Saturday 18 July 2009

Killer arguments against LVT, not (18)

Ian B, who now posts over at Counting Cats came up with two more non-arguments against Land Value Tax/Property Value Tax in the comments here.

(As background, I have long said, as a first step in the right direction, we could replace all existing taxes on residential properties (Council Tax, Stamp Duty Land Tax, Inheritance Tax, TV licence fee, Insurance Premium Tax etc) with a fiscally neutral flat tax on land/property at current market values, which would be about 1% per annum, i.e. on an average property worth £150,000, the annual tax would be £1,500, which is much the same as current council tax plus TV licence fee. Any such system of taxation would have to work on the basis of averaged-out market values based on actual selling prices of properties in each area (i.e. postcode sector or local council ward etc). Sure, it's a bit rough and ready, but better to be roughly right than precisely wrong, say I.)

Ian B's first argument seemed to centre around his claim that "...nothing has value except when it is traded. You are confusing an estimated value with actual value. An estimated value is the value that somebody thinks something would have if it were traded. [and later] You are confusing three things; value (which is instantaneous), utility (which is purely personal) and "the going rate" which is simply an average of similar goods, and which can change arbitrarily at any moment."

I cheerfully agree that I am a simplification campaigner, but his argument overlooks the fact that LVT is still the best way of making land-ownership (which is a series of state-protected local monopolies) more like a free market (see footnote). If we average out selling prices of similar houses on a particular estate and arrive at £200,000, the tax bill would be £2,000 per house. By definition, because there is a free-ish market in the purchase and sale of houses (even though houses themselves are a state-protected monopoly/artificially scarce resource), the tax would act like a price signal, and house prices and the corresponding tax bill would reach an equilibrium where people are happy to pay it.

If £2,000 tax were "too high" in Year One, then instead of five per cent of houses coming up for sale in that area, maybe ten per cent would come up for sale in Year Two, and purchasers would offer rather less than £200,000 to compensate them for the fact that the tax is "too high", so selling prices would fall to £180,000 or £160,000 (or whatever) and the tax would fall to £1,800 or £1,600 (or whatever), i.e. to a level where those marginal households who were thinking of moving, or put their house on the market but failed to sell, decide that they'd now actually prefer to pay the tax and stay put.

It is, in other words, not so much a question of finding out the exact market value of houses, but finding out the market value of the state-protected privilege of owning a home in any particular area. Provided market participants can influence the level of the tax by choosing to buy or sell, the tax will be at the market rate.

I'll cover his second "killer" argument in the next post.
------------------------------------------
Footnote: Remember always that land and property-ownership is not a "free market" and not in any meaningful sense a "private" contractual arrangement. Although there is a free-ish market in buying and selling property, what you are buying are state-protected monopoly privileges, and not the physical thing itself.

In real life, your come-back against the vendor of a property is minimal (unlike other goods and services, where you either have legal rights under the contract, and if not, at least the producer of faulty goods and services stands to lose his reputation), as you have to do your own property survey and legal searches. Apart from restrictive covenants imposed by developers when houses are first built, you have little or no private contractual rights/obligations as against your neighbours. If there is a dispute between your and your neighbours that you can't settle amicably, you have to resort to The State to try and sort it out for you.

So the main benefits of owning land and property - the right to have a house on a particular plot, exclusive possession and legal protection of title - are rationed or provided by The State, via land registration (or recognition of title deeds to unregistered land) and the legal system that guarantees you exclusive possession (backed up by force, i.e. the police will eject squatters or tenants in arrears) and so on, as well as the fact that The State provides or organises the road maintenance, street lighting, refuse collection, planning restrictions so that your neighbour doesn't open a pig farm etc.

Conversely, although the police do a good job in solving murders (and the courts do an even better job in releasing murderers ...) the state cannot protect your "right to life". If somebody shoots or stabs you or runs you over, you are dead, and nothing can bring you back. Similarly, the recovery rate for stolen property or cars is pretty appalling, so in a practical sense, the state does a pretty poor job in protecting your physical possessions. The same goes for investments; if you invested money with Bernie Madoff, no amount of imprisoning him is going to get you your money back.

So the only type of property which The State can really protect on your behalf is land. It does protect the actual building as well to some extent (i.e. the fire brigade, investigating burglaries, evicting squatters) but there's not much it can do if somebody smashes in your front window or smashes the bottles you put out for recycling (that's one for Charlie B!). And without that protection, land/property would be more or less worthless, seeing as the cost of hiring the services of a private army would be prohibitive.

16 comments:

Anonymous said...

God, I know that I'm going to regret this, but how about posting your killer argument(s) for LVT?

