Thursday 26 April 2012

Killer Arguments Against LVT, Not (213)

Rather out of context, in the comments at Tim Worstall:

IanB: This reminds me of attempts over at Mark Wadsworth during lively discussions about the Land Value Tax, where I’ve tried to explain that a valuation isn’t the same as a value. Nobody can get anywhere with economics if they don’t understand what value is. And very few people actually do.

To which the ever reasonable Richard Allan replied: "IanB you’re totally ignorant of economics in general and LVT in particular. Please don’t do this to yourself."

IanB then proved Richard's point with this: "I presume this is based on my having some knowledge of economic theory developed later than the mid nineteenth century..."

Which is about stupid as a GCSE physics pupil dismissing Isaac's Newton's theories as stuffy old 17th century nonsense. Yes, I'm dimly aware that some of Newton's formulations had to be tweaked ever so slightly in very minor respects, but by and large, not much has changed on that front and calculus still works etc.

1. Turning to the point in hand, yes there is a difference between 'valuations' and 'value'. If you ask various estate agents what they would try to sell your house for if you wanted to move within (say) six months, they will make all sorts of wild valuations, and most vendors tend to go with the agent who gives the highest valuation. If your house is on the market for more than six months, clearly the estate agent's valuation was higher than the value, which is whatever it eventually sells for at that point in time at which it is sold.

2. None of this is particularly relevant to LVT. The economy neither functions on the basis of values nor valuations, it works on the basis of prices, and LVT is just one element of the total price of occupying land.

3. In the UK we have a tax called Business Rates which is pretty close to LVT. It is calculated at about thirty per cent of the estimated open market rent of each building*. Subject to lots of stupid exemptions, the tax is payable whether the building is vacant or occupied, whether owner-occupied or tenanted, and whether the actual rent paid by the tenant is lower or higher than the estimated rent. Unlike with income tax on rental income, there are no deductions for interest costs or running costs.

4. Are these estimated rents 100% accurate? Are they heck as like. But they are accurate enough in relative terms, i.e. a bigger office block will have a higher estimated rent than the smaller office block next door; a shop on the high street will have a higher estimated rent than one on a side road; a factory in a good area has a higher estimated rent that one in a worse area etc etc, which is the main thing.

5. The point is that (except in some very marginal areas), the Business Rates on any particular building (or part of a building or area of land) is less than the total rental value of the building minus annual running costs. So it will always be possible to make money by owning that building, because the selling price of the building will adjust up or down so that the return to the investor is 'enough' to justify him buying it (or not selling it). And whoever is prepared to own the building will be happy to rent it out or occupy it himself.

6. It is not the case that investors and businesses have fled the areas with high Business Rates, a tax which has been on the statute books pretty much unchanged for over four centuries. Take a look around the UK and you will observe that if anything investors and businesses are fleeing areas with low Business Rates and it is blindingly obvious to all but a Home-Owner-Ist or Faux Libertarian why this is.

7. Ergo, if we simply applied Business Rates to residential land and buildings (and scrap a corresponding amount of other bad taxes, such as VAT and National Insurance), we would observe much the same thing happening. Buildings would still be occupied and the tax would be collected, given the political will. We would just have to be a bit more careful about ensuring that Domestic Rates on homes in very marginal areas was nothing or next to nothing, which is one big mistake they make with Business Rates.

8. Will some people in some houses in some areas not be able afford the Domestic Rates on that house? Of course. Does that mean that the rental value of those houses has been over-estimated? Of course it bloody well doesn't. If BMW can sell swanky cars for £100,000, then that is what they are worth and that is their value. The fact that most of us can't afford one, or wouldn't waste money on one even if we could is completely irrelevant.

9. But will people who are unwilling or unable to pay the tax still be able to sell their houses to somebody who can afford the tax and is willing to pay it? In 999 out of 1,000 cases, yes of course. Even if the rental value has, on some objective level, actually been over-estimated? Still yes! Because the tax is only part of the cost of owning that house, the other half is paying off the mortgage. So it might well be that a lot of houses end up being sold for less than their current 'value' (or indeed 'valuation') but at the point in time at which they are sold, that is their market value.

10. From that point on the new owner pays the total monthly bill of mortgage repayments plus tax, then clearly, that total bill is a very close approximation of the total rental value of that house (or else he wouldn't be paying it, he would have bid the purchase price down a bit more; or somebody else would have offered a higher price etc). This is the beauty of the system - the price that the house was sold for was the true market value of the house (when you take the pre-existing LVT bill on that house into account) and therefore... the LVT bill on that house will also be the market value tax rate (when you take the price paid for the house into account).

11. Of course, there will be a far larger number of people who are perfectly happy to stay put, because the LVT they are now paying is less than the VAT and National Insurance they were paying. For this vast majority of people not much changes, and a sufficient number of them will trade up to buy up the houses of those who wish to trade down - that is what happens in a free market, prices adjust up or down to ensure that stuff is put to its optimum use.

