Adam Smith in the Wealth of Nations (1776) was an early proponent of land taxes as was that great radical Tom Paine.
John Stuart Mill was an advocate and Henry George put the case in ‘Progress and Poverty’ (1879).
The economist David Ricardo gave us the concept of economic “rent” – that land or property derives its value from scarcity rather than investment.
In the debates before and after the peoples budget of 1909 both Winston Churchill and David Lloyd George argued strongly for the introduction of a land tax.
The economists John Kenneth Galbraith and Milton Friedman recommended Land Value Tax (LVT) for its fairness and intrinsic efficiency.
In recent years, prominent commentators have continued to argue for the introduction of LVT.
“Land value taxation is a no-brainer…It is both fair and efficient. It should be adopted” – Martin Wolf – Financial Times.
“The taxation of future growth in land values – to eliminate the fever of land speculation that has ended up destabilising the entire global economy… is what Labour should have done and should commit to in future.” – Polly Toynbee – The Guardian.
“The wealth produced over the centuries by the efforts of the community is reflected in land values and is therefore a proper target for taxation.” – Vince Cable in ‘The Case For A New People’s Budget’
“The underlying intellectual argument for seeking to tax economic rents retains its force.” – Mervyn King, in the standard textbook on the British tax system: Kay & King, 1990
The Mirrlees review of UK taxation proposes the conversion of business rates to a site value only base and reform of council tax. Sir James Mirrlees, who led the review, said that his findings showed that the current tax system imposes “unnecessary costs” on the economy.” There is no getting away from the political difficulty associated with some of the proposed changes. But there is also no getting away from the enduring costs of failure to reform,” he said.
How much money can it raise? Levied at a flat rate of between 0.5 per cent or 0.6 per cent it has the potential, based on the current value of land in the United Kingdom, which accounts for 38 per cent of our wealth, to raise between £30 billion and £35 billion. That’s enough to replace the council tax while also giving a tax cut to all those living in properties worth less than £350,000-£400,000.
The replacement of the council tax is long overdue. It is heavily weighted against the poor and the “squeezed middle”. Its eight bands lead to the absurdity of people living in properties worth half the national average paying half the tax of someone owning property worth £1 million or more. The council tax hits the poorest hardest. According to the Office of National Statistics, the poorest fifth of households pay 5 per cent of their household income in council tax. The middle fifth pay 3 per cent and the richest fifth pay less than 2 per cent.
* Joe Bourke is an accountant and university lecturer, Chair of ALTER, and Chair of Hounslow Liberal Democrats.
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258 Comments
You seem to have ignored every single argument against this from the last few decades. e.g. That an elderly retired widow in a large house pays more than a family of four earners in a small house. That people who do not own property but just rent it pay nothing. That it weakens the link between local expenditure and local taxation. Who cares if Winston Churchill or John Stuart Mill thought it was a good idea? What did they know about property and the economy in the 21st century?
Finally, it is somewhat disingenuous of you to talk about “Land Value” tax when you plainly mean “Property Value” tax.
@Julian
“Finally, it is somewhat disingenuous of you to talk about “Land Value” tax when you plainly mean “Property Value” tax.”
I don’t think Joe meant that, did he?
He clearly referred to:
“The Mirrlees review of UK taxation proposes the conversion of business rates to a site value only baseand ….”
and
“Levied at a flat rate of between 0.5 per cent or 0.6 per cent it has the potential, based on the current value of land in the United Kingdom ….”
That’s one of the greatest arguments for LVT! It drives down the cost of renting and favours the occupant rather than the landowner.
Taxing the wealthy is a far better idea than taxing those who are so poor that they have to pack into tiny houses.
Your “arguments against it” are some of the major points in favour of LVT.
Julian,
I am going out this evening, but you can review the arguments for and against and practicalities in the attached Guardian economics blog IFS backs Land Value Tax
I am in favour of an LVT for land that is used for business but I am yet to be convinced that LVT works well for homeowners and tenants.
For homeowners it is a totally regressive tax as it doesn’t take into account of ability to pay. One of the flaws of Council Tax is this very thing so LVT would not solve it. There are arguments put forward (by the Scottish Greens) that LVT can be deferred if the owner cant pay via a charge on the property. This of course deprives the Council of income and, when it comes to things like charges being put on homes to pay for social care the Council may actually find itself with a 100% charge on a property. An argument in favor of LVT is that it reflects the public money put into surrounding areas to build new things like roads, school improvements etc which increase the value of the property. LVT then actually creates a disincentive for improvements in some areas. Just as we have seen campaigns against developments that decrease property values we may actually seem them against developments that increase property values (a village bypass for example).
The idea that LVT will also mean moving property tax from the owner to tenant is a bizarre one. As the owner of a property that I let out I can assure you that the rent would increase if I was taxed on it. Right now if my tenant is or is not exempt from paying council tax it has no effect on me. Indeed, having a model Shelter Tenancy Agreement and a rental well within the local authority level for Housing Benefit, it doesnt matter to me if my tenants income falls due to sickness or unemployment. However, if I am to be taxed on the ownership of that flat beyond what I am taxed already (through self-assessment online) then the rental of the flat will go up thus placing lower earners in a more difficult position. This would impact quite badly on students for example.
For residential properties LVT may have worked when Churchill was advocating it. After all, in his time most property ownership was not nearly as widespread as it is now. Living in a property is not a totally clear indicator of wealth and a better idea of local taxation is still a Local Income Tax.
@Joe Bourke. Would LVT be paid locally? One of the advantages of Council tax is that councils have to account to the electorate for how they spend it. Is LVT designed to make the system “fairer”, or as a stealth addition to people’s existing tax burdens?
@Andrew Suffield. Are you having a little joke? It will drive up the cost of renting, because the landlord will pass the cost of the tax on to the tenant in increased rent.
@Polly Toynbee> How will a LVT tax in the UK stop the destabilization of the entire global economy?
@All those old folk (JS Mill etc). What do you know of modern economic theories and conditions? Even the financial crisis is worse that your own, and apparently even has a different cause – debt.
@Mervyn King. Are you the guy who is holding our money supply so low that people don’t have money to invest? While pocketing a seven-figure salary? If so, I have a few choice words for you …!
@Julian
You mention Winston Churchill and JS Mill, but ignore practically every economist that ever lived.
LVT is not a property tax; It is a tax on land values – the clue is in the name. Please look up tax incidence. Currently, tenants have the legal obligation to pay council tax, but, in reality (economics), it is the landlord that pays the majority of council tax due to the inelasticity of supply of land (land is the largest component of house prices and rents). Put it this way – if council tax was scrapped, landlords would be able to put up their rents by £1000 a year – the tenants wouldn’t be better off.
It is far, far better to tax unearned wealth rather than income. Our current tax system attacks the industrious and rewards those that live off dividends resulting from a previously bought slice of monopoly. It is the little old ladies (why is it always the widows that are mentioned? – because it’s an emotive argument, not a rational one) in mansions that are the problem – why should they be able to live in disproportionately large houses at next to no cost whilst hard working families are squeezed into ever more unsuitable shoe boxes? Where did the widow get her money from to buy the mansion in the first place? If she earned enough during her lifetime to pay LVT during retirement then good luck to her. If she didn’t, then she shouldn’t live beyond her means and should downsize accordingly. LVT rewards the productive use of land and punishes the inefficient use of land. It is a virtuous tax and, economically, has zero dead-weight loss.
@Richard Dean
LVT is counter-cyclical in relation to land-values. It is impossible to say for certain that it would have completely prevented the global financial/economic meltdown, but, at the very least, it would have severely mitigated the credit/house-price bubble that caused it.
@Richard Dean
“Andrew Suffield. Are you having a little joke? It will drive up the cost of renting, because the landlord will pass the cost of the tax on to the tenant in increased rent.”
Sorry, I missed that on the first scan of your comment. How can the landlord pass on the cost to the tenant when the supply of land is almost completely inelastic. The tax incidence is on the landlord. If landlords COULD pass on higher rents, then why aren’t they doing so at the moment? – are they really that benevolent?
LVT, yet another windmill for the LibDem’s to tilt at?
Fundamentally LVT is a non-running in the short-to-medium term, largely because of the scale of institutional change it would require, followed by potentially several decades of economic adjustment . Also because as you start to look at the real world implementation lots of questions and issues arise, such that many of the ‘advantages’ trumpeted by LVT supporters start to look like naive statements of faith…
LVT is necessary. It will:
-Reduce the deficit
-Stop the house price bubble
-Allow FTB on the market without getting into significant debt
-Stop the BTL landlords profiting from the youth
-The houses cannot be moved to another country
Do suspect that the youth would appreciate this tax. We are taking so much out of their future with BoE QE policy, the golden public sector policy and the low Interest rates, so it is about time we give them something back.
If it’s going to take a long time we’d best get started.
At any sensible level of LV taxation someone living in a large house would be able to pay the LVT for many hundreds of years using a mortgage, as the mortgage will be on the land plus building and the tax just on the land.
Re: Is it “Land Value Tax” or is it “Property Value Tax”
Well based on the statement “while also giving a tax cut to all those living in properties worth less than £350,000-£400,000” it does seem that Joe is confused; the property value is a market assessed combination of: land value, building value and premium.
Please consult any economics textbook – the fascinatingly unexpected behaviour of LVT in this respect is a standard topic of study. LVT cannot be passed on to tenants, because any action the landlord can take to attempt this will leave him worse off.
In brief: if the landlord increases the rent, then the value of the land has increased, so he has to pay more tax than he would have at a lower rent, and tenants are more likely to look elsewhere and he still has to pay that tax even if the property’s empty.
If you would prefer a more modern and clear term, it is “ground rent tax”. (The sale price of land being some multiple of ground rent combined with the inefficiencies of land trading)
@Andrew Suffield. The text book cannot be correct.
If you read text books on economics you will be familiar with algebra. Here is some. The landlord has land worth L and charges rent R. Suddenly LVT arrives, at tax rate t. So the landlord incresase the rent by D. Now the tax is (L+R+D)*t. The landlord wants the tenant to pay all of this, plus the original rent R, so the total that the tenant pays (R+D) must be given by:
R+D = R+ (L+R+D)*t
Solving gives the amount D by which the landlord must increase the ent in order to get the tenant to pay rent plus all the tax:
D = (L+R)*t / (1-t)
So, for example, if the tax rate is 6% and the original land plus rent was £9400, the landlord must increase the rent by £9400 * 0.06 / (1-0.6) = £600. In other words, the rent has to go up by £600. Rather a lot, but not an infinite amount
You can also do this using the infinite series method that is in many economics tect books. But ‘m guuessing at the rates involved, perhaps the increase in rent won’t be quite so much. Maybe someone could check the math and provide some realistic figures? Apologies for typos and also of course forany calculation errors! Unfortunately the screen keeps moving downwards and I find it difficult to re-read what I wrote.
The (1-0.6) should have been (1-0.06), but I didn’t do this typo on my hand calculator (yes! I am ancient enough to know how to use one!) – I did the arithmetic right and the result is unchanged: the rent increases by £600
The people making the point about people on lower incomes being forced to move out of properties miss the point of the tax. FIrstly, yes, part of the idea is that the tax encourages efficient allocation of housing so that those who can afford to live in expensive areas pay for the privilege of doing so. The most expensive plots are likely to be those which are large and allow for convenient access to a nearby employment hub. Note, however, that the people most likely to actually benefit from living in these areas are those who are employed with children, not single pensioners. Also, the rate of taxation doesn’t have to be so punitive to make living where someone wants to on a pension a completely unrealistic prospect. The point is just that people pay for the privilege in living in a nice area or a nice community, things which are by definition mainly not the fruits of their work but of other people’s.
I should perhaps add that landlords won’t lose out – they never do. A Landlord Protection Group or Association will likely distribute instructions to all members about how to calculate how much extra they need to charge their tenants, so if they all do that there won’t really be much change of competitive advantage.
However, if my arithmetic so late at night is right, the tenants who are presently getting a relatively good deal – paying less rent as a pencentage of land value – will have their rent increased by more that those who are presently getting a bad deal – paying rent that is a higher percentage of land value. I suppose in that sense LVT promotes equality.
Wikipedia says that “Henry George argued that the value of land was created by the community, and therefore its rent belonged to the community”. This is basically what Vince is saying too. But … why stop at land values? ….
Roads and street lights are also created by the community, through their payment of taxes to the government, so pedestrians should pay Road Value Tax. Community amenities, the history of a neighbourhood, unspoken rules which determine what class of people get to buy places there, and its place in the national conciousness, have also all been created by communities. These things seem to argue for Council tax, rather than LVT.
It appears that Fred Foldvary had the right idea – to pay the tax, landowners might find it best to use the land, or rent it out (and so acquire the tax from the tenant). So, owners of derelict property and underused land would be encouraged to develop it and be efficient. This aspect of LVT I would support.
“That an elderly retired widow in a large house pays more than a family of four earners in a small house”
That’s the whole point! Demagoguery. It would not be an ideal (what is ever ideal?) transition but you completely underestimate the problems of society today. The young are in truly dire straights and can’t get access to affordable living conditions and it’s going to get worse. The young need to live in a fair society and imposing this on your elderly retired does not take them out of their fair share.
Roland,
the article refers to Land Value Taxation. A London home with a market value of 400,00 might have a land value of say 225,000. Currently the average council tax on this kind of property in Band E would be approx. 1500. A levy of 0.5% to 0.6 % on land value, designed to replace council tax, would be a reduction compared to the current level of council tax. The reduction of tax for slightly above average priced properties and those below is funded by an elimination of the band limits on higher priced properties that have greater land values. A flat rate LVT is levied on a progressive basis, without an upper limit, and is unaffected by the value of improvements/buildings on the site.
@10th May ’12 – 11:59pm, Richard Dean demonstrated his prowess with algebra.
Nice bit of maths, Richard. Unfortunately it only works if the tenant co-operates. And faced with that type of increase, the tenant generally goes looking for somewhere cheaper, even if that means downsizing, since the tenant was already paying as much as he could afford. The landlord is then left with no one to pay his £600 increase. But he still has to pay the LVT while he owns the house, tenant or no tenant. In the end he either has reduce the rent until he finds another tenant or he has to sell the house to someone willing to buy it.
There is plenty of evidence around to show that this is how the real world works, whatever your algebra may say, but probably the simplest way of seeing the truth is to think of what happens when the landlord finishes paying off his mortgage. Does he suddenly drop his rent? After all his costs have gone right down. No, of course he doesn’t. The house has a certain market rent which depends on the local housing supply and the local wage level. Landlords rent houses at what the market will bear, not based on their costs. If the market rent won’t cover their costs then they get out of the market completely.
This is one bit of economics where facts and theory actually match up.
“Roads and street lights are also created by the community, through their payment of taxes to the government, so pedestrians should pay Road Value Tax”
Taxes compensate society for the costs individuals impose on it. Pedestrians using roads impose negligible costs and can do what they do (walk) without them. Cars wear out roads and require significant management.
@Adam Smith Fan. The tenant has to cooperate, because every other place the tenant looks the landlord has done the same thing! Adam Smith was living in a different situation. Rents now increase all the time!
I still cannot see how P.Toynbee works out that LVT would solve all the problems
@Chris Owen. Does owning a piece of land impose costs on society?
@Richard Dean
Landlords today charge the maximum amount they can get away with. Landlords in Adam Smith’s time charged the maximum amount they could get away with.
Much has changed, but that habit of the free market simply hasn’t. And under these proposals, if every landlord does decide to pass on the cost of LVT to the tenant, that would be a self-correcting problem – since LVT taxes the rental value of the unimproved site, as indicated by market rates set by the landlords, any hike imposed by a kind of ‘property cartel’ would simply lead to the landlords paying more in LVT. Because the landlord’s LVT bill is calculated from the rent the tenant pays, its impossible for the whole cost to be passed on barring the charging of infinite rent, which I think we can assume would be a non-competitive rate pretty much anywhere outside Central London.
Regardless, assuming the landlords do go with that response and hike the rent, that would simply lead to larger LVT revenues. Government would then have the option to either increase spending or lighten the burden of taxation elsewhere in the system. OK, headline rents would be higher, but with that kind of revenue coming in, what else could we abolish from taxation or add to the public budget?
Douglas McLellan
The idea that LVT will also mean moving property tax from the owner to tenant is a bizarre one. As the owner of a property that I let out I can assure you that the rent would increase if I was taxed on it.
So if the tenant is able to pay that increased amount, why not charge that much now? And the tenant is not able to pay it, you won’t have a tenant. As T-J puts it, landlords charge the maximum rent they can get away with, just as house sellers charge the maximum price that doesn’t leave their house unsold because no-one will buy it. That’s the way the free market works. Just as you are not concerned with the tenants costs so long as the tenant is willing yto pay, so the tenant is not concerned with your costs. Of course, if tax is shifted off income and onto LVT, the tenant has more money and so will be able to pay more in rent, so this would enable you to put rents up and still get tenants.
Julian
That an elderly retired widow in a large house pays more than a family of four earners in a small house.
This is indeed the emotional argument that is always thrown at any proposal to tax land or property values. We saw it used against the “mansion tax” which was just a tiny first step proposal at shifting tax from income to property. So while I agree with the principle of LVT, I can see it would be very hard to sell.The loudest voices will be those that are hurt – and they are the people who dominate the commentariat. Those who benefit will not be heard, in part because the commentariat has primed them not to be interested in such things so they would not even know of the benefit.
Now the real question here is why should I weep so much for the widow in the big house but not at all for the four earners squeezed into a small house because thanks to high house prices they cannot afford anything else? Why are there not equally emotional arguments about people squeezed out of the possibility of family life or familes wrecked because of high house prices? This has very much to do with the commentariat being domianted by wealth home-owning and home-inheriting people, while poorer people have been encouraged to adopt the attitude that politics is not for them, they just have to accept things as they are, they shouldn’t bother their heads with economic arguments, though they should weep for those the commentariat tells them to weep for.
I think it would be right for LVT to be offset against mortgage payments and also for there to be a needs-based allowance before it kicks in. Neither of which benefits the elderly widow, though it will greatly assist young families, and seeing the misery and mess caused by the deterioration of family life it would seem to me that’s a good thing.
The widow has the advantage of having the mortgage long ago paid off, whereas the young family have to pay it and the costs of childcare. Is it really good to skew payments like that? Is that going to lead to a well brought up next generation? Or to misery and broken families ground down by costs? All to help the elderly widow … do what?