Mark Wadsworth said...

1. Keep property prices low and stable.
2. Not a tax on incomes or production, so no dead-weight costs.
3. Easy to calculate and collect, impossible to evade.
4. Puts the onus on The State to only do things that make it a nicer place to live, i.e. The State will only spend money on things that add value (so more coppers and fewer 5-a-day advisors).
5. Stops the unhappy situation that tenants have to pay TWICE for state services - they pay for the COST via income tax and the VALUE via their rent.
6. Rich people tend to live in the nicest houses, so they'd end up paying the most tax, even though it's not nominally a tax on incomes.
7. NIMBYs would be far less likely to oppose new developments - NIMBYism would no longer be a one-way bet - if supply is restricted, values goes up but they have to pay more tax as well.

How many do you want?

Anonymous said...

Sorry if I sounded short, didn't mean to be.

It just seems that LVT is more a matter of faith than anything else, and I wanted to think about the issues -- I am open minded enough to do that (wouldn't keep coming back to this, otherwise)!

I'll ponder your list.

Mark Wadsworth said...

Patrick, it is not 'a matter of faith'. There are infinite examples of LVT or similar systems, both from English history and from other countries in the world, and what the LVT-ers predict always comes to pass, for example:

1. Since they scrapped Schedule A taxation in the 1960s (which together with Domestic Rates amounted pretty much to progressive property taxation), we've had three big property price bubbles/crashes. The two bubbles after they replaced Domestic Rates with Council Tax were even bigger than the early 1970s ones, and each bubble is followed by a recession.

2. They ended empty-property discounts for Business Rates (a form of Progressive Property Value Tax) a year or two ago and since then vacancy rates have fallen (except maybe in the financial districts of London, but that's a special case).

3. The three countries in the Asia-Pacific region which have higher property taxes and lower income/corporation taxes (i.e. Hong Kong, Singapore, Taiwan) have done much better economically than other countries in the region.

Lola said...

"if you invested money with Bernie Madoff, no amount of imprisoning him is going to get you your money back" - or in NIC.

Mark Wadsworth said...

L, if you mean National Insurance, that's just an extra tax on employment income that goes into the pot and gets spent. "The secret is, there ain't no fund". No use crying over spilt milk.

CityUnslicker said...

would LTV raise enough to cover the rates though at levels that did not unduly upset the middle class?

i.e. is it politically saleable to middle England?

Mark Wadsworth said...

CU, which "rates" exactly?

There's no such thing as 'middle England', so let's start with a 1% progressive property tax (or 0.7% or whatever), and then take it from there. Provided there's a £2 income tax or VAT cut for every subsequent £1 LVT increase, then a majority will always benefit.

James Higham said...

We could replace all existing taxes on residential properties (Council Tax, Stamp Duty Land Tax, Inheritance Tax, TV licence fee, Insurance Premium Tax etc) with a fiscally neutral flat tax on land/property at current market values, which would be about 1% per annum, i.e. on an average property worth £150,000, the annual tax would be £1,500, which is much the same as current council tax plus TV licence fee.

That sounds nice - what about water rates?

Mark Wadsworth said...

JH, thanks. But there's no such thing as "water rates" any more, you pay them to the water company.

OK, if you're not on a meter, you pay a flat fee of [a made up figure] x [a made up percentage], but as a free marketeer, I approve of water meters (despite my family would probably end up paying more) and also believe that the government should charge water companies for their monopoly right to deliver water (the price to be decided by auction), but those are different topics.

TheFatBigot said...

Not an act of faith? Hmmmm ... let's see ...

Your third point was:
"Puts the onus on The State to only do things that make it a nicer place to live, i.e. The State will only spend money on things that add value (so more coppers and fewer 5-a-day advisors)."

At the moment taxes actually hit people in the pocket day-by-day and month-by-month. We can't roll-up current tax and pay them only when we sell our main asset or die (as you propose for LVT in circumstances where the payee doesn't have ready cash).

If anything should act as a brake on spendthrift politicians it should be the weight they impose every day by current taxes. Yet that doesn't happen. Who has the magic wand that will make it happen when we replace current taxes with LVT?

Mark Wadsworth said...

TFB: "If anything should act as a brake on spendthrift politicians it should be the weight they impose every day by current taxes. Yet that doesn't happen. Who has the magic wand that will make it happen when we replace current taxes with LVT?"

1. People don't "notice the weight" because taxes are largely stealth taxes (in particular VAT, but also anything deducted from wages) which is why they get away with it; as opposed to taxes on property or land values which are totally in-your-face taxes. The simple fact that taxes on property are unpopular is A Good Thing, not A Bad Thing.

