Saturday 27 September 2008

Response to Sobers' objections to LVT

Sobers posted a long comment here, which deserves a proper response:

1. I'm anti LVT on the basis I don't like being taxed on income I don't have! Which is what LVT taxes ...

People are prepared to pay huge sums of money for houses to live in. That house does not produce income, but it is of value to the owner (even if we ignore the notional income, i.e. the cost saving from not having to rent). LVT would reduce the cost of land (as it acts like a higher interest rate) so a purchaser would pay more in tax but less in mortgage repayments. And if he pays more in tax, then other more damaging or more unfair taxes can be reduced.

Exactly the same argument applies to businesses. If you're renting, then part of the rent is paying purely for the location (rents on Oxford are ten times as much as on an average High Street), but think about it, Primark on Oxford Street charges the same prices as Primark on Leytonstone High Road, so the rent is not passed on the customer in the form of higher prices.

The extra rent that Primark's Oxford Street store is paying is for the privilege of being able to work harder and sell ten times as many clothes in a prime retail location. That extra rent acts like a tax on Primark's retail operations, but the site owner collects that tax, not the State. So why not collect more tax from the site-owner, and less VAT/Employer's NIC from Primark? The site-owner cannot pass on the LVT, as Primark is already paying full market value rent.*

2... I'm a farmer, and no farmer in the land could afford to pay a LVT of even 2% without going bust. You would close down the entire industry...

As it happens, I would exempt agricultural land from LVT and have said so (its value, net of subsidies, is so low as to be not worth taxing, plus farmers' incomes fluctuate wildly from year to year). The first challenge it to get rid of CAP subsidies which set a floor for a minimum rents that landowners have to charge tenant farmers (if they can't get at least £70/acre rent, then they might as well leave the fields fallow and collect the subsidies). As it happens, one of the prime LVT-supporters in UKIP is Dr Duncan Pickard, a sheep farmer and land-owner in Scotland, who wrote this fine book.

3. Also LVT would have a massive downward pressure on land prices (not a bad thing in itself), but would leave anyone who had borrowed money to buy in a negative equity situation overnight.

Agreed. Which is why I have always said (e.g. point 5 here), LVT should be introduced at the bottom of the market - when people are already in negative equity anyway - to replace Council Tax, Business Rates, Stamp Duty Land Tax, Inheritance Tax etc**. So the static impact of the shift would be minimised - some properties would go up in value a bit, others would go down a bit. But thereafter, land values would be low and stable, exactly because of the "massive downward pressure"

4. Equally I'm not sure the figures add up - I suspect the 5% I think you've quoted before would have to rise once land prices fell because of the introduction of LVT in order to get the revenues back up, thereby creating further land price falls etc etc.

I do not know what total UK site-only land values (net of buildings thereon), excl. agricultural land, public parks & roads etc. will be in a few years' time at the bottom of the market. Maybe a third of what they were at the 2007 peak, £1,000 billion or so? If the total revenues from the taxes to be replaced are £60 billion, then the rate is 6%, and that's the end of that.

5. LVT is probably a superior taxation system if you were designing a tax system from scratch, but we already have a system in place upon which people have made long term decisions.

Agreed.

6. The government is not entitled in my view to suddenly turn the applecart over and change everything so drastically overnight.

Agreed. But now the property price/credit bubbles have burst, The Markets are busily destroying land values as we speak - total residential property values are falling 1.5% a month = £2 billion per day! So the clock is resetting itself back to normality anyway, i.e. typical house price three or four times income etc.

7. The only other tax similar to LVT that taxes value of assets and has to be paid year on year is council tax, and we know how unpopular that is, and how regressive it is too.

Agreed. Council Tax was designed as a mixture of property tax (fair enough, actually) and Poll Tax (regressive = bad), but the Labour government has skewed the central funding so that LibDem & Tory Councils have to charge far more for the same band than Labour councils, so there's a Jealousy Surcharge element as well (bad).

It always puzzles me that VAT (the worst tax of all) raises four times as much as Council Tax but nobody bats an eyelid. The point is, LVT will go to the local council to cover local spending. Council Tax only covers a quarter or so of local spending, don't forget! If you don't think the council is getting value for money or spending it on the right things, then go and protest! Further, if the council is wasting LVT on the wrong things (5-a-day advisors rather than bobbies on the beat; climate change officers rather than street sweeping) property values and hence land values go down again, so their source of income gets choked off by simple market forces.

LVT would not be regressive relative to property value. Somebody in an ex-Council flat up North would be paying £100 or £200 per year; somebody in a villa in Hampstead or a penthouse in Westminster would be paying £10,000 or £20,000 per year. If they can afford a mortgage repayments of £100,000s a year, then they can afford LVT of £10,000s a year. If they can afford to buy cash, they can afford easily afford it.