Having full equity, the elderly widow is in a position to pay from equity withdrawal. It would indeed be fair to have some sort of insurance scheme, state backed if necessary, to make sure she is never in the position of being thrown out of her house in this way – at worst, ownership should go to the state and she remains a tenant. Although as she is elderly in a high value house, it would actually never get that far.
It is the elderly widow’s heir that lose out. So why should we weep for them? True, they get a less big dollop of cash when she dies, but why should that be our biggest priority? If they need the house they are going to inherit, it would be in their interest to pay the LVT on it to keep full equity – that would still cost them much less than buying a similar house outright. So why should their interests count for so much more than those not in such a fortunate position who do have to pay all their own way to get housing? Even more so if they don’t need the house and it’s just a cash dollop.
If we are to weep, I believe it should be first and foremost for those who are the victims of high house prices, not for those who benefit from them and might lose some of that benefit were taxes shifted that way. Why should a person who is struggling to buy a house have to struggle more because it is paid for from taxed income, while once someone owns a house they or their heirs can make big money from it tax free?
An extra tax on people’s homes.
Great ,lets make sure we don’t hold Twickenham, Sutton and Cheam, Kingston, Carshalton …….
@Simon McGrath
Did you read the article? It’s called a land value tax – it is not a ‘home’ tax.
Secondly, Joe Bourke is talking about LVT as a replacement tax, not an additional tax. A large proportion of the population would be better off (in addition to the benefits LVT provides to economic efficiency),
Lastly, why do you think that policies should be aimed at attracting the votes of probably no more than 1% of the population (Twickenham, Sutton and Cheam, Kingston, Carshalton)? I suggest that chasing the votes of the other 99% of the population might be more profitable.
When the government increases tax on petrol, does the price of petrol rise? Do petrol sellers charge the most they can get? If VAT increased to 25%, would prices go up? Same for rent.
Great to see this healthy debate on LVT. For those who are convinced of its merits please sign this e-petition: http://epetitions.direct.gov.uk/petitions/3662
@Richard Dean
“When the government increases tax on petrol, does the price of petrol rise? Do petrol sellers charge the most they can get? If VAT increased to 25%, would prices go up? Same for rent.”
When the government increases tax on petrol, the price does rise, but not in proportion to the increase in tax (e.g. a 2.5% increase in VAT will lead to a less than 2.5% increase in price). The reason is because of tax incidence (http://en.wikipedia.org/wiki/Tax_incidence). The supply of petrol is elastic, so the quantity supplied reduces when tax is increased. The tax burden is shared by the seller and the buyer – the proportion contributed by the seller and the buyer is dependent on the relative elasticity of supply and demand. Economic activity is reduced by the associated dead-weight loss.
With residential land, the quantity available for use does not change in response to an increased in the tax placed on the value of land. The incidence of the tax therefore falls entirely on the landowner. The landowner cannot pass costs on to a tenant if the supply of land is finite (and there is no loss in economic activity as there is no dead-weight loss). The only way that a part of tax could be passed on to tenants is if the tax somehow results in de-regulation of planning restrictions , increases land reclamation from the sea, etc!
I applaud you for continuing to dig, despite all the excellent rebuttals above.
Simon – an ‘extra tax’? I think the idea is that it replaces the current tax on people’s homes – council tax.
Anyway it’s all a bit academic now. Polly Toynbee has come out in favour of it so it must be a bad thing…
@Richard Dean- does owning a piece of land impose costs on society?
Of course it does! By owning land, you are asserting that you have the monopoly of use on it, and that everyone else (let’s call them “society”) must steer clear. As everyone else needs land to live, to put a roof over their head, run a business, grow food whatever, by depriving society of your land, you are a cost to society. A country (or state) is made up of land, and borders of land, and a LVT is a fair way of paying the state for the part of it you are using.
Richard, if council tax is removed then tennants will no longer be paying as much overall even if some economically illiterate land lords try to take advantage.
Unless you’re thinking of the poor people renting hundred of square meters of land in London, they might be worse off temporarily while the market adjusts.
Also, thanks to Mr Huntbach for some good posts.
@Joe
” A London home with a market value of 400,00 might have a land value of say 225,000. Currently the average council tax on this kind of property in Band E would be approx. 1500. A levy of 0.5% to 0.6 % on land value, designed to replace council tax, would be a reduction compared to the current level of council tax.”
As I thought, you haven’t really thought this out!
The net result of all this upheaval for your London householder is a reduction in local tax from ~£1,500 to ~£1,125 pa.; about one week’s interest repayment on the typical UK mortgage – wow!
However, under the current system, the London council tax payer only pays a small fraction of the actual costs of the services they benefit from, the balance of the costs come largely from taxation received by central government. Under a LVT system this cross subsidy of London residents could not be justified and hence your resident would actually see a significant increase in the direct tax they have to pay.
Additionally, you assume that LVT is levied on the ‘actual’ value of land rather than on the “revenue stream from its rental value” [www.landvaluetax.org].I suggest in London the rental value of land is dependent upon what you are able to build on it and hence the revenue stream you are able to derive, which is in line with the thinking of LVT advocates: “The valuation would be based on market evidence, in accordance with the optimum use of the land within the planning regulations. ” [www.landvaluetax.org]. Hence within the London assembly boroughs, given their stated housing need, it is obvious the optimum use of land is high-rise development. So your householder’s LVT assessment should be based on the revenue stream that could be derived from building a Shard say at their location…
On the little old lady argument, I can’t help but point out that the reason the little old lady is being asked to pay tax is because her house is worth a lot of money. She has sufficient wealth to pay the tax, but that wealth is non-liquid. In the event of an LVT being instituted, I’m pretty confident that the financial markets will deliver some kind of product that allows a portion of the equity of that house to be cashed out, perhaps as some kind of bond that pays the tax, rather than pays the little old lady directly, and reimburses the issuer with some of the equity of the house when it is sold on her death. Effectively, the incidence of the tax is not on the little old lady, but rather on whoever would stand to inherit her estate.
On the incidence of the tax point, Richard Dean has used algebra to attempt to prove the incidence of the tax will necessarily fall on the tenant. This is incorrect, because he hasn’t factored in a key point: demand for something is demand-at-a-price, not demand at any price. An LVT does not change the price for which there is demand for a given property. For it to do so would require that every single landlord for every property in the country passed on the increase wholesale. Given we have a competitive rental market, this seems rather unlikely.
Adam Smith lived in different times. I have already shown that there is an amount D that allows landlords to recoup taxes from their tenants, and that tenants have no choice if every landlord does the same thing. It’s a simple calculation just like the one for NPV that economists are familiar with, and it can eaily be adjusted to take account of inflation in the same way as NPV. And just like anything else, LVT seems to have a few inconsistencies and unintended consequences …
Go to any city and you will find nice small buildings sandwiched between high rise blocks. Some may be of historic value, some may be private residences. If we use the high market value of land for developers to build on, then the owners will be forced to sell to developers who will destroy the small buildings. But do those buildings sometimes add value to the neighborhood – part of the way the community constructs value? In which case, should the neighborhood be paying a tax to the small building owners?
Different ways of using land produce different incomes, so that an owner getting a relatively low income from land use pays a greater relative tax than others. That looks unfair – and why should society dictate how people use their land? Much better to tax land income rather than land value, but that is done anyway through income tax, and the effect on land use would be different. Even tax on the basis of the damage that the use of the land does to the community – so for instance a noisy factory with HGVs destroying the local roads might be taxed more than a similarly-sized house owned by a little old lady who can’t drive.
Roland,
replacing council tax with LVT is merely a change in the base that councils use from levies on property values to Land values. As I have indicated, the average homeowner should see a reduction in tax payments and those with higher value land will see an increase. This change has no effect on other taxes, unless we choose to remove other taxes e.g. inheritance tax. The effect would be the same if the current council tax bands, based on valuations at 1 April 1991, were extended beyond the existing limits
In England, the council tax bands are as follows :
Band Value Ratio Ratio as % Average
A up to £40,000 6/9 67% £845
B £40,001 to £52,000 7/9 78% £986
C £52,001 to £68,000 8/9 89% £1,127
D £68,001 to £88,000 9/9 100% £1,268
E £88,001 to £120,000 11/9 122% £1,550
F £120,001 to £160,000 13/9 144% £1,832
G £160,001 to £320,000 15/9 167% £2,113
H £320,001 and above 18/9 200% £2,536
London rentals values are based on planning consents as elsewhere in the country. You cannot build a tower block in a residential community without going through the planning process. London residents do not generally benefit fron cross subsidies, they are net contributors via business rates and general taxation to other regions of the country.
It does not really matter what the actual Land Value base is. What is important is the relative values- so that the burden of the tax is fairly distributed. Councils will set the levy at the % of the base needed to cover the revenues previously raised by council tax and business rates.
@Matthew, 2 fantastic comments. Thank you.
@Richard, everyone in business wants to make as much money as they can. Landlords would love to charge infinity £ to their tenants. However no tenant has infinite money, so they can only charge as much as they can find a tenant is willing to shell out. They also aren’t the only landlord in town, so if they charge too much, the other landlords will get their tenants and they won’t make any money. Rent levels are totally and utterly down to how much money can be extracted from tenants. If we bring in LVT, that doesn’t change how much money tenants have. Landlords would be forced to pay their LVT from this same source.
Petrol is different to land. Land can’t be moved about. Land’s value is completely down to its location. Petrol can be moved about. Broadly speaking, its value isn’t based on its location as its customers can move to a cheaper site to buy it if one place gets more expensive. (OK, you do get a bit of local variation, because people can’t traverse the country to get to the cheapest station, so a bit of the land value creeps into petrol price. So the difference in petrol price between Oldham and Oxford is small, but the difference in rents is huge.) On top of this, people use less petrol when it gets more expensive, and more petrol can be produced if demand increases. The sum of all this makes the petrol market completely different to the rental market, so the impact of tax on them is completely different too.
@Joe,
If LVT is just council tax levied on land rather than houses, the I would suggest that it would be electorally easier to present it as minor modification to council tax, rather than as a revolutionary new/old tax. One of the arts of politics has to be to present things in ways that don’t automatically generate resistance.
Thinking moves on, and some of Smith’s looks obsolete. And linking all this back to conditions in the 18th century confuses the issue – and gives opponents more ammunition. Just like house-based council tax, there will be inconsistencies and anomalies with LV-based council tax, and there will always be people trying to get round any system.
Richard,
taking the electorally eary route is what has got us to the place we are at. We have been consistently doing this since income tax was first introduced during the Napoleonic wars. As Sir James Mirrlees, after an exhaustive five year review concluded in 2011 “the current tax system imposes “unnecessary costs” on the economy.” There is no getting away from the political difficulty associated with some of the proposed changes. But there is also no getting away from the enduring costs of failure to reform,”
Many have been arguing this for over two centuries:
“Ground-rents are a still more proper subject of taxation than the rent of houses. A tax upon ground rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground.”Adam Smith – Wealth of Nations (1776)
“Landlords grow rich in their sleep without working, risking or economizing. The increase in the value of land, arising as it does from the efforts of an entire community, should belong to the community and not to the individual who might hold title.” John Stuart Mill – Political Economy (1848)
“The tax upon land values is, therefore, the most just and equal of all taxes. It is the taking by the community, for the use of the community, of that value which is the creation of the community”. Henry George – Progress and Poverty (1879)
Roads are made, streets are made, railway services are improved, …water is brought from reservoirs a hundred miles off in the mountains – and all the while the landlord sits still… To not one of these improvements does the land monopolist contribute, and yet by every one of them the value of his land is sensibly enhanced”. Winston Churchill – 1909 People’s budget
“Search out every problem, look into these questions thoroughly, and the more thoroughly you look into them you will find that the land is at the root of most of them. Housing, wages, food, health”. David Lloyd George – Aberdeen, 29th November 1912
“If a tax were imposed equal to the annual use value of real property ex its improvement, so that it would now have no net earnings and hence no capital value of its own — progress would be orderly and its fruits would be equitably shared”. John Kenneth Galbraith – The Affluent Society (1958)
“So the question is, which are the least bad taxes? In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago”. Milton Friedman – University of Chicago in 1978
Smith’s theories are more obsolete Newton’s theories. Both have been developed over the decades and now have a large weight of empirical backing. You now find no serious economist who denies the laws of rent.
Are they relevant to the 21st Century? Well, we’ve just witnessed the creation a giant property bubble (which is still impeding growth). We still see banks lending far more towards property rather than businesses. Imputed rent currently takes the biggest chunk of GDP since records began. LVT has the potential to temper all of this. A
At a time when new forms of government revenue are urgently needed, LVT has to be taken seriously. The OECD is urging government to switch over to property taxes to boost growth, lessons being heeded by Ireland and Greece.
LVT is far from obsolete. In fact it’s never been more relevant.
Clanger, should read “Smith’s theories are NO more obsolete Newton’s theories.” D’oh!
@Duncan Stott. Have you read “The Financial Crisis: Who is to Blame” by Howard Davies, Director of the London School of Economics and Political Science in 2010? Chapters 32, 33, and 34 discuss errors in economic theoreies and models, including the fallacies of the tehories of rational expectations, the efficient market hypothesis, and the emphasis on short-term returns. Put simply, we are now learning that there are serious errors in the way economists are taught to “think”.
And all this harking back to history looks like a way to prevent thinking … and just when we need new ideas most!
@Joe Bourke. Where we are now is in government. That is a huge improvement on where we have been for almost a century. You cannot do anything unless you are there, and you cannot get there or even do things there unless you are prepared to make the effort to present arguments in ways that can be understood and accepted by an electorate. That is what “Dem” in LibDem means. LibDems have planned too long to fail. It’s time to change that.
Richard,
We have known for a long time that neo-liberal economic policy is based on flawed assumptions, as were the quantative risk management algorithms that much of the financial sector relied on for capital allocation prior to the financial crash.
There are two important things to know about the sicience of economics:
The first is Ceteris Paribus. The extent of causal correlation between any economic quantative relationship (ike the algebraic formula you reference above) is always subject to the qualification ‘All other things being equa’.
The second is in the real economy all things are never equal – they are constantly in a dynamic state of flux.
Tinkering around the edges is unlikely to have any impact with the electorate. The entire raison d’etre for the Liberal Democrats is radical reform of society. Lose that reforming zeal and the reason for the party’s existence is gone.
Joe,
“As I have indicated, the average homeowner should see a reduction in tax payments and those with higher value land will see an increase.”
No you haven’t, you have merely shown that for a notional London household a marginal saving might be achieved. Remember Council tax bands are ‘based’ on property value not land value, hence existing council tax bands are no indicator of potential LVT liability. It is telling that you are using Council tax bands to support your argument rather than the results of actual real-world analysis and modelling.
“London residents do not generally benefit fron cross subsidies, they are net contributors via business rates and general taxation to other regions of the country.”
Whilst this may be strictly true, as was demonstrated by analysis of Boris’s tax retention idea, the actual level of (tax) contribution London makes to the rest of the country is marginal.
“You cannot build a tower block in a residential community without going through the planning process.”
LVT assessment doesn’t require actually going through the planning process it merely assess’es “optimum use of the land within the planning regulations”. The planning regulations obviously permit high rise development in London for residential use, otherwise it wouldn’t exist and as urban planners (and LVT advocates) will tell you it is more optimal to have higher density cities… So in fact a council needs merely to change the designation of a piece of land (which the planning regulations allow them to do) to be able to increase it’s LVT liability.
As I said before the more you look at LVT the more questions and issues arise, which is worrying, particularly as LVT has been debated at least as long as House of Lords reform if not longer…
@Joe Bourke. No. The fundamental thing to know is that the economic system is a multiply connected system, and that changes in one part will either cause changes in some other part, or will be impossible if no other part changes. The first of these demonstrates that “Ceteris Paribus” is unreal, as therefore is anything that is inferred using it (which seems to include the IS-LM model). The second implies that unilateral action cannot achieve anything, and the savings/debt paradox is an example of this. Very relevant to where we are now!
@Roland. Absolutely correct. The more you look at LVT, the shakier it becomes. But to be fair, that probably applies to everything in economics today. 🙂
Roland,
LVT would be high in desirable locations such as Central London, low in less desirable ones and zero in marginal locations, which means much of the periphery of the UK. It would then be possible for people to make a decent livelihood in many of the places which presently suffer from depressed economies as they would be relieved of the present burden of taxation. This could assist with arresting the continuing drift to London and the south-east.
The statement you reference from the Land Value Tax Campaign is “The valuation would be based on market evidence, in accordance with the optimum use of the land within the planning regulations. If the current planning restrictions on the use were altered, the site would be reassessed.”
This appears clear enough to me that it is the current planning consent on the site that determines the value not a hypothetical value based on a change of use that has not been granted.
LVT is Liberal Democrat policy for a good reason. It has been shown to work well in stable and prospering economies like Sweden and as Duncan Stott has noted above “The OECD is urging government to switch over to property taxes to boost growth, lessons being heeded by Ireland and Greece.”
@Joe Bourke
The theory is fine, but in practice, it just looks like another device to stiff Londoners for as much tax as possible, since most high value property is concentrated in London and surrounding areas, often not in the hands of the very wealthy in terms of actual disposable income.
Are we really going to surrender any chance of winning any seats in London and the South East on the altar of a theoretical problem that most people actually don’t care that much about?
This proposal is so “Liberal Democrats” it hurts – fine in theory but in practice a complete nightmare, especially once the likes of the Mail, Telegraph, Times etc get to work twisting it and using it against us.
Politics is the art of the possible and this sits firmly outside that category. This is definitely an idea for when we have been swept into parliament with a huge majority and can command the public agenda completely. i.e. Don’t hold your breath.
@11th May ’12 – 2:21am Richard Dean wrote “The tenant has to cooperate, because every other place the tenant looks the landlord has done the same thing!”
Not at all, Richard. Even if all the landlords did as you suggest, the tenant still does not have to co-operate. He merely has to lower his sights and rent a two-bedroom flat instead of a three bedroom one. In fact if he cannot afford any increase, he will necessarily look for a house which is small enough that its increased rent matches his original rent, even if this means sharing with another tenant.
The result is that the demand for the house with the £600 increase falls, so the landlord has more difficulty getting a tenant. Thus the landlord, for all his conniving, ends up having to reduce the rent to attract tenants.
And rents may well have gone up continually during our lifetimes but our Depression-era grandfathers might well have a different story to tell.
“most high value property is concentrated in London and surrounding areas, often not in the hands of the very wealthy in terms of actual disposable income. ”
Home-ownership in London is actually way below the UK average. It’s about a 50/50 split between ownership and rental. Most of it is owned by those who could easily afford to pay, and for those who can’t, the government or the private sector would step in, as already mentioned several times above.
