VAT altogether.Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com6tag:blogger.com,1999:blog-6365034639538623308.post-1234163547712493982013-01-17T21:05:00.006+00:002017-10-07T15:22:14.575+01:00E. LVT is a tax on aspirationAll of the following claims can be debunked by applying logic and looking at hard facts:<br />
<br />
• LVT is a tax on aspiration (<a href="http://kaalvtn.blogspot.co.uk/2013/01/e-lvt-is-tax-on-aspiration.html#1">skip to article</a>)<br />
• LVT is a tax on savings and thrift (<a href="http://kaalvtn.blogspot.co.uk/2013/01/e-lvt-is-tax-on-aspiration.html#2">skip to article</a>)<br />
• LVT will increase the cost of buying a home (<a href="http://kaalvtn.blogspot.co.uk/2013/01/e-lvt-is-tax-on-aspiration.html#3">skip to article</a>)<br />
• Tenants will end up paying nothing. They’ll always vote for increases. (<a href="http://kaalvtn.blogspot.co.uk/2013/01/e-lvt-is-tax-on-aspiration.html#4">skip to article</a>) <br />
• Homeowners will end up paying all the tax (<a href="http://kaalvtn.blogspot.co.uk/2013/01/e-lvt-is-tax-on-aspiration.html#5">skip to article</a>)<br />
<br />
As regards the fourth bullet point, see also <a href="http://kaalvtn.blogspot.co.uk/2013/01/g-lvt-would-benefit-rich-and-hurt-poor.html">Landlords will pass on all the tax to their tenants</a>. It's either one or the other but it can't be both, and in fact it's neither. The two arguments cancel out.<br />
<br />
<a href="" name="1"></a>1. <i>"LVT is a tax on aspiration"</i><br />
<br />
No it's not. Income tax and PAYE are taxes on "aspiration". The point of earning money is to have a nice life. Having earned some money, people want a nice house, a nice car or two, nice holidays etc. All of these things cost money; shifting the tax burden from output and employment reduces taxes on aspiration, it does not add to the cost of buying a nice house, and it reduces the cost of cars and holidays. <br />
<br />
The Home-Owner-Ist system is a pyramid scheme. So of course the people at the top get big payouts, that is what people really aspire to, winning the land price lottery. And they are trying to sucker people into paying their entry fee. By definition, only a small minority can be winners under the scheme and everybody else is paying for their trickle up winnings. Unfortunately, it is impossible to opt out of the scheme - if you don't own land then you are paying rent to somebody who does, so a lot of people are prepared to overpay in order to get onto the pyramid.<br />
<br />
So who are the people who are doing the <i>"aspiring"</i> here? It is the people outside looking in. The people at the top aren't aspiring to anything at all, they are just sitting on their handsome source of unearned payouts and can sit back and relax.<br />
<br />
And who is doing all the work? It is of course the people outside looking in or the people scrambling to get on or climb up the pyramid (it is impossible for everybody to be climbing up, if we were all landlords, there'd be nobody left to be a tenant, but it doesn't stop them trying).<br />
<br />
And who is paying all the tax? It is the people doing all the work, who are the people also doing the aspiring. <br />
<br />
So a more accurate statement is roughly as follows: <i>"Taxes on output and employment are taxes on aspiration. LVT is a tax on those people who can't be bothered going out to work"</i>. <br />
<br />
<a href="" name="2"></a>2. <i>"LVT is a tax on savings and thrift"</i><br />
<br />
a) There is a clear positive relationship between house price increases and mortgage equity withdrawal, and there is also a clear enough negative relationship between house price increases and the household savings (mortgage equity withdrawal is dis-saving). <br />
<br />
LVT would keep house prices low and stable, which would in itself encourage real saving (there'd be no debt-fuelled land price speculation) and if people want to stay in the same house all their lives, they would have to put more money aside to tide them over during retirement.<br />
<br />
Here are the charts showing the relationship in the period 1970 - 2011:<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfaw5V8a3wApnSOn1zLE0rJGjv2BPh1bHliwGrcJmaTZkhP93B16PVQ-yoaxvGMrA_IHk7dFN7V_MyzqHUYXXtmo6WN7AeufGD2R1Po0Datx4EHqi_9QDY5RjRSNzMvHagGFPcVLMoz4g/s1600/Annual+house+price+changes+since+1970.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="244" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfaw5V8a3wApnSOn1zLE0rJGjv2BPh1bHliwGrcJmaTZkhP93B16PVQ-yoaxvGMrA_IHk7dFN7V_MyzqHUYXXtmo6WN7AeufGD2R1Po0Datx4EHqi_9QDY5RjRSNzMvHagGFPcVLMoz4g/s400/Annual+house+price+changes+since+1970.png" width="400" /></a><br />
Data from Nationwide.<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg1dTyazDixE0gisaIu8okl8wu8T-S-MAYa6EER6ZIp09PoxJVcLPOj1SWS2_7XeBDhiNG1gxQTVTjlqnnb0B0xPd2JlzkdpluUfem91A73QE31WB-0oVb9bCJf8UOc9kEx5amWt5bRNVs/s1600/mew.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="250" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg1dTyazDixE0gisaIu8okl8wu8T-S-MAYa6EER6ZIp09PoxJVcLPOj1SWS2_7XeBDhiNG1gxQTVTjlqnnb0B0xPd2JlzkdpluUfem91A73QE31WB-0oVb9bCJf8UOc9kEx5amWt5bRNVs/s400/mew.jpg" width="400" /></a><br />
Chart from <a href="http://duncanseconomicblog.wordpress.com/2011/06/">Duncan's Economics Blog</a><br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiijIlmcIXhoss2mES2OsiLg-KmBkrNBdWmLEeIIYaLaxCIT-Be_2NLLqxyLKhJlx3E6KP-TbEE915KYDRYc4ahm-sarLR5wD1nqnFPyHxP-_W-rSLRJ6CQWXXX__MiqYYvZ82fU-XNtCk/s1600/SavingsRatio.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="245" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiijIlmcIXhoss2mES2OsiLg-KmBkrNBdWmLEeIIYaLaxCIT-Be_2NLLqxyLKhJlx3E6KP-TbEE915KYDRYc4ahm-sarLR5wD1nqnFPyHxP-_W-rSLRJ6CQWXXX__MiqYYvZ82fU-XNtCk/s400/SavingsRatio.jpg" width="400" /><br />
</a>Data from the <a href="http://www.ons.gov.uk/ons/search/index.html?pageSize=50&newquery=savings+ratio">ONS</a>.<br />
<br />
b) From <a href="http://www.cityam.com/latest-news/allister-heath/desperate-osborne-risks-fuelling-another-housing-bubble">City AM</a>:<br />
<br />
<i>Research by Robert J. Shiller, who made his name warning of irrational exuberance, and his colleagues Karl E. Case and John M. Quigley, published by the National Bureau of Economic Research, confirms how house prices drive consumer spending. Their numbers relate to America, but they would undoubtedly also apply here; the authors discovered that changes in house prices have a larger impact on spending than changes in share prices, and that increases in property prices boost consumption by more than crashes cut it.<br />
<br />
They found that an increase in real, inflation-adjusted housing wealth, of the sort seen in the US between 2001 and 2005, pushes up household spending by 4.3 per cent in total. A housing crash of the sort seen in 2005-2009, slashes consumer spending by around 3.5 per cent. There are usually two ways in which house prices impact spending: home owners feel richer; and they are able to extract equity by remortgaging or downsizing their homes.</i><br />
<br />
A household "saves" when it earns more money that it spends. If it starts spending more without earning more (i.e. on the back of a credit bubble) then that is quite simply the opposite of "saving".<br />
<br />
c) The Home-Owner-Ists have another stealth tax on savings, which is inflation and negative real interests, which transfers wealth from cash savers to banks, borrowers and land owners. With LVT in place, there would simply be no incentive for the government to stoke inflation and depress interest rates.<br />
<br />
And land itself is not "savings", how can it be, it is just there. <br />
<br />
With LVT, land will be (from the point of view of the household) just another item of consumption. If people are really thrifty, they will consume <i>less</i> land, unlike under Home-Owner-Ism where trying to own as much land as possible is seen as <i>"savings and thrift"</i>. All these people are doing is collecting rent and pushing up the price of land for everybody else, i.e. making it even more difficult for other people to build up savings. The net impact of Home-Owner-Ism on real savings (in the sense of households deferring consumption to a rainy day) is very negative indeed.<br />
<br />
d) A lot of the Home-Owner-Ist wailing when the Mansion Tax was suggested was about Poor Widows In Mansions who had seen their homes rise in value for reasons beyond their control (thus contradicting the claim that <a href="http://kaalvtn.blogspot.co.uk/2013/01/s-land-owners-create-land-values-land.html">Landowners create their own land values</a>). <br />
<br />
For sure, some people bought houses in west London for a few thousand quid in the 1950s which are now worth £ millions (<a href="http://www.cps.org.uk/publications/reports/taxing-mansions-the-taxation-of-high-value-residential-property/">fewer than 15%</a> of such houses have been owned-occupied by the same people for more than twenty years, most of them cashed in and cleared off long ago); but there are plenty of Poor Widows elsewhere in the country who bought a house for a few thousand quid in the 1950s which are still only worth £100,000 or £200,000. <br />
<br />
Both Poor Widows worked just as hard to pay off the same amount of mortgage. How can the ones in west London be said to have worked and saved harder? Given job opportunities and so on, the ones in west London probably had it easier, if anything.<br />
<br />
<a href="" name="3"></a>3. <i>"LVT will increase the cost of buying a home"</i><br />
<br />
No it won't. It will be much easier to buy a house.<br />
<br />
a) With VAT and NIC gone, potential FTB's (who will save more from the reduction in taxes on output and employment than anything they pay extra in higher rents) will have much higher disposable incomes to start with. <br />
<br />
b) LVT would act exactly the same as higher interest rates in pushing down the purchase price of housing. Any tax on housing does not significantly change the overall cost of buying a house. In the UK, Council Tax is more or less a small Poll Tax and so it is difficult to calculate by how much it depresses the purchase price of housing.<br />
<br />
c) In the USA, "property taxes" vary widely from state to state and from county to county within each state. Published figures on property taxes, house prices and earnings in New York State show that $1 extra on the property tax <a href="http://markwadsworth.blogspot.co.uk/2012/08/earnings-property-taxes-house-prices.html">pushes down the purchase price of a home by $17</a>. <br />
<br />
d) With a twenty-five year mortgage, the total repayments are double the amount of the original loan. So over the mortgage term, the purchaser saves $34 in mortgage repayments (privately collected tax); saves $25 in income tax and pays $25 in property tax. So by the end of that period he is well ahead of the game. What the savings (or additional costs) are over the rest of his life depends on how many years he continues working after that, what his retirement income is and so on.<br />
<br />
e) If a tax on home ownership increases the cost, then a direct subsidy to home ownership would reduce the cost, wouldn't it? The UK had such a subsidy ("MIRAS", tax relief for mortgage interest) which was phased out during the 1990s. So if the subsidy had reduced the cost of buying a home rather than just pushing up prices, then the cost of buying a home (as represented by mortgage interest as a proportion of salaries) would have gone up once MIRAS was phased out. <br />
<br />
Only it didn't, did it? See chart 3 on page 5 of the recent CML report on 'Affordability and first-time buyers' (<a href="http://www.cml.org.uk/cml/filegrab/012010Affordabilityandfirsttimebuyers.pdf?ref=7059">pdf</a>):<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh6C2AFspou25P2L5IN8jnIJppJwCe9juPbzgi71Q6rLT2B0IdOWXJFUSkae1cOswHIZd5RrTrx6_HMo0mbf6RdJUHry4ZKwcsV1W-jmtIPeGEmI3OFUaBugDvMeTKyHnlr1IG-y7nQ6Ys/s1600/Picture+45.png" onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}"><img alt="" border="0" id="BLOGGER_PHOTO_ID_5504957253202921874" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh6C2AFspou25P2L5IN8jnIJppJwCe9juPbzgi71Q6rLT2B0IdOWXJFUSkae1cOswHIZd5RrTrx6_HMo0mbf6RdJUHry4ZKwcsV1W-jmtIPeGEmI3OFUaBugDvMeTKyHnlr1IG-y7nQ6Ys/s400/Picture+45.png" style="cursor: hand; cursor: pointer; display: block; height: 208px; margin: 0px auto 10px; text-align: center; width: 400px;" /></a><br />
<a href="" name="4"></a>4. <i>"Tenants will end up paying nothing. They’ll always vote for increases."</i><br />
<br />
Maybe, maybe not. <br />
<br />
a) Private tenants (20% of households) are already paying LVT of course, it is just that their landlords are pocketing it rather than paying it over as tax (thus enabling other taxes payable by tenants to be reduced). So yes, tenants have nothing to lose and everything to gain by voting for LVT increases. This would also push down house prices, making it easier for them to become owner-occupiers.<br />
<br />
b) For social tenants (17% of households) this is a bit of a two-edged sword. Logic would dictate that social rents and LVT are pretty much the same thing, so LVT increases would mean higher social rents.<br />
<br />
c) This argument completely overlooks the fact that we live in a democracy and landowners are in a majority; 63% of households are owner-occupiers (half of them with, half of them without a mortgage) and a few per cent are also landlords. <br />
<br />
d) We know that all the major political parties in the UK make a great show of promising that they will increase Council Tax by less than inflation, i.e. is being reduced in real terms. Even tenants go along with this because they don't realise that any Council Tax increase will always push down rents in equal and opposite measure.<br />
<br />
e) But if tenants aren't paying the LVT (which they would be, directly or indirectly), then who is? Their landlords, of course! If landlords think that LVT takes too much of his rental income, then he is free to sell his rented homes and invest the proceeds more profitably elsewhere. And to whom will he sell them? To the sitting tenants, of course. So if tenants voted for increases, we'd end up with <i>fewer tenants and more homeowners</i> and it would all find its equilibrium within a couple of years. <br />
<br />
<a href="" name="5"></a>5. <i>"Homeowners will end up paying all the tax"</i><br />
<br />
This is clearly complete nonsense; most homeowners will end up paying less tax.<br />
<br />
a) If you try out the <a href="http://ypp.timalmond.com/index.html#/Main">online app</a>, you will see that most working owner-occupiers will end up paying <i>a lot less in tax</i>. The only ones who would pay more are those with particularly low earned income relative to the value of the house they own, i.e. Poor Widows In Mansions, which we have covered <a href="http://kaalvtn.blogspot.co.uk/2013/01/a-poor-widow-bogey.html">elsewhere</a>. <br />
<br />
Of the majority of UK adults who are owner-occupiers, a majority are still in work and they would nearly all benefit. Younger owner-occupiers will benefit most (because they will save most tax in the long run and are more likely to want to trade up in future) and those nearing in retirement will vote for the status quo (having already banked the tax and rent savings over their lifetime, they are unwilling to give any back), unless of course they are enlightened enough to take their children and grandchildren's interests into account. Unfortunately, most of them aren't.<br />
<br />
b) Three-quarters of privately owned housing is owner-occupied and one-quarter is rented out.<br />
<br />
Seeing as the LVT would be the same whether a home is owner-occupied or rented out, homeowners would be paying three-quarters of the LVT collected from privately owned residential land and landlords/tenants would be paying the other quarter. The LVT payable by social tenants would be included with their rent. You might as well argue against income tax or insurance premium tax or air passenger duty on the basis that these taxes are largely borne by homeowners. Well of course they are because homeowners are (still) a majority of the population.Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com15tag:blogger.com,1999:blog-6365034639538623308.post-33105462805283577262013-01-17T21:05:00.002+00:002017-10-07T15:50:01.994+01:00F. LVT is an attack on families• It's a tax on gardens (<a href="http://kaalvtn.blogspot.co.uk/2013/01/f-lvt-is-attack-on-families.html#1">skip to article</a>)<br />
• It's an attack on families who need big homes and gardens (<a href="http://kaalvtn.blogspot.co.uk/2013/01/f-lvt-is-attack-on-families.html#2">skip to article</a>)<br />
• It's wrong to assume that employers will pass on their NIC savings as higher wages (<a href="http://kaalvtn.blogspot.co.uk/2013/01/f-lvt-is-attack-on-families.html#2b">skip to article</a>)<br />
• It's an attack on single people who'd have to pay as much as a couple (<a href="http://kaalvtn.blogspot.co.uk/2013/01/f-lvt-is-attack-on-families.html#3">skip to article</a>)<br />
• FOOTNOTE: The close correlation between build density and land values (<a href="http://kaalvtn.blogspot.co.uk/2013/01/f-lvt-is-attack-on-families.html#4">skip to footnote</a>)<br />
<br />
<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="1"></a>1. <i>"It's a tax on gardens"</i><br />
<br />
The short answer to that is: <i>"No it isn't. It's a tax on where the garden is. If you really want to live in an expensive area <u>and</u> have a big garden, then the tax will indeed be very high, but if it's the garden that is important to you then you will always be able to find something affordable. You just might have live in an area where gardens are the norm and where there is no particular premium attached to them (less scarcity value), which is in fact nearly all residential areas."</i><br />
<br />
The long answer (see <a href="http://kaalvtn.blogspot.co.uk/2013/01/f-lvt-is-attack-on-families.html#X">below</a>) comes to exactly the same thing, but involves actually knowing about land values.<br />
<br />
<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="2"></a>2. <i>"It's an attack on families who need big homes and gardens ."</i><br />
<br />
I have seen people advance <a href="http://kaalvtn.blogspot.co.uk/2013/01/a-poor-widow-bogey.html">The Poor Widow Bogey</a> and this argument together, which just shows that the Homeys care little for logic or any sort of intellectual coherence. The interests of Poor Widows In Mansions and families with children who want to buy a house are <i>diametrically opposed</i>.<br />
<br />
Even more irritating is that in the next breath, the Home-Owner-Ists say that 'local services' should be funded by a Poll Tax. That really would be a tax on families i.e. larger households, who would clearly pay more under a Poll Tax and less under LVT. While LVT would increase the tax payable by Poor Widows In Mansions, a Poll Tax is the equal and opposite and would increase the tax bill payable by Poor Widows in lower value housing, who probably deserve more sympathy. <br />
<br />
A shift from taxing output and employment to taxing land values will increase the tax payable on the Poor Widow's Mansion (and thus will ultimately be 'paid' by heirs who will receive a smaller or no inheritance) but that same tax shift will enormously benefit working families with children, and especially young couples who would like to settle down, move out of their flat into a house and have kids. The heirs' loss is the family's gain. <br />
<br />
The online <a href="http://ypp.timalmond.com/index.html#/Main">tax app</a> enables you to enter your own figures for earnings/household composition to see how much tax a working family would save. This assumes they've already bought a house and are stuck with the mortgage; in future, the savings to families ought to be a lot more because house prices will go down so their mortgage payments will be lower.<br />
<br />
When challenged, the Homeys will then deny that there is any contradiction and then say that shifting to LVT, combined with a Citizen's Income/personal allowances will also "hit" single people hardest, because they get the least in Citizen's Income/personal allowances. The irony of all this is lost on them.<br />
<br />
<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="2b"></a>2b. <i>"It's wrong to assume that employers will pass on their NIC savings as higher wages"</i><br />
<br />
No it's not. <br />
<br />
Common sense tells us that making employer's pay a payroll tax on wages out reduces headline wages; economic theory tells us that the supply of labour is less elastic than the demand for it, so employees end up bearing most of the Employer's NIC.<br />
<br />
Be that as it may, and even if the assumption <i>is</i> wrong (which it isn't), there is an easy answer to that, assuming we want wages to be taxed at an overall flat rate (20%) the means that the worker should receive 80% of what the employer has to pay (in NIC or in gross wages). So we could leave Employer's NIC at 13.8% and tax the gross wage at 9%. So for £113.80 paid by the employer, the employee nets £91, which is 80% of the total paid.<br />
<br />
Sorted.<br />
<br />
<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="3"></a>3. <i>"It's an attack on single people who'd have to pay as much as a couple or a family"</i><br />
<br />
Hang about here, first the Homeys say that LVT an attack on families who tend to need larger homes, and then they say that LVT is an attack on single-adult households. Those are completely contradictory (and both are wrong, as it happens).<br />
<br />
I even once saw the non-logic taken to its perfectly circular non-logical conclusion: the Poor Widow In A Mansion would be "forced" to pay more than the millionaire City banker living in a small flat; the Hard Working Family would be "forced" to pay more to live in the sort of home with a garden which the Poor Widow lives in; and... [drum roll] a single adult would be penalised because they would be "forced" to pay as much as a family.<br />
<br />
If you mention Citizen's Income then the Homeys get even more rabid, because clearly this doubles-up the discrimination against single people (Poor Widows or not) and is simultaneously a subsidy for feckless single mothers. Actually, the people who will benefit most from this are larger households, i.e. families.<br />
<br />
<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="4"></a>4. <i>"FOOTNOTE: The close correlation between build density and land values"</i><br />
<br />
For most towns and cities, the "centre" is literally in the centre, but in some places, such as seaside/tourist towns, the "centre" is the beach. What people pay for is the view over the beach and the sea and that value to the individual is largely unchanged whether you share the view with a hundred or a hundred thousand other tourists. So the value of the land along the beach front is very high.<br />
<br />
The value of the land further back (with no sea view) is much lower. So we observe that in newer resorts, there is a solid row of ten storey hotels along the front and behind that are ordinary size homes/residences. Whether you have to walk two minutes or ten minutes to the beach scarcely matters so the land values in the hinterland are much lower and more or less flat, so the huild density is much lower and more or less evenly spread. Picture from <a href="http://www.thepalmshotel.com/">here</a>:<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj37C9n3hsoDAc6ShbRau1Jzg_Z8aEf49RduTM83CNb1xeWw1HpnApMECw1DSdrGu-iYq0896r8BK9LPsYfvFrAB8Sbeb0kPYOZURCGx9widruXTW-NVNEXAQXNr2DpKvspUD1E8_u4ucQ/s1600/aerial.jpg" imageanchor="1"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj37C9n3hsoDAc6ShbRau1Jzg_Z8aEf49RduTM83CNb1xeWw1HpnApMECw1DSdrGu-iYq0896r8BK9LPsYfvFrAB8Sbeb0kPYOZURCGx9widruXTW-NVNEXAQXNr2DpKvspUD1E8_u4ucQ/s400/aerial.jpg" /></a><br />
<br />
We can see that with our own eyes and understand it, but the key to all this is that the same general principle applies to normal towns and cities. Even though the physical land in the "centre" is the same as anywhere else, the same effect (massive disparity in values between the "centre" and surrounding areas) is observed. When discussing land value tax, it soon becomes apparent that people do not have a clue about land values (in terms of absolute rental values or relative or absolute selling prices). <br />
<br />
a) So let's completely put tax reform to one side for the moment and look at actual figures:<br />
<br />
- Rental value of farm and forestry land (per acre) = between £5 and £100 a year.<br />
<br />
- Site premium of a residential plot with a semi-detached (around a tenth of an acre) = between £3,000 (bottom decile) and £11,000 (top decile) a year, with more or less no upper limit in the top decile.<br />
<br />
- Rental value of city centre shops and offices = a huge range. They start roughly where residential leaves off. Rents for offices in Manchester are <a href="http://www.savills.co.uk/_news/newsitem.aspx?intSitePageId=72418&intNewsSitePageId=119830-0&intNewsMonth=06&intNewsYear=2012">£30 per square foot per year</a>. The upper reaches are pretty insane. Rent for the best retail space in London is <a href="http://www.standard.co.uk/business/west-end-retail-rental-records-fall-as-1000asquarefoot-mark-reached-7313461.html">£1,000 per square foot per year</a> (allegedly)<br />
<br />
b) So the ratio between the rental value of average residential land and average farmland is about <i>one thousand</i>; the ratio between land used for office space in Manchester (assuming a ten storey block etc) and average residential land is <i>one hundred</i>; and the ratio between central London and normal Manchester is <i>another ten</i> (or whatever) on top of that. Multiply all those up and there is a ratio of <i>one million</i> between the highest and lowest rental values on a per area basis.<br />
<br />
c) Even if you are baffled by these numbers or the fact that the ratio between the highest and lowest rental values is something like one million (meaning that Central London has a higher rental value than the whole of Aberdeenshire), land values are made clearly visible by how densely built an area is.<br />
<br />
For example and simplifying this a bit and looking at residential only in a typical large town and ignoring particularly posh or grotty areas:<br />
<br />
City centres = skyscrapers with no gardens and just a few public parks. There can be hundreds of dwellings per acre, depending on how tall the skyscraper is and how big the flats are.<br />
<br />
Inner suburbs = blocks of flats or terraced housing, between twenty and fifty dwellings per acre. Small gardens if any.<br />
<br />
Outer suburbs = mainly semi-detached, between ten and fifteen dwellings per acre.<br />
<br />
Commuter towns, market towns, rural areas = have the most detached houses, densities of less than ten homes per acre, could be less than one for scattered farmhouses. There is a premium attached to being in The Green Belt (the Faux Bucolic Rural Idyll) but this is offset by the negative premium attached to being far away from town centres (where the best paying jobs are).<br />
<br />
d) The density is fairly proportionate to land values. We can plot this thusly:<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvltE1Un6dXadiUPliOiJiHob6t6pm57C56QN4DivMQLKhjZEQjWFsmqj7qlU7-p-ES_qoWkWTkb3l9bL4jrfU2HQ_AyPZ37W9G_nbzsZnLO-kHr9jecdzwD-qx-WF5DN3ZtMDFpWo-A8/s1600/Densities.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="244" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvltE1Un6dXadiUPliOiJiHob6t6pm57C56QN4DivMQLKhjZEQjWFsmqj7qlU7-p-ES_qoWkWTkb3l9bL4jrfU2HQ_AyPZ37W9G_nbzsZnLO-kHr9jecdzwD-qx-WF5DN3ZtMDFpWo-A8/s400/Densities.png" width="400" /></a><br />
<br />
e) <i>"Hang about here,"</i> shouts the crowd, <i>"If we divide the rental value by the density, the answer is always about £4,000. Do you mean to say that the site premium is about £4,000 wherever you live? That flats cost as much as semi-detached houses?"</i><br />
<br />
Yes, that is exactly how things are. If you look in the estate agent's window, you will see that in most areas, a one- or two bedroom flat costs about 60% as much as a semi-detached house. But we also know that most homes in city centres (expensive land) are flats; and most homes further out (cheaper land) are houses. The two effects more or less cancel out.<br />
<br />
HM LandRegistry's House Price Index for <a href="https://www.gov.uk/government/news/uk-house-price-index-hpi-for-march-2017">March 2017</a> shows the following average prices for the whole of England:<br />
<br />
<i>Detached - £349,524\<br />
Semi-detached - £215,584<br />
Terraced - £186,784<br />
Flat/maisonette - £220,648</i><br />
<br />
Yup. The average selling price of flats in England is <i>slightly higher</i> than the average selling price of semi-detached houses. <br />
<br />
f) So the long answer to bullet point 1 is exactly the same as the short answer. The rental value of most dwellings is in a surprisingly narrow band, everybody makes a trade-off between convenience/less space (city centre flat) with longer commute times/more space (suburban semi) with terraced houses falling somewhere in the middle.<br />
<br />
Which debunks the stupid argument <i>"If we had LVT, some evil developer would come along and get planning to demolish my house and build flats in my garden instead"</i>. <br />
<br />
This will be true where towns have grown up around old houses with big gardens, so what was on the outskirts of a small town (optimum use - house with big garden) but is now near the middle of a large town (optimum use - terraced houses or flats), but for most residential areas, certainly in the outer suburbs and in smaller towns, the optimum use of land is houses, detached or semi-detached. <br />
<br />
There is no latent planning gains uplift to be gained by knocking down a house and building two or three flats, because there would be little demand for those flats. People are prepared to live in flats but only because they are in city centres or inner suburbs, where the convenience outweighs the fact they have no back garden and less privacy. Add to that the fact that our hypothetical builder has just knocked down a perfectly good house and has to pay the cost of building the flats, the optimum strategy for ninety-five per cent of houses is to leave them exactly as they are.Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com0tag:blogger.com,1999:blog-6365034639538623308.post-76864191403205985132013-01-17T21:03:00.005+00:002018-01-16T17:17:22.536+00:00G. LVT would benefit the rich and hurt the poorThis is clearly untrue. This is what a proper "hurt the poor" programme looks like:<br />
<br />
<i>- replace Domestic Rates with a Poll Tax (or something pretty close, like Council Tax).<br />
- reduce welfare payments<br />
- savage means-tested withdrawal of welfare payments<br />
- reduce or scrap the tax-free personal allowance<br />
- increase regressive payroll taxes, such as National Insurance<br />
- increase sales taxes (like VAT)<br />
- have high prices for certain goods (alcohol, tobacco)<br />
- push house prices as high as possible<br />
- sell off social housing.</i><br />
<br />
These clearly hurt low or non-earners the most, and more subtly, taxes on output and employment are the most economically damaging and ensure that there will always millions of people capable of working who are out of work. The tax and welfare system outlined here is pretty much the opposite of all that.<br />
---------------------------------------<br />
• Landlords will pass on all the tax to their tenants (<a href="http://kaalvtn.blogspot.co.uk/2013/01/g-lvt-would-benefit-rich-and-hurt-poor.html#1">skip to article</a>)<br />
• Lower earners will be forced out of nice areas and will be forced to live in ghettoes (<a href="http://kaalvtn.blogspot.co.uk/2013/01/g-lvt-would-benefit-rich-and-hurt-poor.html#1a">skip to article</a>)<br />
• What if somebody loses his job? How will he pay the LVT? (<a href="http://kaalvtn.blogspot.co.uk/2013/01/g-lvt-would-benefit-rich-and-hurt-poor.html#1b">skip to article</a>)<br />
• Lower earners will be forced to sell their homes to rich people who will end up owning all the land, so ultimately, it will benefit the wealthiest landowners (<a href="http://kaalvtn.blogspot.co.uk/2013/01/g-lvt-would-benefit-rich-and-hurt-poor.html#2">skip to article</a>)<br />
• Low and non-earners will all end up homeless (<a href="http://kaalvtn.blogspot.co.uk/2013/01/g-lvt-would-benefit-rich-and-hurt-poor.html#2b">skip to article</a>)<br />
• Landowners will evade the tax by registering land with offshore companies (<a href="http://kaalvtn.blogspot.co.uk/2013/01/g-lvt-would-benefit-rich-and-hurt-poor.html#3">skip to article</a>) <br />
• Wealthy people will avoid the tax by moving into one-bed flats (<a href="http://kaalvtn.blogspot.co.uk/2013/01/g-lvt-would-benefit-rich-and-hurt-poor.html#4">skip to article</a>)<br />
• Multi-nationals will relocate abroad and end up not paying a penny (<a href="http://kaalvtn.blogspot.co.uk/2013/01/g-lvt-would-benefit-rich-and-hurt-poor.html#5">skip to article</a>)<br />
<br />
As regards the first bullet point, see also <a href="http://kaalvtn.blogspot.co.uk/2013/01/e-lvt-is-tax-on-aspiration.html">Tenants will end up paying nothing. They’ll always vote for increases. </a> It's either one or the other, but it can't be both, and in fact it's neither as the two arguments cancel out. Similarly, the <a href="http://kaalvtn.blogspot.co.uk/2013/01/i-lvt-would-not-raise-enough-revenue.html">collapsing revenue theory</a> says that <i>"Everybody will cram into the smallest houses, so not much tax will be collected"</i>.<br />
<br />
<a href="https://www.blogger.com/null" name="1"></a>1. <i>"Landlords will pass on all the tax to their tenants"</i><br />
<br />
This argument is the most infuriating of all as it completely ignores (a) observed facts, (b) economic theory, (c) logic. And even if it were true (which it isn't), (d) so what? Tenants would still end up better off. It is also largely crocodile tears as three-quarters of privately owned homes are owner-occupied, so it's a bit of a red herring anyway.<br />
<br />
What can add to the confusion is the fact that the basic economic theory only holds if LVT is an additional tax. If LVT is matched with corresponding tax cuts on output and employment, tenants' net incomes will increase, which will increase rental values and hence rents; so it looks as if landlords are 'passing on' the LVT when actually they are just increasing the rent in line with what tenants are willing and able to pay. But even if LVT is a replacement tax, it bring a flood of homes onto the market when people "right-size" (be that up- or down-sizing), which will tend to level rental values downwards. <br />
<br />
The short answer is:<br />
<br />
a) Observed facts<br />
<br />
It is widely accepted that higher interest rates = lower house prices. It is difficult to show this with data because periods of higher interest rates tend to coincide with periods of high inflation, so real interest rates are lower than nominal ones and when people fear inflation, they tend to "invest in bricks and mortar" rather than cash. And the amount of easily available credit is just as important as the rate. <br />
<br />
Nonetheless, the basic assumption is correct.<br />
<br />
This is because potential first time buyers are tenants and <i>their rent is fixed</i> ("rents are the Maypole around which house prices dance"). They will only buy a home if the monthly mortgage payments are roughly in line with the rent they are paying. So the amount of monthly mortgage payments are also fixed and the amount of money they are willing to borrow to buy a home is simply the inverse of the interest rate.<br />
<br />
We know that rents don't go up (or down) when interest rates go up (or down) because otherwise, the basic rule that house prices go up when interest rates go down would not hold!<br />
<br />
And LVT will just act like a higher interest rate. So rents will stay the same and house prices will go down (unless LVT replaces taxes on income, which means that rent would go up a bit... see below).<br />
---------------------------------<br />
To illustrate this effect...<br />
<br />
MIRAS was a modest tax subsidy for mortgages, it was intended to make it cheaper to buy a home, and was phased out in the 1990s. In the context of land, a subsidy is the opposite of a tax; withdrawing a subsidy is exactly the same as imposing a tax.<br />
<br />
But did the subsidy really benefit purchasers with a mortgage (most purchasers) or vendors? If it benefitted purchasers, then the share of income which purchasers were prepared to spend on mortgage repayments would have been higher after MIRAS was phased out. If it benefitted vendors, then the share of income would remain constant and the net amount of interest collected by banks/vendors would stay the same.<br />
<br />
So which was it? The latter of course, as the Council of Mortgage Lenders confirms:<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh6C2AFspou25P2L5IN8jnIJppJwCe9juPbzgi71Q6rLT2B0IdOWXJFUSkae1cOswHIZd5RrTrx6_HMo0mbf6RdJUHry4ZKwcsV1W-jmtIPeGEmI3OFUaBugDvMeTKyHnlr1IG-y7nQ6Ys/s1600/Picture+45.png" onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}"><img alt="" border="0" id="BLOGGER_PHOTO_ID_5504957253202921874" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh6C2AFspou25P2L5IN8jnIJppJwCe9juPbzgi71Q6rLT2B0IdOWXJFUSkae1cOswHIZd5RrTrx6_HMo0mbf6RdJUHry4ZKwcsV1W-jmtIPeGEmI3OFUaBugDvMeTKyHnlr1IG-y7nQ6Ys/s400/Picture+45.png" style="cursor: pointer; display: block; height: 208px; margin: 0px auto 10px; text-align: center; width: 400px;" /></a><br />
<br />
(More explanation <a href="http://markwadsworth.blogspot.co.uk/2010/08/hair-splittingwhat-cant-speak-cant-lie.html">here</a>). <br />
<br />
The longer answers are:<br />
<br />
b) The Economic Theory<br />
<br />
Quite simply: any tax is borne by whoever is less price sensitive, the quantity demanded by consumers or the quantity supplied by suppliers/producers. Applied to commodities, this logic leads to <a href="https://en.wikipedia.org/wiki/Optimal_tax#Commodity_taxes">Ramsey's Rule</a>. <br />
<br />
So a tax on tobacco (demand is little changed by increases in the total price, but suppliers have a minimum price which they need to receive in order to stay in business) is borne by smokers. <br />
<br />
And a tax on discretionary consumer spending generally (like VAT) is borne two-thirds by the supplier (being the whole chain from retailer back to manufacturer) and only one-third by the consumer (evidence and workings <a href="http://markwadsworth.blogspot.co.uk/2012/01/vat-inflation-fun.html">here</a>).<br />
<br />
Tenants are price-sensitive, they don't want to waste all their money on rent and will tend to choose the cheapest accommodation and will share if necessary. And the landlord? He cannot vary his output one jot, one home is one unit, either he rents it out at anything up to market rates (and we can safely assume that most of them do) or he demands more and receives nothing. If he is has fixed costs associated with that home (be it mortgage repayments or LVT) then he does not have the luxury of withdrawing the home from the market and leaving it empty, he has to rent it out for as much as he can (market rates).<br />
<br />
This is often expressed with supply-demand curves, see e.g. <a href="http://en.wikipedia.org/wiki/Land_value_tax#Efficiency">Wiki</a>.<br />
<br />
c) Logic<br />
<br />
We also know that rents are dictated local average wages (after deducting PAYE), minus the basic cost of living (rents take the surplus), adjusted for commuting distance from where those wages can be earned, plus a bit if it's a nice area minus a bit if it's a grotty area. That is the beginning, middle and end of the matter. The landlord's actual cash costs are more or less completely irrelevant. As long as the actual or potential landlord can collect more in rent that it costs to provide and maintain the building he will rent it out (if not, he will abandon it).<br />
<br />
If the rent is more than the maintenance costs, the balance is the site premium (or the location rent or whatever you want to call it), so the tenant pays rent sufficient to cover the cash costs and the site premium on top. If the government now decides to tax away the site premium, that is between the government and the landlord, this does not change the rental value of the location; the amount of rent which the tenant will pay is the same and so the landlord bears the tax. His remaining rental income after tax is, by definition, still enough to cover the maintenance costs and so he stays in business.<br />
<br />
Instead of the government taking half the gross rental income in LVT, what happens if there is a divorce situation and the government awards half of one spouses' rental income to the other spouse as maintenance? Does the newly divorced landlord go round to all of his tenants and tell them that there rent will be doubled to keep his net income constant? No of course not, he can't.<br />
<br />
d) So what?<br />
<br />
Even if the claim is correct (which it isn't) and landlords passed on every penny of the tax, tenants would still end up noticeably better off. If rents were capped at current levels, tenants' savings would be all the greater.<br />
<br />
The <a href="http://ypp.timalmond.com/index.html#/Main">online tax app</a> shows that most home-owners (who have to bear the tax) will be better off, so even if every penny of the LVT is 'passed on' tenants will see the same tax reductions. <br />
<br />