2. As to the magic wand, you have to imagine the government like the manager of a hotel.

He knows if he spends £100 every week on flowers for reception, he can increase total room prices by > £100 per week, so he does so. He also knows if he spends £1,000 on flowers every week, he would only be able to put up room prices by another £50 a week, so he doesn't do so.

So the government can only collect more LVT if the UK becomes a nicer place to live in and people are prepared to pay more to live here.

Why on earth would the government divert money to quangos (which is where most of the waste is) and away from useful stuff? The result would be that LVT receipts would fall.

As to your comment that "We can't roll-up current tax and pay them only when we sell our main asset or die"

No, but that is for two reasons - current taxes are too high and the government spends too much.

There is no inherent problem with 'rolling up taxes' because the government knows that is has spending commitment in the future, so it can always match current income with current receipts and future income with future receipts.

Matthew said...

"If £2,000 tax were "too high" in Year One, then instead of five per cent of houses coming up for sale in that area, maybe ten per cent would come up for sale in Year Two, and purchasers would offer rather less than £200,000 to compensate them for the fact that the tax is "too high", so selling prices would fall to £180,000 or £160,000 (or whatever) and the tax would fall to £1,800 or £1,600 (or whatever), i.e. to a level where those marginal households who were thinking of moving, or put their house on the market but failed to sell, decide that they'd now actually prefer to pay the tax and stay put."

This doesn't strike me as a particularly important aspect of a LVT, but I'm not sure this example works. What we're saying here is is something like this. That there are two streets that have been assessed at £200k per house, so £2k LVT, but in fact that masks that one is really £250k and hte other £150k. Because both streets are paying £2k, and that is 'really' too high, houses in street two will be sold off. They will fall in price until the 'right' level is reached. But this might not be possible? They might fall to 100k, but the others might rise to 300k, and nothing will have changed. In fact the entire market could break down, could it not?

Mark Wadsworth said...

Matthew:

That there are two streets that have been assessed at £200k per house, so £2k LVT, but in fact that masks that one is really £250k and the other £150k...

Assuming we work on the basis of postcode sectors (about 2,500 addresses) I doubt that the variation would be that extreme.

But let's assume they are. Under current rules houses in each street are paying the same Council Tax, under my rules they are paying the same LVT, so no big deal, your £300k/£100k scenario will not happen.

If longer-run price data confirms the disparity, then owners of houses in street 1 will ask for the postcode sector to be sub-divided into two, and LVT gets split £2,500 against £1,500. But this then depresses price of more expensive houses and boosts price of cheaper houses, let's say to £225,000 and £175,000, so the LVT evens out at £2,250 and £1,750, again, big deal, that's £250 either way.

I am not too fussed about property values, what is important is establishing the market value of exclusive possession to x00 square yards of land in that area.

Of course some plots are better (south facing garden) and other plots not so good (backing on to the railway) and this will manifest itself by the market value of each individual property adjusting up or down. They are still entitled to the same 'public services' (like police, street-lighting, refuse collection etc) whichever side of the street they are on.

Surely it is far more important to look at disparities in property and land values across the country (overlooking St james Park in Central London is one hundred times as much as on a council estate in the Western isles) than to worry about 25% differences between different streets?

Matthew said...

I don't think it's a major issue - might it depend on how large the tax is, ie if one takes rental values as the annual value of a property, if the tax was to approach those then errors in assesment could lead to major distortions? Council tax (which put on a national basis and with more bands seems to me to be what you are essentially proposing) remains reasonably low.

Mark Wadsworth said...

Matthew, agreed. But I'm struggling to get support for a 1% tax to replace all the other crap (which would lead to few winners or losers overall), let alone worrying about what happens after that.

But seeing as you ask so nicely ...

If we had a 1% tax to get the ball rolling, then the next steps (to be implemented more or less simultaneously to show there's no malice involved) would be:

a) Cut the worst taxes, i.e. VAT and Employer's NIC (which on the whole would benefit higher earners), and once they're phased out, start cutting income tax (which again would benefit rich people more).

b) Exempt the first £x00 per square yard from the property tax, which in relative terms benefits cheaper houses more than more expensive ones.

c) Increase the rate of the property tax to soak up e.g. half the static cost of the tax cuts from a) and b) (overall taxes and government spending are way too high, probably twice as much as is really necessary)

d) Start sub-dividing postcode sectors (2,500 addresses) into smaller chunks, i.e. groups of ten post-code units (10 x 15 address = 150 addresses) or possibly single streets or smaller housing estates, so that it's more accurate.