“Are we really going to surrender any chance of winning any seats in London and the South East”
All tax changes have winners and losers, so if London+South East are losers, the winners are in the the North and West of the UK, where we would LVT would rebalance the North/South divide. As housing land values go up, home-ownership is becoming a pipe dream for more and more young people in London+SE, and there’ll be more and more votes in policies to address this.
“Politics is the art of the possible and this sits firmly outside that category.”
Today, maybe, but there’s lots of intermediate stuff we can be doing. Mansion tax is the immediate one (popular in opinion polls despite the right-wing press). Council tax reform in the form of more bands or removal of bands, equalisation of tax due from the value of each band, making landlords rather than tenants liable, integration with business rates…these things should be the medium-term goal.
Longer term we should make the tax revenues more reliant on a reformed council tax. Devolution of services to a local level, then start to get rid of stamp duty land tax, inheritance tax, national insurance and lower income tax.
Finally, we can’t be a party that both believes in stuff and pleases everyone.
@ Richard Dean
Your comment “@Joe Bourke. Where we are now is in government. That is a huge improvement on where we have been for almost a century” caused a semi-philosophical question to arise in my head.
Is it better to be at 23% in the polls but in opposition, or at 9% but in Government?
If the 9% remains at 9% at the time of the next election, i guess the question will be even more hypothetical, as we will not only be in opposition but also without the comfort of reasonable poll ratings.
I wish we hadn’t had fewer than 30 MPs for so long. Then at least Libdems wouldnt’ be so relaxed about being thrashed in 2015. The tories wouldn’t stand for that yet our lot seem to go ‘we’ll it’s better than having 6 isn’t it’, which hardly shows a hunger for power, which i think we could do with more of.
@ Duncan “Finally, we can’t be a party that both believes in stuff and pleases everyone.”
Just one of those two would be nice. We appear to have achieved neither.
I find the debate for LVT very interesting and wonder if a practical step might be to build a financial model to try and see the implications and unintended consequences, as LVT has been discussed for nearly 200 years with very little movement into the real world I think it is time to address practical issues and move away from the ‘economic utopian’ thinking that seems to prevail, Some years ago communism was spoken of in a similar utopian vein and in practice seemed to result in misery and poverty.
A few thoughts:
Land value, if we assume land values fall from this tax what will happen to the debt lent against the property? ie when the landowner come to refinance he may find as the debt has previously been lent using the property as collateral that the banks may see land now as a liability therefore will either lend less or not at all, how will the ensuing international banking crisis be dealt with?
Will banks ever lend on property in the uk again?
Rent being increased: if the tenants are no longer responsible for paying council tax and the tax liability under LVT was passed to the landlord then this will simply be passed back to the tenant under increased rent.
Land values: How would this be calculated? If for example this was a calculation of build cost less market value of property (there will be a huge cost to this and it will still be highly subjective) then we will find many parts of the country outside of the south east will have a negative land value, will the owner be given a tax credit from the government? (for example see values of houses in Burnley lancashire on rightmove.co.uk)
Commercial property such as Hotels? A hotel in central london will have to pass on the tax to consumers, as we live in a global economy would we find that visitors from abroad choose to go to another country than pay the extra cost here.
Many pension and insurance companies invest in commercial property, how will the underlying investors deal with the subsequent loss’s?
Planning, often it is stated in LVT circles that selfish landlords / developers are sitting on undeveloped sites for capital gain, In the real world they are often locked in protracted and costly battles with local authorities for to get planning, how will the added costs of LVT be supported?
Does anyone know if any practical work has been done, such as a financial model of the implications and a review of the how to deal with the consequences, I understand that it was used once in australia many years ago but the citizens voted it out, does anyone know why?
Looking forward to a debate on practical applications of LVT.
Thanks HM
@LondonLiberal. I am terribly sorry about the question. I hope it does not hurt too much. I guess it was one of those “unintended consequences!! 🙂
On the bright side, there may be an answer! 23 is just over two-and-a-half times 9, so if we are more than two-an-a-half times as effective in government as we were in opposition, then the answer would seem to be to be in goernment. I do see you point though. Are we really being that effective?
“Finally, we can’t be a party that both believes in stuff and pleases everyone.”
We never were. That’s why we never polled about 25%, never exceeded 35% in an opinion poll and even when polled about “if they thought we could win” we polled about 45% (a figure which had fallen at each successive election).
@Adam Smith Fan. Neither of us are right, the reality is somewhere in the middle. But Smith was definitely wrong. As Joe Bourke says, he assumed ” Ceteris Paribus” – all other things being equal. Following his argument, let us consider a base case where the rent is £1000, which the landlord consumes in drink. Suddenly, LVT appears at 20%, and the tenants don’t budge on the rent. The landlord’s consumption now goes down to £800, damaging the local economy by $200 . Maybe the government arranges for $200 worth of the same drink to be consumed. But if it does anything else, it has altered the pattern of consumption, That means something else has changed, so other things are not equal, which contradicts Smith’s original assumption. So his argument is self-contradictory, and cannot be correct!
RC,
Average house prices in London are circa £350k. The average homeowner would benefit from a reduction in taxes as opposed to the current much hyped council tax freeze. There is no question that taxes on high value London properties would increase substantially as the tax became more progressive and redistribution from wealthy households to poorer households occurred.
Approx 15% of the electorate are higher rate taxpayers .The inequalities in wealth in the UK far outstrip inequalities in income. The top 10% of households own more wealth than the rest put together: 0.3 per cent of Britain’s population owns 69 per cent of its land.
You state “This proposal is so “Liberal Democrats” it hurts – fine in theory but in practice a complete nightmare, especially once the likes of the Mail, Telegraph, Times etc get to work twisting it and using it against us.”
Andy Burnham based his campaign for leadership of the Labour Party on the back of introducing LVT LVT describing it as “an idea so ‘old Labour’ it can be traced all the way back to Thomas Paine.”
Nick Bowles, founder of the conservative think tank ‘Policy Exchange’ is on board Progressive conservatives should support a Land Value Tax. He concludes “This is very much a policy that ought to be part of any modern, progressive Conservative agenda.”
Tory Bow Group adviser Mark Wadsworth says, “LVT is an entirely voluntary tax: you decide how much you are willing to pay and you choose a house or flat within that price range. Only, instead of handing over all the rent or purchase price to the owner, the location value would go to the government.” Land Value Tax Questions
The tax justice network (TJN) sets out the case quite well A tax that can curb corruption and quotes Samuel Brittan of the Financial Times “the case for a land tax is one of the oldest and least disputed propositions in economic thought.”
The TJN concludes “there is no intellectual argument against this tax that can withstand any scrutiny. What is preventing it being put in place is the pure political power of those who don’t want to be taxed – (combined with the ignorance of voters and politicians).
The elements are there to build cross-party support. It just needs a leadership bold enough to commit to a determined campaign of public education, particularly among the younger generation who stand to benefit the most from getting our collective houses in order.
What the Dickens are you suggesting this for? How will Miss Havisham cope? Isn’t this going to dash the family’s Great Expectations?
@Joe Bourke
Mark Wadsworth stood for UKIP at the GE. UKIP must be so Lib Dem. He’s commented on this discussion here: http://www.housepricecrash.co.uk/newsblog/2012/05/blog-its-a-no-brainer-36786.php
@HM
Nearly all the questions you have raised are discussed here
http://www.landvaluetax.org
Surely we can all at least agree that a Land Value Tax should replace Business Rates and Business Stamp Duty as a matter of urgency. Such a move would incentivise efficient use of land and investment, rewarding those businesses that make efficient use of land and punishing those that don’t, while also incentivising house building and investment. It would be a powerful pro-growth measure.
We can argue about the difficult issues around domestic housing at a later date.
If LVT is “least disputed”, doesn’t that suggest that people haven’t really subjected it to rigorous test? HM’s suggestion therefore seems very sensible, as long as the models avoid assuming what they are trying to find out. And HM’s list of questions should unsettle anyone! Stephen W’s suggestion would surely have the additional advantage of giving valuable real data on the effects of LVT in the real world – data that could be used to check the models.
On another tack, would it be possible to allow councils, or local electors, to choose whether to base their locality’s council tax on house values or land values, or even a mixture? Would this type of localism also provide councils with convenient ways to compete with each other for domestic or business land users?
Ah, and here is your critical error. When you tax petrol, you get less petrol sold – and higher prices. When you tax sales, you get less sales – and higher prices. That’s a basic supply-demand interaction: higher inefficiencies (tax) shift the supply curve
But land is different. Land is one of the tiny number of things which can’t move the supply curve at all, because the supply of land cannot change. No matter how you tax land, the amount of land available for rent is the same. The price changes only based on demand and efficiency.
Landlords do not set prices. Markets (tenants) set prices (in practice, they do so indirectly by earning money: the market rent is whatever the potential tenants can afford out of their earnings). For an explanation please consult an economics textbook, rather than assuming you know better than people who write economics textbooks.
(Your proposal of a criminal price-fixing cartel that enforces prices across the housing market for the benefit of landlords has the singular problem that price-fixing is illegal, price-fixing of property is impossible to hide, and so it would work for about as long as it takes the ink to dry on the arrest warrants)
And the only way you can avoid the widely-documented answers is to ignore them.
It’s still in use in New South Wales, Australia, and I’m not aware of it ever being voted out. Also in Pennsylvania, Hong Kong, Taiwan, and Singapore. Several other countries are in the process of introducing it.
The amount of fiction in this thread is frustrating.
@Andrew Suffield. Thank you very much for your efforts to explain this. My brain has been doing contortions all night but it still doesn’t see the textbook view.
I imagine the government can regulate the supply of land in more or less the same way that it regulates the supply of money, by buying and selling it. Councils can regulate the the supply through planning laws. Even a large landowner can perhaps regulate the amount of land they hold and the amount they allow to be rented?
Also, surely LVT is NOT a tax on land, but on land values, and the supply of land value can be changed? The supply changes every time there is a change in the value of something else, because all values are relative. Also, if today I can make a ton of wheat per acre, then the value of land is one ton per acre. If tomorrow I improve my methods and can make 2 tons, the value of the acre increases to 2 tons. I have doubled the land value.
But maybe the population doesn’t want 2 tons at that price, so then a suppy and demand interaction takes place which alters the price I am willing to pay for renting the land. Maybe the reult is that the available land value goes down to one and a half tons. All this witout changing the amount of land that is actually available.
I am falling asleep, so apologies if this is gobbledegook.
The problem with Richard’s “analysis” is that he thinks a landlord can pass on the cost of land to the tenant PLUS obtain an unspecified rental income. This is fundamentally false because a landlord needs a land-using tenant to generate rental income for him to pay the cost of land (be it via a mortgage or LVT), but can somehow outbid all potential tenants and demand they pay his mortgage/LVT plus rental income. If all potential tenants bid less than a landlord for the land, than that is the market telling the landlord there is a limit to what he can obtain from a tenant in rental revenue. This is how it is in a world without LVT. What Richard is really trying to argue to all of us is that a tenant can be outbid by a landlord, but will then be able to turn around and give the landlord money he did not have prior to the sale to the landlord for the mortgage PLUS rental income. How is this even possible? The answer is that it isn’t possible, but Richard has not seen fit to acknowledge its impossibility. And if it is impossible for a potential landlord to outbid all his potential revenue generators (tenants) for a piece of bare land while expecting those same outbid tenants to provide rental revenue over and above the winning bid, then the theory that a landlord can pass along more than his costs to the tenant is impossible.
LVT works the same way as above. The revenue generators are the limit on how much LVT can be collected by the government. They will attempt to outbid each other for use of the land, and how much they are willing to pay depends on how much profit they expect to make. A landlord cannot just step in to this process and outbid the highest bidding revenue generator and expect to get the previous highest bidder to pay the LVT+x. If it cannot happen in an LVT-free world, it cannot happen in an LVT world.
@Richard Dean
Take a break and read up the theory on this. If you have studied economics to a reasonable level, there is Brian Hodgkinson’s “A new model of the economy”. If you have not, then there is “Progress and Poverty” by Henry George. Do not attempt to read the original – you will never finish. The best version is an abridgment published by Hogarth Press in the 1950s. Shepheard-Walwyn has a few copies left or you can get one on Ebay.
Almost nothing in economics is quite what it seems at first sight.
@HM
“Land value, if we assume land values fall from this tax what will happen to the debt lent against the property?”
The borrower will still have the revenue stream to pay off the debt, provided that the switch from present taxes to mostly-LVT is phased over a few years.
” ie when the landowner come to refinance he may find as the debt has previously been lent using the property as collateral that the banks may see land now as a liability therefore will either lend less or not at all, how will the ensuing international banking crisis be dealt with?”
The banks will no longer give credit for land purchase as this will be unnecessary, and any credit they give will be subject to their assessment of the ability of the borrower to repay.
“Will banks ever lend on property in the uk again?” They will lend on building value only. They will never lend on land purchase again, as this will no longer be necessary. Those wanting to use land, ie everyone, will pay what is in effect a perpetual rent to the government, in return for which they now longer have to pay taxes on their labour, or for goods and service. Thereby putting a stop to credit-fuelled land price booms and busts.
Bring it on.
While in theory there are proponents of this reform across the party political spectrum, the bitter experience of everything from voting reform to the proposed changes to the House of Lords is that any policy can always be turned against us unless it is easy to explain to the electorate. The simplest proposals are always the most popular.
The crucial test is how would you explain this in a couple of sentences to someone you happened to be talking to in the bus queue who wants to know what’s in it for them. The £10,000 personal allowance passed that test, but very few Lib Dem policies ever do, and that is one big reason why we get pasted by the bigger parties.
@Henry Law. Thanks for the advice. Here are some ideas that are complete nonsense, in this voter’s opinion:
> the idea that LVT will not affect what normal people call “rents”
> the idea that textbooks are always correct
> the idea that one should not think while reading text books
> the idea that what has previously passed as wisdom cannot be challenged
> the idea that LVT will be accepted by an electorate if its proponents can’t persude a person (including dense ones like me) that it’s right
Good to see LVT still being pushed by Lib Dems. Let’s remember that the person to convince is George Osborne, and that the person to convince him is Danny Alexander…
RC,
I would wholly agree with your comments on the need to be able to explain policy in a couple of sentences. As you note , we have been unable to garner popular support for Voting reform or interest in House of Lords reform.
The increased personal allowance was very popular (90% in favour),but the impact has been blunted by inflation and other changes to tax and benefits.
Yougov polls suggest that the proposals for Mansion Tax had75% support which bodes well for electoral support to increase the number of council tax bands or introduce a more progressive system. If a switch to a site value rating for Uniform business rates and council tax is introduced and property owners are levied in place of tenants – this could be expected to be supported by many voters.
With tax reform we do, however, need to pay heed to Sir James Mirrlees advice on the IFS report: – “Successive governments have failed to set out a coherent strategy for tax. As a result the current set of taxes is complex and often incoherent and they impose a much greater cost on the economy than need be,”
Abolishing business rates and business stamp duty and replacing them with a land tax would clearly and obviously increase business efficiency. It would encourage investment and discourage speculative and wasteful land holding. It would be exactly the shot in the arm our economy needs (considering the collapse in private investment since the crash).
The main problem is that it does come with up-front costs, namely the difficulty of re-valuing every site in the country. This could run into a few hundred million pounds up front. But after that it would be vastly cheaper each year to maintain, and the benefits to the economy would run into billions each year. It’s an open goal economically and it just requires a bit of political will to get the whole thing off the ground.
Richard,
when you are considering rents, I find it is best to consider the economy as a whole or Mrs Thatcher slice of a bigger cake if you like.
Commercial and residential rents are the base of a pyramid that are a major determinant of prices and wages. Switching the incidence of tax from tenants to Landowners may see compensating adjustments in the level of the gross nominal rent charged to recover costs – but Landlords cannot arbitrarily increase the share of business profits or wages they extract from the economy – that is a function of supply and demand. A Landlord may be able to increase gross rents so that he charges an amount equal to the existing rent plus the council tax that the tenant no longer pays, but if his LVT is higher than the tenants former council tax, he will need to absorb the excess just as he would if mortgage interest rates increased.
A commonly quoted threshold for housing costs (rent or mortgage and council tax) is 30% of disposable income. Once this personal limit is reached people begin to look for alternative less expensive shelter.
@Joe. I have to work for a living, so this my last stupid comment which, at worst, may assist you in seeing the kind of opposition you will find at bus stops. If property owners are levied instead of tenants, it’s obvious that the owners will add the tax to the rental amounts that the tenants pay, and both will end up with the same net costs, so in effect nothing will change. There won’t be the kind of migrations that people on here have postulated. Why would any voter want to bother to support such ineffective tinkering? I am reminded of Nero playing while Rome burned.
@Joe. I really must earn some money today, I have to eat. Your last comment seems to be code for saying that I have been right all along. Landlords will pass the tax on to tenants.
Adam Smith use the word “rents” for something a little more general than me and my friends at the bus stop. His agument is “all other things being equal”. Mine is that any change has effects in a multiply-connected system. A person with money has a power to decide how that money will flow into an economy. This taxation change changes the amounts of money that different decision-makers have that power over. The change of decision-makers can change the pattern of flows into other slices of the cake, so that some may gain while others lose. This changes the relative values of slices, and means that other things are not equal. Adam Smith’s assumption is wrong!
You will NOT tempt me to reply, until I have earned today’s crust anyway! 🙂
@Richard Dean
No. No. No.
Joe Bourke is saying (as I did earlier) that if the (aggregate) landlord’s LVT is equal to the current council tax that the tenants cease to pay (on aggregate) then landlords will be able to put up the rent by that amount (because the tenant has more money in their pocket to pay it – landlords’ costs can’t be passed on if the tenant has the same net income). However, landlords that sit on land, whether they’re developers hoarding land-banks or landlords with vacant properties, will still have to pay their LVT. It punishes those that use land inefficiently – so is a far better tax than council tax (you don’t pay council tax on undeveloped land and you get massive reductions for hoarding empty houses) and a whole range of other taxes including income tax. The question you need to ask yourself is why the current tax system is set up to reward people who do nothing with a precious resource, encouraging them to hoard and speculate with it.