<a href="https://www.blogger.com/null" name="1a"></a>1a. <i>"Low earners will be forced out of nice areas and will be forced to live in ghettoes"</i><br />
<br />
This is rank hypocrisy of course. The whole Home-Owner-Ist system is designed to take away as much of people's earned income in tax and in rent as possible, clearly, somebody starting out today has to make do with being stuck on the bottom rung; low earners are already "forced" to live in cheaper areas.<br />
<br />
a) The Homeys then take a hardship corner case (often plucked out of thin air), somebody who bought an average house when he was on an average wage ages ago; since then his earned income has fallen and his house has shot up in value because of Home-Owner-Ism in general and gentrification in particular, claim that this person would not be able to afford the LVT (which is only true in a tiny minority of cases and assumes that the person cannot take evasive measures, like earning a bit more, taking in a lodger etc).<br />
<br />
b) With or without LVT, when that low earner's house is eventually sold, to whom does it get sold? To another low earner for a low price? I don't think so. Worst case, LVT speeds up the process of gentrification; and why shouldn't those people who are prepared to pay most into the common fund for everybody's benefit get to live in the nicest housing? Why is it preferable for the new arrival to hand over his hard earned money to the unproductive sector? <br />
<br />
c) The Homeys then warm to their theme and merrily claim that all "poor" people will somehow end up worse off, which is clearly nonsense. Most low earners live in low value housing, or they rent, and they will be among the big winners from the tax shift (try the spreadsheets!).<br />
<br />
c) The difference between "nice" and "grotty" areas has little to do with the physical architecture, it is mainly to do with the people who live there. You pay a bit extra to live among "nice" neighbours and get a discount if you are prepared to live near less desirable neighbours. LVT itself will put pressure on land owners to maximise the availability of good quality housing at an affordable price; it will give each council an incentive to concentrate on making their areas as desirable as possible, and with an end to means testing of benefits and lower taxes on productive activity there will be more jobs and hence fewer "poor" people anyway.<br />
<br />
So to sum up, when half of tax revenues are collected via LVT; taxes on earnings significantly reduced and LVT receipts matched with Citizen's Income payments, there will be fewer "poor" people and better and more affordable housing. So by and large, those people who are currently "poor" and overpaying for housing will end up better off, in better quality housing among nicer neighbours. It seems insane to condemn one hundred people to this for ever more for the benefit of each individual human shield (the "asset rich, cash poor" who features so often in these discussions).<br />
<br />
<a href="https://www.blogger.com/null" name="1b"></a>1b. <i>"What if somebody loses his job? How will he pay the LVT?"</i><br />
<br />
Let's gloss over the fact that the two-thirds of the population have exactly this problem with rent or mortgage payments (i.e. privately collected LVT) and that somehow or other as a society we cope with this (via mortgage holidays, housing benefit or mortgage subsidies, social housing etc), it's not a big problem if you look at the numbers on short term unemployment.<br />
<br />
As at <a href="https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/articles/labourmarketeconomiccommentary/september2017#main-points">2017</a>, the unemployment rate in the UK is about 4%, and half of those are short-term unemployed (less than six months).<br />
<br />
So one in fifty people are between jobs at any one time. A lot of that is probably 'voluntary' and many of those will have a partner who is still in work and who can pay the LVT.<br />
<br />
As long as there are rules in place to distinguish between a) people whose employer has gone out of business/who have been made redundant through no fault of their own/are likely to find another job soon; and b) general shirkers/the long term unemployed, we would simply exempt the short term unemployed from from LVT. A crude way of doing this would be to give people a cumulative six-month exemption in any rolling five or ten year period, or whatever, which they can 'use' if they are made redundant. There is no perfect right or wrong formula.<br />
<br />
So there would be a non-collection rate of 1 - 2%, which is no lower than for any other tax anyway, tuppence ha'penny in the grander scheme of things and a great reassurance to everybody in general.<br />
<br />
And for the long term unemployed and sporadic earners, there's always social housing (which is like LVT and a Citizen's Income rolled into one).<br />
<br />
<a href="https://www.blogger.com/null" name="2"></a>2. <i>"Low earners will be forced to sell their homes to rich people who will end up owning all the land, so ultimately, it will benefit the wealthiest landowners/lead to a greater concentration of land ownership"</i><br />
<br />
This argument is so fatuous and obviously stupid that it is barely worth debunking, but here goes...<br />
<br />
a) Back in 1909 when eighty or ninety per cent of people were private tenants and LVT was seriously on the Liberal government's agenda, the counter-campaign was mounted by the large hereditary landowners in the House of Lords of course, they wanted to keep all the rent for themselves (to the extent of triggering a <a href="http://www.parliament.uk/about/living-heritage/evolutionofparliament/houseoflords/house-of-lords-reform/overview/constitutionalcrisis/">constitutional crisis</a>). The situation is no different today, it is the same vested interests (and the bankers) who are fighting against LVT (or Mansion Tax or Council Tax rebanding or Business Rates revaluations). If LVT would really enable them to re-acquire all the land cheaply and make even more money by renting it out again, why wouldn't these powerful people be subtly campaigning for it?<br />
<br />
b) Owner-occupation rates in the UK rose fastest between 1950 and 1970, from 30% to over 50%. What were we doing differently? Rents were capped; rental income was taxed at higher rates than earned income; there was lots of new construction (social housing and for private purchase); mortgage lending was strictly rationed <i>and we had Domestic Rates, which were much higher than Council Tax on all but the smallest homes and Schedule A tax</i>, which between them were something approaching a modest LVT. There just wasn't much point being a landlord as you couldn't make much money from it. Rent controls are a crude way of preventing concentration of ownership of land, so the arguments for them overlap with arguments for LVT.<br />
<br />
c) Since 1997, the period of extreme Home-Owner-Ism (fuelled mainly by easy credit and low interest rates; a reduction in new construction; modest real reductions in Council Tax; and savage tax hikes on the productive economy) owner-occupation rates have been falling. The number of private renters has doubled <a href="https://www.theguardian.com/money/2017/jun/12/one-in-four-households-in-britain-will-rent-privately-by-end-of-2021-says-report">from 10% to 20%</a> over the last decade, and is likely to rise further. After Council House sales petered out in about 2002, owner-occupation rates peaked at 72%. Since then, the percentage of owner-occupier households has fallen to 63%, <a href="https://www.theguardian.com/money/2017/mar/02/home-ownership-in-england-at-a-30-year-low-official-figures-show">its lowest level since 1985</a>. So it's clear that Home-Owner-Ism leads to land ownership being concentrated in fewer hands and more rent being collected by fewer people (top bankers). What evidence is there to suggest that LVT, which is the opposite of Home-Owner-Ism, would accelerate rather than reverse this trend? None or negative?<br />
<br />
d) On the facts, it will always be cheaper to be an owner-occupier than a tenant; you'll be (say) £4,000 a year better off once you've paid off the mortgage. So there is nothing to be gained by selling up and then renting a similar sized house. If low earners trade down, then by and large the purchasers will be owner-occupiers themselves, albeit slightly higher earning ones.<br />
<br />
<a href="https://www.blogger.com/null" name="2b"></a>2b. <i>"Low earners will all end up homeless"</i><br />
<br />
This is another triumph of circular Home-Owner-Ist non-maths and non-logic and goes like this:<br />
- wicked landlords will "pass on" the LVT in higher rents, which no low earning tenants will be able to afford<br />
- poorer homeowner won't be able to afford the LVT and will be "forced" to sell their housing at a loss to landlords<br />
- so millions of poor people will be made homeless<br />
<br />
What they can't explain is why profit-hungry landlords would want to be paying the LVT for the millions of empty homes which they own.<br />
<br />
<a href="https://www.blogger.com/null" name="3"></a>3. <i>"Landowners will evade the tax by registering land with offshore companies"</i><br />
<br />
Again, nonsense. People who say things like this have just illustrated that they know <i>nothing</i> about the UK tax system.<br />
<br />
a) In 2013-14, the UK introduced an annual tax on high-value residential land and buildings which <i>only</i> which initially applied to homes worth £2 million (since extended to apply to homes worth £500,000 or more) which are registered in the name of "non-natural persons", which means companies (whether UK or offshore), partnerships including a company, collective investment schemes and so on.<br />
<br />
<a href="https://www.gov.uk/government/publications/annual-tax-on-enveloped-dwellings-annual-chargeable-amounts/annual-tax-on-enveloped-dwellings-annual-chargeable-amounts">The tax</a> is about 1% of the value of a home at the bottom of each band, so £3,500 a year for homes worth £500,000 to £1 million, up to £220,350 for homes worth more than £20 million or more. <br />
<br />
The tax was implemented without too much of a hitch - doing the valuations, sending out bills etc - and in the first year of operation, the amount of tax collected was <a href="http://www.dailymail.co.uk/news/article-2556005/Tax-raid-super-rich-hiding-mansions-offshore-companies-raises-100million-FIVE-times-expected.html">five times as much as originally forecast</a>.<br />
<br />
Do the Homeys who trot out the argument seriously imagine that the UK government has just invented a tax which would have had a 100% evasion rate? <br />
<br />
b) There's no need to debate what-if scenarios as we already have a tax which is so close to LVT (administratively) as makes no difference, namely Business Rates (aka National Non-Domestic Rates) which are a flat tax on the total rental value of commercial land and buildings with no lower or upper limit. Officially, the rate is calculated at 46.6% - 47.9% of the rent <i>net</i> of Rates, which means the tax is about 32% of the <i>total</i> rental value (including rates).<br />
<br />
We know that plenty of larger commercial sites are owned by foreign companies, or insurance companies who know a thing or three about tax havens. And plenty of commercial sites are in fact owned by non-UK companies (for other reasons, mainly to do with Stamp Duty Land Tax, a tax on transactions and thus relatively easy to avoid/evade).<br />
<br />
c) And what are the collection rates for Business Rates..? From <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/622488/Collection_Rate_Statistics_Release_2016-17_June_2017.pdf">the DCLG</a>:<br />
<br />
<i>By the end of March 2017, local authorities in England had collected £24.2 billion in non-domestic rates for 2016-17 which gave a national average in-year collection rate for non-domestic rates of 98.2% in 2016-17, the same as for 2015-16.</i><br />
<br />
Those collection rates leave all the other taxes standing; the official 'tax gap" figure (total evasion, avoidance and non-collection) for income tax, VAT, corporation tax and NIC is about <a href="https://www.gov.uk/government/news/uk-tax-gap-falls-to-65-as-hmrc-targets-the-dishonest-minority">6.5% of the tax that should be collected</a>. Experts believe this figure to be an underestimate, and it does not include collection costs and the compliance burden on the private sector.<br />
<br />
Why might this be? For the blindingly obvious reason that you can't hide land and buildings. As it happens, the Rates are collected from the occupant if there is one and from the owner if the building is vacant; if the owner runs up large enough arrears the council can simply take a charge over the land title and sell it. I don't think that this happens very often, it would appear that the simple threat is enough.<br />
<br />
<a href="https://www.blogger.com/null" name="4"></a>4. <i>"Wealthy people will avoid the tax by moving into one-bed flats"</i><br />
<br />
From <a href="http://www.taxresearch.org.uk/Blog/2013/06/21/the-tax-professions-cure-for-corporation-tax-abuse-is-abolish-the-tax/comment-page-1/#comment-651647">here</a>:<br />
<br />
<i>I might be missing the point here, but I think someone is suggesting that we abolish taxes and just levy tax on land?!? If Richard Branson rented a one bedroom apartment he would thus pay zero tax, is that seriously what is being suggested?</i><br />
<br />
a) My initial reply to that was <a href="http://www.taxresearch.org.uk/Blog/2013/06/21/the-tax-professions-cure-for-corporation-tax-abuse-is-abolish-the-tax/comment-page-1/#comment-652044">as follows</a>:<br />
<br />
"If he rented a small flat in a cheap area, then yes, he would pay next to no LVT (or tax in general). But it is highly unlikely that very wealthy people who need to show off would do so – they can already save themselves a fortune in rent or mortgage interest (or free up cash for more profitable investments) by trading down into a one-bed flat in Newcastle, but they don’t.<br />
<br />
"That’s like saying <i>“If we have VAT on new cars, then Richard Branson would start using the bus or walking to work”</i> or <i>“If private schools started charging £10,000 or £20,000 a year, then people like Richard Branson would send their children to state school instead”</i> or <i>“If we have tax on tobacco, then people like Branson would stop smoking and not pay any”</i>.<br />
<br />
"As it happens, Mr Branson derives a lot of his income from rents [Heathrow landing/take-off slots) in the first place, and so he would end up paying tax on all this at source. What he does with his net income is entirely up to him. And as it happens, I assume that he doesn’t smoke and hence pays no tobacco duty, and good luck to him."<br />
<br />
b) The more fundamental point is this...<br />
<br />
i. For future subsequent owners of land, the LVT is quite simply not a cost at all, because the upfront price they are willing to pay will be reduced by the future LVT liabilities on that site (rental values will be pushed up when taxes on output and earnings are reduced - quite what the net effect will be is unknown and largely down to psychology). <br />
<br />
ii. This is the same as the basic observation that higher interest rates increase the future cash outflows for people who buy with a mortgage (or increase the opportunity cost to somebody with cash in the bank) and so depress the price of land. So somebody looking to buy a home with a mortgage in the near future is actually indifferent to interest rates, low mortgage rates are only good news for people with existing mortgages and net sellers.<br />
<br />
iii. So whoever is the next purchaser after LVT has been introduced is indifferent, assuming that people with similar housing budgets are bidding for the same home, whatever extra he has to pay in LVT reduces the amount he <i>is able to pay</i> in mortgage interest but it reduces the amount that other bidders <i>are able to pay</i> in mortgage interest as well, so the LVT reduces the amount which the winning bidder <i>has to pay</i> in mortgage interest, and hence pushes down the price of the home accordingly. And when he sells again in a few years' time, the same applies.<br />
<br />
iv. Another way of looking at this is to say that actually LVT is not a recurring tax, it is a one-off levy on today's landowners which will be paid in instalments out of what the future sales proceeds of that land would have been in the absence of the tax.<br />
<br />
v. So really, we don't need to speculate on the likelihood of Richard Branson <i>"renting a one bedroom apartment"</i> and it doesn't actually matter. We can safely assume that as at today's date he owns a very nice home or three in the UK, all of which will be subject to that one-off levy (but payable in instalments). The chances are, he will continue living in the UK in one or more of these homes (because the future income tax saving he can make by living in the UK rather than anywhere else will make it worthwhile and easily cover the LVT).<br />
<br />
vi. Maybe Richard Branson will sell one or more of his UK homes and superficially, the next owner will be paying the LVT. So what? The LVT doesn't really cost the next owner anything (as explained), the whole cost is shuffled backwards onto Richard Branson.<br />
<br />
<a href="https://www.blogger.com/null" name="5"></a>5. <i>"Multi-nationals will relocate abroad and end up not paying a penny "</i><br />
<br />
If we replace the worst taxes on output and employment (VAT and NIC) and most existing taxes on land and buildings (Council Tax, Business Rates, SDLT, inheritance tax, capital gains tax etc) with LVT, then most productive businesses - including multi-nationals - would be paying <i>far, far less tax</i> then they are now.<br />
<br />
So if anything, multi-nationals and their higher-paid executives will be falling over themselves to relocate to the UK, not the other way round. <br />
<br />
NB, all the much touted "relocations" like WPP were merely them shifting their head office abroad so that income earned outside the UK would not be taxed when it was brought back to the head office, they did not actually shut down all their UK operations. Like most countries, the UK now has a more or less complete tax exemption for profits earned abroad and brought back onshore, so that's not really an issue any more.Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com25tag:blogger.com,1999:blog-6365034639538623308.post-35293260069110532022013-01-17T21:00:00.001+00:002017-10-08T14:28:05.902+01:00H. LVT would raise too much revenue• The government will introduce LVT on top, without reducing existing taxes (<a href="http://kaalvtn.blogspot.co.uk/2013/01/h-lvt-would-raise-too-much-revenue.html#1">skip to article</a>)<br />
• The government will keep increasing the tax rate (<a href="http://kaalvtn.blogspot.co.uk/2013/01/h-lvt-would-raise-too-much-revenue.html#2">skip to article</a>)<br />
• People will never know how much tax they will have to pay next year (<a href="http://kaalvtn.blogspot.co.uk/2013/01/h-lvt-would-raise-too-much-revenue.html#3">skip to article</a>)<br />
• At least with income tax, if your income falls, then your tax bill falls (<a href="http://kaalvtn.blogspot.co.uk/2013/01/h-lvt-would-raise-too-much-revenue.html#4">skip to article</a>)<br />
• At least with income tax, there is a Laffer Curve which sets an upper limit to tax collection (<a href="http://kaalvtn.blogspot.co.uk/2013/01/h-lvt-would-raise-too-much-revenue.html#5">skip to article</a>)<br />
<br />
These arguments are the equal and opposite of the arguments covered in <a href="http://kaalvtn.blogspot.co.uk/2013/01/i-lvt-would-not-raise-enough-revenue.html">I. LVT would not raise enough revenue</a>. Surely they can't both be correct?<br />
<br />
And of course, the Home-Owner-Ists like to confuse the issue by saying things like <i>"LVT would not raise enough revenue, so the government would keep increasing the tax rate"</i> and then <i>"The rate would be so high that we would go past the top of the Laffer Curve and so receipts would fall again"</i>, thus safely hedging their bets without realising that they have just completely contradicted themselves and betrayed their lack of understanding of the Laffer Curve.<br />
<br />
<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="1"></a>1. <i>"The government will introduce LVT on top, without reducing existing taxes"</i><br />
<br />
Given how unpopular LVT is with the brainwashed majority, this is highly unlikely. <br />
<br />
As long as Labour are in the pockets of bankers and the Tories in the pockets of landowners, LVT seems a highly unlikely proposition (they won't even go as far as a Council Tax revaluation); and if they did come to their senses, then politically at least, they would know that LVT could only ever be introduced as a replacement tax.<br />
<br />
If and when enough people vote for smaller parties who have full-on LVT front and centre in their manifestos, the two big parties who take turns running the government will only dare introduce LVT very incrementally, in the same way as it took Thatcher and Blair/Brown twenty years to completely reverse the old 20th century system when it was government policy was to keep prices and rents down.<br />
<br />
If the government decided to continue with wasteful spending and corresponding deficits, it is better for the Baby Boomers to pay a less harmful tax now than simply to dump an even larger burden on future workers, entrepreneurs and investors. Even if they reined back spending to sensible levels and reduced the annual deficit to nil, there is still a massive accrued public sector debt; if they introduced 100% LVT it would still take ten years or so to pay it off, and then after ten years we can have another debate about which taxes to cut.<br />
<br />
<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="2"></a>2. <i>"The government will keep increasing the tax rate"</i><br />
<br />
The politics is the easy bit: <br />
<br />
Nobody said that when LVT is introduced we will suspend democracy. There'll always be plenty of political parties who will try and buy some easy votes by promising to freeze or reduce LVT. It's a question of whether they have a credible programme for reducing spending or increasing other taxes to match. And yes, politicians love increasing taxes, but this is particularly difficult with an in-your-face tax like LVT. So that's a good thing, not a bad thing. <br />
<br />
And let's not forget about geese, feathers, hissing and all that. A couple of years ago they hiked VAT from 17.5% to 20%, which they said would raise another £13 billion a year and nobody batted an eyelid. Just imagine the outcry if they'd decided to raise that £13 billion a year by increasing Council Tax by 50%!<br />
<br />
The economics is the fun bit:<br />
<br />
i. The better known Laffer Curve is the one that says if you increase income tax rates beyond a certain point then total revenues start to fall again. So the revenue-maximising total income tax/NIC/VAT rate is probably somewhere between 50% and 60% (we are currently pretty close to the revenue maximising tax rate) and not 100%. Hopefully most are familiar with this:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgfra6tOYnM0HWDeHv0Xt6vhs90dAqxzYC2PURaOueRwpFfDVGzxHATsN5jnLbYIWO6PvpBvy5jnZvA78-ZuCajmivhKM0L0Vi-ZwF_jBLq78_p7R43NCSIv2Ojko67FE0ZOnA_mcJVq-8/s1600/Laffer+Curve+1.png" imageanchor="1"><img border="0" data-original-height="927" data-original-width="1515" height="245" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgfra6tOYnM0HWDeHv0Xt6vhs90dAqxzYC2PURaOueRwpFfDVGzxHATsN5jnLbYIWO6PvpBvy5jnZvA78-ZuCajmivhKM0L0Vi-ZwF_jBLq78_p7R43NCSIv2Ojko67FE0ZOnA_mcJVq-8/s400/Laffer+Curve+1.png" width="400" /></a><br />
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The main reason that revenues start to fall again once the overall rate is more than 60% is because enterprise is choked off. If you add an extra line to the chart, the upper line shows by how much the total size of the economy shrinks at higher tax rates.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi9C-Tr3xsbwWlVOKBIh8Yhwnv2lhauEoI1tjhEFJErbGXtDGpiYdAUApHladsrw8ZevdffTmSAzLI16XmkyGoyEkAfKTrNpAGjkZoXLImRN4fo0Y5BIJ5uq1iI19jnASR3LNXE3S2g1LY/s1600/Laffer+Curve+2.png" imageanchor="1"><img border="0" data-original-height="927" data-original-width="1515" height="245" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi9C-Tr3xsbwWlVOKBIh8Yhwnv2lhauEoI1tjhEFJErbGXtDGpiYdAUApHladsrw8ZevdffTmSAzLI16XmkyGoyEkAfKTrNpAGjkZoXLImRN4fo0Y5BIJ5uq1iI19jnASR3LNXE3S2g1LY/s400/Laffer+Curve+2.png" width="400" /></a><br />
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These losses (the area above the red line) are referred to as the deadweight losses of taxes. So yes, the UK government is maximising tax revenues by having an overall rate of 50% - 60% on the productive economy (income tax + NIC + VAT), but the price we pay is having an economy that is 15% - 20% smaller than it could be.<br />
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ii. LVT has no deadweight costs, if anything it stimulates the economy. So the optimum tax rate for LVT is somewhere near 100%. It's probably better to pitch it at 90% to go on the safe side, but if the rate does creep over 100% occasionally, well so what? All that means is that it doesn't just tax the rental value of the location but some of the rental value of the buildings and improvements as well, and it is still less bad taxing static rental income than mobile labour and investments.<br />
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iii. If the rate does go measurably over 100% in some areas then the first thing that we would notice is that new construction would stop (the same as punitive Section 106 agreements or Development Land Tax); but this is what the NIMBY majority want, isn't it, so that is not an unalloyed bad. The tax would still be collected from existing buildings (and it would still act to encourage the most efficient use of existing buildings). <br />
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iv. For sure, buildings still have to be maintained and improved, but it is better having a Poll Tax on the buildings themselves whatever condition they are in than to levy a tax on the cost/value of improvements. The tax rate would have to be very high indeed (100% of the site premium and let's say 75% of the bricks and mortar rental value) before people started abandoning buildings. <br />
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v. And if the tax rate does go significantly over 100% of the site premium, then that is simply not LVT any more, that is a "Property Tax" like Business Rates, which is a quite different animal and to which proper LVTers are opposed anyway. <br />
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vi. So it's not an argument against LVT, it's an argument for replacing Business Rates with LVT. Or we could equally argue <i>"Income tax is a bad tax because the government could increase the rate past the top of the Laffer Curve or increase it to beyond 100%"</i> in some cases, the government does. That's not an argument against income tax, that's an argument against colossally stupid governments.<br />
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<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="3"></a>3. <i>"People will never know how much tax they will have to pay next year"</i><br />
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Life is full of uncertainties. LVT merely puts everybody in the same position as tenants or mortgage borrowers who don't know what their rent or interest rate will be next year.<br />
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i. During the transitional phase, you would know that you will pay £x less in income tax next year and £y more in LVT; you'd easily be able to predict the changes by comparing x% of your earned income with y% of the site rental value of where you live. If you have a low earned income relative to the site rental value, then you know that your overall tax bill will increase every year, but this is predictable years in advance and you have plenty of time to take evasive action (like "getting on your bike"). And for a majority, the tax bill will be falling slightly year-on-year!<br />
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ii. If we ever get as far as a full-on LVT system, then if your LVT bill this year was £z, then next year it will be £z plus or minus a bit. Rental values are very stable and only change by a few per cent each year, in line with wages.<br />
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Here's a chart showing ONS figures for <a href="https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/articles/supplementaryanalysisofaverageweeklyearnings/latest">nominal wages</a> and <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/datasets/indexofprivatehousingrentalpricesreferencetables">nominal rents</a> from 2005 to 2017:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhF1SH_9qyqfH-_HLRPquAVnnTr-xRB4f9E534ehLlUp4b23TSEIccHsEuZH3fF7uhD2zj1GG7O8CsfBS1CA_v1tRnOhxc__rMFBJqP4UZDU1LD8S-KRdZu8ot0IZD3dyp4fL5CdkTYuik/s1600/Rents+v+wages.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="924" data-original-width="1520" height="242" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhF1SH_9qyqfH-_HLRPquAVnnTr-xRB4f9E534ehLlUp4b23TSEIccHsEuZH3fF7uhD2zj1GG7O8CsfBS1CA_v1tRnOhxc__rMFBJqP4UZDU1LD8S-KRdZu8ot0IZD3dyp4fL5CdkTYuik/s400/Rents+v+wages.png" width="400" /></a></div>
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iii. So this is no bigger burden than expecting somebody who takes out a mortgage at 4% interest to be prepared for the fact that it might be 6% interest in ten years' time (i.e. a fifty per cent increase in monthly repayments). As it happens, people tend to worry more about upside than downside risks, so all in all, this will keep house prices low and stable, even if the feared "tax bombshell" never explodes.<br />
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iv. Common sense says that increases would be capped at (say) 5% a year, enabling people to budget years in advance, even in a "worst case" scenario. And we know from experience that the government can get away with making higher earners take a hit of several thousand pounds from one year to the next (increase in tax rate from 40% to 50% or withdrawal of Child Benefit) without them taking to the streets.<br />
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v. The only time when rental values jump noticeably is when e.g. a new railways line and stations are opened, but these projects are announced years or even decades in advance, giving plenty of time for evasive action. So people who aren't interested in taking the train will have left by the time it opens, and people who need or want to use the train service will move to the area and happily pay the higher rent/tax. Thus we get far more efficient use not just of the physical land and buildings but of the railway as well. <br />
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vi. What's not to like?<br />
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<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="4"></a>4. <i>"At least with income tax, if your income falls, then your tax bill falls"</i><br />
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Fair point, even though it contradicts the previous supposed argument. What the Homeys want is a tax bill that doesn't go up in the good times, but does go down in the bad times. You can't have it both. As ever, they refuse to accept that there is an inherent contradiction.<br />
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In terms of "ability to pay", income tax beats LVT in the short term, but in the medium term LVT catches up again and overtakes it in the long run. A price well worth paying in exchange for lower dead weight costs; lower collection and compliance costs; and better social cohesion. <br />
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And the politicians are always coming up with new ways of subsidising the "savings culture" (an excuse for bungs for the financial services sector), none of which seem to work, so how about trying the "stick" as well as the "carrot"? Everybody will make sure that they have some rainy day money just in case.<br />
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<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="5"></a>5. <i>"At least with income tax, there is a Laffer Curve which sets an upper limit to tax collection"</i><br />
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i. Yes, the Laffer Curve (see <a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308#2">point 2</a> above) sets an upper limit to income tax (which is why they have several layers of it, VAT, NIC, corporation tax, income tax and so on) but the only way to find out what the revenue maximising rate is is to get there and thereby hugely damage the economy. Many politicians and campaigners on the left of the spectrum deny that it even exists.<br />
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ii. We're currently at an average marginal rate of over 50% and the dead weight costs of that are, on a rough and ready basis approx. 15% - 20% of the potential size of the economy (the tax rate cubed). <br />
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iii. Here's a stripped down version of HM Revenue & Customs' spreadsheet which they used as the basis for <a href="http://webarchive.nationalarchives.gov.uk/20140206181159/http://www.hmrc.gov.uk/budget2012/excheq-income-tax-2042.pdf">this report</a>. The only variable you can change is "taxable income elasticity" (which HMRC correctly assume is the most important unknown). A low figure means people don't care too much how much tax they pay; a high figure means people will avoid or evade high taxes. This then tells you the revenue-maximising tax rate and the dead weight costs, i.e. the fall in GDP:<br />
<iframe frameborder="0" height="330" scrolling="no" src="https://docs.zoho.com/sheet/published.do?rid=hd3vb12e4799d970e4f088c8cbe11deef8771&mode=embed" width="400"> </iframe><br />
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iv. LVT has no deadweight costs (and in fact, tends to stimulate economic activity); it only has deadweight costs if the tax is more than 100% of the site premium and thus acts like a tax on the income from buildings and improvements, but even then, as explained, the dead weight costs are negligibly small.Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com2tag:blogger.com,1999:blog-6365034639538623308.post-54137456133062846692013-01-17T20:55:00.000+00:002017-10-08T15:19:36.904+01:00I. LVT would not raise enough revenue• LVT will never raise enough money to pay for all government spending (<a href="http://kaalvtn.blogspot.co.uk/2013/01/i-lvt-would-not-raise-enough-revenue.html#1">skip to article</a>)<br />
• LVT will never raise enough revenue to replace all taxes (<a href="http://kaalvtn.blogspot.co.uk/2013/01/i-lvt-would-not-raise-enough-revenue.html#2">skip to article</a>)<br />
• Why focus on one narrow asset class? Taxes should be broad-based (<a href="http://kaalvtn.blogspot.co.uk/2013/01/i-lvt-would-not-raise-enough-revenue.html#2b">skip to article</a>)<br />
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The collapsing revenue theories:<br />
• Everybody will cram into the smallest houses, so not much tax will be collected (<a href="http://kaalvtn.blogspot.co.uk/2013/01/i-lvt-would-not-raise-enough-revenue.html#3">skip to article</a>) <br />
• Rich people will avoid the tax by trading down or moving abroad (<a href="http://kaalvtn.blogspot.co.uk/2013/01/i-lvt-would-not-raise-enough-revenue.html#4">skip to article</a>)<br />
• The best way to tax rich people is higher rate income tax or taxes on luxuries (<a href="http://kaalvtn.blogspot.co.uk/2013/01/i-lvt-would-not-raise-enough-revenue.html#5">skip to article</a>)<br />
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These arguments are the equal and opposite of the arguments covered in <a href="http://kaalvtn.blogspot.co.uk/2013/01/h-lvt-would-raise-too-much-revenue.html">H. LVT would [allow the government to] raise too much revenue</a>. Surely they can't both be correct?<br />
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The claim that <i>"Everybody will cram into the smallest houses, so not much tax will be collected"</i> also sits uneasily with the claim that <a href="http://kaalvtn.blogspot.co.uk/2013/01/g-lvt-would-benefit-rich-and-hurt-poor.html">Landlords will pass on all the tax to their tenants</a>. Again, the two arguments cancel out. Broadly speaking, we would expect gross rents to increase by the amount of the reduction in the tax on earnings. Thus illustrating that a £ for £ shift from taxing earnings to taxing the rental value of land is perfectly feasible and plausible.<br />
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<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="1"></a>1. <i>"LVT will never raise enough money to pay for all government spending"</i><br />
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In which the current tax system is failing miserably as well. And that's not because the government isn't collecting enough in tax; it is because since 2008 or so, the UK government has been throwing everything it can at propping up the banking sector, the landowners and house prices - Buy to Let and all its predecessors under the Labour government, quantitative easing etc. (According to official HM Treasury figures, about 40% of UK government spending goes on corporate subsidies in one form or another.)<br />
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The OBR's chart for tax revenues v spending since 1948 is from <a href="http://budgetresponsibility.org.uk/data/">here</a>.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiTafGlMIuqRlHjj66UI_PK5WzytOH1HIr1JWPRU8BEuPGV5SOMU5uF9CCUkcFG5EUaQBessRmkEcbUOle4KZ1Ip-DCzG7mfP6_GJDrfkJRdjsJnucaG_RQUDggbQFpJzMZ3H04JVM4aOk/s1600/Public+spending+v+revenue+1948+2021.png" imageanchor="1"><img border="0" data-original-height="924" data-original-width="1513" height="244" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiTafGlMIuqRlHjj66UI_PK5WzytOH1HIr1JWPRU8BEuPGV5SOMU5uF9CCUkcFG5EUaQBessRmkEcbUOle4KZ1Ip-DCzG7mfP6_GJDrfkJRdjsJnucaG_RQUDggbQFpJzMZ3H04JVM4aOk/s400/Public+spending+v+revenue+1948+2021.png" width="400" /></a><br />
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The deficit periods (blue line above yellow line) tend to follow house price boom/busts (early 1970s, 1990 and 2008), i.e. if we could keep house prices low and stable (via LVT or any other means), there would be no booms, no busts and hardly any deficit periods. If spending had been kept at 2004-05 levels (which were hardly lean years) in real terms, then this year, the public finances would have been in a break-even position.<br />
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<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="2"></a>2. <i>"LVT will never raise enough revenue to replace all taxes"</i><br />
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In the short term, no, but so what? <br />
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The simple fact is that the total site-only rental value or site premiums of UK residential land is currently about £200 billion a year, with another £50 billion for commercial land and buildings (the rental value of farmland is negligible compared to these). Explanation and calculations <a href="http://kaalvtn.blogspot.co.uk/p/valuations-and-potential-lvt-receipts.html">here</a>.<br />
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Taxed at 100%, that would raise £250 billion.<br />
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For a start, we could use £90 billion of that to replace existing taxes on land and buildings (council tax, business rates, SDTL, Inheritance Tax, capital gains tax, the ATED charge etc) net of subsidies (housing benefit for private landlords, farmland subsidies etc).<br />
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This leaves £160 billion which we could use to reduce the most damaging taxes, i.e. VAT and National Insurance, which are forecast to raise £250 billion in 2017-18 (ignoring Employer's NIC on public sector wages and VAT on petrol/diesel) by two-thirds. So VAT would be 7%, Employee's NIC 4% and Employer's NIC 4.6%.<br />
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That must be worth considering, must it not?<br />
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That might be the end of the matter, but when the associated economic growth kicks in…<br />
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a. revenues from the remaining taxes on earnings and profits (income tax and corporation tax) will soar, meaning that VAT and NIC can be phased out, and<br />
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b. rental values will increase, meaning that LVT revenues will increase, meaning that we can then make inroads into reducing the basic rate of income tax etc.<br />
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We know for a fact that rents are a function of people's net disposable incomes after tax, so if taxes on income are reduced, rental values (and hence the tax base for LVT) will go up, probably £ for £.<br />
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We can illustrate this quite simply by comparing the square metre cost of apartments in Nice and Monte Carlo, two towns on the south coast of France which are very similar in most respects. The only big difference is that Nice is in France with very high rates of income tax and Monte Carlo is a little tax haven with very low rates of income tax.<br />