I agree that LVT, if demanded on an annual basis, would be unaffordable for retirees in larger houses. So they would be allowed to roll up unpaid tax to be repaid on death. Which is why it is important to scrap Inheritance and Stamp Duty Land Tax as a quid pro quo.

8. As for CI, you have more knowledge and insight into it than I will ever have

Thanks.

9. As I said, I like the idea, and wish it could be introduced, at whatever level was feasible. I just can't see it ever happening due to the basic flaw of that if it makes anyone at the bottom of the pile worse off, while making wealthier people better off, politically it's a dead duck.

Don't worry about the wealthy - the CIT booklet did not say they'd get rid of higher rate tax, that's just my own view (getting rid of higher rate income tax is the flipside of making the wealthy pay more in LVT than they did in Council Tax to smoothe the shift from taxing productive activity to taxing land values etc).

The CIT system leaves relatively few people better or worse off (and if so, only by marginal amounts, which can easily be recouped by working part time, which is an intended, not an unintended consequence). Where it does shift money is from lone parents to couples, that is part of the point. The reason we have so many children in single parent families is because of the extra £10,000 per annum that parents can claim by pretending to live apart, or indeed split up.

* I assume that Primark are renting. Perhaps they bought the site on Oxford Street, in which case they are paying a mortgage instead of rent, which in economic terms is much the same as renting.

** ... and Capital Gains Tax on property gains, TV licence fee, VAT on domestic fuel, Insurance Premium Tax, s106 Agreements for new builds, minus Council Tax Benefit, CAP subsidies, VAT zero-rating for residential new build, Housing Benefit for private tenants, in other words LVT could and should replace all taxes and subsidies that relate in any way to land, property ownership/occupation, wealth generally or construction costs.

8 comments:

Paul Lockett said...

I'd like to address a couple of the points Sobers makes.

I'm a farmer, and no farmer in the land could afford to pay a LVT of even 2% without going bust. You would close down the entire industry, and a lot of others too I suspect.

I don't think that would be a possible state of affairs. If the LVT were so high that it forced farmers out of business and left agricultural land abandoned, then the LVT would be above market rate. The natural market rent for land would the highest rate that could be charged while keeping all land in use. I am assuming that agricultural land would still have planning restrictions preventing it being used for other purposes.

LVT is probably a superior taxation system if you were designing a tax sytem from scratch, but we already have a system in place upon which people have made long term decisions. The government is not entitled in my view to suddenly turn the applecart over and change everything so drastically overnight.

I would personally suggest a gradual introduction, but irrespective of that, the idea that we should keep the tax system because people have made decisions based on it is problematic, because it implies that all tax rates should be frozen as they are in perpetuity.

For example, if I have set up an automated business, but my competitor has set up a labour intensive business, then cutting the income tax rate will give him an advantage and negatively impact me. I could use Sobers' argument to say that cutting income tax rates is an unfair government action.

TheFatBigot said...

A difficulty I foresee in replacing all taxes with LVT is a potential lack of flexibility which can only be avoided by introducing measures which negate the direct link between land value and tax.

At the moment changes in corporation tax, income tax, CGT and the rest can be made to reflect changing circumstances including changing views of fairness in tax. In the 60s and early 70s there was little general complaint about the highest rates of income tax, once it was seen that they were positively harmful they could be reduced. Flexibility to do so is built into the very nature of income tax.

If everything is bunched together in LVT how do you make adjustments to allow any harmful effects to be mitigated? I can foresee we would soon have a complex range of allowances, rebates and special provisions which would break the link between value and the amount of tax paid. Then you have a tax based on adjusted land values.

And how does it deal with changes in true (i.e. bubble-free) market values of properties? These can occur road by road in cities as something happens to make one road relatively more attractive to buyers than another.

If you have constant revaluations you create enormous unfairness for those on low and fixed incomes who are already settled in the newly fashionable street. Saying they can move to somewhere cheaper is not only impractical but it gives no guarantee that the place they buy will always be cheaper than the place they sell.

If you don't revalue the now unfashionable street, those living there have legitimate grounds for complaint. And their complaint is all the more legitimate because the very name of the tax links it to value yet it is no longer linked directly to true value.

I'm relatively new to LVT, these are just a couple of preliminary thoughts.

Mark Wadsworth said...

TFB,

1. I suggested replacing 'all existing property taxes' with LVT, it need go no further than that.

2. I am in favour of annual revaluations, everything else is hostage to fortune. As a simplification campaigner I am passionately against allowances, rebates, discounts etc.

3. If an increase in values is due to local investment (opening a new railway station, hospital etc) then this ought to be subject to a democratic vote. If you know that your pro rata share of the new station is £100 per annum but you never take the train, then vote against. If you know you can save £200 by leaving your car at home and taking the train, then vote in favour. How else can we decide whether that station is a good investment?