If LVT is levied such that the landlord is paying more LVT than the council tax the tenant no longer pays, then the landlord cannot pass that additional cost on to the tenant. If landlords’ costs did determine levels of rent, as you suggest, then why didn’t rents fall dramatically in 2008/9 when base rates were slashed by the Bank of England? The answer is because the level of rent is emphatically not determined by landlords’ costs. Landlords’ profits increase when their costs are reduced and their profits decrease when their costs are increased. New entrants to the landlord market are thus likely to pay less for a house if their costs increase (in order to maintain yields) – increasing costs for landlords push house prices down (a very good thing) – the reason house prices have only fallen 15%-20% since 2007 is because of base rate slashing. If rates had been left where they were then house prices would be been down at least 40% by now – back to where they were before the credit binge.
@Steve. You are causing me to risk being sacked. Oh well ! 🙂 . Yes, yes, yes. Read what I wrote. It’s the same as what you have written about what Joe wrote …
You wrote “Joe Bourke is saying (… if the … landlord’s LVT is equal to the current council tax that the tenants cease to pay … then landlords will be able to put up the rent by that amount”. Didn’t I write that the landlord would pass on the tax to the tenant? Isn’t that what you write that Joe wrote?
Why is it so difficult for you LibDems to understand that the people at the bus stop do have sparks of intelligence occasionally and can actually be correct quite a lot? And why do you insist that we abandon our way of saying something and insist that we have to say the same thing the way you say it instead?
Didn’t I write that the landlord would pass on the tax to the tenant?
No. You are still wrong. In this particular example (where council tax has been scrapped), the landlord is able to put up the rent. He/She is able to put up the rent as a direct consequence of the council tax being scrapped (which puts more money in the tenant’s pocket – the tenant is able to pay more).
If LVT is increased, but council tax is not scrapped, the landlords are not able to put up the rents – they must find the money from their own revenues. Their costs cannot be passed on to the tenants. Landlords savings (e.g. base rates being slashed) don’t get passed on to the tenants either. It is the tenant’s net income that determines rent levels.
In the first example, the cost to the landlord was only able to be passed on to the tenant because of the the saving to the tenant (in scrapping council tax) – as I said at 9pm two days ago: “Put it this way – if council tax was scrapped, landlords would be able to put up their rents by £1000 a year – the tenants wouldn’t be better off.”.
Oh, and,
“Why is it so difficult for you LibDems to understand that the people at the bus stop do have sparks of intelligence occasionally and can actually be correct quite a lot?”
(a) I’m not a Lib Dem, whatever one of those is (I’d describe myself as a liberal and a democrat though), and (b) you’re not correct.
Are we really going to surrender any chance of winning any seats in London and the South East on the altar of a theoretical problem that most people actually don’t care that much about?
It shows how disgracefully biased political commentary is in this country that taxes on property tend to lead to this response.
People in London and the South East are suffering the most from high house prices – so they will benefit the most from measures that will stop and reverse the ridiculous house price inflation we have seen in recent decades. How about we try selling this policy to all those people in London and the South East squeezed out of home ownership due to high house prices? How about we sell it as a pro-family policy – balanced with a needs related allowance it will once again mean people on ordinary wages in London and the South East will be able to buy a house of their own to raise a family decently. How about noting that since LVT would replace at least some of income tax it would be a massive benefit to those squeezed out of home ownership, or squeezed into tiny housing in London and the South East due to high land prices?
The commentariat cannot see it this way because the commentariat consists almost entirely of people from the upper end of the wealth scale. They think the whole of the South East is people like them. People on middling and average incomes around them might almost be invisible . Some of the worst offenders are those who have moved to London and the South East from elsewhere to become leading media people and just do not realise that those they mix with in this role are NOT typical Londoners and southerners.
@Matthew Huntbach. I am trying to understand not criticise. Is LVT really a stealth debt?
The total cost of a house in perpetuity is the purchase price plus the NPV of all future tax payments on it. Doesn’t an increase in LVT achieve the Smith effect (no change in “rent”) by increasing the NPV of the future tax payments , while reducing the purchase price in the way that you describe? For the owner, the future tax payments would be operationally indistinguishable from debt repayments to be paid in perpetuity.
Does this raise a question about whether the people in London and the South East would in fact “benefit”?
@Steve. I get it. In your words, “the landlord is able to put up the rent”. In my words, the landlord passes on the LVT to the tenant in increased rent. Yes, indeedee, I can surely see the difference now.
Richard,
I think we need to make some distinctions here, so we are all talking about the same thing.
Adam Smith was commenting at a time when tenant farmers paid a rent that left them with just enough income to subsist on and continue working the land and paying rent. Industrial labourers in factories and mills similarly earned just enough in wages to keep them alive and paying for a room in rented accommodation. His argument that a tax on land could not increase rent costs was self-evident. Rents then, as now, were already at the maximum level they could be without forcing great swathes of the population into destitution and homelessness.
He said “whether the tax was to be advanced by the inhabitant, or by the owner of the ground, would be of little importance. The more the inhabitant was obliged to pay for the tax, the less he would incline to pay for the ground; so that the final payment of the tax would fall altogether upon the owner of the ground-rent.”
We are still grappling with these problems today. Housing costs (rents/mortgage and council tax) have become too high for great swathes of the younger generation and are having to be substantially subsidised in the form of housing benefit and social housing for essential workers.
LVT can start to move the burden of these housing cost subsidies back from general taxation of income to tax on high value land reducing the level of subsidy required.
Consider two cases:
1. A tenant paying £1000 per month in rent and £100 in council tax. If the council tax is replaced with LVT of £100 and assessed to the Landlord, the Landlord will be expected to increase the rent charge such that neither the tenant of the Landlord will lose out.
2. A tenant paying £2500 per month and £150 in council tax. If the council tax is replaced with LVT of £250, the landlord (in a free and competitive market) can only increase the rent to £2150. The landlord must absorb the additional £100 of tax.
The effect of replacing council tax bands with a progressive LVT is that higher value properties will incur higher levels of tax for both Landlords and owner occupiers. These higher taxes can be used to reduce the currently disproportionate burden of property taxes for households in average and lower priced properties
@Richard Dean
> the idea that LVT will not affect what normal people call “rents”
LVT will affect rents. It will make them go down.
> the idea that LVT will be accepted by an electorate if its proponents can’t persude a person (including dense ones like me) that it’s right.
Since when do all political proposals have to be accepted by an electorate? I do not recall a great clamour for VAT when it was being proposed. Politicians, opinion formers and academics have to be convinced. Most people will be happy not to be punished for working.
@Joe Bourke. I see your argument and the benefits you expect from LVT. I do not fully undertand why those benefits cannot be achieved by an increase in council tax rates for higher value houses and a reduction for lower ones, but no matter. There is, however, an inconsistency between your arguments about the two cases.
Case 1 shows that it is possible for markets to come into an equilibrium in which the landlord passes on the LVT costs to the tenant. That was Adam Smith’s argument that “whether the tax was to be advanced by the inhabitant, or by the owner of the ground, would be of little importance”. Why then should it be of such great importance, in Case 2, that the equilibrium amount of tax paid by the tenant cannot change? All that needs to happen is for the tenant toagitate for more pay – a thing that was not feasible in Adam Smith’s day. So one of the potential unintended consequences in modern times is that Mark Serwotka will spring into action and there wiil be inflation.
Here is another problem. I own land. Suddenly the government asks me to pay tax on it, but arranges things in such a way that I cannot recoup the tax from anyone I might rent the land to. Also, the land value will go up if I work the land and gain profits from it, but the profits will cause the LVT to rise and the result is that I will be “no better off”. In what way is that an incentive for me to improve the use of the land? My best option would be to sell it, but then the buyer will have exactly the same problem!
Sorry to be such a bother. My excuse is that you started the conversation! 🙂 .
@Richard and anyone else who imagines that LVT could be passed on.
I have a flat which I rent out. The tenant is responsible for paying Council Tax, about £100 per month. If CT were increased it would decrease the amount I could ask for the flat. If it was an LVT payable regardless of whether land was in use or not, rents would have to drop as more property would be brought on to the market.
The suggestion that an LVT could be passed on is contrary to all experience of the way the property market functions.
There is a substantial body of evidence in the opposite direction relating to rate-free Enterprise Zones, where rents inside the zones were higher than those outside, by almost exactly the amount of rates that did not have to be paid.
@Henry Law. Joe Bourke’s Case 1 shows that the rent payments can go up. Average council tax is about £1200, so every single voter paying council tax will be interested in LVT, and a majority will need to be convinced they will gain from the change to LVT, or at least that they won’t lose out.
@Henry Law. More property would not come onto the market, since according to the proponents of LVT there would be no incentive for that to happen – LVT cannot be passed on to the tenant!
“I see your argument and the benefits you expect from LVT. I do not fully undertand why those benefits cannot be achieved by an increase in council tax rates for higher value houses and a reduction for lower ones, but no matter. There is, however, an inconsistency between your arguments about the two cases.”
Some of them can. It is a good interim proposal. But it does not pick up vacant land with planning consent.
“Case 1 shows that it is possible for markets to come into an equilibrium in which the landlord passes on the LVT costs to the tenant. That was Adam Smith’s argument that “whether the tax was to be advanced by the inhabitant, or by the owner of the ground, would be of little importance”. Why then should it be of such great importance, in Case 2, that the equilibrium amount of tax paid by the tenant cannot change? All that needs to happen is for the tenant toagitate for more pay – a thing that was not feasible in Adam Smith’s day. So one of the potential unintended consequences in modern times is that Mark Serwotka will spring into action and there wiil be inflation.”
If Council Tax goes up, I, as a landlord, must absorb this cost as the total amount that a tenant will be willing to pay does not change. Furthermore, the increase in property coming onto the market due to LVT will tend to push down market levels somewhat.
“Here is another problem. I own land. Suddenly the government asks me to pay tax on it, but arranges things in such a way that I cannot recoup the tax from anyone I might rent the land to.”
No no no! That tax is a proportion of the rental value. If you have, as you seem to be suggesting, been overvalued then a decent appeal system will take care of that. You are implying that the valuers have been grossly incompetent in assuming a use that cannot be achieved. This is strange because the permitted use is that stated in the local Planning Register of consents or existing use value.
” Also, the land value will go up if I work the land and gain profits from it, but the profits will cause the LVT to rise and the result is that I will be “no better off”. ”
You can not make your own land value go up. And you will not be taxed on the value of improvements. You appear not to have taken the trouble to understand how this tax is meant to operate. Of course it does not help that some of the proponents of LVT also have not done this. LVT will not work properly if the selling price is the basis of the assessment.
“In what way is that an incentive for me to improve the use of the land? My best option would be to sell it, but then the buyer will have exactly the same problem!”
You pay no more tax than if you did nothing with the land. Sounds like a good incentive to me. And you do not have to pay tax on the work needed to get the improvements done.
Sorry to be such a bother. My excuse is that you started the conversation!
@Richard Dean
“More property would not come onto the market, since according to the proponents of LVT there would be no incentive for that to happen – LVT cannot be passed on to the tenant!”
You forget that there are about a million vacant homes and 300,000 outstanding planning consents which would now become subject to LVT. These owners would sell up or rent out in order to raise the revenue out of which they would have to pay the tax.
@Henry Law. They cannot use that method to raise the revenue, because they cannot pass on the tax (raise the revenue from) the tenants! That is what your side of this argument is saying! 🙂
@Richard Dean
“They cannot use that method to raise the revenue, because they cannot pass on the tax (raise the revenue from) the tenants! That is what your side of this argument is saying! ”
If their property is vacant or their land is vacant with planning consent then they are not getting any revenue at all. They have to let in order to obtain the revenue to pay the tax with. But they cannot charge more than the market rate. And this amount of property coming onto the market will mean that rents will settle at market-clearing levels.
Richard,
Henry Laws argument about the increased supply of housing is a perfectly valid one. Even across London, where there is a huge unmet demand for affordable housing, it is estimated there are something in the order of 36,000 empty properties plus large numbers of flats above shops not in use.
In addition to vacant homes. in the home counties and the Southwest there a great number of second holiday homes that are not regularly occupied throuhout the year..
You would expect that an LVT levied on vacant and underused properties would see a good number of owners making these properties available to local residents for sale or rental.
@Henry Law. The original argument on your side was that the aggregate tax that could be extracted from tenants could not be increased – that is the total of all the LVT extracted from tenants everwhere. Does your suggestion not require this total to rise? If so, you are agreeing with my conclusion that the total can indeed rise.
It’s now clear from Joe Bourke’s information that Adam Smith was talking about the total money that could be extracted from poor people. We are now talking about applying LVT in the context of a completely different range of incomes and a completely different union and legal context, Smith is perhaps only relevant for historical interest.
Richard,
Adam Smith was talking about economic rent as later developed by David Ricardo. Law of rent
The law of rent makes it clear that the landowner has no role in setting land rents. He simply appropriates the additional production his more advantageous site makes possible, compared to marginal sites. The law also verifies the claim by Adam Smith that the landowner cannot pass on the burden of any cost such as land value taxes to his tenants, as long as such taxes truly do not bear down upon improvements and affect the relative productivity of his land compared to marginal land.
Ricardian rent should not be confused with contract rent, which is the “actual payments tenants make for use of the properties of others.” (Barlow 1986). Rather, the Law of Rent refers to the economic return that land should accrue for its use in production.
@Joe. Thank you very much. It is now clear that we have all been talking about the wrong type of rent. Some of us – including me – have been talking about Barlow’s contract rent, which the Law of Rent does not apply to. It is bus stop rent, Smith and Ricardo are talking about economic rent, whose relationship to contract rent can be tenuous.
My proposition is that money charges for LVT can be passed to tenants through increases in their contract rents. One of the responses that tenants have available to them nowadays is to increase the contract rents they charge their employers for the economic value of their work. This may produce an unintended consequence – inflation.
@Richard Dean
“My proposition is that money charges for LVT can be passed to tenants through increases in their contract rents. ”
It’s a proposition that isn’t backed up by reasoning or evidence.
Richard,
that brings us full circle back to ‘Ceteras Paribas’. If tax increases were to spur inflationary domestic rent increases that in turn spur corresponding wage increases and subsequently price increases, then nominal rents, wages and prices all increase proportionally and rentiers, producers and workers are all soon returned to the same position in terms of share of real income. Supply and demand will determine the real pre-tax income from all three; rents, wages and prices of goods and services. Landowners may still have the same % slice of the higher nominal or real GDP but will suffer a higher share of the total tax extracted from the factors of production and consumption by government.
However, as Henry Law noted, the additional supply of vacant land and property being brought into use is quite likely to restrict the bargaining power of individual Landowners to increase or even maintain existing contract rent levels, notwithstanding that they experience an increase in tax costs.
@Joe. I’m happy to see that you are confident about inflation coming to a stable equilibrium! But the lady at the bus stop next to me is asking for a straight line home. She doesn’t like circles. I think the chap in the corner lives here, he’s mumbling about three-letter mnemonics. Me, I just pray for short sentences. I don’t have the attention span. Well, maybe the judge will be kinder this time. Good night! 🙂
@Joe. I wonder whether the problem with economic theory is exactly the thing you identify – the misunderstanding and mismanagement of the difference between economic values and contract values?
Economics experts tend to try to enforce changes in economic values, like what you say LVT will do, but real people in the real world base many of their decisions on contract values. It seems feasible that the inflation caused by LVT will generate an endless real-world tit-for-tat series of increases in contract values, causing the kind of instablity that damages economic activities. Does anyone actually know what causes inflation to stop?
This mismanagement would seems to have found emphatic expression in the divergence between stock and debt prices on one hand, and the economic values of those assets on the other.
@Richard Dean
“The original argument on your side was that the aggregate tax that could be extracted from tenants could not be increased – that is the total of all the LVT extracted from tenants everwhere. Does your suggestion not require this total to rise? If so, you are agreeing with my conclusion that the total can indeed rise.”
You are moving the argument around. Aggregates have nothing to do with point that a landlord cannot recoup his LVT by putting up the rent on a particular property. The owner of a vacant property can recoup his LVT by letting it, which is one of the reasons for having LVT. Bringing vacant land into use results in an increase in the overall size of the economy.
@Richard Dean
You must be the first person ever to suggest that LVT would lead to inflation. Inflation is ultimately due to increase in money supply, and that is usually due to governments being short of revenue. LVT being a buoyant source of revenue, is definitely not inflationary.
Funny we seem to manage quite well with a bit of LVT here in Sweden. Too much other taxes though, which knocks down land values and has led to massive unemployment in the 16-25 age group. But you don’t seen a lot of valuable vacant sites, nor high streets full of empty shops like in Britain.
@Henry Law. Bringing vacant land into use does not increase the economy if it means that other land goes out of use. Particularly if the land is vacant because it’s not fertile, and the land that went out of use did so because its higher fertility increased its value and so its LVT.
I would like to suggest Henry’s Law of Economics: Nothing is simple.
Henry! OMG!!!!!!! you have LVT and you have high unemployment !!!!! OMG! Pennies. Dropping!!! Connections !!!! I am exhausted. 🙂
Henry! OMG!!!!!!! you have LVT and you have high unemployment !!!!! OMG! Pennies. Dropping!!! Connections !!!! I am exhausted. 🙂
@Richard Dean
“Bringing vacant land into use does not increase the economy if it means that other land goes out of use. Particularly if the land is vacant because it’s not fertile, and the land that went out of use did so because its higher fertility increased its value and so its LVT.”
The present tax system results in a massive deadweight loss variously estimated to be between 12% and 30% of GNP (Harrison and Treasury respectively). LOW VALUE unused land might go out of use HIGH VALUE land comes INTO use. Unemployed people stop living on the dole and start working. That is a NET GAIN.
Sweden’s other taxes on labour and employment are too damn high. Everyone here knows that. So we have more unemployment that we would wish. Also a lot of immigrants who cannot speak the language and can only do the sort of marginal jobs that get knocked out by labour-related taxes.
Sleep on it. The penny might drop. But I think you would not want it to drop. I wonder why?
@Richard 14 hours has passed and you still have not addressed the actual refutation of your position that landlords can get more in land rent than the highest land user is willing to pay. If you need it, the comment link is https://www.libdemvoice.org/opinion-land-value-tax-an-old-idea-with-lots-of-modern-supporters-28459.html#comment-207655, and the short question to you is this: if all potential land users cannot outbid a landlord for a plot of land, how can that same landlord turn around and demand more from the losing land users than they originally bid? This goes for both a world without LVT, in which a landlord outbids others to purchase a piece of land from a private owner, either with cash or a mortgage, and in an LVT-world, where the landlord outbids others to pay the most LVT. Remember, if you dispute this, then you are endorsing a view that says a landlord has no upper limit on his demands for rent, property prices can be set by sellers to any level, and that property busts are impossible, because rents and capitalized rents (land prices) have no relation to demand and sellers have no need to lower their demands below their mortgage debt.