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So the average selling price of an apartment in Nice (City Centre) is <a href="http://www.numbeo.com/cost-of-living/city_result.jsp?country=France&city=Nice">€4,500/sq metre</a> and the average selling price in Monte Carlo is nearly ten times as much, <a href="http://www.globalpropertyguide.com/Europe/Monaco/square-meter-prices">€39,000 per square metre</a>. That extra €3 million you would pay for an apartment in Nice is merely the amount which very high earners are prepared to pay in exchange for not having to pay high taxes on their incomes if they lived elsewhere in Europe. <br />
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<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="2b"></a>2b. <i>"Why focus on one narrow asset class? Taxes should be broad-based."</i><br />
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a) For LVT purposes, land is not an "asset" let alone an "asset class" or a "capital asset". The tax is levied on <i>the annual rental value of land/locations"</i>, i.e. the sum total of wealth which flows from the whole productive sector to landowners, homeowners, banks, landlords, land speculators etc. So the source of LVT is very broad-based indeed.<br />
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b) Clearly, it would be silly to try and raise a disproportionate amount of tax from any one "asset class" (cash, buildings, jewellery, works of art, plant and machinery or share prices); from any one particular kind of land use (residential, commercial or agricultural/extractive); or from any one particular kind of economic activity (manufacturing or services or any sub-division thereof). <br />
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c) The worst taxes are things like VAT, a flat percent of turnover of non-favoured productive industries which allow high-margin industries to thrive but condemn low-margin ones to oblivion, and the more "targeted" a tax is, the more distortions it causes (the same goes for "targeted" tax breaks and subsidies). So "broad based" is clearly good - it's just that the Homeys don't like it when they are included in that "broad base", despite the fact that owner-occupiers create two-thirds of tall wealth, pay two-thirds of all the taxes and occupy two-thirds of all the land - regardless of how the tax system is designed.<br />
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d) Land rents are derived from all the activities of the productive sector, and are that part of any industry's income which is not necessary to sustain that industry, they are pure surplus (or the price a retailer pays for having a monopoly position on the High Street). So the least-bad tax on farming is a tax on that extra income (revenue minus costs and the value of the farmer's own labour) which would otherwise go into rent or higher land prices (on average, about £20 per acre). And the least-bad tax on retail is that element of profits which would go into rents. Manufacturing businesses are happy do make do with marginal and out-of-town sites (they need more physical space but central locations are not so important - they need access to stuff like motorway junctions and railway sidings which make places a no-no for residential use) so the tax collected from manufacturing would be minimal. Etc etc. <br />
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e) And we all have to live somewhere. The least-bad tax on earned income is a tax on that element of people's income which is paid as rent or mortgage repayments (which for an average household is the excess of income over the cost of the "basic minimum" standard of living and for higher earning households is "conspicuous consumption"), but unlike income tax (where you get nothing in return for paying it), the LVT is taken out of/included in the rent and when you pay LVT/rent, you get something in return (somewhere to live).<br />
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f) In urban areas (which is where 95% of land rents arise), these land uses are are all intermingled. It could be retail or services at pavement level with offices on the first floor and flats up above, with a car repair workshop in the alley behind. The rental value is fairly constant, it does not matter what that shop sells or what services are provided, it does not matter whether the offices are used by a financial adviser, physiotherapist or fortune teller. And it does not matter how the residents above earn their living or whether the car repair workshop specialises in second cars or tuning brand new Maseratis.<br />
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g) All of these uses compete. If people want to buy mobile phones instead of CDs, then the CD shop shuts down and is replaced with a mobile phone shop (or the canny CD retailer starts selling mobile phones on the side). The flats will be occupied by the people who work in the most profitable local industries, they might lose their job in the CD shop and be taken on by the mobile phone shop. Etcetera. <br />
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h) Occupiers who have to pay rent will always be the people who are best able to capitalise on the opportunities offered by that location or who can earn most by working within commuting distance of that location. So making people pay rent is not in itself a bad thing (price allocation is the best kind of allocation); where it goes wrong is allowing a privileged class to collect those rents rather than pooling them for the common good.<br />
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So as we see, land is not a narrow "asset class" and land rents themselves are a very broad-based and inherently stable stream of revenue/flow of wealth, which can be taxed with impunity.<br />
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NB, a slightly different version of this article is at the <a href="http://www.landvaluetax.org/frequently-asked-questions/shouldnt-taxes-be-broad-based.html">LVTC site</a>.<br />
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<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="3"></a>3. <i>"Everybody will cram into the smallest houses, so not much tax will be collected"</i><br />
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a) No they won't, because for most people there is little incentive to downsizing.<br />
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Here is the table for the site premiums for semi-detached houses in the first nine deciles (the top decile goes off the scale; the top one per cent of homes, mainly in certain small enclaves in London cost £100,000s a year to rent and £millions to buy):<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgiEN0rdSnvKHpPdQhvgzLhlfPdLeo_PlRQCMZFharqAVFqFo95zwQutV6HA8xSXeBSOX-YdHAeg2Xr-DrNm3D1tdYoqVATuRdSTS3OkQPoWzOEdlf5JGHsA6yo0XulA_QMzIclsDbS814/s1600/Site+premiums.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="244" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgiEN0rdSnvKHpPdQhvgzLhlfPdLeo_PlRQCMZFharqAVFqFo95zwQutV6HA8xSXeBSOX-YdHAeg2Xr-DrNm3D1tdYoqVATuRdSTS3OkQPoWzOEdlf5JGHsA6yo0XulA_QMzIclsDbS814/s400/Site+premiums.png" width="400" /></a><br />
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How many people in the ninth decile would really want to trade down to the eighth, merely to save £2,000 a year? How many in the eighth decile would want to trade down to the seventh in order to save £1,000 a year? <br />
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No more than would be willing and able to trade up, providing house prices adjusted down accordingly, and by definition they would. And by definition, those people in the ninth decile <i>could already be saving themselves £2,000 a year</i> if they sold their homes worth currently £260,000-plus and bought a house in the eighth decile costing £210,000-plus, because that would knock £2,000 off their mortgage payments (or rent).<br />
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<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="4"></a>4. <i>"Rich people will avoid the tax by trading down or moving abroad "</i><br />
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a) People who spout this do not understand how rich people behave. The argument is about as plausible as saying <i>"If private schools start charging £10,000 or £20,000 per pupil per year, then the top 7% who currently send their children to private school will send them to free state schools instead."</i><br />
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b) Clearly, high earners won't move abroad, because as the French 75% income tax experiment demonstrated, what high income people are most sensitive to is income tax rates; with a flat income tax of 20%/40% and houses which have fallen in price to compensate them for any LVT thereon, they'd all be flocking to our shores. <br />
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Some even argue that even though UK income tax rates would be low, UK high earners would earn their money in the UK and then live abroad to avoid the LVT. Well, that makes them resident and thus liable to pay income tax somewhere else, so they would lose on the income tax side and gain nothing on the LVT side, because if instead of buying a cheap UK home with LVT on it, they would have to buy a more expensive home elsewhere with lower LVT on it, so best case they break even on the 'housing costs' side.<br />
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That part is easily dealt with.<br />
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c) And what do people like talking about? They'd love to talk about how much they earn, but for some reason that is taboo, but it is perfectly acceptable to complain bitterly about how much tax you pay (from which the astute listener can work backwards and work out what the complainant earns). So people use conspicuous consumption ("spending money you don't have on things you don't need to impress people you don't like") to drop hints as to how much they earn. And people also just love showing off about how much their house is worth.<br />
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So think about it - it would be the winning card at keeping-up-with-the-Joneses poker at dinner parties: high earners can "complain" about the amount of LVT they have to pay, thus subtly signalling that they've got shed loads of money; that their house is worth a lot; and giving them the satisfaction of whining about how greedy the government is and/or the opportunity to show how generous they are in paying so much into the system for schools and hospitals.<br />
<br />
d) Yes, there will be a lot of down-sizing, up-sizing and right-sizing generally in the first couple of years, but by and large, people will be swapping places, there is no reason to assume an overall downward shift.<br />
<br />
That leaves us with the people who live in the top decile. Where are they going to go? We know that there are enough people happy to pay rents of from £15,000 up to £100,000s a year, you only have to look on Rightmove or Zoopla. And there are others prepared to commit millions to buying a house, this is conspicuous consumption at its best. How many of them would really want to lose face with their peers by admitting that they can't afford it? <br />
<br />
e) Just to fill in the gaps, let us now return to our Poor Widows In Mansions. According to arch-Home-Owner-Ists the <a href="http://www.cps.org.uk/publications/reports/taxing-mansions-the-taxation-of-high-value-residential-property/">Centre for Policy Studies</a>, only 15% of high value London homes have been owned by the same person for more than twenty years, so the actual number of Poor Widows is no more than 10,000 or 20,000. Perhaps LVT would give them the nudge to cash in and sell up and buy a smaller flat closer to their no doubt equally poor offspring who will have bee priced out of the prime central London market decades ago? <br />
<br />
And for every Poor Widow who moves out, there will be at least one high earner, oligarch, oil sheikh, foreign kleptocrat or French tax exile willing to move in and pay the tax out of petty cash. <br />
<br />
Win-win! <br />
<br />
<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="5"></a>5. <i>"The best way to tax rich people is higher rate income tax or taxes on luxuries"</i><br />
<br />
Opponents of LVT are missing the point. LVT is not about getting more tax from wealthy people or higher earners, it is about collecting tax from land values instead of earnings and output. There are plenty of high earners who will end up paying less tax after an LVT shift!<br />
<br />
Even if that were the aim, 40% income tax is near the top of the Laffer curve and taxing land values is far better; at the very top end, increases in income tax rates depress rental values and hence LVT receipts anyway.<br />
<br />
And here the argument goes full circle. Not only are "luxuries" difficult to define but any tax thereon is ultimately a tax on the people who provide them. A film star or a celebrity footballer wedding or birthday party "costing" £150,000 may superficially seem like wild extravagance and hence a luxury, but that £150,000 ends up in the pockets of all the dozens of caterers, waitresses, flower arrangers, taxi drivers, marquee builders, decorators, pole dancers etc; exactly the people who buy the cinema tickets and season tickets in the first place.<br />
<br />
But if a film star lives in a £5 million house with an annual site-only rental value of £150,000, how much of that money will the caterers, waitresses etc ever see? Not a penny. And that house is a surely a luxury just as much as the wedding or birthday party. So why not get that £150,000 into their pockets via the tax/welfare system and make the wedding or birthday party tax-free?Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com0tag:blogger.com,1999:blog-6365034639538623308.post-58830690606651806352013-01-17T20:50:00.001+00:002017-10-15T14:02:58.851+01:00J. There would be too much new constructionThese arguments are tricky, because a majority of people in the UK are NIMBYs (or at least, NIMBYs are far more vocal than those who are happy for other people to have new homes). They argue that they are doing it because they care about nature, local history or the catch-all 'pressure on local services'. But underlying it is the selfish interest in keeping house prices as high as possible, so they oppose LVT and new construction with equal venom - you are fighting on two fronts. Even if you could explain the underlying economic logic which tells us that LVT will take away the motive for building on The Hallowed Green Belt and allowing town centres to rot away, they would still oppose it.<br />
<br />
Four typical arguments are as follows:<br />
<br />
• All public parks/school playing fields will be sold off for development (<a href=http://kaalvtn.blogspot.co.uk/2013/01/j-there-would-be-too-much-new.html#1>skip to article</a>)<br />
• Owners of open spaces will [be forced to] build on them (<a href=http://kaalvtn.blogspot.co.uk/2013/01/j-there-would-be-too-much-new.html#2>skip to article</a>)<br />
• The Green Belt will be bulldozed/concreted over (<a href=http://kaalvtn.blogspot.co.uk/2013/01/j-there-would-be-too-much-new.html#3>skip to article</a>) <br />
• What about churches and listed buildings? (<a href=http://kaalvtn.blogspot.co.uk/2013/01/j-there-would-be-too-much-new.html#4>skip to article</a>)<br />
<br />
See also: <a href=http://kaalvtn.blogspot.co.uk/2013/01/l-lvt-would-make-people-live-where-they.html#3>Greedy developers will get planning permission for my land, forcing me to pay more</a>.<br />
<br />
The Home-Owner-Ists are of course perfectly capable of proposing equal and opposite arguments. In the next breath they will claim that with LVT <a href="http://kaalvtn.blogspot.co.uk/2013/01/k-there-would-be-not-enough-new.html">there would not be enough new construction</a> and they will round things off by saying that <a href="http://kaalvtn.blogspot.co.uk/2013/01/l-lvt-would-make-people-live-where-they.html">LVT would force people to live where they don't want to</a> i.e. that with LVT, they would be too much new construction where it isn't wanted or needed and not enough where it is (or something like that, it is never clear what they mean).<br />
<br />
Proponents of LVT do not have any sort of collective view on whether planning laws should be made stricter or more liberal. By and large, it is easier to assume that the power of local councils to decide what gets built where would remain in place. Quite simply, LVT works just as well, conceptually or administratively, whether planning laws are very restrictive or very liberal.<br />
<br />
We are agnostic on the whole planning issue for the simple reason that with LVT, there would be far less need for new construction. Instead, more incremental steps would be taken to make best use of what we've already got - loft extensions, refurbishment, conversions, small scale developments, infill projects, replacing derelict buildings, building on vacant/under-used urban sites etc. Most importantly, some widows in large family homes would downsize so that young families can upsize. In 2011, the Intergenerational Foundation calculated that there were <a href="http://www.if.org.uk/wp-content/uploads/2011/10/IF_housingrel_defin_LE2.pdf">25 million unoccupied bedrooms</a> in the UK, i.e. about ten million homes' worth of bedrooms. All of this is great news for small, local builders and craftsmen, and will go down like a cup of cold sick with national land bankers like Taylor Wimpey, Redrow, Barratts et al.<br />
<br />
Furthermore, with LVT in place, planning decisions would go with the grain of what people actually want anyway.<br />
<br />
<a name="1"></a>1. <i>"All public parks/school playing fields will be sold off for development"</i><br />
<br />
No they won't. Because LVT aligns the interests of the local council (who receive a share of the money) and the people who live there.<br />
<br />
a) A few facts: most of us live in very developed areas, it's the natural sweep of history for people to become ever more urbanised, but it's still nice to live somewhere not too far from a playground, park, open woodland, a river or canal with a footpath and cycle path etc.<br />
<br />
b) So it is obvious that the rental value of homes which are near such amenities, or even better, overlook them is higher. Here's a bit of <a href="http://www.apartmenttherapy.com/how-much-is-a-v-156527">first hand research</a> on the premium which people will pay for an apartment with a better view. <br />
<br />
c) From the <a href="http://www.yorkshirepost.co.uk/news/at-a-glance/main-section/park_life_puts_21_000_on_home_1_3842811">Yorkshire Post</a>:<br />
<br />
<i>Houses close to public parks or open spaces now cost up to £21,000 more, revealing a “green premium”. A survey by finance company ING Direct found that the price difference was higher in cities with less public space as it becomes scarce because of pressure on town halls to sell off land.</i><br />
<br />
Rents are currently capitalised at 3%, so what that means is, the rental value of a house close to a park is £630 a year higher than otherwise.<br />
<br />
d) OK, so let's imagine a nice little commuter village with five hundred houses all within five minutes walking distance of a nice big six-acre public park with all the bells and whistles. A bit like this:<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi2Qa8IDEQLoXMMlyYv7x9VYv1SGhVCRtLaE63Ok5DAKtNy25AX6Nll1vcYCgxUBlO_RcdGbI3jm28c7O936civrv4Vzo2MrvBpYizEzCeAmvHlArA3J20WwU2uAAckWMMl7Fg1b7dnXJQ/s1600/Calverley.png" imageanchor="1" style="margin-left:1em; margin-right:1em"><img border="0" height="234" width="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi2Qa8IDEQLoXMMlyYv7x9VYv1SGhVCRtLaE63Ok5DAKtNy25AX6Nll1vcYCgxUBlO_RcdGbI3jm28c7O936civrv4Vzo2MrvBpYizEzCeAmvHlArA3J20WwU2uAAckWMMl7Fg1b7dnXJQ/s400/Calverley.png"></a><br />
So the council is currently collecting 500 houses x £6,000 in LVT = £3,000,000. <br />
<br />
e) Notwithstanding that the park is the prime selling feature of that village and there would be riots if the council ever even mentioned selling it to developers, how many homes could you fit into that park? Probably around sixty. So now the local council can collect LVT from 560 homes. But the rental value of those 560 homes would not be £6,000 any more, it would be 15% less = £5,100. Times that by 560 and the council only gets £2,856,000. So the council has no incentive to sell off the park.<br />
<br />
f) Now, we also now that under current rules, a developer could make a huge windfall capital gain (at everybody else's expense) by building 60 homes on that park, all he has to do is hand over some brown envelopes to the right councillors. With LVT in place, there is no potential big windfall gain, because the selling price of the finished houses is depressed by the LVT. Even if the developer were given the park for free, there wouldn't be much of a windfall capital gain when he miraculously is given planning permission.<br />
<br />
g) The same applies to school playing fields. A lot of schools use the number of playing fields they have as a selling point. That makes the school more attractive to parents; if a school is in demand, they can filter their intake; that pushes the school up the league tables etc etc; and all that pushes up <a href="http://www.lovemoney.com/news/property-and-mortgages/house-prices/5289/top-4-things-that-will-add-value-to-your-home">the rental values of homes within the catchment area</a>. So just like with parks, the incentive to sell off playing fields is greatly reduced.<br />
<br />
<a name="2"></a> 2. <i>"Owners of open spaces will [be forced to] build on them"</i><br />
<br />
Nonsense. <br />
<br />
For the simple reason that there are very few privately owned <i>open spaces</i> (i.e. public parks), and those that exist are usually owned by trusts set up by Victorian philanthropists and the like and are subject to restrictive covenants. They are effectively public parks as in the previous example. The LVT on such parks would be more or less nil as they cost more to maintain than they generate in direct income.<br />
<br />
There are also derelict and vacant sites, usually behind fences and of no value to the public whatsoever. If anything they are a burden (rats, vagrants, fly tipping etc). Like the Battersea power station site for three decades. The owner can afford to leave them derelict because there is no financial disincentive (exempt from Business Rates and Council Tax). If the potential selling price is expected to increase faster than the equivalent return on other investments, the owner has every incentive to leave it vacant as long as possible. The <a href="http://en.wikipedia.org/wiki/Battersea_Power_Station#Parkview_proposal">Battersea site</a> was bought for £70 million in 1993 and sold for £400 million in 2006 (the next purchaser went bust, of course). Eleven years later, the project is still not completed.<br />
<br />
How land should be used has to be haggled out between owner of the site, the local council and the local electorate. The best uses for derelict sites are some combination of:<br />
<br />
a) Clear the buildings and rubble, decontaminate, plant some trees etc and make it into a genuine public open space, enhancing the rental value of surrounding homes, and<br />
<br />
b) Grant planning permission for an appropriate development, assess the LVT accordingly and start collecting the tax. If the owner runs up any sort of arrears, he loses his title and the site is sold of to somebody who does want to make something of it. <br />
<br />
<a name="3"></a> 3. <i>"The Green Belt will be bulldozed/concreted over"</i><br />
<br />
No it won't. <br />
<br />
a) Whatever happens, remember that only 3.5% of the UK by surface areas is homes and gardens, and considerably more than half of that is gardens, which have the far more bio-diversity than most farms.<br />
<br />
b) The observation that so-called home builders make most of their money from the planning gains uplift applies to greenfield sites as much as it does to the park in the example above. With LVT in place, there would be less incentive to continually expand towns outwards and allow the centre to rot (see Battersea example above). Which is exactly what absence of LVT encourages - you can only bank the massive planning gain uplift once, and if you acquire something a bit run down in a city centre, there's every incentive to just sit back and do nothing.<br />
<br />
And there's a trade-off: <br />
<br />
c) Here's that little commuter village in its wider context:<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg8m9meA-YJ-vuj7wtqwpbn6igX3JhbEW5FzYZ3u_7Z8q9jGcdydqGyEUdtI8PqMl25JWxnIzvMAm3jzuack5m9KqoXDDl5Ca3lTi7mUko-c2oTpUO1gs4nNFP6D85IfLwQ4C0SKIVS-u8/s1600/Calverley+2.png" imageanchor="1" style="margin-left:1em; margin-right:1em"><img border="0" height="322" width="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg8m9meA-YJ-vuj7wtqwpbn6igX3JhbEW5FzYZ3u_7Z8q9jGcdydqGyEUdtI8PqMl25JWxnIzvMAm3jzuack5m9KqoXDDl5Ca3lTi7mUko-c2oTpUO1gs4nNFP6D85IfLwQ4C0SKIVS-u8/s400/Calverley+2.png"></a><br />
If you really had to plonk down another 60 houses, there's plenty of space to the north and east (where the land is flattest before it slopes away again, down to the river below). So whether the town planner is motivated by concern for his fellow men or just wants to maximise LVT receipts for the council, that is where they would go.<br />
<br />
To the extent that this has any negative impact on the rental value of the existing homes (and I'm not admitting it would), it would only be a fraction of the impact of building on the park. Nobody around there really values those fields, it's nice to know they are there is all. I grew up there and was very conscious of the park in the middle, but the fields were just something you saw out of the bus window, and there was one at the end of my road which was very steep and ideal for sledging.<br />
<br />
<a name="4"></a> 4. <i>"What about churches and listed buildings?"</i><br />
<br />
Yawn.<br />
<br />
a) LVT is based on the rental value of each plot, assuming optimum permitted use. So if it's a church, it's a church and would be valued as such, and not as if it could be used to build a ten-storey office block. What is the rental value of a church? It's however much money you can make from it in excess of the vicar's salary and repair costs <i>compared with</i> the amount of money you can make from a comparable church in the least favourable location. In either case, teh value is so low as to be barely worth measuring and the site-only values of a church and the LVT bills will be next to nothing. There is no need for a special exemption for religious buildings.<br />
<br />
b) The same argument applies to the church as to the park. The church is a lovely old one dating back to the 12th century (as opposed to the squat Victorian Methodist church in the north-east corner of the park). Perhaps that church actually adds to the rental value of the houses in the village - some of its character magically rubs off on them. So there is no way that the council would ever grant permission to knock it down, even if it never collected a penny in LVT from it. <br />
<br />
For example, if planning permission were granted to build new houses overlooking the church and the churchyard, there'd be a premium LVT to be collected from those flats because they are more or less guaranteed that the lovely view from their windows will never change.<br />
<br />
c) The same goes for listed buildings; if what the owner can do with them is restricted, then the rental value and the price, and hence the LVT bill, is reduced to what a tenant or purchaser is willing to pay. That said, there are probably far too many listed buildings of no special historical or architectural significance, but this, like planning law, is a different topic to LVT.Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com0tag:blogger.com,1999:blog-6365034639538623308.post-56364485168203398092013-01-17T20:45:00.002+00:002020-09-04T14:57:09.021+01:00K. There would be not enough new constructionHaving argued that <a href="http://kaalvtn.blogspot.co.uk/2013/01/j-there-would-be-too-much-new.html">There would be too much new construction</a>, Home-Owner-Ists are prefectly capable of changing tack completely and claiming, again on the basis of no evidence whatsoever, that with LVT, there would be <i>less</i> new construction and that buildings would fall into disrepair.<br />
<br />
• It's like the Window Tax - a disincentive to improvements (<a href="http://kaalvtn.blogspot.co.uk/2013/01/k-there-would-be-not-enough-new.html#1">skip to article</a>)<br />
• People will wreck or abandon buildings to avoid the tax (Business Rates) (<a href="http://kaalvtn.blogspot.co.uk/2013/01/k-there-would-be-not-enough-new.html#1">skip to article</a>) <br />
• It will impede transactions (like Stamp Duty Land Tax, capital gains tax) (<a href="http://kaalvtn.blogspot.co.uk/2013/01/k-there-would-be-not-enough-new.html#1">skip to article</a>)<br />
• Land taxes just don't work (Land Development Tax, s106 Agreements) (<a href="http://kaalvtn.blogspot.co.uk/2013/01/k-there-would-be-not-enough-new.html#1">skip to article</a>)<br />
• What if a developer has paid out under a s106 Agreement? (<a href="http://kaalvtn.blogspot.co.uk/2013/01/k-there-would-be-not-enough-new.html#1b">skip to article</a>)<br />
• Owners will have no spare cash to pay for improvements (<a href="http://kaalvtn.blogspot.co.uk/2013/01/k-there-would-be-not-enough-new.html#2">skip to article</a>)<br />
• Construction companies will either go out of business or pass on the tax as higher selling prices (<a href="http://kaalvtn.blogspot.co.uk/2013/01/k-there-would-be-not-enough-new.html#3">skip to article</a>)<br />
<br />
The most important point here is that actual developers/builders would pay a lot less in LVT than they currently do in land- or planning-related taxes!<br />
Here's an overview of all the taxes which are currently triggered by development:<br />
Landowner – sells land, foregoes agricultural land subsidies on the area sold and pays Capital Gains Tax or corporation tax on the unearned capital gain.<br />
Developer – buys land and pays Stamp Duty Land Tax<br />
Developer – pays planning fees, Community Infrastructure Levy, s106 contributions and incurs costs of planning obligations.<br />
Developer – claims VAT refunds as new housing is zero-rated for VAT, a kind of subsidy.<br />
Developer – sells some “affordable housing” units at a low profit margin to a Registered Provider such as a Housing Association (this can be seen as a tax of nearly 100% on that fraction of the potential development profit) and sells the rest to owner-occupiers and private investors for a profit. The developer’s profit has two elements – the unearned increase in the value of the land since it was first acquired and the earned element (return for risk and effort) - and the total profit is subject to normal corporation tax.<br />
Owner-occupiers and private investors – pay Stamp Duty Land Tax when they buy the finished homes.<br />
<br />
All these land- and planning-related taxes would be scrapped and rolled into LVT as part of the initial shift. The average total currently taxes paid (less VAT rebates) is tens of thousands of pounds per new home (depending on where in the country it is). Even if LVT became payable as soon as planning is granted, the average would be about £7,000 per home per year. It seems sensible to give developers/builders an exemption for the first year or two after planning is granted, so developers/builders might end paying nothing at all.<br />
<br />
As pointed out in the previous section (<a href="http://kaalvtn.blogspot.co.uk/2013/01/j-there-would-be-too-much-new.html">J. There would be too much new construction</a>) "... with LVT, there would be far less need for new construction. Instead, more incremental steps would be taken to make best use of what we've already got - loft extensions, refurbishment, conversions, small scale developments, infill projects, replacing derelict buildings, building on vacant/under-used urban sites etc. Most importantly, some widows in large family homes would downsize so that young families can upsize. In 2011, the Intergenerational Foundation calculated that there were 25 million unoccupied bedrooms in the UK, i.e. about ten million homes' worth of bedrooms. All of this is great news for small, local builders and craftsmen, and will go down like a cup of cold sick with national land bankers like Taylor Wimpey, Redrow, Barratts et al."<br />
<br />
When challenged on such contradictions, most Homeys will usually just ignore you, but the more inventive will do DoubleThink and say <i>"Aha, you think you're so clever you LVTers, you think that it will increase the amount of development [which is not correct and is a secondary issue], but you are wrong, this is the wrong way to go about it, and actually if you want more development you should reduce taxes on land owners."</i> <br />
<br />
Which again throws up the contradiction that the Homeys want <i>less</i> new development as well as <i>lower</i> taxes on land. So why are they calling for the latter (which they do want) if they really believed it would lead to the former (which they don't want)? The only way to square this is to assume that they know perfectly well that <i>lower</i> taxes on land and subsidies thereto <i>reduce</i> the amount of new development, which is a win-win as far as they are concerned. Not that they'd ever admit it.<br />
<br />
The fact is, by and large, LVT encourages incremental improvements and is neutral on new construction. Planning laws (or absences thereof) will still be the main factor.<br />
<br />
The easiest way to explain why all these assumptions are wrong is to see LVT as a kind of 100% interest-only, non-repayable loan from the government to buy land, secured on the land and buildings only with no recourse to the borrower himself if there is negative equity. Once you grasp that, all the other objections melt away. <br />
<br />
<a href="" name="1"></a>1. The six taxes mentioned - Window Tax, Business Rates, SDLT, CGT, Community Infrastructure Levy and s106 agreements - are not LVT, so their impact is quite different<br />
<br />
a) The Window Tax was a tax on windows, so clearly, the number of windows went down. It did not change the amount of land available or the value thereof. <br />
<br />
b) Derelict buildings are exempt from Business Rates, so if you have no plans to rent out or improve your buildings, you are inventivised to let them fall derelict, often with a helping hand. If there were no such exemption, there would be no such incentive, and if the Rates were calculated on the rental value of the site alone (and not the buildings as well) there would be less disincentive to maintain and improve buildings.<br />
<br />
c) SDLT and Capital Gains Tax are <i>transaction taxes</i>, they depress the number of transactions. Planning fees, the Community Infrastructure Levy and s165 agreements are taxes on (new) construction, so depress the amount of new construction.<br />
<br />
d) All these taxes would be the among the first to be replaced by LVT, which tends to encourage optimum use of sites, be that actually using the existing building, selling it to somebody else or building on it. <br />
<br />
<a href="" name="1b"></a>1b. <i>"What if a developer has paid out under a s106 Agreement?"</i><br />
<br />
See Wiki for a brief explanation of <a href="http://en.wikipedia.org/wiki/Town_and_Country_Planning_Act_1990#Section_106">s106 Town & Country Planning Act 1990</a>.<br />
<br />
If in doubt, apply common sense. If a developer has paid cash or paid for specified expenditure not directly related to works on the site itself, that is to all intents and purposes a prepayment of LVT. If the developer of a site has incurred such expenditure in the past <i>and still owns the site</i>, then the value would be amortised over (say) thirty years from the year of payment, and the developer/owner of the site gets a credit/deduction of 1/30 of the amount for the remainder of the thirty years.<br />
<br />
For example, it is 2017 and a developer paid £300,000 (planning fees, SDLT, CIl and so on) in 20073, that gives an annual credit/deduction of £10,000 for the years 2003 to 2033. The first ten years have been used up and so for the next twenty years, the developer gets a £10,000 credit/deduction.<br />
<br />
<a href="" name="2"></a>2. <i>"Owners will have no spare cash to pay for improvements"</i><br />
<br />
Nonsense on at least four levels:<br />
<br />
a) If you are buying a building and it is in disrepair, you get the discount when you buy it which compensates you for the cost and hassle of doing it up once you've bought it. <br />
<br />
b) If you buy the building with an mortgage, that is no disincentive to keeping it in good condition. LVT is like an interest-only, non-redeemable, non-recourse mortgage, so is no disincentive to keeping it in good condition.<br />
<br />
c) The cost of maintenance and improvements includes a large element of VAT (and income tax, unless you do cash in hand) and those costs have to be paid out of your net earned income. If your net earned income is higher, VAT is gone and the tax which your builders have to include in the price to leave them with enough to live on is lower, then the overall affordability of maintenance and improvements improves dramatically. In real terms, the number of hours of paid work you need to do to earn the money pay for any particular job will fall by at least a third.<br />
<br />
d) By and large, people would rather live in a home in good condition. If you over-occupy, so that your earned income isn't enough to pay for the LVT (or interest on the interest-only loan) and the improvements, then you are in the wrong house. You can just trade down to somewhere you can afford, and somebody else willing and able to pay the tax will buy it from you. That's quite different to current rules, where people hang on to houses which are becoming increasingly dilapidated because there is no obvious holding cost.<br />
<br />
<a href="" name="3"></a>3. <i>" Construction companies will either go out of business or pass on the tax as higher selling prices"</i><br />
Caroline Lucas was harangued by somebody from the Home Builders Federation (or similar) <a href="https://www.youtube.com/watch?v=a0c6Q8BFWIM">on the radio</a>, who claimed that Land Value Tax would make building new homes unviable.<br />
<br />
She didn't actually rebut this with the obvious point, so here it is:<br />
<br />
From <a href="http://www.designingbuildings.co.uk/wiki/Residual_valuation_of_land">designingbuildings.co.uk:</a><br />
<br />
<em>Residual valuation is the process of valuing land with development potential.<br />
<br />
The sum of money available for the purchase of land can be calculated from the value of the completed development minus the costs of development (including profit).<br />
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The complexity lies in the calculation of inflation, finance terms, interest and cash flow against a programme time frame.</em><br />
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Please note - it is quite clear that the developer's costs do not push the selling price of the finished building <i>up</i>, that is fixed; the developer's costs push the purchase price of the land <i>down</i>!<br />
<br />
Here's a real life example:<br />
<br />
OVer ten years ago, I advised a company which was selling an acre of semi-derelict land in north London, they were unsure how much they'd get for it. Somebody from a larger homebuilder told me - blurted out in a meeting, really - that when they were buying land in that area, they'd pay up to £50,000 for each flat that they could build on it (it would be double that now).<br />
<br />
In round figures, each flat could be rented out for £7,000 a year, less costs = £6,000; they could be sold for £120,000; the pure build costs per flat were £50,000; and the developer expected a profit/contingency per flat of £20,000. <br />
<br />
That leaves £50,000 which the landowner gets under the "residual valuation" method. The developer has to finance that purchase somehow, so he ends up paying £3,000 or £4,000 a year in interest to his own financiers (bank, bond holders etc) for the duration of the build<br />
---------------------------------<br />
Now, what if the developer knows that for the duration of the build, he is going to have to pay full-on LVT for each flat/equivalent of £4,000 (net rent £6,000 less bricks and mortar allowance of 4% x £50,000)?<br />
<br />
1. Let us assume that the shift to LVT pushes down the selling price of the flat to £80,000.<br />
<br />
2. The builder will simply stick that into his calculations, deduct the £50,000 build costs, the £20,000 profit margin/contingency (the tax due on these elements would be much lower, so the £50,000 and required £20,000 would be lower, but by an unknown amount) and the £4,000 LVT he would have to pay (assuming project takes a year to complete) and offers (say) £6,000 per plot. <br />
<br />
3. The developer's profits are entirely unaffected. And as it happens, the £4,000 LVT he has to pay is a straight swap for the £3,000 or £4,000 interest he would have had to pay to finance the purchase of the land under current rules.<br />
<br />