4. The people on the lowest fixed income are pensioners and unemployed council tenants, who will not be affected by LVT (as explained).

5. The next category up on low incomes are tenants - if an area becomes more fashionable, then their rent will go up anyway.

6. If a low income household owns a home in an area that becomes more desirable, even though they voted against the new station or hospital, then they can choose to pay the extra £100 or move elsewhere. By definition, the new value of their home will be more than enough to by in a new area which is equivalent to what the old area when they bought. Which is why you have to get rid of Stamp Duty to make moving cheaper.

Anonymous said...

A few points re farm land.

The maximium rent possible for farmland is probably 150/acre. Absolute top whack. Most arable land would make 100/acre, grassland lower still. If you rent land you expect to make money yourself so the gross return could be as high as 250/acre. Bare land (ie no house & no buildings) is curently making (depending on location and type) 5-10k/acre. At 6% LVT you are talking between 300 and 600 per acre. So on those figures you can see no farmer or landowner could continue either to farm or rent land out. You'd be losing money each year. So presumably land values would have to fall immediately to somewhere below 1k/acre to allow farming to continue at all. And even at those values it would mean a lot would not bother.

Are falls in value likely? In a small island of 65m people I think that land values will always be bid up by people with money made elsewhere who want a bit of the English countryside, and can afford to pay handsomely for it. Equally due to the physical restraints we have on open countryside there will always be planning restrictions, leading to even greater differences between land with and without planning permission. I don't think a LVT system can cope with the situation where field A is just agricultural at 1k/acre, but field B next door is granted PP and worth 1m/acre, all at the stroke of a pen. I suspect LVT would work better in a country where land is not so physically restrained.

Finally if agricultural subsidies were abolished (and I can't really argue that they should not be) the profitablity of farming would drop to zero anyway. So any LVT would be moot anyway - we'd all have to give up and do something else.

Finally should farm land be exempt from LVT? As a landowner I would of course agree! But I can't see the point of having a simplified system, and immediately granting an exemption to a huge section of the countryside. There would then be all sorts of others wanting the same exemption. If LVT is such a good idea surely it should be able to deal with all types of land not just developed ones?

Paul Lockett said...

Sobers - The maximium rent possible for farmland is probably 150/acre. Absolute top whack.

Then that would be the 100% LVT level. There is no way that LVT could realistically ever be set above the full rental value. The "value" in LVT is generally rental value rather than sale value.

I don't think a LVT system can cope with the situation where field A is just agricultural at 1k/acre, but field B next door is granted PP and worth 1m/acre, all at the stroke of a pen.

LVT is perfect for that kind of situation, because the tax on field B would be 1000 times that on field A. It would instantly reduce the perverse incentive we have for building on agricultural land rather than brownfield, because there would be less windfall gain to be made from obtaining planning permission.

Finally if agricultural subsidies were abolished (and I can't really argue that they should not be) the profitablity of farming would drop to zero anyway

The flip side is, if there is a subsidy of x pounds per acre on agricultural land, that will currently be pushing up the rental price by x pounds. With 100% LVT, for every pound reduction in subsidy, LVT will fall by the same amount, so long as the rental value is above zero, making the majority of the subsidy irrelevant.

Mark Wadsworth said...

Sobers, for exactly those reasons, I (personally) would exempt agricultural land - getting rid of CAP subsidies is the main issue (being a negative LVT and hence the worst type of subsidy).

The next issue is, farmers who strike lucky and get planning permission (because they know the right people on the council etc).

Under the present system, they make a windfall gain of £1m per acre (on which capital gains tax may be payable, but that goes to central gummint, not the local council).

Under LVT, they would still make a windfall gain of (say) £100,000 per acre (tax free, capital gains tax having been scrapped), but the local council would be able to collect £25,000 plus inflation per acre (or whatever the figure is) forever more.

So at least the NIMBYs who opposed that new development know that the council has more to spend on roads, additional school teachers, nurses etc.

And as I have said before, the value of land = planning permission x local amenities x scarcity value. If agricultural land has no planning permission and it is not scarce, then there is no overriding moral reason to tax it.

AntiCitizenOne said...

You could also do the reasonable thing and extend the LVT to Intellectual Property.

This would work better with market geonomics but...

Mark Wadsworth said...

AC1, I am still mulling over whether this would be enforceable under existing copyright treaties.

Although to be fair, international tax treaties usually have a provision saying that copyright royalties can have 10% or 20% tax deducted by the payer and paid to the payer's home country before the overseas copyright owner receives it.

And the grey area between actual copyright income of e.g. J K Rowling, and the income of people who print and distribute and sell the books and DVDs etc is still troubling me.