@Henry Law.
Sorry about the double posting which was due to a nervous twitch of my finger on the keyboard. I think you are having a joke about deadweight? If one agency estimates 12% and the other 30% – which is more than twice – then isn’t is likely that at least one of the agencies doesn’t know what they’re talking about, perhaps even both?
Joe Bourke’s Case 2 and the general tenor of his argument indicates that the change to LVT is being recommended as a way to change the pattern of taxation, so that richer people pay more and poorer people pay less. Rich and poor is being measured by how much land people have. The inflation comes when the people whose tax bill rises try to pass that rise on to their tenants, and the tenants pass it on to their employers, etc. In this way, the attempt to use the change to alter the pattern of taxation will result in inflationary pressure. The BofE in its infinite folly will do whatever it needs to do to prevent inflation , and the result will be an increase in unemployment. One of the many bad effects of unemployment is that it does indeed cause socila tensions, with immigrants being wrongly blamed.
You have the evidence that supports this argument in Sweden, it seems.
@Logan
You are a factory employing 50 local staff, or a family with three children of school age. You rent the land you need from me, and our rental agreement comes up for possible renewal tomorrow. Neither you nor me is obliged to renew. The government has just increased my tax bill by 5%. Am I in a weak or strong position as regards requiring a corresponding increase in the contract rent you pay me?
@Richard Dean
“You are a factory employing 50 local staff, or a family with three children of school age. You rent the land you need from me, and our rental agreement comes up for possible renewal tomorrow. Neither you nor me is obliged to renew. The government has just increased my tax bill by 5%. Am I in a weak or strong position as regards requiring a corresponding increase in the contract rent you pay me?”
Both parties are in about the same position. The land owner, liable for the tax, is not going to want to take the risk of being saddled with a hefty bill and no income to pay it out of. Especially when other landowners with vacant holdings are going to be looking to find tenants to pay their bills.
@Richard Dean
“Joe Bourke’s Case 2 and the general tenor of his argument indicates that the change to LVT is being recommended as a way to change the pattern of taxation, so that richer people pay more and poorer people pay less. Rich and poor is being measured by how much land people have.”
No, the tax is based on the value of the land, not by how much they have. You are criticising something which you clearly do not understand.
” The inflation comes when the people whose tax bill rises try to pass that rise on to their tenants, and the tenants pass it on to their employers, etc.”
This is not going to happen. Did you read and understand my previous posting? I am myself a landlord. I would love to earn a bit more, but I can not pass my expenses on to my tenants. I can only charge as much as the market will bear, and my agent who deals with these things for me says that one should always ask a little bit less because a month’s void soon loses any additional rent one might have got from sticking out for the maximum. I can not pass on maintenance charges or ground rent, and I must absorb the Council Tax which is nominally payable by the tenant. Exactly the same would apply with LVT. It can not be inflationary.
The Swedish problems arise from all the other taxes, not from the LVT which mitigates their effect.
In this way, the attempt to use the change to alter the pattern of taxation will result in inflationary pressure. The BofE in its infinite folly will do whatever it needs to do to prevent inflation , and the result will be an increase in unemployment. One of the many bad effects of unemployment is that it does indeed cause socila tensions, with immigrants being wrongly blamed.
You have the evidence that supports this argument in Sweden, it seems.
@Henry Law. LVT isn’t much – Joe Bourke (11th May ’12 – 12:54am) suggested 0.5%. The increase of rent that I am asking for is less than the cost to you of moving.
@Logan. The bidding process you describe is an elegant “thought experiment”, but not a real life scenario. I suspect that, hidden in the detail, there are things like credit-worthiness, risk, and bank and landlord transformations between short-term liquid assets and long-term illiquid assets, and other complications.
I’m afraid it’s too much for my tired brain tonight. Many apologies for not responding properly. I’m paid by results and these 14 hours have reduced today’s a lot! I’ll have to work more and comment less tomorrow. Good night! 🙂
@Richard Dean
” LVT isn’t much – Joe Bourke (11th May ’12 – 12:54am) suggested 0.5%. The increase of rent that I am asking for is less than the cost to you of moving.”
0.5% of Annual Rental Value would not be worth collecting. I cannot speak for Joe Bourke. UBR is 40% of composite rental value, but is in reality a tax on land values already, but a defective one. Present rental values are depressed by existing taxes including taxes nominally paid by employees but where the incidence is on employers. Initially LVT would be set to collect roughly the same as existing property taxes, or perhaps a bit more. That would not be an insignificant amount and landlords would not particularly want to be saddled with it.
But if you can slap an extra 5% on the rent as a result of LVT you are going to do that anyway – you can only do it if the rent charged is at the low end of the market range. You can not pass on a significant amount of LVT. You might pass on a small amount if it is within the trading range, but that is not really passing on anything to speak of. I repeat yet again, you as a landlord can not pass on this tax, any more than I as a landlord can pass on my expenses to my tenants. If I try they could well move, living me to pay maintanance charges and ground rent just the same – that is my incentive to keep the place occupied just as LVT would be.
I am curious to know why you are so opposed to this proposal?
@Richard Dean
“The bidding process you describe is an elegant “thought experiment”, but not a real life scenario. I suspect that, hidden in the detail, there are things like credit-worthiness, risk, and bank and landlord transformations between short-term liquid assets and long-term illiquid assets, and other complications.”
These “complications” are evened-out within the context of the property market as a whole. LVT can not be passed on.
If we accept the lowest estimate of deadweight cost of taxes, which comes from an LVT advocate, I think it is bad enough to require that the problem is addressed. The high estimate comes from the Treasury who are not LVT advocates!
@Henry Law. I am not opposed to this proposal. I have no idea whether it is a good or bad one. I am a man at a bus stop who is interested in exploring it. A voter. I am doing this by arguiang against, and learning from everyone’s responses.
I am learning that there is a huge amount of confusion about what the actual proposal is – what types of rent are involved, what percentage of what value? I am learning that arguments forit change – someone makes statement, I argue against it, not necessarily well, but then A gets dropped and people make statement B, etc etc. Sometime I saw one person arguing against me for one reason, and another arguing ahgainst for a contradictory reason.
I have learned that economists are not well connected to the real world (i knew this already though), and that it is entirely feasible that their attempts to improve the world have the opposite effect, due to confusions like between economic and contract value. I learnt that economists sometimes mistake judgments for facts. I am learning that there is potentially a direct link between attempts to impose LVT, inflation, and unemployment, and that Sweden may provide evidence of this link.
I conclude that this proposal has not yet been fully thought through, and that a lot of attention will be needed to presenting it in ways that do not automatically generate resistance. I hope that I have provided everybody with some intellectual stimulation, entertainment and even some practice at arguing the case!
Please can I go to sleep now. 🙂 !! zzzz
There is a lot of theoretical argument presented here. That scares me. What matters is what will happen in the ugly old practical world, and I am worried that not enough people are addressing that.
First question: All proposed changes in tax policy create winners and losers. What commonly happens is that the losers find out that they are going to lose, and scream blue murder so that the change does not happen. The winners stay relatively quiet. Most proposed changes therefore fail to happen, or get heavily watered down. Who will lose out from LVT, and how will they react when they find that out.
Second question: I recall that a Labour government in (I think) the 1960s introduced something called a Development Land Tax, which was going to clobber the land speculators who gained from planning permissions. It failed. Developers just stopped developing and sat on their land banks. This encouraged the Tories to promise to scrap the tax because of its disastrous effect on house building. Knowing that the Tories would scrap the tax only made the builders more determined to hold off building (and to vote in the Tories!) Now, are we sure that LVT – which to be sure is not by any means the same tax as Labour’s – could not suffer a similar problem?
@Richard… Wow, classic sidestep. The market is always one big bidding process, especially the property market. The land seller or landlord is the auctioneer, and interested parties compete with each other to offer the highest bid. These complications you speak of are not of concern to the land seller, the question he has is: do you have the highest bid? How the bidders get there with the money is not his concern, only a guarantee of payment is satisfactory. Such “complications” are not really complications, because my question was pertaining to whether a landlord with the highest bid could extract over and above his bid from losing bidders. The fact that the losers had to go through some “complications” to obtain funding does not lessen the argument that if they couldn’t afford the winning bid, they cannot afford the winning bid plus some nonzero rental income that the landlord wants. Once again, the question to you is: if landlords and land sellers could pass on the full cost of their debts related to obtaining the land, how can a property bust exist? Since we know property busts exist, then rents are not determined by landlords and sellers passing on debts related to obtaining land (be it mortgage or tax debt aka LVT) plus any income they wish to have but rather are determined by land user demand. To suggest otherwise is illogical.
@Richard Dean
The proposal is very weoo thought through. Here
http://www.landvaluetax.org
Part of the trouble is that quite a lot of LVT advocates are not sure of their ground either, which serves only to spread confusion. The biggest confusions are that it is tax on land price or land area or that it is some kind of a wealth tax or a tax on increases in land value.
The actual proposal is for a tax on the annual rental value of land. The specific legislation is almost identical with the 1938 London Rating Bill. Anything else is based on misunderstandings to a greater or lesser extent. I wish both supporters and opponents would take the trouble to understand what was being proposed before engaging in debate. And bus stops are not the place to engage in discussions about this sort of thing.
The Swedish situation is a consequence of very high taxes on labour, in particular the payroll tax. If these taxes were knocked down and the property taxes rationalised, the problem would go away.
@David Allen
We long-time advocates of LVT were amongst the first to point out that Labour’s Development Land Tax would fail, as did the similar provisions for betterment charges under the 1947 Planning Acts.
LVT is essentially the UBR and Council Tax changed over to site-only valuation. Since it is also levied on vacant land on the basis of the planning consent applicable to the site, owners will not hold it off the market. Nor will it help to hold back from making planning applications as this can be done by third parties including local authorities.
@Richard “You are a factory employing 50 local staff, or a family with three children of school age. You rent the land you need from me, and our rental agreement comes up for possible renewal tomorrow. Neither you nor me is obliged to renew. The government has just increased my tax bill by 5%. Am I in a weak or strong position as regards requiring a corresponding increase in the contract rent you pay me?”
It depends on how much the market rent has increased, not the tax bill. If the market rent increases X%, then you will charge me X% more, regardless if the tax bill went up 5%. As long as the total market rent is more than or equal to the tax bill, there will be no problem from an overall economic point of view. Now, if I can and am willing to pay the market rent after the X% increase, then I will and I’m sure you would have no problem taking my money. I know of no reason why you would think that you or I are in a strong position or weak position. It’s just the market. If I couldn’t pay the market rent increase, then you wouldn’t renew the lease to me. Simple as that.
@ Richard “I conclude that this proposal has not yet been fully thought through,…” And I conclude that your lack of understanding of the many arguments presented in favor of LVT does not qualify you to make a statement like this.
“and that a lot of attention will be needed to presenting it in ways that do not automatically generate resistance….” Your resistance, unfortunately, is probably indicative of many “bus stop voters” who have neither the reasoning capabilities or desire to think outside the box (politically speaking, on both counts) to fully embrace a concept that they have been indoctrinated away from for numerous generations. When Soviet communism fell, it was feared by some of the Russian citizenry that they wouldn’t get fed because the state no longer “guaranteed” food provision. After all, all they knew all their lives was that bread got to the market because the government said so. Relatively uncoordinated free markets were feared as insufficient to feed the people because it lacked a central directive to feed people.
“I hope that I have provided everybody with some intellectual stimulation, entertainment and even some practice at arguing the case!” Actually, your arguments have been around as long as the LVT has been around as a concept, so our refutations are merely the standard defense against the spread of misinformation guised in harmless question asking. We have led you to the water, but we will not hold our breath until you drink.
David Allen,
On your first questionre: winners and losers,
there is a good newsletter on LVT from the Tax Justice Network here Land Value Tax with an article from Henry Law where he notes:
“The real difficulties are political. Vested interests are powerful. In most countries,the lion’s share of the most valuable areas of city centres is concentrated in the hands of a tiny elite of landowners. This gives rise to great political influence, working quietly in the background.”
On the second question, unlike the land development tax of the seventies Land Value Tax is levied on undeveloped sites and is a highly positive incentive to develop land to its optimum planning use as quickly as possible.
@Richard I think your main problem is your conception of what LVT being “passed on” means. If you think it means that tenants (aka land users) will pay the LVT, then yes, you are correct. But this is self-evident: no one but the land user can pay the LVT. A landlord who is not the land user cannot pay it; that is why he takes on a tenant. I think your confusion lies in the fact that you think that once LVT is imposed, that it will be added onto the market rent (or contract rent, if you wish to call it that; I don’t know why you belabor that point: aren’t contracts the essence of market transactions?). But your understanding would mean a doubling of the rent paid by the tenant, which cannot be possible because you cannot pay double the market rent if the market rent is defined as the highest amount someone will pay for the land. It’s like saying Usain Bolt can run the 100 m dash in half of his world record time if we just passed a law telling his agent that he will be killed if Bolt doesn’t run that fast. Just as the agent cannot make Usain Bolt run 100 m in 4.79 seconds even on pain of death, an LVT law cannot make the amount received by a landlord more than what the tenant can pay.
@David Allen, via Joe Bourke “The real difficulties are political. Vested interests are powerful. In most countries,the lion’s share of the most valuable areas of city centres is concentrated in the hands of a tiny elite of landowners. This gives rise to great political influence, working quietly in the background.”
And the vested interests will use all sort of intellectual subterfuge to convince the “bus stop voter” that what is not good for the rich vested interests is not good for the average man at the bus stop. And most of these voters will go along, because their ideological baggage will be holding them back from making the most rational decision for them and their families.
As for winners and losers, I would say that a tax shift away from an income and consumption base to a land base is akin to a cell phone company going away from charging a flat fee or graduated fee (based on your income) for text messaging to a per-text charging plan. That is, you pay for what you receive in benefit, both from government provision of public services and from the value of private interactions that generate positive externalities to your site.
I wonder how many people at a bus stop could explain how VAT works? Or could fill in their own self-assessment income tax return if they were required to?
“I wonder how many people at a bus stop could explain how VAT works? Or could fill in their own self-assessment income tax return if they were required to?”
Or describe the terms ‘tax incidence,’ ‘demand elasticity,’ ‘supply elasticity,’ ‘Ramsey Rule,’ and ‘deadweight loss.’
The vested interests have certainly done an excellent job in convincing people standing at bus stops that taxes should be “fair”, without specifying what “fair” means, and that they should be related to “ability to pay”, and possibly “soak the rich”. All of this is to ignore the obvious realities of tax: avoidance, evasion and bureaucracy, the less obvious side effects such as the damage to the economy, and more fundamental issues like morality, justice and equity.
The shameful thing is that so many of those who are not part of the vested interest groups but are working in some way for social and economic reform go along with the myths. LibDems not the least, with their policy of local income tax which they have pushed for decades. Economist too have joined in the collusion by fudging terms like rent to include “rent of talent”, a notion rooted in jealousy of people like football stars who earn large sums of money because a lot of other people will pay good money to watch them kick a ball around a field.
I wonder how many LVT proponents actually realise that the people at the bus stop control them? David Allen is right. Through our votes we control whether or not you get to convert your simplistic thought experiments into action. So if that’s what you want to do, perhaps you had better start talking our language! 🙂
@Richard Dean
Are you suggesting there was any great support at the bus stop for the introduction of VAT? I don’t think so. That is not how political decisions are made. It is of course an excellent thing if concepts can be explained in simple terms, but people need to make a little bit of effort. Clearly you yourself have not taken the trouble to understand the concept of LVT or its implications or ramifications, or you would not have raised the objections that you have. This is evident because there are other objections and difficulties which you might have raised, that are more difficult to answer, but you did not raise them.
Terms such as ‘tax incidence,’ ‘demand elasticity,’ ‘supply elasticity,’ ‘Ramsey Rule,’ and ‘deadweight loss’ are actually very easy to understand in plain English with a few cartoon diagrams, and describe in brief what most people already know from experience. But it still necessary to expend a minimum of effort and thought.
For democracy to function, it is necessary that the electorate makes that effort. If it does not, then it will have to take the consequences which will be painful. People in political parties have a leadership role and to dumb down the debate below a certain point is to abdicate from that responsibility. The situation that then arises is that the people in the bus queue are dissatisfied with their rulers and hold them in contempt. The stage after that difficult to predict but in other countries it has been some kind of dictatorship.
Actually the use of the phrase “the people at the bus queue” as shorthand for poor ignorant stupid people is offensive and misconceived. The use of public transport as a travel mode indicates a level of discernment and it also requires a good level of cognitive function to be able to use the systems effectively.
“Through our votes we control whether or not you get to convert your simplistic thought experiments into action.”
Simplistic thought experiments? You’re the one on here who just simplistically assumed that landlords will pass on LVT to tenants for no other reason than you asserting that they can. Really Richard, you’re going to give no refutation of any points I made above, and just claim that we are talking too smart for normal folk? I have explained in clear English to you the reason why LVT cannot be passed on; indeed, I myself would need clear logic laid out to me to accept the claim that a tax cannot be passed on, so I do not make this claim lightly. You are the one who has a curious obtuseness when it comes to this particular claim, responding to clear arguments with non sequiturs and strawmen. Since you are unable to actually answer any question posed to you, there is no further need to engage with you in a dialogue. Goodbye, and I hope you are not the person sitting next to someone at the bus stop when they inquire about LVT.
@Logan
Using public transport is more intellectually demanding than understanding the basic principles of LVT. One has to understand routes and route diagrams, timetables, fares, ticketing arrangements, etc. Someone who could not grasp a simple point after a clear explanation would be unlikely to be on a bus in the first place.
Henry is sooooo right! Please refer all questions about people at bus stops to RC 12th May ’12 – 8:30am, who seems to have been the first to introduce them into this conversation. Alternatively, please refer to Joe Bourke 12th May ’12 – 11:59am, who seems to have been the first to respond to RC’s comment.
@Henry Law. Thanks very much for giving the heads up that there is more to think about LVT. It turns out that LVT looks like one of the most socially damaging, illiberal and anti-democratic taxes that can be imagined!
It seems illiberal and anti-democratic because the specter of unending tax payments will strongly discourage poorer people from wanting to become part of the landowning community – you’d need more confidence that you could keep up the payments. It’s also illiberal because it attempts to control what that community chooses to do, within planning permission, with its assets. In effect it prioritizes activities that create the greatest income. A landowner who wants to buy land and create a civic amenity on it is strongly discouraged from doing so.