4. The landowner has to accept the offer of £6,000 per flat; his alternative is paying [£4,000 x number of flats] each year for the privilege of owning a derelict site. In theory, there might be a flood of landowners literally giving away their brownfield sites.<br />
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5. Clearly, there will be marginal situations where the theoretical land value dips below zero (the finished selling price might be lower than £80,000 or the project might take much longer); so even if the developer is given the land for free, his profit margin of £20,000 will be so eroded that it's not worth the hassle.<br />
<br />
6. In that case, if the council wants the development to go ahead, it can simply waive the LVT for the duration of the build, or for the next one or two years (or whatever), pushing our developer back into the black. That will just be part of the usual negotiations and haggling between the developer and the planning department/local council (the LVT exemption is like a Section 106 payment, but in the other direction).Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com24tag:blogger.com,1999:blog-6365034639538623308.post-86216975086784218602013-01-17T20:40:00.002+00:002013-08-11T17:53:28.050+01:00L. LVT would make people live where they don't want to• If you increase the tax on inner city/urban/suburban/rural land, that will force land owners to over-develop<br />
• If you increase the tax on urban etc land, that will price people out and force them away (<a href=http://kaalvtn.blogspot.co.uk/2013/01/l-lvt-would-make-people-live-where-they.html#1>skip to article covering both points</a>)<br />
• Poor Widows will be forced to move away from their family and friends (<a href=http://kaalvtn.blogspot.co.uk/2013/01/l-lvt-would-make-people-live-where-they.html#2>skip to article</a>)<br />
• Millions of households will be uprooted and the country will descend into chaos (<a href=http://kaalvtn.blogspot.co.uk/2013/01/l-lvt-would-make-people-live-where-they.html#3>skip to article</a><br />
• Greedy developers will get planning permission for my land, forcing me to pay more (<a href=http://kaalvtn.blogspot.co.uk/2013/01/l-lvt-would-make-people-live-where-they.html#4>skip to article</a>)<br />
• The disappearing homes conundrum (<a href=http://kaalvtn.blogspot.co.uk/2013/01/l-lvt-would-make-people-live-where-they.html#5>skip to article</a>)<br />
<br />
There are infinite variations to these arguments of course. It's traditional to say <i>"If farmers had to pay LVT, they would be forced to abandon/sell off all their fields to [greedy] developers and the countryside would be concreted over"</i> (clearly this is not true, it all depends on <a href="http://kaalvtn.blogspot.co.uk/p/agriculture.html">how high you set the rate</a> and whether you grant planning permission).<br />
<br />
The argument has also been advanced that if the tax on inner city land is very high (and it would be), then land owners would be "forced" to build sky-high skyscrapers to try and collect enough rent to cover the tax, so we would all end up living in a giant tower block. Does that not contradict the first argument?<br />
<br />
<a name="1"></a>1. <i>"If you increase the tax on inner city/urban/suburban/rural land, that will force land owners to over-develop"</i> and <i>"If you increase the tax on urban etc. land, that will price people out and force them away"</i><br />
<br />
a) The arguments are starting at the wrong end. It is markets, i.e. tenants, owners and potential owners who decide what rental values in different areas are, taking all factors into account. And LVT is based on market rents. A tax not based on market rents is not LVT.<br />
<br />
b) So if people are living somewhere paying rent (and in economic terms, an owner-occupier is paying rent, he's just paying it to himself) then clearly the rent is not high enough to drive them away; the LVT does not increase the rent and so LVT cannot possibly drive people away <i>en masse</i> any more than rents do (although clearly it will tend to speed up the process whereby lower income people live in some areas and higher income people in others).<br />
<br />
c) We have established that LVT would have little impact on the amount of new construction, it would neither <a href="http://kaalvtn.blogspot.co.uk/2013/01/j-there-would-be-too-much-new.html">increase</a> nor <a href="http://kaalvtn.blogspot.co.uk/2013/01/k-there-would-be-not-enough-new.html">reduce</a> it to any significant degree, and planning and zoning laws will always trump LVT/market forces. <br />
<br />
d) LVT will only have an impact on sites which are chronically underdeveloped compared to neighbouring sites, so derelict and vacant sites will be brought back into use, and if that means building a new building, so be it. As long as a site is developed to something approaching its <i>optimum permitted use</i> then the owner thereof will be making a nice little profit. There is no pressure on him to do anything except keep his building well maintained.<br />
<br />
e) So there's no question of either of these nightmare scenarios happening.<br />
<br />
f) As we established in an <a href="http://kaalvtn.blogspot.co.uk/2013/01/f-lvt-is-attack-on-families.html#X">earlier footnote</a>, in any typical town, there is a close relationship between site rental values and build density. They are highest in the centre and fall, the further away from the centre you go. Therefore, the actual site rental value per home as you move outwards changes relatively little; for the same amount of money, you can live in a small flat in the centre; a small terraced house in the inner suburbs or a semi-detached in the outer suburbs. <br />
<br />
g) So the LVT for most homes in any particular town would also be surprisingly similar. Of course, there are big houses in inner suburbs, which would be very expensive, and small flat in the outer suburbs which would be very cheap; and of course there are "nice" and "grotty" areas and so on, that's a separate issue. So if the LVT per home is fairly similar, it wouldn't really change people's decisions on where to live very much. The same old trade off between convenience/no garden and less convenience/big back garden remains the same.<br />
<br />
<a name="2"></a>2. <i>"Poor Widows will be forced to move away from their family and friends"</i><br />
<br />
Of course it's always the Poor Widows, isn't it?<br />
<br />
Fact is they wouldn't be forced to move, they can choose to <a href="http://kaalvtn.blogspot.co.uk/2013/01/a-poor-widow-bogey.html#5d">defer and roll up the tax to be repaid on death</a>, even if house prices were to halve, we'd still be collecting 60% plus of the tax. So they only move if they decide that they want to pass on more of the value of their homes to their children rather than consuming that value themselves. To what extent the Poor Widows' heirs put pressure on them to trade down remains to be seen.<br />
<br />
Further, cases where the only home they will be able to find within their budget is far away from family and friends would only apply in a small minority of cases in the short or medium term:<br />
<br />
- if both they and their "family and friends" live in low tax areas, it doesn't apply. There'd no pressure to trade down and nowhere to trade down to.<br />
<br />
- if they live in a low tax area and their adult children live in a high tax area, then LVT wouldn't make any difference.<br />
<br />
- if they live in a high tax area and their adult children live in a low tax area, not a problem. They win on both sides of the equation.<br />
<br />
- if both they and their adult children live in a high tax area, then the Poor Widow can either move into a smaller home, cutting her tax bill in half, and/or she can ask her high earner adult children (who would be saving most tax under a flat income tax system) to pay her tax for her (which is much the same as allowing her to defer and roll up the tax). <br />
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In the long term, the whole issue would melt away: <br />
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Planning for LVT payments during retirement would just be part of normal retirement planning and people would get used to the fact that "their home is their pension" in a literal sense; it is the asset which is used to fund LVT expenditure during retirement.<br />
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And with a more balanced and stable economy (i.e. not one fuelled by credit bubbles, land speculation and over-consumption) and low and stable house prices, far fewer children would move away from their parents. There are two main reasons why this has happened:<br />
- if the parents live in an area where house prices have rocketed (London, south east and south west) then children can't afford to live anywhere near their parents;<br />
- if the parents live in an area where house prices are low, this is mainly because of the lack of job opportunities, so their children move elsewhere where they can find a job. <br />
These factors would be greatly reduced by an LVT/flat income tax system.<br />
<br />
<a name="3"></a>3. <i>"Millions of households will be uprooted and the country will descend into chaos"</i><br />
<br />
Having made three unrealistic assumptions on the basis of no information whatsoever, the extreme view is that there will be some sort of destructive internal migration, a game of musical chairs where millions end up on the wrong chair or on the floor.<br />
<br />
Yes, there will be some households who end up down-sizing and an equal number who end up up-sizing, which adds up to a general "right-sizing" which must be a good thing, it's like a man with size nine feet and a pair of size ten shoes swapping shoes with a man with size ten feet and size nine shoes, but never mind, the real question is, how many such households will there be?<br />
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The answer is <i>"not that many"</i>. The <a href="http://www.jrf.org.uk/publications/struggling-pay-council-tax-new-perspectives-local-taxation-debate">Joseph Rowntree Foundation</a> did some research and came up with the following table, showing the correlation between households by income and households by Council Tax band, which we can use as a rough and ready proxy for value of home and hence likely Domestic Rates bill:<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLYDod6DvVq4nfHQhLyzFgsjw2_aBAeSI1kcNcAoFH3mAvPsO4z6L1uw2f6kgh8zQe5m2VOY4xOBS7SvXy7h2GofBhJoI6_3G11afgfFCxGyIT19SWkrFZisZbB5ASQiO7Z3u0L0EbDAf_/s1600/JRF+council+tax+and+incomes.png" imageanchor="1" ><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLYDod6DvVq4nfHQhLyzFgsjw2_aBAeSI1kcNcAoFH3mAvPsO4z6L1uw2f6kgh8zQe5m2VOY4xOBS7SvXy7h2GofBhJoI6_3G11afgfFCxGyIT19SWkrFZisZbB5ASQiO7Z3u0L0EbDAf_/s640/JRF+council+tax+and+incomes.png" /></a><br />
Assuming two adults (and hence two personal allowances) per household...<br />
<br />
* eighty-one per cent of households, those above the horizontal black line, will be paying less in Domestic Rates than they did in Council Tax, as well as paying less in income tax. Nothing to worry about there.<br />
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* ten per cent of households, those in the top right-hand corner, will be paying less in Domestic Rates than they did in Council Tax <i>and</i> saving thousands or tens of thousands of pounds in income tax. Absolutely nothing to worry about there.<br />
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* nine per cent of households, those in the bottom right-hand quadrant, will be saving thousands or tens of thousands in income tax and paying thousands or tens of thousands more in Domestic Rates, most of them will end up better off and only a very few will be forced into penury, so not much to worry about there either.<br />
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* the whole debate seems to be focused on the ten per cent of households in the bottom right-hand corner, who will be paying more in Domestic Rates but not saving much in income tax. We can sub-divide these relatively few households into the following groups:<br />
- a third of them are pensioners, who can go for the deferment/roll-up/pay on death option.<br />
- some of them will break even anyway (income tax saving = Domestic Rates bill)<br />
- some will be able to take evasive action, like getting a better paid job, taking in a lodger, having their adult children live with them for longer etc.<br />
- some will be living in a house which is far too large for them, so they can halve their Domestic Rates bill by moving to a smaller home in the same area.<br />
- some are unemployed and claiming Housing + Council Tax Benefit. I'm all in favour of a welfare system that pays for the basic essentials, but I don't see any rationale for paying "private" landlords to house people in swanky areas, they can shape up or ship out.<br />
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So realistically, how many people will be <i>"cruelly forced to down-size"</i>? Maybe three or four per cent of all households?<br />
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And how many households will be chomping at the bit and ready and able to up-size? A third of those in the top right-hand corner, perhaps? So that's three or four per cent of households ready to trade up.<br />
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For sure, three or four per cent of all households is a million households, which sounds like a lot but that is normal annual turnover in the UK housing market, a million households move home every year anyway, the two categories largely overlap, so the net extra number of movements is barely a blip in the overall scheme of things.<br />
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Or are we really going to allow the vested interests to impose a tax system using three or four per cent of households as a human shield to impose a heinous and wicked tax system on the eighty per cent "above the line"?<br />
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<a name="4"></a>4. <i>"Greedy developers will get planning permission for my land, forcing me to pay more"</i><br />
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Developers are always "greedy", that's one of the rules.<br />
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It is a quirk of English planning law that you can apply for planning permission for somebody else's land, and one of the basic rules of LVT is that the tax is based on the site premium of the land <i>assuming optimum permitted use</i>, so in theory, this could happen and the Home-Owner-Ists fall over themselves to use this as a killer argument. <br />
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Funnily enough, I have only ever seen this as a hypothetical case. I have never actually heard of it happening to anybody, that they wake up to find a fat envelope on the door mat, full of blueprints and terms and conditions from the planning department explaining what the new building could be.<br />
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It would of course be a simple matter to restrict LVT up-ratings to cases where the owner himself has applied for more generous planning, but in reality, how often do developers apply for planning on somebody else's land without their knowledge or permission, and would it really be more common with LVT?<br />
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It could only happen in two basic scenarios:<br />
<br />
SCENARIO 1: There is a smallish bungalow on a single very large plot (which has a correspondingly low-ish tax bill, assuming this was the optimum permitted use so far), which is crying out to be replaced with a few houses or a small block of flats. In which case, why is this so terrible? For sure, one bungalow owner has the inconvenience of moving, but a few families get to live somewhere convenient, and the construction people get to make some money and create new wealth (buildings).<br />
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And how many such plots are there? Even if the developer gets the planning permission, the owner of the bungalow can still hold out for a ransom price for his bungalow, and he would (by definition) end up with plenty enough money to buy a different bungalow on a maybe slightly smaller plot, with a lower tax bill and a bit of spare cash for his time and trouble.<br />
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If you own a semi-detached house or a terraced house, you are pretty much insured against this happening. A developer can only squeeze out extra income if the existing house is in the top fifth of all houses by value and if it can be replaced at least three flats - and that's in an LVT-free world. We can safely assume that the council will increase the LVT bill accordingly if the development goes ahead; so the council can either turn down the planning application anyway, or it could nod it through but then (whether accidentally or on purpose) make it economically unviable by proposing "too much" additional LVT. In which case the planning application is withdrawn and no harm done.<br />
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Try for yourself with the <a href="https://www.zoho.com">ZohoSheet</a>:<br />
<iframe width="500" height="500" frameborder="0" scrolling="no" src="https://sheet.zoho.com/publish/markwadsworth/developers-decision"> </iframe><br />
<br />
SCENARIO 2: A developer is trying to buy up two or more adjoining plots in order to build something bigger. This is an absolute nightmare position for a developer to be in, as each individual plot owner can hold him to ransom and bump up their prices accordingly so that they bank the planning gain uplift and not the developer.<br />
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So let's assume the planning department grants the developer permission to build a new shopping parade and car park covering ten existing plots. By how much does the rental value of any of those plots increase? By not one penny; the rental value of one-tenth of a shopping parade is precisely £nil. So the <i>optimum permitted use</i>, being to leave it as housing, is not changed and the tax would not change.<br />
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<b>Furthermore</b>, even if each owner were charged to tax on one-tenth of the rental value of a shopping parade, who's to say that this is significantly higher than the rental value of one single house? It probably will be more, but only twenty or thirty per cent more. If the gain were larger than that, somebody else would have already built a shopping parade somewhere else in the vicinity.<br />
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Unlike the Homeys, I've actually looked into this. The car park at the top of my road is about twice as big as a normal residential plot, and the total income they get from parking charges is about the same as they'd get if they built two houses on it instead. If they were earning significantly less, then they'd build two houses on it. And if could earn more from a car park than from housing, then some of the newer houses would never have been built, there'd be another car park instead.<br />
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<b>Taking an extreme case</b>, Heathrow airport:<br />
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How much does Heathrow earn for BAA? Not quite clear, but it made <a href="http://www.bbc.co.uk/news/business-20120641">£110 million in the three months to September 2012</a> = £440 million a year, with far higher political risks than housing. <br />
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The airport covers 4.7 square miles = 3,100 acres, at a density of 10 homes/acre (low by London standards) = 31,000 homes, which you could reasonably rent out for £15,000 each a year = total income £465 million. Or BAA could flog off the land for easily £1 million/acre, they'd get £3.1 billion for it (minus the cost of digging up the tarmac. They can convert the passenger terminals to a shopping centre or something). And that is a stress and hassle free type existence, far simpler than running an airport with 70,000 employees and 70 million passengers and 400,000 aircraft movements etc. <br />
<br />
Have you never noticed that when new airports are built, they are built out of town? This is not just a safety thing, it is a land cost thing. Airports make less money per square yard of land than suburban housing, so they are built where the only alternative use is farmland, where the rental value of the land is negligible. Suffice to say, even if the local council went totally mad and granted planning for an airport to replace tens of thousands of houses, the LVT bill would not go up.<br />
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<b>And don't forget</b> that planning permission usually expires after three years (another man made law which could easily be changed). If the current owners and the developer haven't sorted things out within three years, the whole topic has died a death.<br />
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<a name="5"></a>5. <i>"The disappearing homes conundrum"</i><br />
<br />
This cracked logic comes from the vested interests, and is cheerfully perpetrated by the UK government.<br />
<br />
It goes like this: young people need homes; homes are expensive and they can't afford to buy, but they can afford to rent. Therefore they need landlords. So we have to encourage landlords (via tax breaks and subsidies) to invest in housing so that there are more homes for the priced-out young people to rent. If we had LVT (the opposite of a subsidy), then being a landlord will be less profitable, so there will be fewer homes to rent. Worse than that, some homeowners won't be able to afford the tax, so they will have to sell up and rent as well; so there will be more potential tenants chasing fewer homes and this will push up rents.<br />
<br />
So with fewer landlords, fewer homeowner and more tenants, homes will simply cease to exist and disappear from the system.<br />
<br />
The reality is this: young people need homes; homes are expensive because of all the subsidies to land ownership; so banks demand higher deposits, which only people who have already made nice capital gains on housing they already own can afford. It is physically impossible to "invest" in land, the land is just there. If we spent less money on buying land and more on buildings homes, we could afford to build more homes. If people can afford to rent, they are paying off the landlord's mortgage, so actually they can more than afford to buy. Even with LVT, being a landlord will still be profitable, the absolute cash profit net of tax and without subsidies will go down but the percentage return on capital is fixed, so prices will fall. If prices fall, then young people will be able to afford deposits again and will be able to buy. <br />
<br />
There will be the same number of people and the number of homes, or even more homes. If landlords decide to sell up, then they will sell to sitting tenants. If these tenants could afford to pay the income tax to pay for the subsidies and then pay the rent to cover the mortgage repayments on the inflated mortgage, they can easily afford the lower mortgage repayments and the tax on the land will be less than the reduction in tax on their income anyway (they win on both sides). And a homeowner can cease to be a homeowner by selling up and becoming a tenant, but he will either sell to a landlord or to another owner-occupier. The number of homes can't possibly go down, and even if not a single new home is built, the tax will encourage people to bring derelict and empty homes back into use.Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com0tag:blogger.com,1999:blog-6365034639538623308.post-69555351797161041542013-01-17T20:38:00.003+00:002013-06-12T22:14:13.524+01:00M. LVT is anti-free market• The government will effectively own all the land and thus own everything (<a href=http://kaalvtn.blogspot.co.uk/2013/01/m-lvt-is-anti-free-market.html#1>skip to article</a>)<br />
• Land use and land ownership are best left to the free markets (<a href=http://kaalvtn.blogspot.co.uk/2013/01/m-lvt-is-anti-free-market.html#2>skip to article</a>)<br />
• Landowners compete with each other and there is a free market in land (<a href=http://kaalvtn.blogspot.co.uk/2013/01/m-lvt-is-anti-free-market.html#3>skip to article</a>)<br />
• Landowners are doing us a favour by keeping some land out of use and/or deciding how it should be used (<a href=http://kaalvtn.blogspot.co.uk/2013/01/m-lvt-is-anti-free-market.html#4>skip to article</a>)<br />
<br />
<a name="1"></a>1. <i>"The government will effectively own all the land and thus own and control everything"</i> <br />
<br />
Nonsense on several levels:<br />
<br />
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.<br />
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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).<br />
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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. <br />
<br />
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?<br />
<br />
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.<br />
<br />
c) How is LVT worse than income tax?<br />
<br />
If it were true that LVT is "nationalisation of land" (it's not of course, it is nationalisation of <i>the rental value of</i> land), then income tax etc. is the nationalisation of labour, enterprise and capital.<br />
<br />
Only it's not, is it?<br />
<br />
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.<br />
<br />
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?<br />
<br />
<a name="2"></a>2. <i>"Land use and land ownership are best left to the free markets"</i><br />
<br />
Nonsense on several levels:<br />
<br />
a) Land is not and never can be a free market - it is a monopoly or a cartel (<a href=http://kaalvtn.blogspot.co.uk/2013/01/m-lvt-is-anti-free-market.html#3>see below</a>).<br />
<br />
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. <br />
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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.<br />
<br />
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.<br />
<br />
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?<br />
<br />
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.<br />
<br />
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. <br />
<br />
Conversely, the value of the plot in isolation might be very low or negligible. Is this not a massive distortion of the free markets?<br />
<br />
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: <i>"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?"</i><br />
<br />
<a name="3"></a>3. <i>"Landowners compete with each other and there is a free market in land"</i><br />
<br />
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. <br />
<br />
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.<br />
<br />
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 <a href="http://en.wikipedia.org/wiki/Price_discrimination#First_degree_price_discrimination">first degree price discrimination</a>. 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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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. <br />
<br />
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).<br />
<br />
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.<br />
<br />
<a name="4"></a>4. <i>"Landowners are doing us a favour by keeping some land out of use and/or deciding how it should be used"</i><br />
<br />
This is a fairly insane theory put about mainly by Faux Libertarians, the argument goes thusly:<br />
<br />
- 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. <br />
<br />
(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 <i>employees</i> or <i>sub-contractors</i> (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%?) <br />
<br />
- 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.<br />
<br />
These arguments are nonsense and cancel each other out anyway.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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. <br />
<br />
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.Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com0tag:blogger.com,1999:blog-6365034639538623308.post-22050198785256140002013-01-17T20:37:00.001+00:002018-09-13T18:32:22.215+01:00N. Valuations are impossible• Valuations are impossible, subjective, can’t be decided by government (<a href="http://kaalvtn.blogspot.co.uk/2013/01/n-valuations-are-impossible.html#1">skip to article</a>)<br />
• The Army Of Surveyors (<a href="http://kaalvtn.blogspot.co.uk/2013/01/n-valuations-are-impossible.html#2">skip to article</a>)<br />
• Endless appeals, would cost more to collect that it raises (<a href="http://kaalvtn.blogspot.co.uk/2013/01/n-valuations-are-impossible.html#3">skip to article</a>)<br />
• What about leaseholds and freeholds? (<a href="http://kaalvtn.blogspot.co.uk/2013/01/n-valuations-are-impossible.html#4">skip to article</a>)<br />
• What about unregistered land? (<a href="http://kaalvtn.blogspot.co.uk/2013/01/n-valuations-are-impossible.html#5">skip to article</a>)<br />
• What about social housing? (<a href="http://kaalvtn.blogspot.co.uk/2013/01/n-valuations-are-impossible.html#6">skip to article</a>)<br />
• Not all flats in a block are worth the same (<a href="http://kaalvtn.blogspot.co.uk/2013/01/n-valuations-are-impossible.html#7">skip to article</a>)<br />
• What about protected tenancies? (<a href="http://kaalvtn.blogspot.co.uk/2013/01/n-valuations-are-impossible.html#8">skip to article</a>)<br />
<br />
Let us get this clear from the off. The tax is <i>not</i> based on absolute selling prices from time to time, it is based on the "annual site premium" of any site,(although relative selling prices prior to the tax being introduced are a good enough proxy for rental values to get the ball rolling) which is quite simply the difference between:<br />
- The total annual rental value of any plot of land and buildings on it (or permission to build on it), and <br />
- The rental value of very similar land and buildings in the cheapest area (provided that those buildings can actually be rented out at all).<br />
<br />
We already have perfectly good records for commercial land and buildings, which are used for assessing rateable values for Business Rates, so we need not concern ourselves further with those.<br />
<br />
Residential land and buildings are even easier than commercial. I have explained how it would all work on a <a href="http://kaalvtn.blogspot.co.uk/p/valuations-and-potential-lvt-receipts.html">separate page</a> (it's surprisingly easy to do).<br />
<br />
<a href="http://www.blogger.com/null" name="1"></a>1. <i>"Valuations are impossible, subjective, can’t be decided by government."</i><br />
<br />
a) No they're not, they are very easy to establish for 99% of homes. <br />
<br />
b) The site premium is not "decided" by the government, all the Valuation Office Agency does is observe what market rents are and allocates homes to bands accordingly. They are perfectly capable of doing this for Business Rates, and the Council Tax banding exercise went without too much of a hitch, as did the fairly recent full revaluations in Wales and Northern Ireland.<br />
<br />
c) It's like saying <i>"If we had income tax, then the government would be able to decide what your taxable income is."</i> Ignoring silly tax breaks, by and large it is you, operating within the constraints of supply and demand, who decides what your taxable income is; the government then levies a tax on that resulting figure.<br />
<br />
The problem with the existing system is that:<br />
- first the government decides whether a business is VAT-able or not; if it is, the government takes an arbitrary percentage of your gross profits in VAT; <br />
- when salaries are paid out, and the government takes arbitrary percentages in income tax and National Insurance; <br />
- of what's left the government takes an arbitrary amount in corporation tax; <br />
- when a company pays dividends then some shareholders have to pay an abitrary amount in higher rate income tax. <br />
- and the government might then give individuals an arbitrary amount of money back for transferring money into favoured schemes (pensions) or take away a further arbitrary amount of money in benefits withdrawal. <br />
<br />
At each stage, there is a pseudo-scientific statutory method of working out a precise arbitrary percentage of a large number of precise but ultimately arbitrarily chosen large amount. The actual effective tax rate can thus be anything between negative and over one hundred per cent, with an average marginal rate of about fifty per cent.<br />
<br />
It is far better to have a single layer of tax levied at a high rate on a reasonably accurately assessed lower amount, i.e. LVT, ultimately, LVT is far less arbitrary.<br />
<br />
d) Values are not "subjective" either any more than the price which any supplier charges is "subjective". An airline doesn't know or care exactly <i>why</i> any particular passenger on any particular flight decided to fly <i>where</i> he did and <i>when</i> he did. The airline just charges the highest price it thinks it can get away with and still have a fairly full flight. If enough people are willing to pay it, then that is the market value of that service.<br />
<br />
e) Most people will be perfectly willing and able to pay the LVT, and by simply paying it, that sends a signal that the tax was not "too high". And yes, of course there will be some home owners who decide that they'd rather trade down and save some money, but there will be plenty of others who'd like to trade up. The selling price of homes will adjust to whatever the parties think is a fair net payment for swapping places.<br />
<br />
f) Once the tax is in place, the selling price of houses will be the new correct market price taking the tax into account. Similarly, the tax will always be the correct amount of tax, taking the selling price of houses into account.<br />
<br />
<a href="http://www.blogger.com/null" name="2"></a>2. <i>"The Army Of Surveyors"</i><br />
<br />
Compare and contrast: if the government wants to find out how much you earn, it has to employ people to do a lot of snooping, they have to see your payslips, employment contract, bank statements etc. Even with the force of the law on their side, people can still cheat. Most don't, because they can't be doing with the hassle of an investigation, but they would if they could. And these calculations have to be done from scratch every month, every quarter and every year. Last year's turnover, wage bill, income or profits are only a very rough guide to this year's.<br />
<br />
In contrast, how difficult is it to establish the site premium of any home? Very easy indeed. Once all homes are valued and banded, then it is an easy matter to observe how rents and selling prices develop and index homes in different areas up or down accordingly, every year is an incremental exercise only.<br />
<br />
There is also absolutely no need for internal inspections, that goes against the whole point of the tax!<br />
<br />
The site premium depends on where a plot is, what sort of planning permission it has and how big it is, plus or minus a few external factors (like being next to a mobile phone mast), that's all. And HM Land Registry, the Valuation Office Agency and local planning departments already hold 99% of this information. <br />
<br />
The point is that if the average total rent for generic 3-bed semi-detached houses in Area Such-and-such is £10,000 a year and the total rent for similar generic 3-bed semis in the cheapest zero baseline area is £4,000 a year, then the site premium in Area Such-and-such is £6,000.<br />
<br />
All generic 3-bed semi detached houses would be allocated to Council Tax Band D the tax on Band D homes in the zero baseline area would be close to £nil (by definition) and the tax on Band D homes in Area Such-and-such would be £6,000 a year (or a percentage thereof) and no back chat. The tax is the same for a semi which is in tip-top condition with brand new kitchen and conservatory as it is for one in the same area with no central heating and an outside toilet.<br />
<br />
<a href="http://www.blogger.com/null" name="3"></a>3. <i>"There will be endless appeals, the tax will cost more to collect that it raises."</i><br />
<br />
Again, nope.<br />
<br />
In the real world, the UK has Business Rates, which is a lot like LVT but the valuations are more complicated because they take the bricks and mortar into account and Council Tax, which puts homes into Bands..<br />
<br />
The system proposed <a href="http://kaalvtn.blogspot.co.uk/p/valuations-and-potential-lvt-receipts.html#4">here</a> is to adapt and adopt the Council Tax system, so all similar homes are in the same Band, and all homes in a Band in an area have the same tax bill. A lot of people might appeal against the initial Banding if they can show that their home/plot has the same or a lower site premium than homes/plots in a lower band, in which case some homes/plots will be moved down a band (and others up a band). <br />
<br />
Once homes/plots have been allocated to Bands, there is little need for homes to be shifted between Bands. The LVT due for all Bands in each area will be indexed up or down for changes in local average rents.<br />
<br />
As to the cost, even die-hard Home-Owner-Ist Eric Pickles admitted that a full Council Tax rebanding would cost <a href="http://www.dailymail.co.uk/news/article-2234611/REVEALED-Secret-new-mansion-tax-plan-hammer-1m-homeowners.html">a mere £10 per home</a>. His other claims in the linked article are quite simply ouright lies:<br />
<br />
<i>He also says a revaluation would cost around £260 million, see ‘snoopers’ going into homes to revalue them, and take three years to implement fully</i><br />
<br />
and we have the experience of the original Council Tax valuations/Banding and the more recent revaluations in Wales and Northern Ireland to prove it.<br />
<br />
In detail: <br />
<br />
<i>The work of <a href="http://www.voa.gov.uk/corporate/About/WhatWeDo.html">the VOA</a> encompasses: <br />
<br />
* compiling and maintaining lists of rateable values of the 1.7 million non-domestic properties in England, and the 100,000 in Wales, to support the collection of around £25 billion in business rates; [that's an average Business Rates bill of £14,000]<br />
<br />
* compiling and maintaining the lists of council tax bandings of some 23 million domestic properties in England and 1.3 million in Wales, to support the collection of around £26 billion in council tax;</i><br />
<br />
According to page 66 of their <a href="http://www.voa.gov.uk/corporate/_downloads/pdf/AnnualReport2011-2012.pdf">Annual Report 2011-12</a>, they have just under 3,000 employees keeping all those valuations up to date.<br />
<br />
Under proper LVT, valuations for commercial land and buildings would be a lot simpler but valuations of residential would have to be a bit more sophisticated because there would be more bands (at least twenty or thirty), broadly speaking the workload wouldn't change much (it can all be computerised, everything can be indexed up from year to year, and so on). <br />
<br />
The VOA's total running costs including salaries, IT and so on are about £200 million a year, i.e. 0.4% of tax collected; and only about two or three per cent of Business Rates and Council Tax go uncollected. That's not absolutely brilliant, but far, far better than for any other taxes (collection costs approx. 1% and evaded and unpaid taxes about 10%).<br />
<br />
The Valuations Tribunal deals with appeals against Business Rates and Council Tax valuations. There were 180,000 appeals against Business Rates valuations in 2011-12 (that's one-in-ten valuations, but three-quarters were agreed within the year) and 2,040 appeals against Council Tax bandings (that's one-in-twelve thousand bandings), see page 7 of their <a href="http://www.valuationtribunal.gov.uk/Libraries/Publications/VTS-Annual-Report-11-12.sflb.ashx">Annual Report 2011-12</a>. The Tribunal employs about 80 people.<br />
<br />
<a href="http://www.blogger.com/null" name="4"></a>4. <i>"What about leaseholds and freeholds?"</i><br />
<br />
The connoisseur then advances this argument, which means that they have ignored Rule One, that the tax is on the annual site premium or ground rent.<br />
<br />
With blocks of flats, we often find that there is a freehold and several layers of leaseholds before we get to the real leasehold, the one that gives exclusive possession in exchange for the next ... years in exchange for payment of ground rent to the next leaseholder up, who pays ground rent to the leaseholder above him all the way up to the freeholder, who just collects.<br />
<br />
The rental value and hence site premium of the leasehold flats (level 1) is easily established, and if they have to pay £100 ground rent each to their immediate superior leaseholder (level 2), then the level 1 LVT assessments are knocked down by £100. <br />
<br />
The leaseholder at level 2 thus has [number of flats] x £100 ground rent = income and pays [random amount] to the leaseholder at level 3. If the level 2 leaseholder receives more than he gets, the net income is what is liable to tax (at up to 100%). If a leaseholder decides it's not worth the hassle of collecting it, merely to pay most or all of it over in LVT, then he is free to waive it, and the LVT assessments on the flats go up by £100 a year each.<br />
<br />
<a href="http://www.blogger.com/null" name="5"></a>5. <i>"What about unregistered land?"</i><br />