PS, John at comment 12 and Jim at comment 13 were both right. What they describe is basically Business Rates.

* Morons/smart arses will point out that the official multiplier is 45.8%, but as the tax is payable by the occupier on the estimated rent net of the tax, the effective rate is thirty per cent or so.

19 comments:

Kj said...

Another possibility is that he means value as in utility-value, as in it's totally up to individuals and noone can know(Austrians frequently try to pull this one). But me suspects it's not that complicated, just that belief that nothing can be valued approximately enough until someone actually buys/rents. Army of assesors etc...

Mark Wadsworth said...

Kj, it is a mystery what he means and why it would be an objection to taxing land rents rather than earned income or output. But as I illustrate in 8 to 10, provided the estimates were not too far off piste, the tax would be paid and collected.

Bad things only happen if the LVT on an existing building were more than the total potential rental income from that site if developed to its most profitable allowable possible use. But that is about as relevant as the fact that imposing 110% income tax yields no revenue. The former is not an argument against LVT any more than the latter is an argument against income tax.

Of course, in cash terms, three-quarters of the LVT would never be collected and three quarters of the CI would never be paid out - as they'd be netted off to produce a single bill or a single payment.

Both figures are arbitrary to some degree, and the net figure more so, but most households will be paying or receiving less than a couple of thousand pounds a year, so will be pretty indifferent to the whole thing. You can get used to anything.

Physiocrat said...

My agent knows within plus or minus 2.5% what I can let my flat for. That is pretty good going. If I go over his estimate it will be empty for weeks and I will end up with a tenant who will not stay. If I go at the bottom end there will be several people competing.

The Enterprize Zones are the classic example of a rates-free area, as were properties on the two sides of the Wandsworth-Lambeth boundary. These were both the subjects of thorough study.

Mark Wadsworth said...

Phys, I found an up to date EZ study done for HMRC which said what we expected it to say, can you refer us to a W-L study?

Shiney said...

Interestingly I mentioned LVT yesterday to a friend who is a fellow small businessman, quite intelligent and would benefit hugely - i.e. small-ish house relative to large-ish income from his business.

Anyone care to guess his first objection?

(Clue... he's obviously been brainwashed by the forces of the Empire)

Old BE said...

Can you help a lazy and ignorant person out here by explaining why people flee low-business tax areas? And what happens to house prices/rents on the Lambeth-Wandsworth border?

Mark Wadsworth said...

S, my guess is "attack on wealth".

BE, because businesses and people want to move to 'better' areas, so rents go up in better areas, so Business Rates is higher in better areas. Right now, economy is on its arse, and it is marginal areas which die off first. Clearly, businesses don't deliberately choose to move to high BR (non-marginal) areas, it's just that BR are higher in non-marginal areas.

Lola said...

So, how do we sign up - as I keep on asking - being a results driven, get on with it now, sort of bloke...

Shiney said...

M - nope 'poor widows in mansions'

Shiney said...

BE and M - speaking as an owner/manager of an SME I'd guess that businesses flee low-BR areas 'cos the infrastructure is crap, skilled labour is unavailable, less customers etc - in other words all the stuff created by everyone else not the landlord of the property.

For instance, I 'could' move my business to, say Merthyr Tydfil and harvest the grants/low rents/low-BR - but my business would die within a year.

Mark Wadsworth said...

L, I have sent you an email.

SH, aha, thanks for that. I assume you told him that yes, PWIMs were a concern for a lot of people, which is why every LVT assessment will include boxes to tick asking "Are you a PWIM who'd like to be exempted?" and "Are you a non-PWIM who is prepared to pay a surcharge on your LVT to pay LVT on PWIMs' behalf?"

Old BE said...

I get it. I was confused because of the word "rate". It is not the rate which is changing but the amount.

Sarton Bander said...

In my Market geonomics I say let the person decide what it's worth to them, and charge a %age of that.

The property is then permanently "on sale".

The only fiddly bit is the delay time.

Sarton Bander said...

When you hear 'poor widows in mansions' say it causes 'rich families in hovels'

Mark Wadsworth said...

BE, good.

SB, the 'market geonomics' works as well, but to some extent that discourages improvements, doesn't it?

QP said...

So can we settle on 'location valuation tax' then?

Mark Wadsworth said...

QP, I call it LVT, that could mean either. With the benefit of hindsight, "location value tax" is far better as this would catch radio spectrum, mooring rights and so on. Or call it "ground rent", "ground rent tax", "Domestic Rates" or anything you like.

Sarton Bander said...

MW I've thought maybe the state could provide rebuilding insurance or allow the discounting of insurance costs from the LVT.

Physiocrat said...

The Wandsworth/Lambeth study was done by a research company in Cambridge. It was called PE consulting or PA consulting. The work was in the early 1980s. Unfortunately I know no more than that.