It seems anti-democratic and socially-damaging because its effect is to reduce the upfront cost of land. It does so because LVT really is a stealth debt. By doing so, it encourages people with credit or liquid assets (capitalists) to buy the land, thereby reinforcing the distinction between the owning and renting classes. And this will happen before LVT comes in, because the prospect of LVT in the near future will immediately drive down land prices. Those owners who bought to build a house at some time in the future will now find themselves unable to support the land or build the house, and so will be forced to abandon their dreams and sell up.
If you want to encourage land development in a liberal and democratic way, why not arrange to split up large pockets of land on the market into smaller plots, so that more people on the edge of landowning can buy land and start developing it? Why not have development grants – the opposite of taxes – for first time land owners? Why not develop partnerships between local community representatives and local companies so that both work together to develop their land use? I suppose an example might be sponsored roundabouts, but much more could be done.
So my message is: Think Again, or Join the Tories, or if I am totally wrong then Polish Your Presentation Skills – don’t present an argument with so many open holes that people can’t help but fall into them!
David Allen
There is a lot of theoretical argument presented here. That scares me. What matters is what will happen in the ugly old practical world, and I am worried that not enough people are addressing that.
Yes, that is why I started off writing:
So while I agree with the principle of LVT, I can see it would be very hard to sell.The loudest voices will be those that are hurt – and they are the people who dominate the commentariat. Those who benefit will not be heard, in part because the commentariat has primed them not to be interested in such things so they would not even know of the benefit.
I certainly wouldn’t advocate putting LVT in the next manifesto.
I am depressed, however, that public commentary in this country is so skewed that it seems impossible to put forward anything which by moving some of the tax burden towards taxing some aspect of property ownership reverses the way in which it is one of the main instruments deepening the divide between rich and poor. It is particularly depressing to see every time something like this is raised it is put down as an “attack on London and the South East”, as if the millions of people in London and the South East who are suffering from high house prices don’t count for anything, all that counts is the smaller number of people at the top of the “property ladder” churning in unearned wealth.
What is needed is for the argument to be kicked off elsewhere so eventually it moves forward to mainstream politics. Look at how the political right slowly put forward its Ayn Rand ideas, first at the fringe “thinking the unthinkable” and then gradually moving them in. Where has the political left been on this?
Well, look at the left-wing fringe groups, the SWPs, Occupy and so on. Have they anything to say on this? No. This is why I believe most of the political left in this country is an utter waste of space. It is stuck in its own little world, obsessed with fringe issue that are of no interest to most people. They can go on and on about the Palestinians or whatever. But a practical policy that would do more than anything else to help the poor of THIS country? Not a thing. I suspect a contributing factor is that a fair proportion of them are striking a pose against their rich mummies and daddies – but they aren’t going to go so far as proposing something that will hit their inheritance.
@Richard Dean
“It turns out that LVT looks like one of the most socially damaging, illiberal and anti-democratic taxes that can be imagined!”
No, it doesn’t ‘turn out’. That is nothing more than your opinion. An opinion that is based on a very wilful misrepresentation of the evidence and logic.
LVT (as a replacement for income tax) is incredibly liberal and democratic as it strongly discourages the enormously socially damaging consequences of land price speculation. It is economically efficient as it rewards those that use the land the most productively and punishes those that don’t make good use of it. Placing the burden of taxation on land rather than income rewards people that WORK (WORKERS as they’re known). How is a taxation system that removes the tax on peoples’ incomes socially damaging?
“And this will happen before LVT comes in, because the prospect of LVT in the near future will immediately drive down land prices. Those owners who bought to build a house at some time in the future will now find themselves unable to support the land or build the house, and so will be forced to abandon their dreams and sell up.”
Nonsense. Anyone that bought land before the introduction of the LVT will be able to pay the LVT from the reduction in income tax they’ve received. Anyone that wants to buy land to build on after the price of land has fallen will be better off.
“Why not have development grants – the opposite of taxes – for first time land owners?”
Because they push up the price of land, transferring wealth from those that currently don’t own land to those that do on the basis of nothing more than the fact they own land. A productive, efficient and fair economy is one in which wealth flows to those that work, produce and innovate. Your subsidy would guarantee the opposite. Unfortunately, your level of understanding is shared by the government (see right-to-buy, underwriting of loans for first-time-buyers, etc). That is why our economy is stagnant and why the dreams and aspirations of our youth are being dashed.
Richard et al,
Liberal Democrat policy endorses and accepts the concept of Land Value Tax as a potential improvement on our current system of taxation. The Libdem campaigning group ‘ Action for Land Taxation and Economic ReformAlter carries the following mission statement at the head of its website:
“To improve the understanding of and support for Land Value Taxation amongst members of the Liberal Democrats; to encourage all Liberal Democrats to promote and campaign for this policy as part of a more sustainable and just resource based economic system in which no one is enslaved by poverty; and to cooperate with other bodies, both inside and outside the Liberal Democrat Party, who share these objectives.”
While a general consensus exists among Libdems as to the potential benefits of LVT, there are varying opinions as to how and to what extent it should apply in the UK tax system.
We of course have various property taxes and levies already in the UK – Stamp Duty, Uniform Business Rates, Council Tax, Capital gains tax , inheritance tax, North Sea Oil duty, landfill tax, Section 106 agreements, etc.
LVT purists will argue for the replacement of virtually all taxes on income and business activity. The article above does not argue for such radical change. The proposal is to use site value rating (instead of property rental values/council tax bands for both UBR and council tax .
UBR rates would be largely unchanged but overall revenues should increase as vacant commercial land is brought into use. As part of the redistributive measures proposed in the article, council tax bills would reduce on housing currently at Band D and below and increase for houses at Band E and above. The rate of LVT to be applied on residential housing is suggested in the article is 0.5% to 0.6% of the capitalised rental value of the site (Land Value) i.e. approx 10% -12% of residential land annual rental values in the UK.
As to wider tax reform, I would support much of the thrust of the recent Mirrlees review in the UK (which proposes the conversion of UBR to site value only rating and reform of council tax as part of much broader reforms).
@Joe et al. Thanks for an interesting and educational debate. I hope that my dogged determination to play the obstinate objector has helped. I finish enlightened, but still no nearer a decision on whether to support it or not.
@Richard Dean.
I don’t particularly mean to get involved in what looks like quite a long argument already. But I fear you have reached a couple of misconceptions.
1. “It seems illiberal and anti-democratic because the specter of unending tax payments will strongly discourage poorer people from wanting to become part of the landowning community ”
That happens already. Domestic property pays council tax, business property pay business rates. A land tax would just shift the base of taxation from the value of buildings and land to that of land alone. LVT would be an improvement, because it would actually replace stamp duty for both businesses and individuals, encouraging transactions, and displacing the costs onto a smaller annual basis (like a morgatge) making land more affordable for the vast majority.
2. “A landowner who wants to buy land and create a civic amenity on it is strongly discouraged from doing so.”
On the surface this would be an issue. But it should be trivial to build in very limited exceptions for landowners who want to covenant land specifically to create such immunities, especially as such an action would change their planning class and hence value of the land.
3. “If you want to encourage land development in a liberal and democratic way, why not arrange to split up large pockets of land on the market into smaller plots, so that more people on the edge of landowning can buy land and start developing it?”
Because all those things cost serious amounts of money, especially in the places people actually want to buy land, by definition where it is already expensive. Unless you’re suggesting communist style land confiscation, but that’s not exacltly liberal is it?
” It turns out that LVT looks like one of the most socially damaging, illiberal and anti-democratic taxes that can be imagined!”
I would politely suggest that this is because you haven’t actually thought about the alternative taxes we already have. We currently have a tax on investment for businesses and for individuals a regressive tax on property prices as well as two stamp duties that arbitrarily tax both businesses and individuals more heavily based not on what a property or land is worth but how often people want to move home or buy or sell a property.
Abolishing business rates and stamp duty and replacing them with an LVT would be a big increase in efficiency and tax fairness for business. A serious pro-growth measure. For individuals we should certainly abolish (or massively restrict) stamp duty, but I do think that rather than an LVT we should concentrate on making council tax less regressive and more fair, since I do think it is right that individuals are taxed on the basis of their homes as well as land since they derive so much benefit from the buildings.
The IFS make the case best here. I would really suggest you read it. It is much more clear, thorough and persuasive than I could be. http://www.ifs.org.uk/mirrleesreview/design/ch16.pdf
“LVT looks like one of the most socially damaging, illiberal and anti-democratic taxes that can be imagined!”
“A landowner who wants to buy land and create a civic amenity on it is strongly discouraged from doing so.”
I’m not sure this “illiberal” example really helps your case. You think the use of public space should be decided by the whim of the rich??
There are a lot of people living in what amount to bedsits with a shared bathroom/kitchen who would rather we build houses and flats and the fact they can’t afford to buy land and make it a park doesn’t mean their liberty doesn’t matter.
Even the libetarian Alliance, the UK’s radical free market and civil liberties think tank is calling for action:
“Inheritance taxes should be abolished, but the parasitic falling of higher property prices into the laps of householders benefiting from government policies to build amenities and infrastructure near their homes should be ended. I would official record the surveyor’s view as to the site value (the value of the unimproved land) separately at the time of the house purchase, and then impose a windfall levy of 100% of the increment in site value when the house is next sold. This is not as dramatic in its effects as calls for a land value tax (an annual tax that would make it difficult for pensioners to retain expensive homes), but it would capture the increase in the site value—an increase created by society as a whole in the form of investment in private and public facilities nearby—and prevent the “windfall” from being passed on as a legacy.”
Let us imagine that a certain type of house has a building reinstatement value of £150,000. Insurers generally know how much it would cost to rebuild a house from scratch, and that is the building reinstatement value (and householders should be careful not to insure their buildings for more than the reinstatement value). Such a house located in a northern town might have a property price in the current housing market of £60,000. The property costs less to buy that it would to build new. This is partly because the property is old, but let us say that we would calculate the site value at a negative -£90,000. Somewhere else in the country, in the middle of London perhaps, exactly the same house, of the same age and condition exists, with a property value of £600,000. We would calculate therefore that the site value was £450,000. In both cases, any increment in the site value can be captured by a levy, thus tending over time to destroy property as an “investment” and restore property as a “place to live”. House price increases would be tamer as a result, and standards of living would go up. To do otherwise is to run the entire economy in the interest of the banks, and not of the people who the banks are supposed to be serving.”
Matthew Huntbach,
“What is needed is for the argument to be kicked off elsewhere so eventually it moves forward to mainstream politics. Look at how the political right slowly put forward its Ayn Rand ideas, first at the fringe “thinking the unthinkable” and then gradually moving them in. Where has the political left been on this?”
Joseph Stiglitz is probably the most notable of modern day economists advocating Land Value Tax. His views on how to garner wider interest were expressed in an interview in 2002 Stiglitz
Q: What are the greatest political obstacles confronting developing countries to the extraction of economic “rent” for public purposes? Is it simply a matter of “vested interests?”
JES: Yes, it’s not very complicated. You know, in the Clinton Administration, we tried to reform the disposition of natural resources — mineral rights — by saying the US Government should not be giving this away to a few wealthy people. But the mining interests were adamant in opposing this reform.
Q: In your opinion, would it be more effective to attempt to achieve support from economists about the need for such reform, or to bypass them in seeking to build popular support independently from them, in that the views of mainstream economists on the topic of land reform might fairly be characterised as an “intransigent”?
JES: There are some economists who are interested in this. I think most economists would like the idea, and would support it. But, economists spend their time on things that they think have marketability. So it isn’t that they don’t think it’s a good idea; they don’t think there’s any resonance in it. President Bush is still talking about the inheritance tax, and income tax, and they want to get involved in what other people are talking about. It’s a social phenomenon, I think. So, if you get a lot of other people talking about it, then they’ll join the fray.
Q: You are aware that Henry George was a critic of the moral foundations of our economic institutions. What do you think of reform efforts toward land value taxation based on an appeal to morality?
JES: What it fits into is that there is a wide view today that we should tax environmental “bads” such as pollution and the like. And switch from taxing good things like labour. So, in a way, that’s where it comes in: let’s stop taxing good things like labour, and tax things that are resources. So the argument is, “why tax things that are contributing to society?”
@M. Very good!
@Joseph Stiglitz. I see the need for action, but there are plenty of other options for action. LVT is an inadequate response to the present crisis because it will take far too long to be effective.
@All. Following is my final objection to LVT. I hope you enjoy it. It is based on the conept of fairness, and is a direct challenge to Vince Cable’s justification for LVT. I might not personally agree with it – Im not saying – but I would certainly be interested to know in how people might argue against it…
Why does society believe it has automatic rights over land? Do all Australians as a whole own the Aboriginal heartlands? Do Canadians in Ottawa own the northern Inuit territories a thousand miles away? No! The truth in the UK is very different too. Historically, UK society would never have developed without landowners and property rights. Those rights meant that one group could plan and cultivate over a season, without the worry of another group destroying the crop. They meant that a person could rest at home, secure in the knowledge that another would not take it away. It was that cultivation and home that created today’s communities. In short, value in community has been created by land, not the other way round. And that process of value creation is continuing. So in fairnes, it is community that should pay tax to land, not the other way around.
The Libetarian Alliance is not thinking straight.
If I build a house in the middle of nowhere, it has one value. If ten more houses arrive there, we have formed a village and created extra value. But that value was created by us, not the government, so we have no duty to pay the government for it. On the contrary, every citizen pays other taxes and has rights to government services, and our little community is no exception. That’s not parasitic at all, it’s our right as citizens.
In what way does the transfer of thousands of pounds from owners owning properties in London to owners owning the same properties in the North add economic value to anything? The transfer is an accounting matter only – affecting contract values but not economic ones. It might even be from one Jersey bank account to another! The transfer gives no encouragement to housebuilding in the North – honest builders still have to pay the replacement value to build a house there. And the whole system looks wide open to fraud from dishonest ones!
@ Richard Dean
If all the plots in your imaginery village are worth the same (i.e same size, with the same soil fertility etc) then clearly there’s no need for a tax between the 10 villagers (assuming they want no public services). If the first villager grabs the most fertile plot and next 9 are disadvantaged by his actions the LVT would be an excellent way to solve this economic injustice while upholding basic property rights. It’s about counting up who’s getting the freebies so we can net them off against one another and hopefully level the economic playing field a bit. I thought Lid-Dems were all for this sort of thing?
The creation of value is not a zero sum game. Rather, economic value in a community comes partly from replacement value and partly from the value of the relationships in that community. Thus two identical houses can have different values because of their different relationships. That is why the Libetarian Alliance’s plan to move cash from London to the North has no economic effect – it does not change the relationships.
Being human is all about relationshiops, so LVT is a tax on being human.
In many cases the spatial and other relationships that create the added value were built up by our ancestors – a thousand years for London for example. It was their work that created those relationships, so it is unfair that their descendents are penalized in their place.
Proponents of LVT say it will increase output, so perhaps we can use a business concept to see if that is true. In business terms, LVT is a sunk cost. Once incurred, no subsequent business decision can affect it, except two exceptions which I will discuss shortly. If my factor produces 1000 widgets and I have s sunk cost of 200, I can’t change that by creating more widgets. Because I can’t sell more widgets – if I could I’d already be doing it. If no action of mine can change the sunk cost, I have no incentive to change.
One exception is for a business to sell the land on to someone else who won’t sell it on, so in effect only one exception is left. That one remaining business decision is available if LVT is a tax on rental value. In this case, the sunk cost can be reduced by reducing the rental value. This can be done, for example, by allowing an entire area to become derelict, a slum, a crime-infested place, or a disease-infected place, a swamp. Landlords do this the world over. They do it to get people out so they can buy the place cheap and then develop it. But for LVT they won’t develop unless they have already decided to anyway – because it’s a sunk cost. This is the very opposite of what the well-meaning proponents of LVT want.
LVT is an intellectual and practical disaster!
@chefdave. Please let me explain. There are no plots in my imaginary village, It wasn’t civilized before I was there. I did a little bit of civilizing, and this helped Joe when he arrived to do his bit. Then Anne came and added her bit, benefitting from the bits me and Joe had done. Then Leslie arrived – with children but no spouse – and the thing just grew like that. There’s lots of us now. We all work in the city thirty miles away and pay our income taxes and VAT to central government, so I think it’s time they built us a proper school in return!
@Richard Dean
“Thanks very much for giving the heads up that there is more to think about LVT. It turns out that LVT looks like one of the most socially damaging, illiberal and anti-democratic taxes that can be imagined!”
It sounds as if you had already made up your mind on that point long ago.
“It seems illiberal and anti-democratic because the specter of unending tax payments will strongly discourage poorer people from wanting to become part of the landowning community – you’d need more confidence that you could keep up the payments.”
There is a statement that needs to be unpacked.
1) Poor people NEVER become part of the landowning community. Who owns, free of debt, both the land they work on and the land they live on? Certainly not poor people.
2) Landowning and community are mutually exclusive notions. There will be some who own land and others – the majority – who do not and will never be able to. Thus land owning divides the community.
3) Poor people must borrow to purchase land. They need confidence that they can keep up the payments.
Rich people are almost always rich because they own land. And if they become rich the first thing they to is to buy as much land as they can afford, borrowing up to the hilt. If land is subject to a tax, people will take no more land than they want for their own use.
“It’s also illiberal because it attempts to control what that community chooses to do, within planning permission, with its assets.”
That is what happens now.
“In effect it prioritizes activities that create the greatest income. A landowner who wants to buy land and create a civic amenity on it is strongly discouraged from doing so.”
Landowners do not normally create civic amenities on donated land. They develop to the maximum permitted. Civic amenities are normally achieved through things like planning agreements.
“It seems anti-democratic and socially-damaging because its effect is to reduce the upfront cost of land.”
Surely that is an excellent thing. It means that people are less in hock to the banks, who then become de facto landowners and the borrowers de facto tenants.
” It does so because LVT really is a stealth debt.”
All taxes are stealth debts. You work and you get a bill from the tax authorities. But land values exist only because they are continually sustained by the actions of the community and its public bodies such as the government which protects land titles, defends the realm, maintains the rule of law and provides infrastructure. Without this perpetual expenditure land values would collapse. It would be like what happened when the Romans withdrew their armies in 409AD.
“By doing so, it encourages people with credit or liquid assets (capitalists) to buy the land, thereby reinforcing the distinction between the owning and renting classes.”