<br />
The notion that we can't have LVT because there is so much unregistered land is another myth.<br />
<br />
a) It's not the land which is unregistered as such, it's the <i>owner</i> who hasn't bothered to register himself. Either way, this does not stop the land being assessed to tax just like any other land; the valuations and banding are quite independent of who owns it and whether he or somebody else occupies it - we manage to assess Council Tax and Business Rates on 'unregistered land' without too much of a hitch.<br />
<br />
b) Even if it were true (which it isn't), this is an irrelevant consideration, or else they could have opposed the introduction of the national income tax two centuries ago on the basis that there was no official register of how much people earn. Working out who owns (earns) what is part and parcel of any system of taxation of rental values (or incomes).<br />
<br />
c) It is quite true that back in 2005, HM Land Registry's Strategic Plan (which I can no longer track down online) said that half of land <i>by area</i> was as yet unregistered, but that they hoped to have full registration by 2012.<br />
<br />
As it happens...<br />
<br />
d) By 2012, HM Land Registry had completed registration of <a href="http://www.landregistry.gov.uk/announcements/2012/registered-land-covers-more-than-80-per-cent-of-england-and-wales">over eighty per cent</a> of land, and if they keep going at this rate, they will have full registration in four or five years.<br />
<br />
e) On an administrative level, this was pretty irrelevant, as the unregistered land was largely agricultural land, the total rental value of which is about £2 billion a year, as against the rental value of residential and commercial land which is over £230 billion a year (and which would be much higher than that if earned income, output and profits were not taxed).<br />
<br />
f) All this residential and commercial land is already registered for <a href="http://www.voa.gov.uk/cti/InitS.asp">Council Tax</a> or <a href="http://www.2010.voa.gov.uk/rli/">Business Rates</a> purposes, even if it is not registered at HM Land Registry. So we can run Council Tax and Business Rates perfectly well, even though the owners of some bits of land are not registered with HM Land Registry, so we can run LVT without every owner being registered. HM Land Registry also runs a separate registry for mortgages secured on unregistered land.<br />
<br />
g) Even if valuable urban land is not even registered for Council Tax or Business Rates (how, exactly?), then it is still physically there and shows up as a blank on HM Land Registry's computerised maps. So what "unregistered" means is that HM Land Registry don't officially know who the owner is. <br />
<br />
In which case, the LVT bill gets sent to the occupants (just like with Business Rates and Council Tax). If they are the owners, they pay it. If they are tenants, it's their choice whether to pay or not, or to tip off the council as to who their landlord is. If the tax doesn't get paid, despite demands being issued, i.e. if the plot is unoccupied, then under general English law, the land can be obtained under a court order and sold to cover the debts, and under English land law (different in Scotland, I believe), if the owner doesn't come forward for twelve years, the title lapses and he loses ownership anyway.<br />
<br />
h) There is a rough and ready parallel register for agricultural land called the <a href="http://rpa.defra.gov.uk/rpa/index.nsf/0/57EB5CADAD0BFAD580256F72003D47AE?Opendocument">Rural Land Register</a>:<br />
<br />
<i>All land must be registered on the RLR in order to be eligible for payments under the Single Payment Scheme (SPS), the Environmental Stewardship Scheme (ES) or the English Woodland Grant Scheme (EWGS)."</i><br />
<br />
i) So to the extent that we wanted to go to the hassle of collecting a billion or two from agricultural land (as long as they pay the full tax on the areas used for buildings, that is quite enough, actually), we can base it on what the RLR says. The subsidies used to be based on how good the land was, so the payments for owning arable land was much higher than for marginal land used for forestry. It'll be very interesting to see how many landowners start trying to explain that their prime arable land of ten years ago is now so degraded that it can only be used for forestry or for grouse shooting, for which the rental value is £5 or £10 per acre per year.<br />
<br />
<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="6"></a>6. <i>"What about social housing?"</i><br />
<br />
a) This requires no special rules whatsoever, as rents in social housing (local council or Housing Association), like all rents by definition, include a payment for the bricks and mortar value and a payment for the site premium. Any rents received in excess of the bricks and mortar cost is to all intents and purposes LVT. It seems to be bureaucratic madness for local councils/Housing Associations to collect two quite separate sums of money from tenants, the rent itself and the council tax (each with their own earmarked means-tested benefits) instead of the council/Housing Association just collecting a single, all-inclusive figure. <br />
<br />
b) Whether there should be an obligation on local councils to provide affordable housing and how high the rents should be are separate topics. <br />
<br />
c) One thing is clear though, it is another layer bureaucratic madness for social housing providers to demand average rents of £83 per week and for another part of the government, the Department for Work and Pensions to then pay up to two-thirds of the rent via Housing Benefit. Figures from the <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/78793/EHS_Headline_Report_2011-2012.pdf">DCLG English Housing Survey 2011-12</a>. It would make more sense just to set the headline rents at however much the tenants are willing and able to pay (which can be netted off with a tenant household's personal allowance/Citizen's Income entitlement). If that's only £30 a week per home in some areas and £250 a week in others, then so be it. <br />
<br />
d) Remember that the LVT proposed here is a national tax, just like Business Rates. Councils would be allowed to keep a certain percentage of what they collect locally (approx. twenty per cent) and the rest would be pooled nationally. So there are two separate cash movements: from tenant to social housing provider, and from the social housing provider to the national pool. The simplest approach would be for social housing providers to have to pay 80% of the notional full amount of LVT relating to their housing into the national pool (i.e. the full amount less the 20% which can be retained locally) and to leave them to maximise receipts from tenants as far as possible. By and large, any excess of rents collected over and above the bricks and mortar cost will be the "site premium", which in lower-income areas or on less desirable estate will be very low or zero.<br />
<br />
e) While the whole aim of the tax system proposed here is to move away from taxation of incomes; and the aim of the welfare reforms proposed here is to move away from income- or asset-based means testing, it has to be accepted that there are people with low or irregular incomes for whom social housing is the only realistic option. In such cases, it would make sense to set rents at a certain percentage of earned income, so that people automatically pay more when they are earning and less when they are not. <br />
<br />
f) In most cases, an additional "income tax" on social tenants of up to about 25% of earned income (collected via PAYE) would mean that the total rents actually collected from social housing (headline rents minus Housing Benefit) are about the same as they are now (but with a lot less adminstrative faff). This might lead to a greater demand for social housing and longer waiting lists in some areas, in which case social housing provider has to make the same decision as any other supplier: either increase the supply or increase the rents (or the percentage of earned income to be paid in rent).<br />
<br />
<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="7"></a>7. <i>"Not all flats in a block are worth the same"</i><br />
<br />
This is quite true. <br />
<br />
a) But to the outside world, it makes no difference who of the various people going through the same front door lives on the top floor and who lives in the basement. While some are getting slightly more benefits than others from the building itself, by and large, they are all getting the same benefits from the location, i.e. they all have the same work or leisure opportunities, they all have the same access to transport links and so on.<br />
<br />
b) If a block consists of 1, 2 and 3-bedrooom flats, then the LVT could be apportioned according to the relative interior area of each flat.<br />
<br />
c) Ultimately, it is up to the owners of the various flats to sort out between themselves. One possibility would be a self-assessment/auction process: each owner writes down how much rent he would be prepared to pay to occupy each flat (sight unseen). If the highest offer for your flat is more than you are willing to pay, then you and he swap places and the LVT to be paid is adjusted up and down accordingly.<br />
<br />
<a href="https://www.blogger.com/blogger.g?blogID=6365034639538623308" name="8"></a>8. <i>"What about protected tenancies?"</i> <br />
<br />
a) For an explanation of what protected tenancies are, see <a href="http://england.shelter.org.uk/get_advice/renting_and_leasehold/private_tenancies/regulated_tenancies">Shelter</a>. Basically, tenants who moved in before 1989 and had the right sort of rental agreement are still paying whatever rent they were originally paying, which in today's money is to all intents and purposes nothing. So the selling price of a home with a sitting protected tenant is usually only about half of a vacant home (all depending on how old the tenant is and what the chances are of another household member having the right of succession). And such home are usually in a miserable state of repair.<br />
<br />
b) Rough justice says that the LVT has to be paid by the tenant, as he is getting the benefit of the location (and the landlord certainly isn't), but then again most such tenants are relatively old, so we are back into the Poor Widow Bogey. It appears that there are <a href="http://www.guardian.co.uk/money/2012/jun/01/fair-rent-tenants-sitting-comfortably">only 100,000</a> of these tenancies left, so it's hardly a big issue is it?Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com0tag:blogger.com,1999:blog-6365034639538623308.post-68196532542839867322013-01-17T20:36:00.002+00:002014-11-12T16:07:31.601+00:00O. Land values are real capital or wealth• Land is just capital like any other kind of capital (<a href="http://kaalvtn.blogspot.co.uk/2013/01/o-land-prices-are-real-wealth-or-capital.html#1">skip to article</a>)<br />
• House prices will plummet and wealth will be destroyed (<a href="http://kaalvtn.blogspot.co.uk/2013/01/o-land-prices-are-real-wealth-or-capital.html#2">skip to article</a>)<br />
• House prices will plummet and millions will be trapped in negative equity (<a href="http://kaalvtn.blogspot.co.uk/2013/01/o-land-prices-are-real-wealth-or-capital.html#3">skip to article</a>)<br />
• House prices will plummet and banks will go bankrupt (<a href="http://kaalvtn.blogspot.co.uk/2013/01/o-land-prices-are-real-wealth-or-capital.html#4">skip to article</a>)<br />
• "Banks pay lots of tax. Without them, the country will go bankrupt" (<a href="http://kaalvtn.blogspot.co.uk/2013/01/o-land-prices-are-real-wealth-or-capital.html#5">skip to article</a>)<br />
• House prices will plummet and the tax base will disappear (<a href="http://kaalvtn.blogspot.co.uk/2013/01/o-land-prices-are-real-wealth-or-capital.html#6">skip to article</a>)<br />
<br />
<a href="" name="1"></a> 1. <i>"Land is just capital like any other kind of capital"</i><br />
<br />
No it's not. That's just brainwashing.<br />
<br />
First we have to distinguish between selling prices and rental values. Rental values are merely a measure of scarcity of land at any particular location, i.e. anywhere with that particular combination of work/leisure opportunities. Rents are pure monopoly (or cartel) income, and no matter how much land is divided up or how widely it is held, those are still shares in a monopoly. <br />
<br />
Consider: a utility company with a monopoly of supply is privatised and shares are freely traded and widely held. The underlying asset is a monopoly. However dispersed the ownership is, it is still a monopoly. And if you want to own shares in a utility company, you can only buy them from somebody who already owns shares in that monopoly (a cartel). So when you buy shares, you are paying a premium to join the cartel which owns the monopoly (and itself earns a premium from having the monopoly). Buying land is no different.<br />
<br />
a) Selling prices are merely the capitalised value of rental values, i.e. the rents which the owner can collect or enjoy himself, net of tax. My workings tell me that the discount rate being used is (at present) about 3%, so land with a site premium of £10,000 a year sells for £330,000 or thereabouts (£10,000 ÷ 0.03 = £333,333) If the house on that site costs £100,000 to build, the total price is £430,000. The house is real capital (the cost in man hours and materials to replace it), the land value isn't.<br />
<br />
For example, if interest rates rise and the discount rate increases to 4%, the selling price of the land is now only £250,000. <br />
Q: Where did the other £80,000 go? <br />
A: Nowhere, it was never there in the first place. The purchaser took a gamble on interest rates not going up and lost. The bank won. <br />
<br />
Q: What is the source of wealth for the bank's winnings?<br />
A: The purchaser's earnings. He'd have been earning that money whether he took the bet or not.<br />
<br />
Q: Has the nation as a whole become richer or poorer? <br />
A: Neither nor. Swings and roundabouts. Net savers are happy because they have higher incomes, net borrowers are unhappy. Land purchasers are happy because land is cheaper, land sellers are unhappy etc. Overall, there is a small marginal gain.<br />
<br />
b) If you took out a large mortgage to buy that house and prices fall, then oo-er, you soon notice that the land value was not real but find out to your cost that the debt very much is, and your mortgage payments cost <i>more</i> than it would have done to rent the place.<br />
<br />
c) Ultimately, only rental values are real (and that is what the banks tap into). And what are rents? Do they add to wealth or merely shift wealth from one group to another? The landlord cannot collect more wealth that his tenants can crate, minus their basic minimum living costs.<br />
<br />
d) In the case of owner-occupation, no cash changes hands but the owner-occupier derives a benefit and thereby places a burden on everybody else. Once the best sun-loungers by the pool have been taken, everybody else has to sit further back, and some people will end up having to sit on the floor or going elsewhere.<br />
<br />
e) Or imagine that the local council sold off the entire road and pavement in front of your house to a private infrastructure fund. From now on, you have to pay them for the privilege of crossing their land between your house and the nearest "free" public road. What sort of toll can they charge you for this? Well, pretty much the entire location premium of your house, even if that is thousands or tens of thousands of pounds per year. Maintaining the road and street lighting costs them tuppence ha'penny and they make a handsome income. Even though the infrastructure fund can show that land as an asset in its books and derives income from it, that is matched by the fall in value of your land. No net wealth has been created, has it? <br />
<br />
<a href="" name="2"></a> 2. <i>"House prices will plummet and wealth will be destroyed"</i><br />
<br />
No, because land selling prices are not wealth, see above, and to a large extent they are merely the flip side of a credit bubble. Did people all become wealthier during the last house price bubble, which was pretty much a global phenomenon? A minority did, but by and large, people are now worse off: older people have been tricked into over-consuming (mortgage equity withdrawal) and under-saving, all recent purchasers are saddled with bigger mortgage debts, and younger people are completely screwed. They have a choice between taking out a huge mortgage or paying rent for decades.<br />
<br />
On a far more mundane level, what if house prices had stopped increasing around the year 2000? To say that a halving of house prices is a destruction of wealth we must also say that when the government sacrifices huge chunks of the economy to propping up house prices it creates wealth, which cannot possibly be true. <br />
<br />
If my parents had known when they bought their house for £2,000 in the 1960s that they could sell it £100,000 thirty-odd years later, would they have made the decision to buy? Yes. Would it still be a good investment if they knew that they would be able to sell it for £100,000 fifty years later? Also yes. Would they still have made that investment and been happy with it if they'd know its potential selling price would rise from £2,000 to £200,000 and then fall back to £100,000? Yes. The middle bit was never real money as they stayed living there. <br />
<br />
And if somebody bought a house in 2000 and the potential selling price stayed the same for ever, would they be happy with their purchase decision? Yes of course, it still wouldn't have been a bad investment. What if that person had completely ignored every single article about house prices, until after LVT is introduced and notices that his house can still be sold for as much as he paid for it but that his overall tax bill had gone down, why would that person be any poorer or less wealthy?<br />
<br />
<a href="" name="3"></a> 3. <i>"House prices will plummet and millions will be trapped in negative equity"</i> <br />
<br />
It makes for a great sounding headline, but it's just the Home-Owner-Ists shedding a few crocodile tears for recent buyers while panicking that the lovely house price cash machine will stop spewing out the free money and that, Heaven forfend, they might have to start paying something back.<br />
<br />
Fact is, before we worry about negative equity, let's look at the time it takes to pay off a mortgage. Please refer to the <a href="https://www.zoho.com/">Zoho sheet</a> on the <a href="http://kaalvtn.blogspot.co.uk/p/tax-calculator.html">Tax Calculator page</a>. <br />
<br />
The default figures are for a typical recent purchaser household with a large mortgage, i.e. a couple on median male and female full time earnings, two children in a £200,000 home. They would pay £13,000 a year less in tax. That can go towards paying off their mortgage.<br />
<br />
Let's assume that they have an 80% mortgage (£160,000) at 3%, repayable over 20 years. That currently costs them £896 a month. If they put the whole of that £13,000 towards paying off the mortgage - and assuming that house prices fell by half (they'd fall by nowhere near that, of course), they will be out of nequity within three to four years and will have paid off their mortgage in full within seven or eight years.<br />
<br />
After that they are £24,000 a year ahead of the game (no more mortgage, much less tax) for the rest of their working lives.<br />
<br />
You can enter your own figures and see what sort of results you get.<br />
<br />
The other point is that banks could simply be made to write off all nequity. Because of the fairly straight line distribution of mortgages by loan-to-value, the amount which banks would lose is surprisingly small. Even if house prices were to fall by half (wild exaggeration), banks would have to write off about 25% of mortgage assets, which is about 15% of their total financial assets, which is easily made good with debt-for-equity swaps.<br />
<br />
This doesn't mean that banks will actually lose any future income, as they can just bump up interest rates. So banks are currently collecting 3% interest on £1,200 billion mortgages = £36 billion income. If mortgages are written down to £900 billion and interest rates increased to 4%, monthly mortgage repayments stay much the same and banks' interest income is much the same, so what's the problem?<br />
<br />
Also remember that nequity is largely a psychological thing. It's just not nice to have a mortgage larger than what your house is worth and banks make it difficult for you to move. Well that's for them to sort out, isn't it?<br />
<br />
<a href="" name="4"></a> 4. <i>"House prices will plummet and banks will go bankrupt "</i><br />
<br />
Again, it's a great sounding headline but it's simply not true. <br />
<br />
a) Let's start with those recent purchasers for whom the Homeys were shedding crocodile tears in the section above. If we assume reasonably sensible purchasers took out mortgages of no more than four times salary and have been keeping up the repayments on a twenty-five year mortgage, then even if house prices were to halve immediately under LVT (which they wouldn't) <i>and</i> the underwater amount of all mortgages were written off, the total write off would be only 10% of all mortgage debt (about £120 billion out of £1,200 billion). Such a write-off is unnecessary as it will be recent purchasers who make the biggest overall tax savings, but hey, it'd be nice to get one over those private rent collectors, the banks.<br />
<br />
b) Even if we take all mortgage borrowers, including those who have constantly be remortgaging upwards to finance over-consumption, the figure is not that dramatic. Only half of houses have mortgages them and there's a fairly straight line distribution of loans-to-value, i.e. a tenth of borrowers have equity of 10% or less; a tenth have equity of 11% to 20% and so on. <br />
<br />
So even if house prices were to halve (which they wouldn't) then only a quarter of all mortgage debt would be underwater, and even if all borrowers in negative equity were to lose their jobs, default and declare themselves bankrupt, and the banks were to repo all such houses and sell them (all highly unlikely assumptions), then the total loss to the banks would be no more than a quarter of all their residential mortgage assets (£300 billion out of £1,200 billion).<br />
<br />
c) UK banks claim to have total assets of £6,000 billion or something, so that £120 billion or even the £300 billion is a drop in the ocean, and nothing which can't be sorted out with debt-for-equity swaps. Ordinary depositors would not lose a penny. <br />
<br />
<a href="" name="5"></a> 5. <i>"Banks pay lots of tax. Without them, the country will go bankrupt"</i><br />
<br />
Again, not true. <br />
<br />
a) The total taxes borne plus taxes collected by the financial services sector (mainly PAYE, with bits of corporation tax, Business Rates, irrecoverable VAT, Stamp Duty and so on) is in the order of <a href="http://www.cityoflondon.gov.uk/business/economic-research-and-information/research-publications/Documents/research-2012/Total_tax_Contribution_OnlineVersion_PDF.pdf">£63 billion</a>, allegedly, about one-tenth of all tax receipts (hardly surprising as financial services' gross income is about one-tenth of GDP, an alarming figure in itself).<br />
<br />
b) Beyond a certain level, and we are way past that level, banks do not add to GDP, they reduce it. If the bankers consumed less of our wealth, then the economy would do better and the extra tax receipts from the rest of the economy would more than make up for the loss from banking.<br />
<br />
c) The crude analogy is crime. Let's assume that we semi-legalised burglary and taxed licensed burglars at 50% of their ill gotten gains, the amount of tax they pay would be quite significant. But burglary is bad for the economy. Would those people who are crying out for burglary to be made illegal again be shouted down on the basis that burglars are paying tens of billions in tax? <br />
<br />
d) And collecting tax from banks is easy, you just increase <a href="http://www.hmrc.gov.uk/budget-updates/autumn-tax/bank-levy-manual.pdf">the bank asset tax</a> rate to whatever is the revenue maximising rate. That rate is probably about 2% per annum (on UK related lending only, obviously), being the spread between lending and deposit rates which banks can earn in their sleep from dull and boring mortgage lending and taking deposits.<br />
<br />
e) The advantage of taxing their "rental income" via a bank asset tax over taxing their stated profits via corporation tax/PAYE is that it incentivises them to get into more profitable lending, such as lending to businesses. The effective tax rate on more profitable, risky and productive lending will be correspondingly lower and their retained profits correspondingly higher. <br />
<br />
f) Even if bank balance sheets fell by three-quarters, we'd still be getting £30 billion a year from them in bank asset tax, with flat income/corporation tax and Business Rates on top of that. So yes, tax receipts from the sector would fall, but so what? <br />
<br />
<a href="" name="6"></a> 6. <i>"House prices will plummet and the tax base will disappear"</i><br />
<br />
a) This ignores Rule One of LVT, that it is a tax on annual rental values and not selling prices. Rental values across the country are very stable in most areas from year to year, and for every area in which they fall there is one in which they increase and the overall trend has been steadily upwards since the Black Death, rising with wages (see shorter term chart <a href="http://kaalvtn.blogspot.co.uk/2013/01/h-lvt-would-raise-too-much-revenue.html#3">here</a>).<br />
<br />
b) Even if LVT were set at a percentage of selling prices to get the ball rolling, it would be set at a percentage of selling prices at a fixed point in time before the introduction of the tax (just like Council Tax), and so fluctuations in selling prices thereafter would simply have no impact on the tax base, then at the next revaluation, we shift to taxing rental values (which means adjusting LVT rates up or down a bit).<br />
<br />
c) We can illustrate this by looking at the closest thing the UK has to LVT, which is Business Rates, which is a set percentage of the total rental value of commercial land and buildings, selling prices are simply completely irrelevant. <br />
<br />
Total Business Rates receipts have increased steadily and smoothly, from £18 billion a year before the bubble in the chart below, to £20 billion at the peak and £23 billion in the year that prices levelled out again.<br />
<br />
Chart from the Bank of England's Feb 2010 Inflation Report (click to download <a href="http://www.bankofengland.co.uk/publications/Documents/inflationreport/ir10feb1.ppt">Powerpoint slides</a>, via the ever reliable <a href="http://www.tutor2u.net/blog/index.php/economics/comments/revision-deflation-in-residential-and-commercial-property#extended">Tutor2U</a>:<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFbWrgDxj0LiJ5Lov2f41piuq_XYyycgbAKn_DmCe9LJoPd58AEWcTeIWKg9O3pigPcmLzg8MtnB2CpXue5PSflt7W_TSTsKEYozLZ4cBeUjljKUs4CbUCp5J3UcMLZafvT-NgQ-0hIITr/s1600/Commercial+and+residential+bubbles+in+the+UK.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFbWrgDxj0LiJ5Lov2f41piuq_XYyycgbAKn_DmCe9LJoPd58AEWcTeIWKg9O3pigPcmLzg8MtnB2CpXue5PSflt7W_TSTsKEYozLZ4cBeUjljKUs4CbUCp5J3UcMLZafvT-NgQ-0hIITr/s400/Commercial+and+residential+bubbles+in+the+UK.png" height="281" width="380" /></a>Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com1tag:blogger.com,1999:blog-6365034639538623308.post-63635853152168482762013-01-17T20:35:00.003+00:002013-01-27T21:09:09.517+00:00P. LVT is a wealth taxAs explained in <a href="http://kaalvtn.blogspot.co.uk/2013/01/o-land-prices-are-real-wealth-or-capital.html">O. Land values are real capital or wealth</a>, the rental value of land (excl. the rental value of buildings and improvements thereon, or services provided in connection with) is not net wealth, and it certainly is not net private wealth. Ground rents are merely the amount of 'national wealth" which passes from the productive economy to the passive economy, and selling prices are merely the capitalised value thereof.<br />
<br />
Unfortunately, even some supporters of LVT bracket in LVT with "wealth taxes" so we might as well deal with the issue.<br />
<br />
• If you tax one kind of wealth, it will end up being extended to all wealth (<a href=http://kaalvtn.blogspot.co.uk/2013/01/p-lvt-is-wealth-tax.html#1>skip to article</a>)<br />
• Why is there no tax deduction if you have a big mortgage? (<a href=http://kaalvtn.blogspot.co.uk/2013/01/p-lvt-is-wealth-tax.html#2>skip to article</a>)<br />
• It will increase the tax burden on London and the South East (<a href=http://kaalvtn.blogspot.co.uk/2013/01/p-lvt-is-wealth-tax.html#3>skip to article</a>)<br />
• It's an attack on wealth/the wealthy; wealth/the wealthy will disappear abroad (<a href=http://kaalvtn.blogspot.co.uk/2013/01/p-lvt-is-wealth-tax.html#4>skip to article</a>)<br />
<br />
<a name="1"></a>1. <i>"If you tax one kind of wealth, it will end up being extended to all wealth"</i><br />
<br />
a) That's about as daft as claiming that <i>"If you have Business Rates, quasi-LVT on commercial land and buildings, it will be extended to other assets owned by businesses"</i> or <i>"If you have Council Tax, it will be extended to other assets owned by households"</i>. <br />
<br />
b) Admittedly, Business Rates taxes the rental value of the building and not just the ground rent, so if you make improvements which are part of the fabric of the building (air conditioning, lifts, solar panels etc) then you increase your tax bill. Under LVT this would not happen, but even Business Rates goes not further than that. It does not extend to moveable assets in the building (plant and machinery, office equipment, furniture etc).<br />
<br />
c) An important part of the shift to LVT would be to get rid of these scattergun taxes which hit true private/personal wealth and privatised slices of national wealth alike (Inheritance Tax or Capital Gains Tax). Those two taxes only raise about £5 billion a year, which pales into insignificance the amount of LVT which could be collected (£200 billion a year from residential land).<br />
<br />
d) There is no need to tax the value of income-generating assets anyway, as the income would be liable to income tax (at a suggested flat rate of 20% for the time being). So if the income from bank accounts or shares is about 5% of the amount invested, that's pretty much the same as a "wealth tax" of 1% per annum. Having a wealth tax on top would clearly be double taxation which is what a flat-tax system is trying to avoid.<br />
<br />
e) Trying to tax "wealth" generally (as opposed to ground rents) is a non-starter in practical or administrative terms anyway, even if there were any intellectual merit to it. The problem with valuations would be enormous, there would have to be long lists of things which are included and things which are exempt, and evasion and avoidance would be rife. Not only that, but the total yield would be minimal with enormous collection and compliance costs.<br />
<br />
f) "Yes," they will wail, "but once the principle is established, taxes on other wealth will not be far behind." Anybody who says that has not understood the principle behind LVT, go back to square one.<br />
<br />
<a name="2"></a>2. <i>"Why is there no tax deduction if you have a big mortgage? "</i><br />
<br />
Because there has to be symmetry and coherence in a tax system: <br />
<br />
a) People's savings are not liable to LVT, so why would there be a deduction for negative savings, i.e. mortgage debt.<br />
<br />
b) LVT is a tax on the consumption of ground rents, so why would it make any difference how the consumer pays for it? That would be like saying <i>"If I pay for petrol with a credit card without paying off the balance, why do I have to pay the petrol duty?"</i><br />
<br />
c) Grounds rents are only ever positive not negative, the lowest possible ground rent is zero (i.e. land which is not worth owning). Ground rents can never be negative, but allowing a deduction for loans secured thereon would mean that a mortgage free neighbour pays it but his heavily indebted neighbour does not.<br />
<br />
<a name="3"></a>3. <i>"It will increase the tax burden on London and the South East"</i> <br />
<br />
This is a variant of the Poor Widow Bogey, because that is where most Poor Widows In Mansions live.<br />
<br />
It is a stupid argument, because by and large, a disproportionately large share of most taxes (apart from Poll Taxes like Council Tax and the TV licence fee) is collected from people and activities in London and the South East.<br />
<br />
As other taxes would be reduced, the two effects would cancel out on a territorial level, but there would of course be a shift between productive people and businesses and passive land owners, and its effect might be even more marked in London and the South East.<br />
<br />
We get exactly the same wailing in Ireland, of course: <i>"Property tax is a tax on people who live in Dublin"</i>. The whole thing is self-cancelling, you can't argue against a tax on rental values on the basis that the tax would be highest where rental values are highest; if this line of argument is correct, then we can throw income tax straight out of the window because income tax is highest where wages are highest etc.<br />
<br />
<a name="4"></a>4. <i>"It's an attack on wealth/the wealthy; wealth/the wealthy will disappear abroad "</i><br />
<br />
a) Yes, as mentioned above, taxes on vaguely defined "wealth" would lead to evasion and avoidance as people register assets abroad, even though the underlying assets remain in the UK. And those people who love being surrounded by moveable wealth, such as antique furniture or paintings or classic cars might move abroad with them.<br />
<br />
b) LVT is not a tax on vaguely defined "wealth" (moveable or immovable) it is a tax on a very precisely defined <i>annual flow of wealth or benefits</i>, being that which flow from the productive sector to the passive sector via ground rents being collected from immovable land. <br />
<br />
c) You cannot take land abroad. The rental value of land depends entirely on the location and what goes on around it. You cannot take land abroad and you certainly cannot take any of those things abroad. Even if somebody physically dug up his whole mansion and beautifully arranged garden and moved it abroad brick by brick and plant by plant, the location would still be exactly where it is. <br />
<br />
And the rental value of that location is unchanged, there will always be somebody happy to build a new mansion and lay out new gardens in its place. So clearly, it would be cheaper and better for the existing owner to simply leave the bricks and plants in situ and sell the whole thing to the next owner.<br />
<br />
d) I have already explained that reducing taxes on earned income and publicly collecting ground rents would mean that high earners find the UK a much more attractive country to live in and <a href="http://kaalvtn.blogspot.co.uk/2013/01/i-lvt-would-not-raise-enough-revenue.html#4">would be flocking here</a>. That's easy enough. So, even though the maths and logic is more complicated in the other direction, there is no reason to assume that those high earners who are already UK resident would all move abroad, they would be cutting off their noses to spite their faces.Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com0tag:blogger.com,1999:blog-6365034639538623308.post-90298756305411849622013-01-17T20:34:00.004+00:002014-06-13T07:40:58.210+01:00Q. Businesses will go bankrupt• Businesses which use lots of land would go out of business and/or move abroad (<a href=http://kaalvtn.blogspot.co.uk/2013/01/q-businesses-will-go-bankrupt.html#1>skip to article</a>)<br />
• Businesses need to own valuable land to use as security for borrowing (<a href=http://kaalvtn.blogspot.co.uk/2013/01/q-businesses-will-go-bankrupt.html#2>skip to article</a>)<br />
• Business rates are killing the High Street (<a href=http://kaalvtn.blogspot.co.uk/2013/01/q-businesses-will-go-bankrupt.html#3>skip to article</a>)<br />
• Retailers will push up prices (<a href=http://kaalvtn.blogspot.co.uk/2013/01/q-businesses-will-go-bankrupt.html#4>skip to article</a>)<br />
• The construction industry will be hardest hit (<a href=http://kaalvtn.blogspot.co.uk/2013/01/q-businesses-will-go-bankrupt.html#5>skip to article</a>)<br />
• FOOTNOTE: The rent-setting process (<a href=http://kaalvtn.blogspot.co.uk/2013/01/q-businesses-will-go-bankrupt.html#6>skip to article</a>)<br />
<br />
<a name="1"></a>1. <i>"Businesses which use lots of land will go out of business and/or move abroad"</i><br />
<br />
a) This is nonsense on the facts, because the tax system suggested here would leave Business Rates (quasi-LVT) pretty much unchanged for the time being, the total collected would remain at approx. £28 billion a year, and taxes on business activity (around £400 billion) would be halved, from a marginal rate of over 50% (average overall rate 40%) down to a flat 20%. So no business (taking investors and employees together) would end up paying more tax.<br />
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b) According to the <a href="http://data.gov.uk/dataset/land_use_statistics_generalised_land_use_database">Generalised Land Use Database</a>, about seven times as much land is used for private homes and gardens as it used for commercial premises. So we would expect the tax collected from residential land (£200 billion a year) to be about seven times as much as tax collected from commercially used land (£28 billion a year). Oh... it is. So that seems neutral as between land used for residential or commercial purposes, to the extent that there is a clear dividing line, which there isn't - what about shops at street level with flats above?<br />
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c) So under the halfway house tax system suggested here, with equal amounts collected from land values and from earnings, business activity comes out miles ahead. Under a full-on LVT-only tax system, the total tax collected from businesses would fall to negligible amounts. And that's even ignoring the fact that landowners pay the tax and it does not increase the effective cost on businesses.<br />
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d) How do we know this? Because there have been plenty of <a href="http://www.hmrc.gov.uk/research/report42.pdf">empirical studies</a> which show that for every £1 reduction in Business Rates in Enterprise Zones, rents went up by £1 so the tenant ended up paying the same total amount.<br />
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e) "Ah yes," the crowd shouts, "But businesses which own their own premises, for them a £1 cut in Business Rates is a £1 gain."<br />
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Indeed yes, but it is still better to reduce the taxes on their actual trading profits and wages, which rewards good businesses, than to reduce a static tax which rewards good and bad businesses alike.<br />
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However high the Business Rates is, it is always a lot lower than the rent the owner could get by simply renting out his premises. So if there is a marginal business which struggles to make enough money to pay the Business Rates, then the owner has nothing to complain about - he can make himself better off by shutting up shop and renting out his premises to another business. Any business willing and able to pay the rent and rates will by definition, be a better one that the previous one.<br />
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f) As per usual, the opponent also miserably fails to distinguish between <i>area</i> and <i>value</i> of land.<br />
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Commercially used land can be roughly categorised into i. high value city centre land, used for retail or entertainment outlets and offices, and ii. lower value out-of-town industrial estates and factories. The rental value of the high value categories is hundreds of times as high as for the latter, so the rental value of a hundred acre site for a factory at the edge or town is still probably lower than for an office block in the centre of town. <br />
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g) If it were true that businesses flee areas with high rents (i.e. high rents plus Business Rates), why is it that high rent areas are full of businesses? All the high value retail and service businesses in town centres paying high rents could save themselves a fortune by relocating to the middle of nowhere, but they don't, because they'd have no customers and struggle to find employees. So there is no reason to assume that they'd flee from high tax to low tax areas either.<br />
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<a name="2"></a>2. <i>"Businesses need to own valuable land to use as security for borrowing"</i><br />
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a) Borrowing is not the best source of finance for businesses. The best is profits which are built up and reinvested, the next best is people prepared to put their own money in and take the risks and rewards by subscribing for shares.<br />
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b) Where does this leave our new business? Do we expect the bank to say <i>"We'd love to lend you money, but first of all you have to divert huge amounts of profit into buying over-priced land out of over-taxed income and paying us a shed load of interest. Then after ten or twenty years, if you're still going and you've made a windfall gain on the land you bought, then we'll be happy to lend you money"</i>?<br />
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c) Using land as security is only relevant for businesses which have stopped growing. If they were still growing organically, they'd be able to finance that from reinvested profits. If a marginal or failing business which owns lots of land ends up having to borrow from the bank to stay afloat, it would probably better to pull the shutters down sooner rather than later and just become a landlord.<br />
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<a name="3"></a>3. <i>"Business Rates are killing the High Street"</i><br />
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No they are not. <br />
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Not one single office or shop is standing vacant because of Business Rates, they are standing vacant because landlords refuse to reduce their rents. Or because landlords can't be bothered getting tenants in and would rather speculate on rising selling prices, so they allow their premises to fall derelict and claim empty rates relief.<br />
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Turning LVT into Business Rates would sort out both those negatives overnight.<br />
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And I am perfectly aware that there is a well-organised and well-financed campaign underway to have Business Rates reduced. Instead of using the Poor Widow as their human shield, they use the Small Independent Local Retailer: <i>"Boo hoo! The small local shopkeepers are under pressure from the evil government intent on robbing their hard earned AND from the wicked giant out-of-town shopping centres. The High Street is dying! We must do something!"</i>.<br />
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Boo hoo indeed. Don't forget that giant out-of-town shopping centres are also liable to Business Rates. The huge great commercial landlords who own these centres stand to gain millions of pounds for every hundred pounds which The Local Butcher would save - and it's the huge great commercial landlords who are organising and financing the campaign. Their ability to wipe out the traditional high street will be enhanced by a cut in Business Rates, so be careful what you wish for.<br />
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<a name="4"></a><i>4. "Retailers will push up prices"</i><br />
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a) Again, no need to speculate on the impact of land value taxes on prices. There is plenty of evidence - you just need to use common sense - that rents and taxes on rents have <i>absolutely no impact at all on retail prices</i>.<br />
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b) We all know perfectly well that most stuff you buy in shops costs pretty much the same wherever you are in the country. Prices are the same in a Primark in a retail park at the edge of a low-income town as they are in Primark on Oxford Street, London. Research backs this up, wherever you shop in the UK, prices for similar goods are within a range of <a href="http://www.dailymail.co.uk/news/article-1379097/Shoppers-paying-heavy-price-postcode-lottery-Prices-vary-500.html">+/- one percent</a>.<br />
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c) Q: But we also know that rent and rates for shops in the best locations are much, much higher than for shops in less favourable locations? So why is this so if retail prices are the same in all shops?<br />
A: It's do do with volume. If a retailer has a net mark up of £1 on something and can sell 1,000 a week from Location A, but can only sell 100 a week from Location B, then by and large, the rent for a shop at Location A will be nearly £1,000 a week and the rent for the shop at Location B will be less than £100.<br />
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Observed facts, simple logic. Prices are fixed and volumes drive rents. Taxes on rents do not increase the total rent which a tenant will pay. If the tax on the shop at Location A is £800, then the rent net of taxes will fall to less than £200. <br />
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d) We can also drag actual hard facts and figures into this. The British Property Federation's <a href="http://www.bpf.org.uk/en/files/reita_files/property_data/BPF_Property_Data_booklet_2013_spreads_web.pdf">Property Data Report 2013</a>, two-thirds of UK businesses trade from rented premises. <i>So two-thirds of UK businesses are already paying in full for the value of land they occupy!</i> It is just that they are paying a small part to the government and most of it to private tax/rent collectors. Further, retailers occupy about one-third of all commercial premises by value.<br />
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e) Business Rates are about 40% of rents net of Business Rates and raise £28 bn a year, so the net rents payable to landlords are about £70 billion, and the total rental value is about £98 billion, if we knock one-fifth off that for safety and assume that the site premium element of commercial rents is half the total rental value (for residential it's about two-thirds), the LVT payable on commercial premises would be £40 billion.<br />
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f) Further, it is definitely the case that taxes like VAT, PAYE push up prices and reduce wages. So if high retail prices are your concern, then shifting from taxing output to taxing land rents is a good idea, is it not?<br />
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UK retail sales were <a href="http://www.brc.org.uk/brc_stats_and_facts.asp">£311 billion</a>, some of that is VAT-exempt, but the total VAT payable by retailers is about £45 bn, to which we can add £5 bn Employer's NIC (retail wages are quite low) and £10 bn Business Rates (one-third of £28 bn) = £60 billion.<br />
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So if we shifted from VAT/Business Rates to LVT-only, the LVT bill on retail premises would be £13 bn (one-third of £40 bn, from (e)), the total tax on retailers/owners of retail premises would <i>fall by three-quarters</i>; the tax bill for the one-third of retailers which are owner-occupiers would also fall by three-quarters. Quite how much of the LVT would end up being "passed on" to tenants in higher rents (to soak up their much higher margins) need not concern us here. <br />
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It is quite simply the case that there would be some combination of more output, fewer empty shops, more businesses, more employment, lower prices, higher profits. All of those are Good Things.<br />
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g) The matter is a bit more subtle with <a href="http://www.dailymail.co.uk/news/article-2141536/It-IS-cheaper-North-Price-divide-pub-food-film-tickets.html">goods and services consumed at or near point of purchase</a>, like pubs, restaurants, cinemas, where prices are higher in high rent areas. But again, any tax on the rents would not increase prices, it would merely reduce the rent which the landlord collects net of tax. <br />
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<a name="5"></a>5. <i>"The construction industry will be hardest hit"</i><br />
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No it wouldn't. The land speculators and land bankers would be done for, but actual builders would pay a lot less in tax and interest. I covered this topic in more detail <a href="http://kaalvtn.blogspot.co.uk/2013/01/k-there-would-be-not-enough-new.html#3">here</a>.<br />
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<a name="6"></a>6. FOOTNOTE: The rent-setting process<br />
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People who wail on about LVT hitting businesses simply do not understand the (iterative) process by which rents are set. <br />
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a) In any town, you can rank every single plot/location from best to worst. So there is only one absolute best plot, and whoever bids the highest amount to trade from there pays that much in rent - quite willingly, that's how rents are set.<br />
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b) So businesses like Marks & Spencer, TESCO, Sainsbury's or John Lewis will all be bidding for the biggest and best plot, and perhaps the winning bid is £1 million a year. It makes no difference to those businesses whether they pay that rent to a private landlord or to the local council - the point is that <i>they have stolen a march on their competitors and that is what they are paying for</i>. If your shop is the first one outside the station or at the entrance the shopping mall/precinct, then you have a slight advantage over everybody else as people will visit your shop first.<br />
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Thought experiment: an evil supermarket chain wins the bid for the best site and pays £1 million a year rent. A manager from the supermarket chain bribes a local council official to ensure that no other supermarket ever opens up within a ten-mile radius, so this doubles the amount of profit the supermarket can make from that site. Assuming the corrupt official can do his sums, how much bribe can he ask for? He can ask for up to £1 million a year for his share of the extra profits. That bribe is still just "rent" - the supermarket is happy to pay it, simply to have a huge advantage over the other supermarket chains.<br />
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c) And so the losers from the first round then bid for the second, third and fourth best sites, and they happily pay £900,000, £800,000 and £700,000 etc. Again, whether they pay that to a private landlord or the local council makes no difference (what if, for example, the shops on High Street is owned by Crown Estates, or the shopping centre belongs to the local council or a public sector pension fund?).<br />
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d) Then there are second tier, smaller shops, like Boots or WH Smith, who end up putting in the winning bids for the £100,000 sites. And then along come Harry the hairdresser, Wendy the watch repairer, Tim the tattoo artist and Daisy the dentist, who can't possibly compete with Boots or WH Smith. They end up paying £10,000 a year each for the next best sites after Boots and WH Smith have had their pick.<br />
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e) Martin the manufacturer and Harriet the wholesaler need a lot of space for their factory and distribution centre and there is no advantage to them in paying hundreds of thousands of pounds in the town centre for a relatively small site with crap lorry access. All they need is to be within reasonable commuting distance of the town for their workers and being near a motorway or railway goods yard is a big plus, as is a big car park. <br />
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f) There are plenty of such sites surrounding the town where land is not really that scarce. So they end up bidding and paying £50,000 or £100,000 a year for a large site at the edge of town - entirely voluntarily, because that is what their sites are worth. The further away the site is from the town and the further from the motorway junction/goods yard, the lower the rent, and so if there are enough industrial units available, some of the sites will simply have zero rental value - not because they are worthless but because there are only a couple of low-margin businesses left bidding for them.<br />
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g) This is not some hypothetical example, this is how it works. The rental value of land varies enormously between town centres and surrounding developed land (and even the most marginal developed/developable land is worth a hundred times as much as agricultural/green belt land). The rent in a town centre is ten or a hundred times higher than the rent of land on the outskirts or in a particularly grotty or inaccessible part of town, and the larger the town is, the higher the ratio. And provided a town is allowed to expand, by definition there will be land at the margin which can be rented for more or less nothing (and on which the tax would also be more or less nothing).<br />
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h) Of course, even under full-on LVT with zero tax on profits, businesses will still fail. Fashions and technology will always change, some businesses will always be badly run etc. So if tattoos go out of fashion, Tim will find that his tattoo parlour doesn't generate enough profit to pay the rent. That's his problem isn't it? He can retrain and re-open as a tattoo <i>removal</i> parlour if he wants. The fact that the rental value is higher than his net profits is a clear indication that some other business would bid a higher amount than him. So if he shuts down and sacks his one or two remaining workers, then Nancy's nail bar or Estelle's espresso bar will open up instead and hopefully employ two or three people. That's called 'creative destruction" and is just the way that free-market capitalism works.Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com0tag:blogger.com,1999:blog-6365034639538623308.post-16023842432359451102013-01-17T20:32:00.003+00:002020-08-27T13:50:03.517+01:00R. Farmers will go bankrupt• Farmers would all go out of business (<a href="http://kaalvtn.blogspot.co.uk/2013/01/r-farmers-will-all-go-bankrupt.html#1">skip to article</a>)<br />
• Farmers would be forced to sell off all their fields for development (<a href="http://kaalvtn.blogspot.co.uk/2013/01/r-farmers-will-all-go-bankrupt.html#2">skip to article</a>) <br />
• LVT will push up food prices (<a href="http://kaalvtn.blogspot.co.uk/2013/01/r-farmers-will-all-go-bankrupt.html#3">skip to article</a>)<br />
• What about the smallholder who is self-sufficient? (<a href="http://kaalvtn.blogspot.co.uk/2013/01/r-farmers-will-all-go-bankrupt.html#4">skip to article</a>)<br />
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<a href="https://www.blogger.com/null" name="1"></a>1. <i>"Farmers would all go out of business"</i><br />
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Nonsense. <br />
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Before we get hysterical about "all farmers going out of business", "food prices being pushed up to cover the tax" or "all farmers being forced to sell off their land to developers", <i>let's look at actual numbers</i>! They are dwindlingly small:<br />
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Residential land = 3.5% of UK by surface area, rental value £200 billion a year.<br />
Commercially used land = 0.4% of the UK by surface area, rental value at least £30 billion a year.<br />
Farm and forestry land = 80% of the UK by surface area, rental value approx. £1.7 billion a year*.<br />
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a) Agricultural output, at farm gate prices, is less than one per cent of UK GDP (see <a href="http://kaalvtn.blogspot.co.uk/2013/01/r-farmers-will-all-go-bankrupt.html#3">below</a>), so that looks about right; the rental value of farm land (about eighty per cent of the surface area) is, unsurprisingly, also less than one per cent of total land rental values.<br />
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b) Before we even start thinking about reintroducing Agricultural Rates (which this country had from the 1600s to the 1900s), let's think about getting rid of the <i>negative land value tax</i> which we have on farmland, i.e. the farm subsidies known as the <a href="https://www.gov.uk/the-single-payment-scheme">Single Payment Scheme</a> (currently about £80 per acre) which is a straightforward bung to landowners. Nominally it is paid to the working farmer, but the right to receive payment can be traded separately. <br />
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c) The total amount of negative LVT paid out was <a href="http://archive.defra.gov.uk/evidence/statistics/foodfarm/enviro/observatory/indicators/a/a2_data.htm">£2.3 bn a year in 2009</a>. <br />
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d) Ultimately, most of the subsidies end up as higher rents or land selling prices, see very technical study <a href="http://www.econ.kuleuven.be/licos/publications/dp/dp293.pdf">here</a>, and the rest ends up as higher profits for the supermarkets, who can merrily knock farm gate prices down to less than the cost of production, knowing full well that the farmer lives partly of the SPS payments and only partly from actually producing and selling food.<br />
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e) So, in practical terms, rents (in the absence of SPS payments) will be so low as to be barely worth assessing to tax, if the subsidies (£80 per acre) were scrapped, rents would drop by about £80 per acre, two-thirds of lower-value farmland (pasture land) would have a rental value of plus/minus nothing and the rental value of the one-third higher value arable land would fall by half. So the tax on a typical 100 acre mixed farm would about £2,000 per year, i.e. less than the farmer's personal allowance or Citizen's Income.<br />
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How much income tax, NIC and PAYE on wages does a typical farmer pay? A damn' sight more than £2,000 per year, and it is always better to tax the small part of farm income that is rent at a high rate than to tax all of their income (earned and unearned alike) at a 29%.<br />
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<a href="https://www.blogger.com/null" name="2"></a>2. <i>"Farmers would be forced to sell off all their fields for development"</i><br />
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No they wouldn't. <br />
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a) Nobody said we would abolish planning laws.<br />
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b) The tax on farmland (if any) would be a small fraction of farm incomes (a smaller fraction than their current tax bills)<br />
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c) In the UK, developed land is less than 10% of the surface area (housing 3.5%, commercial/municipal 0.5%, roads etc 4%), farmland is about 80% and the rest is bits and pieces (forests, lakes, rivers, mountains, marshes, beaches and other quasi-natural land), so it would take us a good while to develop it all.<br />
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d) It is <i>the current system</i> where planning gains are taxed lightly that encourages farmers who are lucky enough to own fields near urban areas to sell them off for development, because somebody (the farmer or the developer) can bank most of the planning gain. With LVT <i>there will be little or no planning gain</i>; there will be little or no incentive to get land rezoned for development for its own sake.<br />
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<a href="https://www.blogger.com/null" name="3"></a>3. <i>"LVT will push up food prices"</i><br />
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a) We know for a fact that taxes are borne entirely by the landowner and comes out of rents; taxes on rents do not increase rents, they merely reduce the landowner's unearned income; and we know that tenant farmers (about a third of UK farmers) do not charge higher prices for their output than owner-occupier farmers (how could they?).<br />
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b) Or put it this way, what happens to rents if food prices go up? They go up. But what happens if food prices stay the same, and all UK landowners with tenant farmers got greedy and just demanded higher rents? Those tenants would throw in the towel, they would refuse to pay and they would go and do something else for a living. It is food prices and the productivity of land which pull up rents; rents (or taxes thereon) do not push up food prices.<br />
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b) Taking the total rental value of UK farmland to be considerably less than £1.7 billion a year (we don't know what rents will be if SPS were scrapped) and total farm output of £7 billion a year, a tax those rents, even at 100% would be <i>less</i> than the total income tax, PAYE, Council Tax and Business Rates they pay. So if their tax bill goes down, why would food prices go up?<br />
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Be that as it may...<br />
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c) Going by <a href="http://www.defra.gov.uk/statistics/files/defra-stats-foodfarm-food-pocketbook-2011.pdf">Defra's</a> figures for 2009 (the most recent available), total consumer spending on food in shops is £65 billion a year, and that income/turnover is shared as follows:<br />
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Agriculture and fishing - £7 bn (less than 1% of our GPD).<br />
Food and drink manufacturing - £ 25 bn<br />
Food and drink wholesaling - £9 bn<br />
Food and drink retailing - £24 bn.<br />
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i.e. out of £10 spent on food in the UK, only 10p goes to the farmer.<br />
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So even if a modest tax on farmland, which reduced the overall tax bill on the agricultural sector did push up food prices (which it wouldn'), then it would have next to no effect on shop prices; the tax would be absorbed by others in the chain, and even if it didn't (which it would) then so what? A 50% increase in farm gate prices only means a 5% increase in shop prices, for example.<br />
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<a href="https://www.blogger.com/null" name="4"></a>4. <i>"What about the smallholder who is self-sufficient?"</i><br />
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a) I'd be interested to know how many smallholders there are in the UK. I bet the people asking the question don't know, and probably aren't smallholders themselves.<br />
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b) The tax (if any) on smallholdings of farmland would be at the same rate as that on farmland, in other words somewhere between £nil and maybe £20/acre <i>per year</i>. It costs more than that to rent farmland now, and a lot of smallholders do rent their land; it costs far more than that to rent an allotment, and there are still waiting lists for allotments in most places. <br />
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c) Which illustrates the point that if you tax land highly (when the government charges rent for land, that is the same as charging LVT), you get more people occupying smaller plots each. If a field is divided into dozens of allotments rented out for £100 a year each, that's rental income of £1,000s per acre per year; if the field were rented out as farmland, the best price that you would get would be £50 to £150 per acre per year (depending on how good the land is), and it would be rented by a single farmer.<br />
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d) And smallholders will of course be entitled to their personal allowance or Citizen's Income of £3,500 a year; the £20 a year they might have to pay for an acre wouldn't even make a dent in that.<br />
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* If we multiply up land use statistics from <a href="http://www.bis.gov.uk/assets/foresight/docs/land-use/jlup/27_agriculture_and_land_use_-_demand_for_and_supply_of_agricultural_commodities.pdf">here</a> by average rental values from <a href="http://www.dairyco.org.uk/resources-library/market-information/farm-expenses/rent-levels/">here</a>, the total rental value of all UK farm and forestry land is about £1.7 bn a year; two-thirds is pasture (rents as low as £50/acre) and a third is arable (rents as high as £150/acre).Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com15tag:blogger.com,1999:blog-6365034639538623308.post-72939575978005317762013-01-17T20:24:00.000+00:002018-05-13T12:27:46.681+01:00S. Land owners create land values; land owners have no influence over land valuesAnother two lines of completely contradictory arguments are advanced:<br />
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The first is that:<br />
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• Land owners create land values so it's double taxation (<a href="http://kaalvtn.blogspot.co.uk/2013/01/s-land-owners-create-land-values-land.html#1">skip to article</a>)<br />
• Larger landowners create their own rental values (<a href="http://kaalvtn.blogspot.co.uk/2013/01/s-land-owners-create-land-values-land.html#2">skip to article</a>)<br />
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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).<br />
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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:<br />
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• Land owners have no influence on land values. Just because a location becomes more desirable doesn't mean that land owners all benefit. (<a href="http://kaalvtn.blogspot.co.uk/2013/01/s-land-owners-create-land-values-land.html#3">skip to article</a>) <br />
• The government could dictate official land values which are higher than actual land values (<a href="http://kaalvtn.blogspot.co.uk/2013/01/s-land-owners-create-land-values-land.html#4">skip to article</a>)<br />
• The council influences land values with planning permission/restrictions (<a href="http://kaalvtn.blogspot.co.uk/2013/01/s-land-owners-create-land-values-land.html#5">skip to article</a>)<br />
• 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? (<a href="http://kaalvtn.blogspot.co.uk/2013/01/s-land-owners-create-land-values-land.html#6">skip to article</a>)<br />
• The government will push up land values with easy credit and low interest rates (<a href="http://kaalvtn.blogspot.co.uk/2013/01/s-land-owners-create-land-values-land.html#7">skip to article</a>)<br />
• The government would push up rental values by paying higher Housing Benefit (<a href="http://kaalvtn.blogspot.co.uk/2013/01/s-land-owners-create-land-values-land.html#8">skip to article</a>)<br />
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<a href="" name="1"></a>1. <i>"Land owners create land values so it's double taxation "</i><br />
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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?<br />
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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. <br />
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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.<br />
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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.<br />
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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. <br />
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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).<br />
<br />
e) The only practicable way to reverse this trickle-up economics is by collecting land rents and dishing them out again as universal benefits.<br />
<br />
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?<br />
<br />
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.<br />
<br />
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.<br />
<br />
<a href="" name="2"></a>2. <i>"Larger landowners create their own rental values </i><br />
<br />
This argument is usually advanced by Faux Libertarians than Home-Owner-Ists. <br />
<br />
(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.)<br />
<br />
The Faux-Lib argument is something like this: <i>"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. <br />
<br />
"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"</i><br />
<br />
Hokum. <br />
<br />
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 <i>people</i> 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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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. <br />
<br />
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?<br />
<br />
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 <a href="http://en.wikipedia.org/wiki/Walt_Disney_World">47 sq miles</a> out of <a href="http://en.wikipedia.org/wiki/Geography_of_the_United_States">3,717,813 sq miles</a> 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.<br />
<br />
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.<br />
<br />
<a href="" name="3"></a>3. <i>"Land owners have no influence on land values. Just because a location becomes more desirable doesn't mean that land owners all benefit."</i><br />
<br />
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.<br />
<br />
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.<br />
<br />
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 <i>will</i> 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.<br />
<br />
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.<br />
<br />
<a href="" name="4"></a>4. <i>"The government could dictate official land values which are higher than actual land values"</i><br />
<br />
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.<br />
<br />
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.<br />
<br />
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. <br />
<br />
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.<br />
<br />
<a href="" name="5"></a>5. <i>"The council influence land values with planning permission/restrictions"</i><br />
<br />
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.<br />
<br />
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. <br />
<br />
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.<br />
<br />
<a href="" name="6"></a>6. <i>"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?</i><br />
<br />
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.<br />
<br />
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?<br />
<br />
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. <br />
<br />
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?\<br />
<br />
We have a real life example of the second one. In May 2018, Transport for London announced that they wanted <a href="http://www.cityam.com/285621/homeowners-near-crossrail-2-stations-could-hit-new-tax">a windfall tax on owners of homes near the new Crossrail stations.</a> 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.<br />
<br />
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. <br />
<br />
<a href="" name="7"></a>7. <i>"The government will push up land values with easy credit and low interest rates"</i><br />
<br />
People who say things like this have completely missed the point. <br />
<br />
LVT is on <i>rental values</i>, 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?<br />
<br />
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. <br />
<br />
<a href="" name="8"></a>8. <i>"The government will push up rental values by paying higher Housing Benefit"</i><br />
<br />
I saw this one recently, this is real hard core stuff.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com22tag:blogger.com,1999:blog-6365034639538623308.post-12031901685115097482013-01-17T20:22:00.001+00:002014-01-25T15:22:39.004+00:00T. Yeah, it all sounds nice, but...• LVT is not a panacea for everything (<a href=http://kaalvtn.blogspot.co.uk/2013/01/t-yeah-it-all-sounds-nice-but.html#1>skip to article</a>)<br />
• LVT would be a great idea if we started again from scratch, but it's too late now, it’s too difficult to implement (<a href=http://kaalvtn.blogspot.co.uk/2013/01/t-yeah-it-all-sounds-nice-but.html#2>skip to article</a>)<br />
• LVT won't prevent the boom-bust cycle (<a href=http://kaalvtn.blogspot.co.uk/2013/01/t-yeah-it-all-sounds-nice-but.html#3>skip to article</a>)<br />
• Hong Kong has LVT and it still has property boom-busts (<a href=http://kaalvtn.blogspot.co.uk/2013/01/t-yeah-it-all-sounds-nice-but.html#4>skip to article</a>)<br />
• LVT still takes money out of the economy as it has to be paid out of earned income (<a href=http://kaalvtn.blogspot.co.uk/2013/01/t-yeah-it-all-sounds-nice-but.html#5>skip to article</a>)<br />
• If some people downsize, then other people will upsize. So if you keep the total tax take constant, everybody will still end up paying the same amount of tax as before. So what's the big difference? (<a href=http://kaalvtn.blogspot.co.uk/2013/01/t-yeah-it-all-sounds-nice-but.html#6>skip to article</a>)<br />
• There will be more losers than winners (<a href=http://kaalvtn.blogspot.co.uk/2013/01/t-yeah-it-all-sounds-nice-but.html#7>skip to article</a>)<br />
• You underestimate people's atavistic desire to "own" their own home because it makes them feel independent/like a fully-paid member of society (<a href=http://kaalvtn.blogspot.co.uk/2013/01/t-yeah-it-all-sounds-nice-but.html#8>skip to article</a>)<br />
• Over sixty per cent of voters are home owners and turkeys don't vote for Xmas (<a href=http://kaalvtn.blogspot.co.uk/2013/01/t-yeah-it-all-sounds-nice-but.html#9>skip to article</a>)<br />
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<a name="1"></a>1. <i>"LVT is not a panacea for everything"</i><br />
<br />
Nobody says it is. <br />
<br />
But are income tax, VAT, National Insurance, corporation tax and all the other crappy little taxes a panacea for anything at all? No, they just raise money for the government to spend on alleviating all the problems caused by levying those taxes <i>instead of sticking with the old system of Domestic, Agricultural and Business Rates, which used to cover the bulk of government spending</i>. <br />
<br />
The current system provably causes unemployment and business failure, a trade deficit, and a regular boom-bust cycle in finance and land prices, recessions etc. And has been doing since banking, private land speculation and income tax were invented. Taxes on land values quite provably do the opposite. That does not mean that nobody would ever be unemployed or that no business would ever fail, but so what?<br />
<br />
If the choice is between stick with the status quo or do something which is better, regardless of whether that's "a bit better" or "a hell of a lot better", why not go for "better"? <br />
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<a name="2"></a>2. <i>"LVT would be a great idea if we started again from scratch, but it's too late now, it’s too difficult to implement"</i><br />
<br />
Why is it too late? There are plenty of people who don't own land who will easily adjust to an LVT system. Why saddle them with this crap just because older generations were saddled with it? Is it some sort of vicious revenge?<br />
<br />
I accept that politically LVT is difficult to implement, that's because the majority of UK politicians are land speculators if not downright corrupt and in the pocket of bankers and large landowners, it's exactly these people who have been pumping out Home-Owner-Ist propaganda for decades if not centuries. But in practical terms it is dead easy: you tell people what the LVT on each plot of land is, cut taxes on output and employment and watch things blossom.<br />
<br />
Yes, house prices will fall, but we'll adjust to that, some better than others. We adjusted to house prices rising, didn't we? some people (older Baby Boomers) will have to down-size. So what? People move home all the time, it's only a couple of months hassle and then they settle in.People change jobs or get pay rises or pay cuts all the time, most of them soon adjust. Poor Widows can stay put and defer the tax until death. That'll wipe out inheritances for some people, but so what? People who thought they'd rely on inheriting rather than working to get through life will be in a for a rude shock, that's all. Why is that worse than people losing their jobs during a financial recession? Lots of buy to let landlords (without whom we managed perfectly well until five or ten years ago) will go bankrupt and have to sell off their "investments" to their sitting tenants, so what? That's a risk of being in business, there'll be plenty of new business opportunities for the truly business-minded. And there's a limit on the speed with which existing businesses can expand and new business start up, but it's quicker than you think. <br />
<br />
Once we've settled in to the new system, well that will be it, done and dusted.<br />
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<a name="3"></a>3. <i>"LVT won't prevent the boom-bust cycle "</i><br />
<br />
I'm not really sure what level of reality these people are operating on. First they wail that LVT <i>will</i> bring house prices down (see <a href="http://kaalvtn.blogspot.co.uk/2013/01/o-land-prices-are-real-wealth-or-capital.html">here</a>), and hopefully it will, even though that is not guaranteed, and then they wail that LVT <i>won't</i> bring house prices down and keep them down? Those are two equal and opposite arguments and the truth lies somewhere in the middle.<br />
<br />
As it happens, it is provably the case that LVT dampens land price bubbles. Again, we refer to the next-best tax, Business Rates which is a flat tax payable on the rental value of commercial land and buildings, more or less regardless of who owns it or uses it (income tax or corporation tax is on top of that). And we observe that there was a price bubble in commercial land and buildings but it was far smaller than the one in house prices, and it was over quicker:<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFbWrgDxj0LiJ5Lov2f41piuq_XYyycgbAKn_DmCe9LJoPd58AEWcTeIWKg9O3pigPcmLzg8MtnB2CpXue5PSflt7W_TSTsKEYozLZ4cBeUjljKUs4CbUCp5J3UcMLZafvT-NgQ-0hIITr/s1600/Commercial+and+residential+bubbles+in+the+UK.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="281" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFbWrgDxj0LiJ5Lov2f41piuq_XYyycgbAKn_DmCe9LJoPd58AEWcTeIWKg9O3pigPcmLzg8MtnB2CpXue5PSflt7W_TSTsKEYozLZ4cBeUjljKUs4CbUCp5J3UcMLZafvT-NgQ-0hIITr/s400/Commercial+and+residential+bubbles+in+the+UK.png" width="380" /></a><br />
Chart from the Bank of England's Feb 2010 Inflation Report (click to download <a href="http://www.bankofengland.co.uk/publications/Documents/inflationreport/ir10feb1.ppt">Powerpoint slides</a>, via the ever reliable <a href="http://www.tutor2u.net/blog/index.php/economics/comments/revision-deflation-in-residential-and-commercial-property#extended">Tutor2U</a><br />
<br />
I have seen it argued that house prices are not in a bubble, that they were chronically undervalued and are now fair price; or that banks' losses on residential mortgages are small compared to losses on commercial mortgages, which proves that commercial was a bubble and residential wasn't. <br />
<br />
That does not make sense. We know that Council Tax is much lower than Business Rates, and developers can make windfall gains by getting commercial premises re-zoned for residential use. That difference in selling prices is tax-fuelled bubble value. Whether the house price bubble ever bursts or not, it must be pretty clear that house prices would not have risen to where they are if we had Domestic Rates on them at the same level as Business Rates on commercial.<br />
<br />
<a name="4"></a>4. <i>"Hong Kong has LVT and it still has property boom-busts"</i><br />
<br />
The connoisseur then throws lobs this one into the game, but it doesn't really prove very much either way. <br />
<br />
The fact is that Hong Kong does not have full-on annual LVT, what the government does is raise a lot of money from selling leases of land, usually for about thirty years, which is the lifespan of a typical skyscraper, and it gets a lot of other land-related taxes, which make up 45% of government revenues. For historical reasons, it can't spend the income from lease auctions on general stuff, it has to spend it on things which further improve the value of land such as transport and similar infrastructure. So rents keep going up, so the price which people are prepared to bid for thirty year leases keeps going up.<br />
<br />
It is a simple matter of financial maths, that a thirty year lease behaves pretty much like a freehold, so if people underestimate interest rates a bit and overestimate rental growth a bit, and throw a bit of property developer machismo into the mix, yes, sometimes they overpay and come a cropper.<br />
<br />
However, what it does prove is that people are happy to invest in buildings even if they are only going to own the land for thirty years and pay for the privilege. It's not too difficult to make your money back in that timescale, and after that, the land and buildings reverts to the government.<br />
<br />
Alongside that, the top rate of income/corporation tax is very low (17% I believe), and Hong Kong has very little economic regulations on anything at all, there's very little in the way of a welfare system. But it all seems to work.<br />
<br />
<a name="5"></a>5. <i>"LVT still takes money out of the economy as it has to be paid out of earned income"</i><br />
<br />
The short answer is: paying rent out of untaxed income must be far better taxing the income itself and then expecting people to pay rent out of taxed income. If you work for a living, then <i>everything</i> is paid out of earned income, that does not mean that money you spend on clothes or eggs or guitar strings is 'money taken out of the economy'.<br />
<br />
The long answers are the same, just a bit more roundabout:<br />
<br />