Precisely the opposite would happen. Nobody will buy land unless they want to use it. Why take on a tax liability?
” And this will happen before LVT comes in, because the prospect of LVT in the near future will immediately drive down land prices. Those owners who bought to build a house at some time in the future will now find themselves unable to support the land or build the house, and so will be forced to abandon their dreams and sell up.”
No they will have to stop dreaming and build their house. Or sell the land to someone who will. Otherwise they are just sitting on a planning consent and locking the site out of use, thereby contributing to Britain’s chronic shortage of affordable housing.
“If you want to encourage land development in a liberal and democratic way, why not arrange to split up large pockets of land on the market into smaller plots, so that more people on the edge of landowning can buy land and start developing it?”
Are you suggesting expropriating the development companies land banks?
“Why not have development grants – the opposite of taxes – for first time land owners?”
That will just put the price of land up. Remember, land is in inelastic supply – or if you are still waiting for your bus – they don’t make it any more.
“Why not develop partnerships between local community representatives and local companies so that both work together to develop their land use?”
LVT would facilitate this kind of partnership.
“I suppose an example might be sponsored roundabouts, but much more could be done.”
Eh?
“So my message is: Think Again, or Join the Tories, or if I am totally wrong then Polish Your Presentation Skills – don’t present an argument with so many open holes that people can’t help but fall into them!”
Those who refuse to listen or have made up their minds already are not going to listen to any argument, however polished.
“If I build a house in the middle of nowhere, it has one value.”
Correct. The land is worth nothing. You would not recover your building cost either.
“If ten more houses arrive there, we have formed a village and created extra value.”
Ten times nothing is still nothing.
“But that value was created by us, not the government, so we have no duty to pay the government for it.”
No value was created because you built the houses in the middle of nowhere. They acquire a value when infrastructure is put in at public expense, and incidentally also the government issues and maintains your right to title.
“On the contrary, every citizen pays other taxes and has rights to government services,”
Through the system of legalised robbery which passes for a tax system today. Is that what you support?
“and our little community is no exception. That’s not parasitic at all, it’s our right as citizens.”
Why do the taxpayers have a duty to support your land values by providing you with infrastructure.
“In what way does the transfer of thousands of pounds from owners owning properties in London to owners owning the same properties in the North add economic value to anything?”
They are the same properties if they are in different places. But the point is that by NOT doing so, economic activity in the peripheral regions is taxed out of existence, thereby saddling the taxpayer with a massive welfare bill and additional costs to deal with the congestion in London and the south east, and unpleasant living conditions to boot due to this congestion.
” The transfer is an accounting matter only – affecting contract values but not economic ones. It might even be from one Jersey bank account to another!”
It is more than an accounting matter. It eliminates the deadweight cost of taxation – 12% of GNP at the lowest estimate.
” The transfer gives no encouragement to housebuilding in the North – honest builders still have to pay the replacement value to build a house there. ”
The shortage of houses is in the south east. By removing the damage done by the tax system, which works disproportionately in areas of geographical disadvantage, a switch to LVT reduces pressure where it is most severe.
“And the whole system looks wide open to fraud from dishonest ones!”
How do you work that out?
@Henry Law.
Ok. Rich people become rich because they can borrow and buy up all the land. So, the government introduces LVT. I’m one of those landlords who gets clobbered with higher LVT than council tax, and I can’t afford it. So, I sell. Who do I sell to? Rich people who can afford it. What does this mean? It means that LVT causes land to be concentrated more in the hands of those who already have land! Is that what you want?
Look at my contributions to this discussion. At the start, a record-breaking 150 or so comments ago, I clearly had no idea what I was talking about when I started – so how could I have made up my mind and then stick to it? My mind has been developing, and I thank you very much indeed for helping me with that. Look at your contributions. You haven’t budged an inch! So it’s you who made you mind up previously, not me!
@Richard Dean
“Please let me explain. There are no plots in my imaginary village, It wasn’t civilized before I was there. I did a little bit of civilizing, and this helped Joe when he arrived to do his bit. Then Anne came and added her bit, benefitting from the bits me and Joe had done. Then Leslie arrived – with children but no spouse – and the thing just grew like that. There’s lots of us now. We all work in the city thirty miles away and pay our income taxes and VAT to central government, so I think it’s time they built us a proper school in return!”
It sounds as if there was a considerable amount of infrastructure in place before you started to build this village allegedly in the middle of nowhere.
@Henry Law. I refer you to the answer I gave before, about how the little village developed, how the value developed through our rleationships as much as through our assets, and we all work and pay our taxes.
Man does not live for objects alone. The economic value is expressed in our pleasure at living here, in the relationships we have with ourselves and nature, and in its direct track connection to the highway and thence to the city. In fact, we now have city dwellers come out here and marvel at the wildness of the place – but don’t worry, we don’t charge them anything for the pleasure they get by visiting.
Yes, we accept that some of our taxes go to help build the highway, but others use the higway too, and we do pay a lot – much more than what would be our share for the highway. So we do agree with you – it would indeed be robbery if the government refuses to build us that school!
“The creation of value is not a zero sum game. Rather, economic value in a community comes partly from replacement value and partly from the value of the relationships in that community.”
The second of these is related to land value.
“Thus two identical houses can have different values because of their different relationships. That is why the Libetarian Alliance’s plan to move cash from London to the North has no economic effect – it does not change the relationships.”
Oh yes it does, very much so. LVT effectively creates tax havens just where they are most needed.
“Being human is all about relationshiops, so LVT is a tax on being human.”
All humans need land. At present they have to pay rent to a landowner and work for wages, which results in them receiving a fraction of the value they create. And on top of that they have to pay tax on the value of their wages. It sounds like a good deal – you pay tax in accordance with the value of your land. The tax can always be avoided by working on marginal land which has no value and is therefore subject to no tax.
“In many cases the spatial and other relationships that create the added value were built up by our ancestors – a thousand years for London for example. It was their work that created those relationships, so it is unfair that their descendents are penalized in their place.”
Not really. Some of the spatial advantages are natural. Others have to be continually maintained and sustained, so why should the beneficiaries not pay a regular charge for this service?
“Proponents of LVT say it will increase output, so perhaps we can use a business concept to see if that is true. In business terms, LVT is a sunk cost. Once incurred, no subsequent business decision can affect it, except two exceptions which I will discuss shortly.”
Same as rent.
” If my factor produces 1000 widgets and I have s sunk cost of 200, I can’t change that by creating more widgets. Because I can’t sell more widgets – if I could I’d already be doing it. If no action of mine can change the sunk cost, I have no incentive to change.”
You might sell a bette r widget or reduce your input costs. But it is exactly the same as rent, and you no longer have to pay tax – indidentally, as employer, you carry the incidence of the tax nominally paid by your employees. It comes out of your pocket since you could otherwise get away with paying them their take-home amount net.
“One exception is for a business to sell the land on to someone else who won’t sell it on, so in effect only one exception is left. That one remaining business decision is available if LVT is a tax on rental value. In this case, the sunk cost can be reduced by reducing the rental value. This can be done, for example, by allowing an entire area to become derelict, a slum, a crime-infested place, or a disease-infected place, a swamp.”
Yes but all the time the landlords would be shelling out the LVT. It would be madness not to make the best use of the land.
” Landlords do this the world over. ”
Yes that is because there is no LVT. If there was they would not do it.
“They do it to get people out so they can buy the place cheap and then develop it. But for LVT they won’t develop unless they have already decided to anyway – because it’s a sunk cost. This is the very opposite of what the well-meaning proponents of LVT want.”
That is the opposite of what LVT would do.
“LVT is an intellectual and practical disaster!”
It is evident that you have not made the slightest attempt to understand how it would work, presumably because you have made up your mind already or have other reasons for getting this policy pushed to the sidelines.
@Henry Law.
This is what you wrote
… land values exist only because they are continually sustained by the actions of the community and its public bodies such as the government which protects land titles, defends the realm, maintains the rule of law and provides infrastructure
You have forgotten that all of those government actions also provide benefits to people who have no land.
@Richard Dean
“Ok. Rich people become rich because they can borrow and buy up all the land. So, the government introduces LVT. I’m one of those landlords who gets clobbered with higher LVT than council tax, and I can’t afford it. So, I sell. Who do I sell to? Rich people who can afford it. What does this mean? It means that LVT causes land to be concentrated more in the hands of those who already have land! Is that what you want?”
Nobody would take the land if it was a liability, unless they were going to use it. Richer people are in the same situation. The land ends up in the hands of those who want to use it.
“Look at my contributions to this discussion. At the start, a record-breaking 150 or so comments ago, I clearly had no idea what I was talking about when I started – so how could I have made up my mind and then stick to it?”
You moved the goalposts. First you argued that it could be passed on and then you switched your line of attack on the grounds of social justice.
” My mind has been developing, and I thank you very much indeed for helping me with that. Look at your contributions. You haven’t budged an inch! So it’s you who made you mind up previously, not me!”
I have been thinking about this subject for years, and you have not touched any of the real difficulties with making a transition to LVT.
@Richard Dean
“… land values exist only because they are continually sustained by the actions of the community and its public bodies such as the government which protects land titles, defends the realm, maintains the rule of law and provides infrastructure
You have forgotten that all of those government actions also provide benefits to people who have no land.”
I have not forgotten at all. People without land pay their landlords for those benefits since they are reflected in their rents and in property prices they have to pay. The presence of a tube station adds £27 k to the price of a house and it will also have an effect on the rents in that area. All the benefits of infrastructure – fare subsidies, transport improvements, schools, the lot – quickly pass to landlords.
@Henry Law. It was the house owners who paid for the tube station, through their higher taxes. It is those others, the people who rent, who are getting the freeebie.
@Richard DEan
“. I refer you to the answer I gave before, about how the little village developed, how the value developed through our rleationships as much as through our assets, and we all work and pay our taxes.”
The land value of your little village was initially next to nothing. It will go up when you get a decent road connection to the nearest town. It will go up again when you get a school.
Under LVT you get what you pay for and you pay for what you get. What is wrong with that as a principle?
“Man does not live for objects alone. The economic value is expressed in our pleasure at living here, in the relationships we have with ourselves and nature, and in its direct track connection to the highway and thence to the city. In fact, we now have city dwellers come out here and marvel at the wildness of the place – but don’t worry, we don’t charge them anything for the pleasure they get by visiting.”
Oh but you will charge them. One of you will let a bit of their house out for use as a tea shop. The now accessible wilderness is not longer wilderness and the land has value that was not there before – all due to public investment in the provision and maintenance of infrastructure.
Yes, we accept that some of our taxes go to help build the highway, but others use the higway too, and we do pay a lot – much more than what would be our share for the highway. So we do agree with you – it would indeed be robbery if the government refuses to build us that school!
@Richard Dean.
” It was the house owners who paid for the tube station, through their higher taxes. It is those others, the people who rent, who are getting the freeebie.”
I am a landlord, please remember this. The property I let is near a railway station with an excellent service. The rent I can charge reflects this facility. I am getting the freebie. I am not complaining, but it is still unjust.
@Richard Dean
“Yes, we accept that some of our taxes go to help build the highway, but others use the higway too, and we do pay a lot – much more than what would be our share for the highway. So we do agree with you – it would indeed be robbery if the government refuses to build us that school!”
Yes but that school will push up your land values and if these are not paid back then you in your little village are doing the robbery. So now we have a double robbery. Hard working families are robbed of their wages through tax and your villagers are robbing the taxpayer by not paying for the benefits they are receiving.
@Henry Law. I have already paid for the increase in land value, through the taxes. I have done the calculation. Those taxes are exactly the sum of
> the cost of the school
> the increase of land value as a result of having a school
So, please stop being a government clerk and get those builders moving! Anne’s children are of school age already, and we wouln’t want the county to have to go to all the expense of arranging for their schooling 15 miles away. would we? That would also add 2 hours to the kid’s journey, and put them at such a huge and unfair disadvantage compared to the children of you rich intellectuals in town.
“It was the house owners who paid for the tube station, through their higher taxes. It is those others, the people who rent, who are getting the freeebie.”
No. The people getting the freebie are the landowners living next to the school – the increase in value of their land is greater than their contribution in taxes – the renters will pay higher rents, but then again, they’ve got a school on their doorstep they can use. The people being robbed are the renters and landowners a few miles away from the school, living at the alternative site that was rejected. Their land value has not gone up, but they have paid for the improvement to the land a few miles away.
@Richard Dean
Think about the Olympics. Those that own hotels in London benefit greatly. Those that own property in areas improved by the expenditure benefit from increased property values (as the land value increases). Who pays for it? – taxpayers across the Country. So, some people get rich just by being lucky (through the planning decision) and they get rich from the money generated by other peoples’ labour. That is the system we have currently. It is unjust in the extreme. If we had LVT instead, then those landowners in London that benefit from the higher rents/land-values would pay a proportionate increase in tax to fund the improvements they benefited from. A much fairer system. How can you possibly argue against it? Are you the Duke of Westminster by any chance?
Richard and Henry,
I can only admire your stamina. I would point out that the case for a Land Value Tax is widely accepted among mainstream economists and spans the political divide. It is the political difficulties that are the main obstacle.
Samuel Brittan is among the foremost economic journalists in the UK. Despite his background as a Thatcherite and monetarist – he has been one of the most vocal, consistent and well-informed opponents of austerity economics in recent years. Writing in the Financial Times recently, he said:
“Whatever one thinks of fiscal austerity, governments will need a new source of income in future if only because of demographic trends.
The case for a land tax is one of the oldest and least disputed propositions in economic thought. The underlying theory was developed at the beginning of the 19th century by the highly respectable David Ricardo. Many chancellors have said that they would jump at a tax that had no disincentive effects on work or enterprise but had a strong redistributive element. The problem was that the amount of preliminary work required would take more than one parliament and any credit for the measure would redound to their successors.
A land tax is one of those subjects – basic income is another – which divides commentators into a great majority who never mention it, and a minority who talk of nothing else. The result is to give supporters a cranky appearance, while the eyes of chancellors of either main party glaze over if you as much as mention the subject.
The basic point is that the supply of land, with rare exceptions such as reclamation in the Netherlands, is fixed. But because of its scarcity owners can command an income over and above the normal return to the enterprises placed upon it. Gross UK trading profits of non-financial and non-oil corporations are running at over £200bn per year or about 20 per cent of gross domestic output. Some part of this – we do not know how much – is not true profit but the return on land. There is one way in which the supply of usable land can increase. That is when land, previously off limits, is newly released by local authorities for development. The consequent increase in value, say some land tax campaigners, is created by “the community”, which is entitled to a share of the increment. But to argue in this way is to sell the case short. The case for a land tax is valid even for land which always was available for development or which remains in agricultural use.
If politicians really want to think about the unthinkable, as they sometimes claim, here is a place to start.”
@Richard Dean
“I have already paid for the increase in land value, through the taxes. I have done the calculation. Those taxes are exactly the sum of
> the cost of the school
> the increase of land value as a result of having a school”
No, someone else has probably paid more than their share. And those other taxes are also saddling the government with a massive welfare bill which is leaving everyone worse off.
There is also the cost of running the school, which is ongoing and no a once and for all thing. If the school is a particularly good one your land values will be higher than if it is a poor one.
“So, please stop being a government clerk and get those builders moving! Anne’s children are of school age already, and we wouln’t want the county to have to go to all the expense of arranging for their schooling 15 miles away. would we? That would also add 2 hours to the kid’s journey, and put them at such a huge and unfair disadvantage compared to the children of you rich intellectuals in town.”
Yes but as you are not paying any LVT, why should everyone else cough up? This is, incidentally, the argument that is used in relation to railways, so your chances of ever getting a train service are next to zero, even if this village in the middle of nowhere is close to the route of a line that was closed and the track taken up in the 1960s. The external benefits are measured in terms of “time saved”, a poor and unreliable measure, whereas they could be measured in terms of land value generated. The result is you get dubious schemes like the HS2 given the go-ahead whereas more solid local projects never happen.
@Richard Dean
If you had to pay for it, are you sure you and your villagers would really want the kind of school the state would give you?
Under an LVT system you might be able to vote to provide the school of your choice, at your own expense. As you would not have been taxed on your wages and on everything you buy, with one-third of government expenditure going to relieve tax-induced poverty, you would certainly be able to afford it.
@Joe.
Many thanks! Your helpful answer identifies the real motive for LVT – not fairness, not re-distribution, but dirty old money grab. This shows in the sentence you quote from Samuel Brittan “Whatever one thinks of fiscal austerity, governments will need a new source of income in future if only because of demographic trends”
A basic flaw in the arguments of all those coddled intellectuals s contained in the sentence “But because of its scarcity owners can command an income over and above the normal return to the enterprises placed upon it”. There is no such thing as a normal return.
So please spare all this stuff suggesting that LVT is somehow a morally good tax, The reason for the political difficulties is that everyone sees through those absent clothes. He who pays the piper calls the tune, and LVT is just another way of concentrating power in the hands of the landowning rich.
@Henry Law 13th May ’12 – 12:21am
“The proposal is very weoo thought through. Here
http://www.landvaluetax.org”
Ha ha ha! The content of this site was the basis of my observation “many of the ‘advantages’ trumpeted by LVT supporters start to look like naive statements of faith…” ( 10th May ’12 – 9:26pm)
Where is the ‘Proposal’ for the UK? Where are the case studies on where LVT has/is being trialled? Where are the scenarios relevant to the UK situation? etc. etc. The absence of readily accessible substantive material on this website naturally raises questions about both the maturity of the thinking and its real world relevance.
“Part of the trouble is that quite a lot of LVT advocates are not sure of their ground either, which serves only to spread confusion. ”
The reason, I suggest for this is that (given the information available from http://www.landvaluetax.org) is that LVT hasn’t been very well explained by the ‘long term’ advocates of LVT. The differing takes on LVT contained in this topic thread provide additional evidence to support this fact.
Lets get back to basics, from what I remember of the LVT courses I attended in the 1980’s:
1. Land is a finite resource that because of its nature is distinct from other forms of property.
2. LVT is an economic mechanism that recognises this fact and who’s primary objective is to optimize the use of land.
3. It does this by making ‘the Crown’ the owner of all land and thus all landowners tenants of ‘the Crown’.
4. ‘The Crown’ determines the ‘value’ of the land and levies rents/taxes on it’s tenants based on this to encourage good use of the land.
The key is understanding the concept of ‘land value’ being referred to, it isn’t it’s monetary value but it’s usefulness in sustaining life.