a) All income or benefits which people receive of derive from land (or more correctly, "locational advantage") are "unearned". Any household is not actually doing anything to measurably increase the benefits they receive from living where they live. So while an owner-occupier is not getting a cash income to pay the tax; he is getting benefits from the location equal to (or greater than) the tax. From the point of view of the household, LVT is just a user charge, or a tax on consumption (without being a tax on production).<br />
<br />
b) As I explained <a href="http://kaalvtn.blogspot.co.uk/2013/01/x-semi-literate-faux-libertarian.html#4">here</a> with real life supporting evidence, if average wages are higher in some areas than others, the extra wages in high wage areas merely go into higher rents; those higher wages do not benefit the person earning them. So if an average private sector worker can increase his or her (net) wages by £5,000 by moving to London and doing the same job there (and living in similar quality accommodation), his or her rent will by £5,000 higher as well. If that rent goes to a landlord, it is unearned and can be taxed at no detriment to the economy. So we could equally argue that the extra £5,000 was unearned in the first place, as it is extra income for doing exactly the same job, merely from a different location, and so an owner-occupier in a high wage area receives, in cash, an element of unearned income.<br />
<br />
c) If LVT takes money out of the economy, then rents and interest payments take money out of the economy as well. It's the same stream of money, just going in a different direction. So that's a break-even. But taxing earned income clearly takes money out of the economy as well, so more LVT and less income tax means overall, that less money is taken out of the economy.<br />
<br />
d) Taxes on earned income have deadweight costs (GDP is 12% smaller than it would be, hence all the unemployed) and LVT does not. So that's 12% which the current tax system takes out of the economy which LVT wouldn't. That's extra money on the table, out of nowhere.<br />
<br />
e) However wasteful a government is, and however it collects tax, it still spends a good proportion on things which benefit people in general and it keeps the rest for itself and its cronies, which I would consider "waste". If the UK government had kept spending level in real terms for the past ten years, it would be spending £500 billion a year instead of £700 billion (Public Sector Finances Databank), and it's not as if there was no "waste" ten years ago. So over £200 billion a year (a third of government spending) is disappearing into the pockets of the government and its cronies, that much is true, but that still means that two-thirds is benefitting people in general.<br />
<br />
f) If we allow private individuals to collect the ground rent instead of the government, then <i>none of that ground rent</i> is spent on things which benefit people in general. A landlord or landowner or banker spends all the money on himself, he spends nothing on welfare or education or health or roads, why would he? He is under no democratic pressure to do so, and there is little benefit to an individual landlord, landowner or banker in doing so.<br />
<br />
g) So why have a dual system, where the government takes money out of the economy via income tax (and spends a third on itself), and a small group of private individuals take as much again out of the economy via ground rents (and spends it all on itself)? If you want to minimise the amount of money 'taken out of the economy' then let the government collect ground rents instead of taxes on earned income, that's basic maths and logic.<br />
<br />
h) That landlords and landowners and bankers take money out of the economy must be blindingly obvious. Imagine that all bankers cheerfully waived all debts and all landlords gave their homes to the sitting tenants for free. Would the rest of the productive end up worse off or better off? And imagine that the bankers and landlords (along with a load of quangocrats) went out at got themselves proper jobs. Would GDP fall or rise?<br />
<br />
i) The same goes for taxes on earned income. If they were abolished overnight, then we'd all be better off as well.<br />
<br />
j) So what happens if the government announces that it will scrap all taxes on earned income and collect the rent and interest instead (via LVT), and it spends the vast bulk of that LVT on things which benefit people in general and dishes out the rest of the income on straight forward cash rebates? Would we not all be better off?<br />
<br />
<a name="6"></a>6. <i>"If some people downsize, then other people will upsize. So if you keep the total tax take constant, everybody will still end up paying the same amount of tax as before. So what's the big difference?"</i><br />
<br />
There is a huge difference.<br />
<br />
a) Yes, it is true that on a short term basis, most people's tax bills will go down, but for others it will go up, and incomes of bankers and landlords will go down quite a lot. Let's ignore them, that is a straight win for the economy.<br />
<br />
b) Let's focus on a younger/higher income household (H1) in a smaller home trading up and an older/lower income household (H2) in a larger home trading down; they swap places. Under current rules, H1 pays £15,000 tax and H2 pays £5,000 tax. Afterwards, H1 ends up in the larger home paying £15,000 tax and H2 ends up in the smaller home, still paying £5,000 tax.<br />
<br />
Does it not seem equitable that the family expected to pay more tax into the pot for the benefit of society gets more back from society, i.e. gets to live in the larger/nicer home? H2 will still be getting their Citizen's Income etc, funded out of the tax paid by H1And does it not seem sensible to reduce taxes on earnings - why punish people for going out to work, adding to the pot of total wealth etc?<br />
<br />
c) Or imagine a load of people who've run up a tab drinking in the pub all evening who now have to split the bill:<br />
<br />
If they split the bill equally, with the same amount per drinker, that's like a Poll Tax.<br />
If everybody puts in a certain percentage of his last week's wages, that's like income tax.<br />
If everybody just pays for his own drinks, that's like Land Value Tax.<br />
<br />
So under LVT the total amount of land rent which people will consume is the same, and the total amount of tax which people will pay is the same, it just gets split up more sensibly.<br />
<br />
<a name="7"></a>7. <i>"There will be more losers than winners"</i><br />
<br />
This is quite simply not true. <br />
<br />
Even in the shortest of short terms, any fiscally neutral shift from taxing earned income to taxing the rental value of land will create far more winners than losers, for the simple reason that earnings capacity is quite evenly distributed and land ownership is concentrated in relatively few hands, especially if you deduct mortgage debts.<br />
<br />
Only about ten or twenty per cent of working age adults are unemployed at any one time, so eighty or ninety per cent have positive earned income, but nearly fifty per cent of working age adults own no land whatsoever, i.e. the thirty per cent who are social or private tenants and all the recent purchasers whose mortgage is as much as the value of their home. Even worse, those people don't just own <i>no</i> land, they actually own <i>negative</i> amounts of land because they have to pay rent and mortgage interest (land ownership is at best a zero sum game). <br />
<br />
I have included spreadsheets on the separate page covering <a href="http://kaalvtn.blogspot.co.uk/p/the-transition.html">the transition</a> and you can check for yourself how different households would be affected, around two-thirds of households would be noticeably better off from Day One.<br />
<br />
Who would lose out in the short term? A few small groups such as landlords, large landowners, senior bankers etc (a few per cent of the population at most), I don't see why anybody should be too bothered about them, and their favourite human shield, the "asset rich, cash poor" (see <a href="http://kaalvtn.blogspot.co.uk/2013/01/a-poor-widow-bogey.html">The Poor Widow Bogey</a>).<br />
<br />
In the medium and long term, nobody will lose out, people will just have to find better things to do.<br />
<br />
<a name="8"></a>8. <i>"You underestimate people's atavistic desire to "own" their own home because it makes them feel independent/like a fully-paid member of society"</i><br />
<br />
This shows how warped people's consciousness is. <br />
<br />
The feeling of "independence" is entirely illusory. Without society providing law and order, without a functioning economy, without all these things you own nothing. "No man is an island". A fifth of all adults live off state pensions, which do no appear magically out of thin air, they depend on other people paying taxes and other people providing benefits in kind (like "free" healthcare) and producing all the goods and services for pensioners to spend their pensions on.<br />
<br />
The very real price of this illusion to the would be home-owner is to have to pay two layers of tax - publicly collected taxes on his income for the whole of his life, which he can only avoid by ceasing working or not having any savings (in which case, what is he going to live off? Fresh air?) and the privately collected taxes represented by all the extra mortgage payments on the land element which he has to make to be able to clamber up to the hallowed status of "freeholder".<br />
<br />
What people have to realise is that the rental value of land is the result of the individual efforts of everybody in the whole country, and indeed other countries who export subsidised goods to us and live in mutually beneficial peace with us. That rental value does not belong to any individual or any group of individuals, it belongs to the whole community.<br />
<br />
LVT recognises this, so the revenues are spent on things which benefit everybody and the surplus is dished out as welfare payments or pensions. So that means that everybody is effectively a "landowner" as of right, everybody is a fully paid up member of society and every household receive enough Citizen's Income/personal allowance to be able to pay the tax on an average home for a household of that size, and a whole layer of privately collected taxes (location rent, the cost of land, mortgage interest on the land element) is stripped away.<br />
<br />
Instead of some people owning a disproportionate amount of land (by value) and nearly half of households owning none (while still having to pay rent), which causes massive wealth disparity and hence social frictions, everybody will be able to walk past any plot of land, and however humble or grand the building on it is, he will know that <i>"I own an equal share in that, a sixty-two-millionth part of that belongs to me."</i><br />
<br />
Would that not be a much more reassuring feeling?<br />
<br />
<a name="9"></a>9. <i>"Over sixty per cent of voters are home owners and turkeys don't vote for Xmas"</i><br />
<br />
This is a non-argument. <br />
<br />
Even if were a valid objection, you might as well point out that considerably more than 60% of people have income on which they have to pay income tax and/or employment income on which they have to pay National Insurance; that nearly everybody buys goods and services subject to VAT etc.<br />
<br />
If it were an important factor in designing a tax system, then we would find that the only taxes levied would be those only ever borne by a minority (for example alcohol, tobacco and gambling duty, possibly corporation tax and Business Rates).<br />
<br />
And as a matter of fact, for most households (certainly for most working age households) their earnings as a share of total national earnings is much higher than the value of their home as share of total land wealth, so shifting taxes from the former to the latter will reduce the tax bills for most households (quite dramatically, as it happens). Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com16tag:blogger.com,1999:blog-6365034639538623308.post-72652898496773471772013-01-17T20:21:00.000+00:002013-01-31T12:59:19.056+00:00U. Re-writing history• If LVT is such a great idea, how come no country has ever tried it? (<a href=http://kaalvtn.blogspot.co.uk/2013/01/u-re-writing-history.html#1>skip to article</a>)<br />
• LVT is un-British as it is an attack on land ownership (<a href=http://kaalvtn.blogspot.co.uk/2013/01/u-re-writing-history.html#2>skip to article</a>)<br />
• Land ownership is the foundation of free enterprise (<a href=http://kaalvtn.blogspot.co.uk/2013/01/u-re-writing-history.html#3>skip to article</a>)<br />
• We are a property owning democracy (<a href=http://kaalvtn.blogspot.co.uk/2013/01/u-re-writing-history.html#4>skip to article</a>)<br />
<br />
<a name="1"></a>1. <i>"If LVT is such a great idea, how come no country has ever tried it?"</i><br />
<br />
Plenty of countries have forms of LVT, or have had in the past, and it works exactly the way we expect it to work, keeps prices down, keeps land in use, discourages monopolisation, cheap to assess and collect, low evasion rates etc. <br />
<br />
The oldest surviving tax we have in the UK is Business Rates, which goes all the way back to the <a href="http://en.wikipedia.org/wiki/Elizabethan_Poor_Law_1601#Description">Poor Rates</a> introduced nationally in England & Wales in the 16th century. Queen Elizabeth I, canny politician that she was, must have twigged that the reason there were so many poor people in the first place was because they were being driven off the land; so the neatest way to alleviate poverty was to levy a tax on those people (land owners) who had caused it in the first place and dish it out to the landless. So the earliest Georgist was in fact Queen Elizabeth I. <br />
<br />
Over the centuries, the Poor Rates were then split up into Agricultural Rates (which disappeared around 1900), <a href="http://en.wikipedia.org/wiki/Rates_(tax)#United_Kingdom">Domestic Rates</a> (which ended in 1990, except in Northern Irelan) and <a href="http://en.wikipedia.org/wiki/Business_rates_in_England_and_Wales">Business Rates</a> (which is still going strong). We still had Schedule A income tax on the notional rental income from owner-occupier housing until 1963.<br />
<br />
<a name="2"></a>2. <i>"LVT is un-British as it is an attack on land ownership "</i><br />
<br />
See above. LVT is very British indeed, and we exported to idea to lots of our colonies, most of whom still have it.<br />
<br />
Historically, the bulk of UK government revenues were from annual taxes on land values, it is taxes on income, employment and output which are modern inventions, and over time, the amount collected in annual land taxes has gradually fallen.<br />
<br />
And it's not an <i>"attack on land ownership"</i>. LVT only works if people own land, or else there's nobody to pay the tax. The whole point is to maximise the benefits to owning land in the UK (such as cutting taxes on earned income) and then reclaiming those benefits for the benefit of everybody.<br />
<br />
<a name="3"></a>3. <i>"Land ownership is the foundation of free enterprise"</i><br />
<br />
Where on earth does this come from? LVT is synonymous with land ownership (if nobody owns land, then there's nobody to pay the tax).<br />
<br />
a) Not even farmers need to "own" the land they farm. Historically it was "the community" which "owned" the land (i.e. the community put together the army to fight off invaders) and people just farmed their share, strips would be allocated to individuals for one season, and when people died or became adults, the strips were reallocated. <br />
<br />
b) In more modern nation-states (feudalism), the King nominally owned all the land and everybody else was a tenant, but they all farmed away quite happily, and the King was responsible for sorting out defence, law and order and so on. In modern times, only a third of UK farmers are still tenants, but they farm away quite happily. The only important thing is that they have <i>exclusive possession</i> of the land they work.<br />
<br />
c) Businesses don't need to own land either. Office blocks and retail premises are all pretty generic, whether you rent or own your premises makes no difference. Some manufacturers need to install huge amounts of expensive equipment, so they need exclusive possession, but as we know, these businesses tend to occupy huge amounts of very low value land at the edge of towns and cities, and their LVT bills will be no more than what they currently pay in Business Rates anyway (it's just that the other taxes they pay would be halved).<br />
<br />
<a name="4"></a>4. <i>"We are a property owning democracy"</i><br />
<br />
This is another of those now-meaningless phrases, which was first used in <a href="http://www.dur.ac.uk/n.d.lee/ma.pdf">1923</a>. As it happens, the originator meant something quite different to Home-Owner-Ism. It is a modern perversion of the phrase to describe any Western country as a "property owning democracy", as over half of people do no own any land, they are paying rent or mortgage interest instead.<br />
<br />
The "democracy" owns stuff which is public, government, national or common property, like the army, the roads, council housing, the biros in No 10 Downing Street, the village green. We decide (in a very haphzard democratic fashion) who uses it, what we use it for, how much we spend on it, and how much tax or rent we collect from it.<br />
<br />
Planning laws dictate how land may be used, so the "democracy" also controls and "owns" land use. So what's wrong with taking the phrase as it was originally meant and letting the "democracy" collect the rental value, which the "democracy" creates in the first place. Without a stable government and a stable, reasonably law-abiding society, there is no land ownership and there are no rents to collect. Or have you tried buying land in Afghanisatan or Somalia recently?<br />
<br />
Surely LVT is better than the "democracy" owning half the value of everybody's output via income tax etc? If, worst case, LVT demotes a landowner to being a tenant again, then that's not as bad as being demoted from a free man to a semi-slave via income tax etc.Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com0tag:blogger.com,1999:blog-6365034639538623308.post-62195234679678057502013-01-17T20:20:00.002+00:002017-05-10T07:52:35.454+01:00V. Moralising• I've already paid enough tax (<a href=http://kaalvtn.blogspot.co.uk/2013/01/v-moralising.html#1>skip to article</a>)<br />
• LVT revenues will just be squandered on [insert unpopular item of government spending] (<a href=http://kaalvtn.blogspot.co.uk/2013/01/v-moralising.html#1b>skip to article</a>)<br />
• I've paid for my pension with my National Insurance contributions (<a href=http://kaalvtn.blogspot.co.uk/2013/01/v-moralising.html#2>skip to article</a>)<br />
• I bought my home out of taxed income (<a href=http://kaalvtn.blogspot.co.uk/2013/01/v-moralising.html#3>skip to article</a>)<br />
• An Englishman's home is his castle; if they try and take my home I will be waiting with a shotgun (<a href=http://kaalvtn.blogspot.co.uk/2013/01/v-moralising.html#4>skip to article</a>)<br />
• LVT will lead to a break up of The Great Estates (<a href=http://kaalvtn.blogspot.co.uk/2013/01/v-moralising.html#5>skip to article</a>)<br />
• Even if the original appropriation was wrong, I paid for my land in good faith and it is now all water under the bridge (<a href=http://kaalvtn.blogspot.co.uk/2013/01/v-moralising.html#6>skip to article</a>)<br />
• It's nationalisation without compensation (<a href=http://kaalvtn.blogspot.co.uk/2013/01/v-moralising.html#7>skip to article</a>)<br />
• Land ownership is widely spread and no longer a monopoly (<a href=http://kaalvtn.blogspot.co.uk/2013/01/v-moralising.html#8>skip to article</a>)<br />
<br />
<a name="1"></a>1. <i>"I've already paid enough tax "</i><br />
<br />
This is usually from the pensioners' corner. What they merrily overlook is that they are net recipients of tax by a huge margin. <br />
<br />
<a href="http://fullfact.org/articles/pensioners_tax_income_direct_indirect-27677">Fullfact.org</a> put the numbers from <a href="http://www.metlife.co.uk/uk/Press_Room/20120725-PENSIONERTAX.pdf">MetLife Inc</a> through the wringer and concluded that the quoted figure of £42 billion a year seemed reasonably accurate.<br />
<br />
And what do pensioners get for that £42 billion? According to Fullfact.org (same link), the value of NHS treatment for pensioners was £40 billion a year. What else do they get? Ah, £94 billion a year in old age pensions, Pensions Credit etc (<a href="http://www.dwp.gov.uk/docs/dwp-annual-report-and-accounts-2011-2012.pdf">DWP Annual Report 2011-12</a>, pages 124-125), add to that £25 billion a year in public sector pensions, maybe £10 billion for long term care. And don't they use libraries, 'phone the police and fire brigade, benefit from law and order, street lighting, defence and all that like everybody else? Let's allocate them a one-fifth share of the cost of that last lot, brings us up to £184 billion from the taxpayer, for which they pay £42 billion, they are up by £142 billion a year.<br />
<br />
Under a flat 20% tax system, the amount of tax they have to pay would fall to about £15 billion (occupational + private pensions = £75 billion a year x 20% = £15 billion), and they wouldn't have to pay any LVT if they go for the deferment/roll-up option, it will be their heirs who bear the tax. So what's the problem?<br />
<br />
<a name="1"></a>1b. <i>"LVT revenues will just be squandered on [insert unpopular item of government spending] "</i><br />
<br />
When people run out of sensible arguments, they then resort to this level of stupidity. I have seen this surprisingly often. Included here for a bit of light relief, as not worthy of serious further debate.<br />
<br />
<a name="2"></a>2. <i>"I've paid for my pension with my National Insurance contributions"</i><br />
<br />
Not quite relevant to the LVT debate, but somebody always throws it in, the answer is, no you didn't. <br />
<br />
The UK (like most countries) runs a pay-as-you-go system. This is probably the cheapest and least risky and hence best kind of system to run, but let's at least be honest about it. Today's pensioners paid for the old age pensions of people who were pensioners back then, in other words, they paid a lot less. People didn't live as long, so there were far fewer pensioners-per-taxpayer; the amount spent on the NHS treatment was a tiny fraction of what it is now, and the amount of NHS spending on pensioners was a smaller fraction of that than it is now etc. Broadly speaking, today's pensioners are <i>massively up on the deal</i>.<br />
<br />
So pensioners, have a heart, you did not pay for your own pension, it's today's workers and taxpayers who are paying for it. In theory, everybody under the age of 65 could emigrate, and what are you going to live off then? The legal obligation to pay for you only applies to the extent that somebody lives in the UK and has to pay tax here.<br />
<br />
<a name="3"></a>3. <i>"I bought my land out of taxed income"</i><br />
<br />
This rolls so glibly off the tongue, but it is a big fat lie. <br />
<br />
a) Whatever small deposit people paid donkeys' years ago was out of taxed income, but that was just prepayment of rent and usually far less than the cost/value of the bricks and mortar. LVT will never push the selling price of land and buildings to below the cost/value of the bricks and mortar, so you will still get more than your original money back if you decide to sell again.<br />
<br />
b) The rest was a mortgage, and the mortgage payments over the nest few years <i>were paid out of the money which was being saved in rent</i>. Because the Home-Owner-Ists rigged things via inflation, the amount of mortgage payments was a progressively smaller proportion of the rent saved as time went on. And seeing as rent is just privately collected tax, any homeowner who bought more than ten years ago <i>has paid a lot less tax than somebody who was renting</i>. It's a simple fact that if all houses disappeared overnight and the insurance companies refused to pay up, people who bought more than fifteen years ago will still be far better off than they would have been had they stayed renting the whole time.<br />
<br />
c) To cap it all, many countries give homebuyers subsidies, whether that is cash grants, subsidised mortgages or tax relief for mortgage interest. <br />
<br />
In the UK, like most countries, most people who pay for the bulk of the purchase price by taking out a mortgage, usually 20 to 25 years at the onset with a twenty per cent deposit. MIRAS was phased out in stages before disappearing in 2000 or thereabouts. So nearly everybody who bought before the mid-1970s, paying an average interest rate of 8% paid more in interest than the original purchase price of the house, and the value of the tax break/subsidy was broadly equivalent to the amount of tax paid on the income earned to buy the house.<br />
<br />
d) There are of course plenty of people who are part way through paying off their mortgage (out of earned income). If they have only just started paying it off, then the income tax etc they save in future will be more than any extra tax they have to pay on their home. There will of course be some people stuck in the middle, who received little benefit from MIRAS and have largely paid off their mortgage, but you can't make an omelette without breaking eggs.<br />
<br />
<a name="4"></a>4. <i>"An Englishman's home is his castle; if they try and take my home I will be waiting with a shotgun"</i><br />
<br />
a) The original meaning of this phrase (which dates back to <a href="http://www.phrases.org.uk/meanings/an-englishmans-home-is-his-castle.html">at least 1628</a>) had nothing to do with land "ownership", it was a general rule of common law that you can do what you like in your own home. It does not matter whether you rent or own that home. And if the police want to search your home (rented or owned), they usually need a warrant. <br />
<br />
All very sensible. And in return for that privilege and protection, you pay rent, or mortgage or LVT. Or you might as well argue <i>"I paid for my car, so I shouldn't have to contribute towards cost of maintaining public roads and the pollution I cause through fuel duty."</i><br />
<br />
b) For some reason, the Faux Libs get all trigger happy when you mention LVT. I do wonder where all this aggression comes from? If they are so averse to paying taxes, they can start right now, they can walk into a shop with a shotgun and demand a 1/6 discount on the basis that they refuse to pay VAT. They can threaten the payroll lady with a shotgun and demand that their salary be paid out gross without deduction of PAYE. They can do the same in the bank when they receive interest net of 20% income tax. And so on. So, please get on with it lads, then you'll all be safely locked up in jail and no threat to me when we finally introduce LVT.<br />
<br />
When you point out to them that if they have to stand guard over "their" land 24/7, they'll never have time to earn any money. Aha, they say, we will organise standing patrols with our neighbours and we will take it in turns, an hour or two a day each. OK, if they actually get away with it and form a breakaway republic, have they not now become "the state"? The very thing they claim to despise? If I want to live in their wonderful libertarian republic, would they not expect me to do my share of standing guard with a shotgun? How is that not a kind of tribute or a tax? What if all the residents decide they have better things to do, and all chip in a bit of money and pay for a few mercenaries to protect their borders? How is that not a tax? So we are back where we started.<br />
<br />
<a name="5"></a>5. <i>"LVT will lead to a break up of The Great Estates"</i><br />
<br />
I've even seen this one once or twice. Why on earth does anybody think it's a good idea for a few people to own far more land than they can possibly use themselves and to have a lot of tenants on it? What about the tenants' right to own land, they are the ones doing all the work, aren't they? Further, owning land will still be profitable, there will still be net rental income, unless a landowner is heavily mortgaged.<br />
<br />
Another phrase which hacks me off is this boast that <i>"The land has been in the family for ... generations"</i> as if that makes people special. The flip side of this is the derogatory term <i>"nouveau riche"</i>, so some Victorian industrialist who has bought a stately home off some landed aristocrat who has wasted all his unearned income gets looked down on. And what's so special about having lived off the land which your distant ancestors the Normans stole? Does anybody think that the land could care less which human beings claim to own it? The land can manage quite happily without them, it's like two fleas arguing over who owns the dog.<br />
<br />
<a name="6"></a>6. <i>"Even if the original appropriation was wrong, I paid for my land in good faith and it is now all water under the bridge"</i><br />
<br />
Aha, but it's not the original appropriation which matters, what matters is what happens now and in the future. Bare land is not worth much, what matters is the flow of wealth or benefits which the landowner receives by virtue of owning the land (the rental value) today, tomorrow, this year and next year, all of which are generated by the whole of society.<br />
<br />
It's like the difference between <br />
- me stealing your car (you'd claim on the insurance, get a new one, and you'd get over it) and <br />
- me stealing your car and expecting you to pay for the petrol, insurance, road tax and repairs as long as it's on the road. And then expecting you to buy me a new one when it goes on the scrap heap. And another one when that one wears out. For ever.<br />
<br />
More specifically, there are the legal concepts of (a) "privity of contract" and (b) the distinction between the parties to a contract and the subject matter of the contract.<br />
<br />
a) "Privity of contract" means that Mr A and Mr B can make a contract between themselves, with mutual obligations. So Mr A can agree to work for Mr B for a wage; or Mr A can sell something to Mr B. Mr A gives his labour or a car to Mr B, and Mr B gives cash to Mr A.<br />
<br />
So a private contract is never binding on third parties. So Mr A cannot agree to sell Mr C's labour or Mr C's car to Mr B (that would be slavery or sale of stolen goods) without Mr C agreeing to enter into the contract and receiving some consideration. If Mr A runs an employment agency or sells used cars on commission, then Mr B pays, Mr A takes his cut for bringing the two parties (Mr B and Mr C) together and Mr C receives, hopefully, a better wage or a better price than if he had looked for a job or tried to sell his car himself.<br />
<br />
b) If Mr A sells his land to Mr B, then Mr A's part of the contract is to vacate the premises, sign some bits of paper or hand over the titles deeds and hand over the keys. Mr B hands over cash and/or takes on a mortgage. The private element of the contract is thereby concluded.<br />
<br />
But what is the "subject matter" of a contract for sale of land? It is the land itself, and that "land" only has value because Mr B now has a privileged position as against everybody else in the whole of society in perpetuity. It is the whole of society which provides that value (by respecting Mr B's exclusive right to possession; by paying for the police to protect Mr B's right to exclusive possession; by paying for the roads and schools etc out of their taxes; by running all the private businesses in the vicinity, where Mr B or his tenants can earn money or spend their money). <br />
<br />
Mr A plays no greater part in all this than anybody else, so why does he receive all the money?<br />
<br />
c) We can put the two concepts together and illustrate the point using an extreme example. <br />
<br />
Under the EU's farm subsidy scheme, people who own farmland are entitled to a cash subsidy of around £80 per acre on average (in the UK - other Member States pay smaller or higher amounts). So when you buy farmland, you are paying for two things, the "land" itself and the future subsidy stream paid for by taxpayers generally.<br />
<br />
It is perfectly legal for a landowner to split this into two and to sell the land and the subsidy stream as two separate items (or retain one and sell the other). So Mr A might keep his farmland and sell the subsidy stream to Mr B. Let's say that the subsidies are £10,000 a year and Mr B pays £500,000 for them (his gamble being that the UK government will continue to pay for ever more).<br />
<br />
Now, what if a future UK government realises the error of its ways and reduces or scrap the subsidy payments. Would it be reasonable for Mr B to attempt to force the UK government to divert £10,000 of taxpayers' money into his pockets every year for nothing in return, on the simple basis that "he has paid for them"? Why would a private contract between Mr A and Mr B be binding on all third parties - i.e. UK taxpayers - in perpetuity?<br />
<br />
Surely not, in which case, why would it be any different if Mr A retains the subsidies and sells the "land" to Mr B? How on earth can that private contract be binding on all other UK citizens (who are then forced to maintain the value of that land as described above) in perpetuity? Why shouldn't all other UK citizens be entitled to that value, which inevitably would have to be collected by a central national body ("the government") and either spent on stuff which benefits everybody or dished out as a Citizen's Income/personal allowance?<br />
<br />
<a name="7"></a>7. <i>"It's nationalisation without compensation "</i><br />
<br />
Firstly, it's not <i>"nationalisation"</i> because that would imply taking away something private or personal. Land rents are not private or personal, they belong to the location and are generated by the whole of society, or the nation-state (or whatever abstract term you wish to use). Even if LVT is nationalisation (which it isn't), it is only nationalisation of <i>land rents</i> and not the land itself. And even if it is nationalisation, then surely it is not as bad as nationalising half of the wealth generated by productive businesses and their employees (I don't see any big dividing line between the two).<br />
<br />
I've done <a href="http://markwadsworth.blogspot.co.uk/2013/01/killer-arguments-against-lvt-not-298.html">a longer post</a> on compensation, it's a whole topic in itself, but here are the bullet points:<br />
<br />
a) If the government had to compensate people for the amount of tax they pay, then it would never raise a penny.<br />
<br />
b) All occupiers of land are getting compensation because they are receiving/consuming rental value of land worth at least as much as the tax.<br />
<br />
c) LVT is in itself the compensation that a land owner has to pay "everybody else" for the state-protected right to exclude them and hence place a burden on them. A bit like the "polluter pays" principle.<br />
<br />
d) Similarly, every individual, including every individual land owner, is also being excluded from all the bits of land he doesn't own, so is entitled to his share of the tax paid by all the other land owners (Citizen's Income or personal allowance). That's your compensation. <br />
<br />
e) Proper LVT'ers are as united in their loathing of taxes on output, earnings and profits as they are united in favour of taxes on land (and other government protected monopolies or cartels). So another way in which people will be compensated is that for every £1 LVT they pay, their other taxes go down by £1.<br />
<br />
f) For sure, older homeowners will see the unearned windfall paper capital gains they have accumulated over the years disappear, but was that a real gain anyway? What is morally wrong with a windfall tax on a windfall gain?<br />
<br />
h) In practical terms, all these old people who wail about having "bought their houses out of taxed income" effectively got their houses for free; they paid a tuppence ha'penny deposit and the mortgage payments were a lot less than what they would have paid in rent. They have lived rent free for decades and have already had their money back several times over. <br />
<br />
i) The only people deserving in any way of compensation are recent first time buyers who were tricked into taking out large mortgages in the last few years and who might end up in negative equity. They'll get automatic compensation because by and large they will have the biggest tax cuts, but I'm not averse to writing off the underwater element of their debts. The banks will cope somehow. <br />
<br />
j) There are some freebies as well: with taxes on productive activity reduced or phased out, the economy can grow by at least ten or fifteen percent. <br />
<br />
<a name="8"></a>8. <i>"Land ownership is widely spread and no longer a monopoly"</i><br />
<br />
A moral argument for LVT is that as land is a state-protected monopoly right (without a state, there is no landownership; once you have enough landowners co-operating for mutual benefit, you have a state), land rents are fair game for taxation. The pragmatic argument is that taxing monopoly income (cash or in kind) does not disincentives wealth creating economic activity, it has no deadweight costs.<br />
<br />
<i>"Ah yes,"</i> cry the Homeys, <i>"But it's not like under the Normans when a few people owned all the land. That was a monopoly. Nowadays, millions of people - in fact a majority of households - own some land, and when it comes to selling it or renting it, they are all competing with each other and the potential buyer or tenant can pick and choose."</i><br />
<br />
Even if were true that land isn't inherently a monopoly (and it isn't true), so what? The Homeys are happy with taxing non-monopoly earned income so even in their terms that is not an argument against LVT.<br />
<br />
And clearly it is true that land ownership is always a cartel or a monopoly. The prices and rents charged are much the same whether each individual plot is owned by a different individual or whether one powerful landowner owns them all. Imagine that all the land and all the buildings in a town or even in the whole of the country belonged to one corporation or one family. Would they charge higher or lower rents for an individual building than a small owner? They'd charge much the same because the price is set by the willingness and ability of the purchaser or tenant to pay and the relative advantages of each site. If they get too greedy, then people will rent less land and the monopolist's total income will fall.<br />
<br />
This is quite different to e.g. radio spectrum. If four telco's own a quarter of the available frequencies each, they are an oligopoly, but the customer couldn't care less which particular frequency he's on so those four telco's are still competing. <br />
<br />
Our other clue is that it is quite easy to envisage a tax system with 100% LVT and no taxes on income. People would still go to work and spend money, businesses would still thrive, buildings would still be built and maintained. Contrast that with a tax system with 100% income and no taxes on land. Everything would grind to a halt within a few hours.Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com3tag:blogger.com,1999:blog-6365034639538623308.post-85961281527510504592013-01-17T20:19:00.002+00:002013-02-09T12:00:28.984+00:00W. I want to have my cake and eat it• It's just my home - it doesn't place a burden on anybody (<a href=http://kaalvtn.blogspot.co.uk/2013/01/w-i-want-to-have-my-cake-and-eat-it.html#1>skip to article</a>)<br />
• All the new development will place a burden on me (<a href=http://kaalvtn.blogspot.co.uk/2013/01/w-i-want-to-have-my-cake-and-eat-it.html#2>skip to article</a>)<br />
• My home is my/gives me security (<a href=http://kaalvtn.blogspot.co.uk/2013/01/w-i-want-to-have-my-cake-and-eat-it.html#3>skip to article</a>)<br />
• My home is my pension (<a href=http://kaalvtn.blogspot.co.uk/2013/01/w-i-want-to-have-my-cake-and-eat-it.html#4>skip to article</a>)<br />
• I want to leave my home to my children (<a href=http://kaalvtn.blogspot.co.uk/2013/01/w-i-want-to-have-my-cake-and-eat-it.html#5>skip to article</a>)<br />
• Land is the only asset which has beaten inflation (<a href=http://kaalvtn.blogspot.co.uk/2013/01/w-i-want-to-have-my-cake-and-eat-it.html#6>skip to article</a>)<br />
• With LVT, you would never properly own land (<a href=http://kaalvtn.blogspot.co.uk/2013/01/w-i-want-to-have-my-cake-and-eat-it.html#7>skip to article</a>)<br />
<br />
<a name="1"></a>1. <i>"It's just my home - it doesn't place a burden on anybody"</i><br />
<br />
This is actually an argument against taxes on output and employment: <i>"It's just my job - I don't place a burden on anybody by going out to work or running a business, and in fact, society as a whole benefits from me doing so."</i><br />
<br />
And yes, all landownership places a burden on others. <br />
<br />
a) There's only so much land to go round and some bits are more desirable than other bits. And how desirable bits of land are is measured by their rental value - you can say that this is the price people are willing to pay to occupy it, or that the rental value is the burden which the occupier places on others by excluding them.<br />
<br />
b) For example, lots of people would like to live in the catchment area of a good state school, but not everybody can (unless all state schools were equally brilliant, but they can't be because how good a school is depends largely on the children going there and their parents). So for every family who lives in that catchment area, there is another family who is excluded. That's why house prices (and rents) are higher in the catchment area of good schools. <br />
<br />
c) So whoever lives in that area is excluding somebody else from a free place at a good state school <i>despite the fact that all parents are paying for the cost of state education through their taxes</i>. Under current rules, you pay the same income tax or council tax wherever you live, but if you want to be in the good catchment area, <i>you have to pay extra to buy a rent a house there, and you pay that money to somebody who is not providing or paying for that school</i>. Under LVT, if you want to live in the good catchment area, you'll pay more LVT; and if you are excluded from the area, you pay less LVT (in either case, you'll be paying less tax on your earnings).<br />
<br />
d) The same applies to privately provided opportunities. The main driver for local average rents or house prices are average local wages. Who generates those wages? The employers and employees between them. But if you want to open a business or find a job in a high profit/high wage area, you will find yourself handing over a large chunk of your extra profits/wages to a landlord, just for the privilege of having premises in/living in a higher wage area.<br />
<br />
e) This is at its most extreme in London, and the closer to the centre you are, the higher are the rents (<a href="http://england.shelter.org.uk/__data/assets/pdf_file/0008/425708/London_Rent_Watch.pdf">Shelter</a>). Paying more than half your net income in rent is quite normal. So the people who work and live in those areas are at best breaking even (extra profits/wages but extra rents). The winner every time is the landlord. <br />
<br />
f) Of course, a lot of people in high wage areas own their own premises or homes, so they are getting the benefits without paying for them - and they are excluding other businesses or workers from moving to those areas. <br />
<br />
g) Under LVT, the extra rental value generated by the businesses and workers in high proft/wage areas is shared between those working in the area and those excluded from it, instead of everything extra accruing to landowners (whether landlords or owner-occupiers).<br />
<br />
<a name="2"></a>2. <i>"All the new development will place a burden on me"</i><br />
<br />
This is a NIMBY argument rather than one against LVT, but it just illustrates how Home-Owner-Ists (which includes NIMBYs) are happy to completely contradict themselves.<br />
<br />
Yes, if you currently own a house right at the edge of the village and have a beautiful unspoilt view, you don't want more houses being built obstructing the view. But by the same token, <i>your house</i> is blocking the view for the houses behind it.<br />
<br />
So they'll wail on about preserving the Hallowed Green Belt and food security and so on, before coming up with this:<br />
<br />
<i>"Ah... but if more people move to this area, it will increase pressure on local services!"</i> which again is nonsense (except in the very short term). 'Local services' are provided pro-rata to the number of people living in an area and not pro-rata to the surface area. That's why there are more coppers, teachers and nurses in London (pop. 8 million on 600 square miles) than in the whole of Scotland (pop. 5 million on 30,000 square miles). <br />
<br />
And it won't just be users of services moving to the area, some of the people who move into the new houses will be coppers, teachers, nurses, dustbin men, who don't get paid particularly high wages and are most in need of affordable housing; to the extent that building more housing keeps prices and rents down, 'local services' will be better if there's more housing because it will make it easier to attract coppers, teachers, nurses and dustbinmen to the area.<br />
<br />
<a name="3"></a>3. <i>"My home is my/gives me security"</i><br />
<br />
No it isn't and doesn't. <br />
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A house is a building and it keeps you and your belongings physically protected, that's all. All the other benefits you get from owning a house are provided by <i>other people</i> and are beyond your control.<br />
<br />
Without some sort of law enorcement in your area, the house isn't much good to you if you daren't step out of the door. Without local schools, families won't want to live there. Without NHS and so on, pensioners won't survive there. Without local jobs, or a welfare and pensions system if you cannot find work or are too old to work, you wouldn't have an income and you would starve. As people in the Pathfinder areas found to their cost, if the majority of other people in the area move away, all of a sudden, <a href="http://www.guardian.co.uk/housing-network/2011/jun/29/pathfinders-housing-market-renewal">your house is nigh worthless</a>.<br />
<br />
<a name="4"></a>4. <i>"My home is my pension"</i><br />
<br />
Fully agreed, a home is like any other asset to see you through your old age.<br />
<br />
a) When you retire, you need to consume food, heating, water and electricity every day, new clothes occasionally and a TV to watch. And that's what the old age pension covers, those basics. <br />
<br />
b) If you want more than that, you save up a separate fund. You can either save up cash and spend it as you go and gamble on not running out before you die, or you can buy an annuity with your pension fund, which gives you a fixed amount of cash every year, however long you live, and when you die, the payments stop. It's entirely your choice how much to save up and what you'll end up spending it on.<br />
<br />
c) Your home will be the asset you use to pay for the value of living in a nicer area (i.e. the LVT), as there would be a deferment/roll-up option. If you live long enough in retirement, the accrued and unpaid tax will be more than the value of your home when you die, so actually you've come out ahead on the deal. That's exactly the same as if you saved up an annuity which is sufficient to pay rent/tax for the rest of your life.<br />
<br />
<a name="5"></a>5. <i>"I want to leave my home to my children"</i><br />
<br />
Hang about here, didn't we just agree that your home is your pension? <br />
<br />
a) A pension is a personal asset, you cannot take it with you and you cannot pass it on. If you want to pass on more to your children, then you will have to live a more modest lifestyle, whether that's during your working life or your retirement.<br />
<br />
So the question is: do you want to make your children and grandchildren better off?<br />
<br />
b) For a given total tax take, we can shift between taxing the rental value of land or taxing earned income. If we stick with the present system of taxing earned income, then people have lower incomes from working (bad for incentives) and some of them will make a windfall gain when they inherit a house and usually later in life; a minority indeed will be making very big windfall gains indeed. But those windfall gains are ultimately funded out of the income tax which <i>everybody</i> has to pay, whether they inherit or not. <br />
<br />
c) Although a cuddly liberal at heart, I'm always a bit nervous about <i>downwards</i> redistribution (because of the damaging impact on work incentives), but at least that only disincentivises work at the very bottom, those people whose output is of little value.<br />
<br />
d) But taxing earnings instead of the rental value of land is clearly <i>upwards</i> redistribution with an <i>even worse impact on work incentives</i> because it disintentivises work <i>all the way up the income/value scale</i>; the people who stand to inherit nothing get clobbered with taxes on their earnings, and the people who stand to inherit valuable land don't even need to bother working in the first place.<br />
<br />
e) Basic maths, and the spreadsheets I have embedded (e.g. <a href="http://kaalvtn.blogspot.co.uk/2013/01/f-lvt-is-attack-on-families.html#2">here</a>)show that the average working family would pay £100,000s less in tax over their working lives; maybe £500,000 less for higher earners. How many people hope to inherit land and buildings worth £100,000s or even £500,000? A few per cent maybe? So very few of your children and grandchildren will get their money back. It's the One Per Cent, who stand to inherit millions or tens of millions of pounds worth of land and buildings who really benefit, all paid for out of the taxes on earnings <i>which you force your children and grandchildren to pay</i>.<br />
<br />
Now try that question again: do you want your children and grandchildren to be better off?<br />
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<a name="6"></a>6. <i>"Land is the only asset which has beaten inflation"</i><br />
<br />
Yes of course, but so what?<br />
<br />
a) That's partly because of the natural tendency for rents and house prices to rise ever so slightly faster than wages in the longer term, but also because landownership is ever more subsidised and ever more lightly taxed.<br />
<br />
b) And the most hideous subsidy to landownership is monetary inflation, primarily fuelled by low interest rates, which push up house prices and push up inflation at the same time. So savers are losing wealth and landowners - especially highly leveraged ones, are gaining wealth at their expense.<br />
<br />
c) Under LVT, house prices will still keep pace with inflation, it's just that all other asset classes, i.e. productive investment whether directly in shares in businesses or cash in the bank will do correspondingly better.<br />
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d) The Homey logic here appears to be: land prices beat inflation, so <i>they should be lightly taxed</i> (despite the <i>main reason</i> why they have beaten inflation being because they are already heavily subsidised and lightly taxed). <br />
<br />
Clearly, cash savings are being beaten by inflation, and shares haven't been doing too well for the past fifteen years either (income from these sources is very heavily taxed), so if we apply their logic to cash and shares, then cash and shares should be <i>even more heavily taxed</i>.<br />
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<a name="7"></a>7. <i>"With LVT, you would never properly own land"</i><br />
<br />
That's a philosophical point and it depends what you mean by "ownership".<br />
<br />
a) Do you own your own body? Yes, but you still need to spend money on food and so on or you will die. Do you own your own car? Yes, but you still need to spend money on fuel and repairs and so on, or it will be of no use to you. Even if you own your house, you still need to pay for repairs, heating, utilities, insurance and so on, or else that won't be much good to you either.<br />
<br />
b) Do you own the right to vote? Yes, because society says so, but that is an inalienable right, you cannot sell it or buy it or pass it to your children when you die. The right to vote is of benefit to you, but the fact that fifty million other people have the right to vote differently is a burden on you.<br />
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c) The land itself is not so important, it is the rental value, that part generated by 'everybody else' (whether by private individuals or 'the state') which is important. Instead of paying a large lump sum in advance for the land and keeping your fingers crossed that the area goes uphill rather than downhill, under LVT, people will effectively get land for free and just pay the rental value every year, if it goes up you pay more, if it goes down you pay less; so there's far less risk (negative equity will be nigh impossible).<br />
<br />
d) So what you will properly own is the building themselves (unaffected by LVT) and the inalienable right to a personal allowance or Citizen's Income, which will cover the LVT on homes in the bottom half anyway. It's only if you want to live in the top half that you would actually pay anything.<br />
<br />
e) The personal allowance or the Citizen's Income is like the right to vote. If we all agree that it is a good thing, then everybody gets it and everybody gets it equally. And a household's total personal allowances/Citizen's Income will always be enough to pay the LVT on the bottom half of homes suitable for that size household, that's basic maths. So if you define "ownership" as meaning "for no annual cash outlay", then everybody already owns a lower-value plot of land as of right; if you want something nicer, then pay for it. <br />
<br />
f) And however you twist it, surely it is better to pay LVT to the government and to keep more (or all) the value of your own labour and enterprise than it is to pay large sums to private individuals to acquire land in the first place (the capitalised value of the LVT you aren't paying) and then to have to hand over half your earned income in income tax, NIC, VAT and so on?Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com0tag:blogger.com,1999:blog-6365034639538623308.post-89688130793290324972013-01-17T20:18:00.004+00:002013-05-18T13:14:06.199+01:00X. Semi-literate Faux Libertarian argumentsWhen I say "semi-literate" what I mean is that they have read stuff but not understood it. I use the expression Faux Libertarian to mean people who don't believe in economic liberty; they grasp that it's not good if 'the state' takes half your earnings in tax, but don't understand that land ownership and the nation-state are synonymous, you cannot have one without the other. So any money you pay to rent or buy land is in fact a privately collected tax. <br />
<br />
• Even Karl Marx said that LVT wouldn’t work (<a href=http://kaalvtn.blogspot.co.uk/2013/01/x-semi-literate-faux-libertarian.html#1>skip to article</a>)<br />
• Karl Marx later conceded that LVT would work (<a href=http://kaalvtn.blogspot.co.uk/2013/01/x-semi-literate-faux-libertarian.html#2>skip to article</a>)<br />
• Ricardo's law only applies to agricultural economies (<a href=http://kaalvtn.blogspot.co.uk/2013/01/x-semi-literate-faux-libertarian.html#3>skip to article</a>)<br />
• We are no longer a land-based economy (<a href=http://kaalvtn.blogspot.co.uk/2013/01/x-semi-literate-faux-libertarian.html#4>skip to article</a>)<br />
• With the internet, locations are no longer so important (<a href=http://kaalvtn.blogspot.co.uk/2013/01/x-semi-literate-faux-libertarian.html#5>skip to article</a>)<br />
• All taxes are equally bad. Private individuals spend money more efficiently than the government. (<a href=http://kaalvtn.blogspot.co.uk/2013/01/x-semi-literate-faux-libertarian.html#6>skip to article</a>)<br />
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<a name="1"></a>1. <i>"Even Karl Marx said that LVT wouldn’t work"</i><br />
<br />
This much is true, see <a href="http://www.marxists.org/archive/marx/works/1881/letters/81_06_20.htm">here</a>: <i>"{land Value Tax] is a frank expression of the hatred which the industrial capitalist dedicates to the landed proprietor, who seems to him a useless and superfluous element in the general total of bourgeois production.”</i><br />
<br />
Which is a fair summary, apart from the fact that the landed proprietor is useless and superfluous from the point of view of the worker as well, the interests of employee ('worker') and employer ('industrial capitalist') are very closely aligned, there is no absolute dividing line between the two (UK pension funds hold a lot of shares, so to a large extent albeit very indirectly, UK businesses are worker-owned. It's just that the people in the City of London are paying themselves handsomely to shuffle bits of paper round.<br />
<br />
Nonetheless, the Faux Lib's like to misinterpret this to imply that <i>even Marx thought that LVT was going too far</i>, i.e. that LVT is even worse than Marxism (whatever that is).<br />
<br />
<a name="2"></a>2. <i>"Karl Marx later conceded that LVT would work"</i><br />
<br />
Rather embarrassingly for all concerned, Marx <a href="http://www.cooperativeindividualism.org/brinsmade-robert_karl-marx-and-henry-george-1916.html">later dropped</a> some of his antagonism towards the "industrial capitalist" (recognising that in a free market his profits would be competed away) and said that actually it was only landowners who had unearned or undeserved gains. <br />
<br />
In which case the Faux Lib's will trumpet - you see! Karl Marx thought it LVT was a good idea, therefore LVT is Marxist and therefore bad!<br />
<br />
<a name="3"></a>3. <i>"Ricardo's law only applies to agricultural economies"</i> <br />
<br />
You can read up on Ricardo's Law of Rent at <a href="http://en.wikipedia.org/wiki/Law_of_rent">Wiki</a>. <br />
<br />
a) It is usually explained in terms of farmland, because that is easiest to understand, although Ricardo himself used the law to explain rent differentials for urban/developed land.<br />
<br />
b) The average wages of a landless worker will tend to be much the same anywhere in the country because there is free movement within the country so wage differentials quickly get competed away. Those wages will tend towards just enough to pay for the bare minimum, any lower and workers would revolt, turn to crime, starve or emigrate. Let's call it £10 per year. Assuming one worker per field (to save faffing about with units), if a field will produce £11's worth of crops, the landowner keeps £1 for himself. If the field will produce £12's worth of crops, the landowner keeps £2 for himself and so on.<br />
<br />
c) If a worker wants to become self-employed and rent his own field, the rent which the landowner charges will be the same as the net value he could keep from employing somebody. So the rent for a field which will produce £11's worth of crops is £1, the rent for a field which will produce £12's worth is £2 and so on.<br />
<br />
So far so good.<br />
<br />
d) Ricardo (and Adam Smith when he was still radical) both concluded that if the rental value is taxed, it does not deter production and does not depress wages. From the point of view of the self-employed worker, it makes no difference whether he pays £1 in rent or £1 in tax, that is just money that goes up to the higher authority. If the owner of a field yielding £13 per acre has to pay £3 tax, then he cannot leave the field fallow and he cannot demand a rent that is higher than £3, because that would push the self-employed worker's income down to less than £10 and he would go elsewhere, starve, emigrate etc.<br />
<br />
e) We know perfectly well that we have had towns and cities for thousands of years, and the great cities of the past were either administrative centres, wherever the king or emperor or pharoah happened to live, and also trading hubs. And we know that land was much more expensive in cities than out in the countryside because buildings are packed much more tightly together and plot sizes are much smaller. A Roman nobleman in the countryside would have a villa surrounded by a huge garden; a Roman nobleman in Rome would probably have a villa with a small courtyard. So rental values were always higher in urban centres than in the countryside and Ricardo and Adam Smith knew that as well. Adam Smith made it quite clear that the rental value of urban land was the most suitable subject for taxation, and he appeared to be in two minds about taxing farm land.<br />
<br />
<a name="4"></a>4. <i>"We are no longer a land-based economy"</i><br />
<br />
(They sometimes phrase this as: <i>"We do not understand your obsession with land, land isn't important in a modern economy, therefore what's the point in taxing rental values?"</i>. This is the same mistake as Karl Marx originally made (see above), and equal and opposite to the Homey arguments in <a href=http://kaalvtn.blogspot.co.uk/2013/01/o-land-prices-are-real-wealth-or-capital.html>Section O</a>, which are that the selling price of land represents real wealth or capital and that taxing it would destroy wealth or capital. As usual, both arguments are wrong and cancel each other out anyway.)<br />
<br />
Wrong. <br />
<br />
a) We are not an <i>agricultural economy</i> (even though the UK is or could be more or less self-sufficient in food), less than one per cent of the population are in farming; farm gate prices only amount to less than one per cent of GDP and the total rental value of all UK farmland/buildings is less than one per cent of the total rental value of urban/developed land and buildings. Those are just <a href="http://kaalvtn.blogspot.co.uk/2013/01/r-farmers-will-all-go-bankrupt.html#1">facts</a>.<br />
<br />
b) But everything is land-based, we use land for houses, roads, offices, shops, radio transmitter masts etc. Some people live in house boats, but these still have to be moored somewhere, they still need land/location, and all that separates them from the land is a few feet of water. We are just as much a land-based economy as we ever were and always will be (until we all live in hot air balloons or spaceships or something).<br />
<br />
c) Ricardo's law of rent is still easily observable today. There <i>are</i> differentials between average incomes (before housing costs) in different parts of the UK (or any other country for that matter) but most or all of the differential goes into higher rents, even <a href="http://www.dailymail.co.uk/money/mortgageshome/article-2141824/The-cost-renting-flats-surges-7-time-high-young-priced-buying.html">The Daily Mail</a> reports this regularly. A typical private sector worker (hairdresser, receptionist, bus driver, shop worker) can increase his or her income before rent by (say) £5,000 moving from a low wage area to London, but will end up paying £5,000 more in rent. So after housing costs (actual or notional), net household incomes are pretty much the same everywhere in the country, I refer to another article in <a href="http://www.dailymail.co.uk/news/article-180705/Why-great-north.html#axzz2JlAQ60CJ">The Daily Mail</a> which reports exactly this effect.<br />
<br />
d) So the analogy with farming is this: if the "yield" from a job in a low-yield area is £11, then the rent is £1, and if the yield is £15 in a high-yield area, then the rent is £5, and true net wages after housing costs are more or less the same everywhere. In a roundabout sort of way, Ricardo's Law of Rent is exactly the same as the estate agent's mantra: <i>"Location, location, location"</i>.<br />
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e0 The countervailing force which prevents 100% of any growth in the economy going into higher rents is that over time, people also have a higher expectation of what the basic minimum is; if they get less than that they will not exactly starve, but they will revolt, strike, emigrate or turn to crime. So with the farming example, if some new technique is invented which increases the yield of all fields by ten percent, then wages (or the net profit of a self-employed worker) will creep up a bit, from £10 to £11, but mathematically, rents will still take a slightly larger slice of the whole cake.<br />
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<a name="5"></a>5. <i>"With the internet, locations are no longer so important"</i><br />
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a) People sometimes show how little they understand by throwing this into the mix. The internet is merely a great way of communicating, but you could have said the same thing when they invented writing and the messenger boy or the carrier pigeon, or the telegraph, radio, telephone or fax. The differentials in rental values between the city centre, the suburbs and farm land; between nice and grotty areas; between high wage and low wage areas; between plots with restrictive and with less restrictive planning permission will always be there. <br />
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b) Whatever you do over the internet, it still requires land to hold the cables (or the WiFi transmitters), goods sold over eBay and Amazon still have to be manufactured somewhere and delivered from warehouses somewhere to shops or homes somewhere else. We can safely assume that the Internet increases our productive capacity and therefore the total rental value of UK land. Houses with broadband sell or rent for more than houses with only sporadic 3G reception; and those sell or rent for more than ones without either, or without even a telephone line. Conversely, rents on the High Street might have fallen a bit because a lot of people shop online. But the rents for factories and warehouses are unaffected.<br />
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c) At this stage, the Faux Lib's like to throw in a diagonal comparison and say: <i>"But with LVT, a best-selling author would be able to live in a remote croft, email his books to his publisher, and not pay any tax; he'll pay less tax than the printer with a printing shop in an urban area who prints his books."</i> Well yes of course, but that's his good fortune and a stupid comparison. Surely it is more relevant to compare a best-selling author in a remote croft with one in a swanky mansion? Or compare a printer with a good site on the high street (with lots of passing trade and extra customers) with one in a back street or out of town industrial estate who has to spend more money on advertising and marketing?<br />
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Also please note...<br />
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The traditional system of taxing profits and transactions doesn't really work with internet based businesses. They can circumvent many of the old rules and concepts dictating what will be taxed in which country, which gives them an unfair advantage over. So to level that particular playing field, taxes on output and profits and so on have to be reduced for all businesses.<br />
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But internet businesses need land the same as anybody else. Amazon and other internet retailers have their warehouses and delivery depots. Google, Facebook and Microsoft have massive offices, usually in expensive central locations. All their employees, directors and shareholders have to live somewhere. So the more that business takes place over the internet, the more important is is to collect revenue from the rental value of land instead of trying to collect taxes from turnover and profits in a most haphazard and damaging fashion.<br />
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<a name="6"></a>6. <i>"All taxes are equally bad. Private individuals spend money more efficiently than the government."</i><br />
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(LVT is demonstrably a much better tax than any other, because it has no dead weight costs, keeps land prices low and stable, cheap to assess and collect, is morally justifiable and so on, but glossing over all that...)<br />
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Well let's assume they are, that's the whole point, but first you have to understand what taxes are. <br />
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a) All money which changes hands with regards to land (be that rent, mortgage interest or selling prices) is, from the point of view of the payer, absolutely no different to a tax; and LVT is absolutely no different in its impact on the "owner" than is a 100%, interest-only, non-payable, non-recourse mortgage. <br />
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b) It is all just money paid up to a higher authority in exchange for exclusive possession of land (protected by the nation-state). If we cut out the land owning middleman (who in turn can only claim ownership with the protection of the nation-state) and a local council rents somewhere to the occupant, then it makes no difference whether we call that payment "rent" or "LVT".<br />
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c) Let's assume a kleptocratic government which collects LVT and spends nearly all of it on keeping itself in luxury; how is that any different from a landlord or banker collecting rent and half the mortgage mortgage interest (the other half goes to depositors) and living in luxury? And as terribly wasteful as the UK government is (about a third of our tax money is stolen), well at least two-thirds is spent on things which benefit the general public. How much does a landlord spend on things which benefit the public? Clearly a negative amount, as the subsidies he receives exceed the tax he pays; the net balance is his rent. This is the same as the observation that public sector workers don't actually pay income tax; whether they have a headline wage of £25,000 with £6,000 PAYE deducted, or get paid £19,000 tax-free makes absolutely no difference to anything.<br />
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d) So there is a bare irreducible minimum of taxes which will always be collected or enjoyed or consumed privately. Intellectually, it is an easy exercise to get rid of taxes on earnings and cut public spending accordingly, but all that happens is that a larger share would go in privately collected taxes i.e. rents, which is only of benefit to a minority. So if you really are a low tax person, the absolute bare minimum tax is a 100% tax rate on rental values; we get more benefit out of taxing rents than we do by not taxing them at all. For while individuals are best at spending money on themselves (smaller scale stuff), it is the whole nation which best decides how to spend national wealth on the whole nation (via some messy democratic compromise, and most people will always disagree with many items of public spending, as indeed do I).<br />
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e) And yes, on the whole and with small-scale things, of course people spend their own money more wisely than the government, because they know exactly what they want and they shop around. Which doesn't answer the question of how public goods (the core functions of the state: law and order, defence, roads, refuse collection etc) would be paid for without an element of compulsion. <br />
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f) Now, as long as people are spending their own earnings on themselves, that is fine (because the harder money is to earn, the more carefully you spend it). But common sense tells us that a government which collects rents will pay for the core functions first, and then spend it on merit goods (health, education) and pensions and welfare payments (which is nothing more than a tax rebate) and then spend some on itself. But if they get too greedy, at least we can kick them out (in theory rather than in practice). <br />
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g) But if you allow private individuals to collect the rents, then they will spend <i>all of it</i> on themselves, so the government then has to introduce taxes on earnings to cover the cost of the core functions; this damages the economy and causes poverty, so they have to increase the rates to pay for a welfare system and so on and so forth.Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com0tag:blogger.com,1999:blog-6365034639538623308.post-65236088048942969302013-01-17T20:18:00.001+00:002013-03-05T21:05:46.287+00:00Y. We need more lendingSome people vaguely grasp that house prices are too high, even Tory Housing Ministers have alluded to it. They also vaguely grasp that shifting taxes from earned income to the rental value of land would keep land prices low and stable and simultaneously increase disposable incomes, thus making it easier for people to buy their own homes.<br />
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But this idea is anathema to them, so they will desperately suggest things which are superficially attractive but on closer inspection will just make things worse - they will ultimately inflate rents and house prices, and of course primarily benefit the banks.<br />
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• We can help First Time Buyers with cheap loans or MIRAS (<a href=http://kaalvtn.blogspot.co.uk/2013/01/y-we-need-more-lending.html#1>skip to article</a>)<br />
• We can help people onto the property ladder by selling off council housing (<a href=http://kaalvtn.blogspot.co.uk/2013/01/y-we-need-more-lending.html#2>skip to article</a>)<br />
• What about people who exercised Right-To-Buy and bought their home off the council? (<a href=http://kaalvtn.blogspot.co.uk/2013/01/y-we-need-more-lending.html#2b>skip to article</a>)<br />
• Without assets to use as security, people won't be able to borrow money (<a href=http://kaalvtn.blogspot.co.uk/2013/01/y-we-need-more-lending.html#3>skip to article</a>)<br />
• I can use the inflated value of my house as collateral to help my children borrow money to buy their own home (<a href=http://kaalvtn.blogspot.co.uk/2013/01/y-we-need-more-lending.html#4>skip to article</a>)<br />
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<a name="1"></a> 1. <i>"We can help First Time Buyers with cheap loans or MIRAS"</i><br />
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Over the last five years, both Labour and Lib-Con governments have come up with dozens of different schemes. These culminated in the Funding for Lending Scheme, which is basically giving the banks very low interest taxpayer funded loans to do with as they will; the main impact of this has been to reduce interest rates paid on deposits by about one per cent, from "below inflation" to "even lower than that".<br />
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a) We know that a first time buyer is happy to take out a mortgage provided the monthly mortgage repayments are not much more than the monthly rent, so all a lower interest rate does is to push up the price they are willing and able to pay for a home. So these schemes benefit sellers rather than buyers; the total lifetime cost to the purchaser does not go down (he just pays a lower interest rate on a large amount of principal).<br />
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b) We know that the biggest hurdle to buying is getting the deposit together and if banks demand higher deposits, this tends to push down the amount which people can take out as a mortgage and so keeps a lid on house prices. So a scheme where the government, or the government and home builders together, only requires a 5% deposit and offers to give borrowers a <a href="https://www.gov.uk/affordable-home-ownership-schemes/first-buy-equity-loans">low-interest loan of 20% of the purchase price</a>, then again, this just pushes up the price which people will pay. <br />
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c) MIRAS was the same; it did not reduce the share of income which people spent on mortgage interest in the slightest. It <i>increased</i> the share of income, it's just that people didn't notice, because some of that larger share was paid by the taxpayer, see chart <a href="http://kaalvtn.blogspot.co.uk/2013/01/e-lvt-is-tax-on-aspiration.html#3">here</a>.<br />
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In terms of redistribution the whole thing was pointless anyway, it increased the amount of tax which Middle England had to pay (or reduced the amount spent on welfare and pensions), it was superficially a subsidy to the lower middle (first time buyers) but actually benefitted the upper middle, if MIRAS inflated house prices by a tenth, then the more expensive the house you were selling, the larger the benefit to you. And of course it mainly benefitted the banks.<br />
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<a name="2"></a> 2. <i>"We can help people onto the property ladder by selling off council housing"</i><br />
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Aargh! <br />
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In the short term, all the council house sales did increase the level of owner-occupation, but this short term boost has since reversed itself and the ex-council homes are falling into the hands of landlords and/or the original purchasers (or their heirs) have moved out and are now renting it out. The Daily Mirror did an FOI request and the answer appears to be that <a href="http://www.mirror.co.uk/news/uk-news/right-to-buy-housing-shame-third-ex-council-1743338">around 40% of council housing</a> which was sold off is now in the hands of landlords, some of whom own dozens of such homes, illustrating yet again the natural tendency of land ownership to become more concentrated over time.<br />
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The total number of renters (private or social) seems to be a fairly fixed figure, you can shuffle people from social to private, but not from renter to owner-ocupier.<br />
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Chart from <a href="http://falseeconomy.org.uk/blog/social-housing-decline-why-has-it-happened">falseeconomy.org</a>:<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgahfCWOoNA0ouxpj0AGnONVsyOc4ByoS51Mn9vtv31O1zL5lUbA4pYM8tz-KM6BdMycK1P58Bz1Jq1JuPh8zNWetoK1f0F8BcGUbTiq5HTztMUma-EUYfgLLdQRrM3aFnm8jUmh86u8ks/s1600/tenure-trends-30-years.jpg" imageanchor="1" style="margin-left:1em; margin-right:1em"><img border="0" height="345" width="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgahfCWOoNA0ouxpj0AGnONVsyOc4ByoS51Mn9vtv31O1zL5lUbA4pYM8tz-KM6BdMycK1P58Bz1Jq1JuPh8zNWetoK1f0F8BcGUbTiq5HTztMUma-EUYfgLLdQRrM3aFnm8jUmh86u8ks/s400/tenure-trends-30-years.jpg" /></a><br />
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And the banks love this of course; if somebody is renting from the council, how much money do the banks get? None. Even if the first purchaser is given a massive subsidy at the taxpayers' expense, somebody exercising their "right to buy" will still need a mortgage, and once the home is resold for market value, the banks are then cashing in for ever more.<br />
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In any event, this suggestion is the opposite of the rather more sensible suggestion that we can make things better by having <i>more</i> social housing (see <a href="http://kaalvtn.blogspot.co.uk/2013/01/z-lvt-is-sledgehammer-to-crack-nut.html">section Z</a>), which applies with or without LVT.<br />
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<a name="2b"></a> 2b. <i>"What about people who exercised Right-To-Buy and bought their home off the council?"</i><br />
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If in doubt, apply common sense. The payment to buy the freehold or leasehold of a council house was clearly a payment for the brick and mortar value and a prepayment for future "location benefit" arising from the home. The approx. bricks and mortar value at the time of purchase will not be too difficult to establish and the balance can be treated as prepayment of LVT. <br />
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The general idea of the council house sell-offs was to allow council tenants to acquire their only and main residence, so if the original purchaser still owns the home and it is his only or main residence, the prepaid LVT element would be amortised over (say) thirty years from the year of payment, and the owner gets a credit/deduction of 1/30 of the amount for the remainder of the thirty years.<br />
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For example, it is 2013 and a qualifying owner paid £70,000 in 2003 of which £40,000 relates to the bricks and mortar, the prepaid LVT amount is £30,000 and that gives an annual credit/deduction of £1,000 for the years 2003 to 2033. The first ten years have been used up and so for the next twenty years, the owner gets an annual £1,000 credit/deduction against his LVT bills.<br />
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<a name="3"></a> 3. <i>"Without assets to use as security, people won't be able to borrow money "</i><br />
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This is a circular argument; a rational person responds that if people had higher incomes after housing costs and lower mortgage repayments, then they wouldn't need to borrow so much money in the first place - to spend on what, exactly? People can either save up beforehand, or they can take out personal loans payable out of their higher net disposable incomes.<br />
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And the economy is provably on a dangerous path when people are spending money they have never earned on the back of rising house prices; between 2001 and 2008, people were overspending by 5% a year. And only a minority were doing this; most people didn't remortgage and a minority were overspending by 20% or 50% a year. Once this easy credit dried up, economic growth ground to a halt. See also charts <a href=http://kaalvtn.blogspot.co.uk/2013/01/e-lvt-is-tax-on-aspiration.html#2>here</a> showing the negative correlation between the savings ratio and house price increases. <br />
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<a name="4"></a> 4. <i>"I can use the inflated value of my house as collateral to help my children borrow money to buy their own home"</i><br />
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This argument is as circular as the previous one.<br />
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If homes were cheaper, then parents wouldn't be under pressure to borrow money to lend to their children to help them "onto the property ladder". The only winners from this are the banks, as per usual, and people selling houses without buying a new one, i.e. a lucky few heirs of Poor Widows and the home builders/land bankers.Mark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.com1