Hence in Adam Smith’s time, good agricultural land was highly valued, so the optimal use was to grow crops rather than building a settlement. (It is clear from the advantages listed on http://www.landvaluetax.org that this principle still holds in the version of LVT being advocated, namely the advantage of minimising urban sprawl.) As I noted in my previous comments, with respect to London, if implemented, the true effect of LVT would be to encourage high-density development (something metropolitan London needs if it is to build 390,000 homes within its current boundaries) – this not only representing optimal land use but also delivers many benefits.
Obviously, the questions for ‘the Crown’ are: how to value land? what is an appropriate rating and charging framework? and what to do with the revenues obtained? As we live in a democracy, we expect the revenues to be re-invested to further support land improvement and economic development – so the aspiration to totally fund local government out of LVT (not just the existing Council Tax portion) would make sense.
I look forward to seeing on http://www.landvaluetax.org a section outlining how LVT could be implemented in the UK today and what it would look like to the person standing in the bus queue.
Economics is a tool of politics, not the other way round. In Adam Smith’s day, there was a growing recognition of unfairness and of the need to improve the lot of the poor, which meant getting money off the rich. The question was, how to get the rich to accept tax? The answer was to make it “fair”, in the sense that the richest paid most. Hence the tax would be related to land value. But those days are gone.
Tax is now the price the population pays for participation in the democratic process. Roland’s remembered points illustrate the new motive for LVT, which is to return the UK to a feudal system. Point 1 is no longer valid – many things have become finite, such as all of the minerals we steal from Mother Earth, all of the oil and gas we steal from the Jurassic, and all of the air we breathe courtesy of plants. Point 2 has changed – because as Roland correctly points out, the situation has changed, and the key concept is not “land value” but usefulness in sustaining life – what we now might call “economic value”. Point 3 is a very clear return to feudalism – almost a definition – and point 4 confirms that the powers that the feudalists wants are those of the Barons before the Magna Carta.
Is LVT about minimizing urban sprawl (Roland?) or making the system fairer (Joe?, Henry?) or about transferring money from the South East to the North (Libertarian Alliance?) or efficiency (Andrew Suffield?, Steve?, Steven W?, Logan?, many others) or house prices (Chris Owen, Matthew Huntbach?) or what? No, not fundamentally. All of these are excuses, tricks to get support, that hide the true motive – the disenfranchising of renters.
LibDems really have lost their way on this. Julian is right, we’re in the 20th century now, and like Duncan Stott says, all changes create losers as well as winners. Democracy is not just about being, it is also about learning, and we the people have learned that we don’t want a feudal system. Our knowledge is embodied in sayings like “He who pays the piper …”. It is perpetuated through our schools and in our tolerance of rebels. It is expressed in our ambivalent views about Lords reform, and in the collapse of the Liberal vote after a generation had grown accustimed to universal suffrage and had started learning how to use it. If we want wider support, we need to see these things.
@Joe, I think we’re going for gold on this one! Guinness Book of Records for the Longest Discussion on LDV? 🙂
Ok, the 21st. What’s 5% between friends?
Roland,
Dr. Tony Vickers was Chair of Alter and sets out here initial proposals for the UK Baby steps to wealth tax .
For quick comments on LVT in the UK system see attached The Progress report.
Countries currently using a form of LVT in their tax systems include Singapore, Hong Kong (Republic of China), Estonia, Australian and Americam states and cities. Sweden, Denmark.
There has been a lot of research and publication in this area. As others on this thread have noted, the chapter from Sir James Mirrlees recent review of the UK tax system includes an in-depth analysis The Taxation of land and propertry.
@Richard
A good build – I’m glad you got the point of my posting – I agree with you, just what is it that we want to achieve with “LVT” and is the method suitable for a modern democratic society ie. where we are now.
@Joe,
Thanks for the links – however they do illustrate one of my points rather nicely, namely such links are not on http://www.landvaluetax.org …
Also, I do not disagree with you that there has been research and publication on LVT, however there is a need for the advocates to provide the signposts and make it easy for people (in the bus queue) to find out more. Furthermore the advocates of LVT need to show that their thinking has built upon such work. Statements such as “Properly applied, Land Value Tax would support a whole range of …” need to be supported so that we all know what “properly applied” might actually look like.
Richard.
“All of these are excuses, tricks to get support, that hide the true motive – the disenfranchising of renters.” I have no idea where this comes from!.
From Adam Smith we learned something of land markets and the ideas that the rent of land is societally-created and is, therefore, the rightful source of public revenue. Collecting land rent is, then, not taxation because it is not confiscation of what individuals produce.
What this means is that there is an optimum amount of revenue to be raised from the taxation of land values. Above this amount is both unjust confiscation of private property and economically inefficient (i.e., a disincentive to the production of goods or provision of services). Every parcel of land in our cities or towns or every tract of natural resource-laden land has an annual rental value that could be obtained under competitive bidding. This is the monetary value the community should seek to collect, no more. All buildings, which are produced assets, should be removed from the tax base.
The net result of these measures would be that all land would be brought to its highest, best use. Profits from land speculation would disappear as land markets became competitive and imputed or actual income streams generated by simply owning land would no longer exist to be capitalized into higher and higher selling prices for land. Hoarding land, holding it off the market for years, decades or generations would be far more expensive than it is today.
Taxing the rental value of land is progressive. Taxing the value of the buildings we construct and must maintain makes no sense.
Adam Smith was merely the originator of these economic ideas that have been developed and refined over the past 200 years and continue to be refined and adapted for the modern age.
Today, we have an entire new generation locked out from home ownership and paying the greater part of their after tax income in rents . This generation is expected to cover ever increasing pension and social care payments for an ageing population while continuing to subsidise essential workers with social housing provision and housing benefits. These economic issues are confronting us now, they are not going away.
re:”The OECD is urging government to switch over to property taxes to boost growth”
From the “Baby steps to wealth” link that Joe provided, it would seem that the OECD position was:
“Duval said the OECD advocated a replacement [of Britain’s council tax regime] with “a property tax based on current market values or a land tax”
[http://www.guardian.co.uk/society/2012/jan/23/banking-amplifies-inequality-oecd-britain]
However, I can find no mention of this in the UK specific section of the OECD’s report “Going for Growth 2012” [ http://www.oecd.org/economy/goingforgrowth ], although the report does advocate shifting the tax burden away from labour.
“Economics is a tool of politics, not the other way round.”
Economic laws operate regardless of politics. If politicians ignore them, we all get bitten in the backside.
” In Adam Smith’s day, there was a growing recognition of unfairness and of the need to improve the lot of the poor, which meant getting money off the rich. The question was, how to get the rich to accept tax? The answer was to make it “fair”, in the sense that the richest paid most. Hence the tax would be related to land value. But those days are gone.”
It has nothing to do with fairness, whatever that means. It is about justice.
“Tax is now the price the population pays for participation in the democratic process”.
That is a new idea. No representation without taxation – reverse tea party. It ignores the fact that the incidence of a tax falls far from where the burden is initially placed.
“Roland’s remembered points illustrate the new motive for LVT, which is to return the UK to a feudal system.”
At least under the feudal system the landholders were expected to contribute their full whack. On that basis the Grosvenor Estates holdings in London would keep a couple of aircraft carries at sea.
“Point 1 is no longer valid – many things have become finite, such as all of the minerals we steal from Mother Earth, all of the oil and gas we steal from the Jurassic, and all of the air we breathe courtesy of plants.”
Surely it is more valid than ever – land is more important as the pressure on natural resources tightens.
” Point 2 has changed – because as Roland correctly points out, the situation has changed, and the key concept is not “land value” but usefulness in sustaining life – what we now might call “economic value”. ”
Land value=Economic value.
“Point 3 is a very clear return to feudalism – almost a definition – and point 4 confirms that the powers that the feudalists wants are those of the Barons before the Magna Carta.”
The barons had more power AFTER Magna Carta. The forced the king to hand over privileges to them.
“Is LVT about minimizing urban sprawl (Roland?)”
or making the system fairer (Joe?, Henry?)
Yes
“or about transferring money from the South East to the North (Libertarian Alliance?)”
Not really, it is about REDUCING THE TAX BURDEN on the north to enable its economy to function more effectively.
” or efficiency”
Yes
“or house prices”
Yes
“All of these are excuses, tricks to get support, that hide the true motive – the disenfranchising of renters.”
In that case the big landowning interests would be falling over themselves to hand over money to LVT campaigners to pay for lobbyists, press officers and all the other stuff. Are LVT campaigners awash with money from these wealthy people? I have not noticed. The British Property Federation has not rushed foward with support for LVT. Have you have spotted something nobody else has?
“LibDems really have lost their way on this. Julian is right, we’re in the 20th century now, and like Duncan Stott says, all changes create losers as well as winners. Democracy is not just about being, it is also about learning, and we the people have learned that we don’t want a feudal system. Our knowledge is embodied in sayings like “He who pays the piper …”.
The system in Britain is now worse than feudal. At least under the feudal system land holding went with obligations. Now, when land holdings are several orders of magnitude greater, the great landholdings are in the hands of offshore companies and banks and the rental streams largely escape tax.
Roland,
I think the reference to the OECD recommendations come from this Guardian report Big banking sector amplifies risk of inequality, OECD warns Britain
@Joe
“Today, we have an entire new generation locked out from home ownership and paying the greater part of their after tax income in rents . ”
Ignoring that this situation has largely arisen government policy (massive and unsustainable levels of immigration with no regard for it’s impact on housing demand etc), I do not see how LVT can actually change the situation other than initiate a massive property devaluation. Please explain how a member of the new generation will be able to afford to own a London property currently valued at £350,000-£400,000, without the existing owner suffering a massive reduction in capital with all the ramifications that would follow.
What puzzles me is, If it is true as Joe Bourke, Samuel Brittan and others say that most economists accept the case for LVT even from different places on the communitarian/libertarian spectrum (or roughly the left and right as we used to call it) then why, if this is one thing that economists can agree on, don’t they teach LVT and generally make more noise about it until the public gets it? After all generally accepted findings in most other fields get communicated (one of your five a day for example). Why not this?
I have to say that I personally am somewhat ashamed to have only discovered LVT and Henry George etc in the past year – and yet I have had an interest in economics all my adult life, studied it at MSc level and have subscribed to the Economist for over twenty years. Incidentally I have been told that at least some of the Economists “senior journalists” support LVT – though you would never know if from reading it. Why is that? Are they really taking part in that fierce debate they claim they are?
I also like the postivemoney.org.uk agenda but am slightly less certain about it than LVT.
@Joe,
Re: source of quote
Yes I wasn’t totally correct/clear about the path I took to to get to the Guardian article. I went via “Baby steps to wealth”, http://libdemsalter.org.uk/en (Homepage), http://libdemsalter.org.uk/en/article/2012/562345/oecd-to-northern-europe-raise-your-property-taxes (recent update/article), although I did give the correct URL for the Guardian article in my comment.
@Roland
“I do not see how LVT can actually change the situation other than initiate a massive property devaluation. Please explain how a member of the new generation will be able to afford to own a London property currently valued at £350,000-£400,000, without the existing owner suffering a massive reduction in capital with all the ramifications that would follow.”
At last, a sound objection to LVT! It will change the situation but it will lead eventually to lower property prices. You have obviously understood, which is more than can be said of another objector.
LVT has to be phased in over a decade or two in order to avoid the kind of disruption you are talking about. But Council Tax and UBR could be switched over straight away without causing significant disturbance to the property market. After all, there is LVT in Sweden and the property market functions perfectly well. Further increases in LVT rates would be accompanied by cuts in other taxes and this would tend to counteract the drops. But certainly LVT would remove the speculative froth off the top of land PRICES and that has to be a good thing.
Androo235, others have asked why LVT is not better known. Those who are interested can find an answer in the book, “The Corruption of Economics”, by economist, Mason Gaffney, and journalist, Fred Harrison, who studied exactly that question. The book is available online for free or from Amazon at extortionate cost. Just search for the title via Google.
Roland,
what is it that keeps pushing property values ever higher? You mention immigration and certainly population growth and the creation of new households is a major factor with more people chasing a limited supply of housing, paticularly in London and the Southeast. They only way we can deal with that issue to to build sufficient housing to meet demand. That requires urban land sites being made available for development. LVT on undeveloped sites changes the dynamics of holding land and encourages its release from landbanks for development.
With initially modest taxes on land, house prices can be allowed to stabilise and as earnings grow return to a more historically sustainable national level of around 4 times average earnings. One of the key reasons property prices have not suffered a massive reduction in values (and continue to rise in London) is the unprecented artificially low rates of interest we have. Who can say in today’s globalised market how long these low levels of interest can be maintained and the articially high price of housing sustained?
With a switch to LVT we can move some of the burden of property taxation from tenants to Landlords, bring more land into use for development and make the current council tax banding more progressive- making it easier for the younger generation to get started in life.
androo235,
“..why, if this is one thing that economists can agree on, don’t they teach LVT and generally make more noise about it until the public gets it?”
This is what Joseph Stiglitz said in 2002 “There are some economists who are interested in this. I think most economists would like the idea, and would support it. But, economists spend their time on things that they think have marketability. So it isn’t that they don’t think it’s a good idea; they don’t think there’s any resonance in it. President Bush is still talking about the inheritance tax, and income tax, and they want to get involved in what other people are talking about. It’s a social phenomenon, I think. So, if you get a lot of other people talking about it, then they’ll join the fray.”
The comments by Adam Smith fan and Henry Law confirms me in my growing feeling that there needs to be a new Theory of Taxation, and I wonder whether people might want to suggest how it might look? Obviously, if a theory exists already, it’s either badly out of date or corrupted or just plain wrong. I think the new theory should start with a definition of tax as the contract price a population pays for democracy. Here are some proposals for Laws of Taxation in a Multiply-Connected Economic System
First Law of Taxation. Unilateral action fails.
This should perhaps be the First law of Economics. It brings to mind the Savings paradox, and the way that economists misunderstand reality and provide politicians with damaging advice. The German recession of 2002-2003 provides a good example described in “Macroeconomics” by O.Blanchard, A.Amighini, and F.Giavazzi , which I have interpreted as follows:
Saving in macroeconomics is the single action of reducing individual consumption, which of course leads to reducing demand and so reducing income – the savings paradox. In reality, savers define saving as two simultaneous acts – reducing consumption while maintaining output. The appropriate government response is to maintain demand by increasing government consumption. But when savers started saving in 1997 Germany, the government failed to do this – economists failed to advise them properly – and that failure produced the 2002/2003 German recession.
Second Law of Taxation. Tax cannot incentivize, but can destroy.
This is because tax is a sunk cost, so that the only business decisions available to avoid the tax are to pass the taxable asset to someone else, or to deliberately damage the asset so that its taxable value reduces. Another example is the Financial Transactions Tax, being discussed in another thread, where the EU estimates the effect to be a 0.8% reduction in GDP.
A slightly more general form of the law mught be along the lines that: Tax cannot alter behaviour of it provides those taxed with no ways of changing behaviour to minimize the tax they pay.
This law is not inconsistent with the use of tax incentives to attract industries. If the industries would have been profitable without the incentive then they would have come anyway. A tax incentive is basically a gift, not a negative tax. It’s a price paid.
Third Law of Taxation. Tax is a transfer of contract value, not of economic value.
A corollary would be that tax has no positive effect if it is spent on what is taxed. Thus the use of tax to transfer money from the South East to the North does not provide economic benefits. The reason is that it does not transfer the economic value of the connections, as discussed in an earlier comment. Quite the contrary, it reduces the contract value of houses in the South East while not increasing their contract value more than that in the North.
Richard.
no need to reinvent the wheel, Sir James Mirrlees and the IFS have spent the last five years reviewing the tax system for us. In the publication “Tax by Design” they present a picture of coherent tax reform whose aim is to identify the characteristics of a good tax system for any open developed economy, to assess the extent to which the UK tax system conforms to these ideals, and to recommend how it might realistically be reformed in that direction. Drawing on the expert evidence in Dimensions of Tax Design, it provides an integrated view of tax reform.
The volume was written by James Mirrlees (Cambridge University and the Chinese University of Hong Kong), Stuart Adam (IFS), Tim Besley (Bank of England and the London School of Economics), Richard Blundell (IFS and University College London), Stephen Bond (Oxford University), Robert Chote (Office for Budget Responsibility and former IFS Director), Malcolm Gammie QC (One Essex Court and the IFS Tax Law Review Committee), Paul Johnson (Director, IFS), Gareth Myles (Exeter University), and James Poterba (US National Bureau of Economic Research and the National Tax Association).
‘Whatever view you take of tax reform, you will need to read this volume in order to participate in the debate.’ Mervyn King, Governor, Bank of England
‘Theory and practice rarely are brought together effectively. This volume is the best public economics has to offer. It should be read by anyone who cares about the future of taxation – that is anyone who cares about the future of government.’ Lawrence Summers, Charles W. Eliot University Professor of Harvard University
‘a fundamental review of British taxes by the Institute for Fiscal Studies, the first such exercise for more than 30 years. The results are a bracing blast of fresh air, which deserves to scour away some of the tax junk that has accreted over the decades.’ Tim Harford, Financial Times
‘a worthy successor to the 1978 Meade Review of taxation … The Review is a terrific achievement … the most thorough and clear-sighted assessment of the UK tax system we have seen for decades.’ Diane Coyle, The Enlightened Economist
‘The report was compiled by some of the world’s finest economic brains…’ Peter Wilby, New Statesman
@Joe. Thanks. That looks like misdirection to me. You want me to spend my time reading while you get on with changing the world? Every industrialist knows that creative re-thinking of wheels can produce valuable new products. Have any of the authors got any experience of bus stops?
@Adam Smith fan. I’ve just read the introduction to said work. So they really are out to get us then. Well, that’s a relief.
The trouble is, as Brittan says, or implies (from Joe Bourke’s post somewhere above), unless you have undertaken some of the journey already (and I have), then coming straight to Gaffney most will write him off immediately as a conspiracy theorist and LVT as the obsession of nutters.
So, what can be done about it?
Richard, I think that that is quite a sensible way of looking at taxation. Certainly I was first attracted to land value taxation by your second law when I saw how “the rates” (as they used to be) incentivised the destruction of unused buildings. I only became aware of LVT’s other benefits when I started studying taxation in general and discovered how destructive many other taxes are when compared to LVT.
I am sorry if it seems difficult to change Henry’s or my opinion but the fact is that both of us have been studying the topic of taxation for many years and so we have already thought about the issues in some detail. For that reason we may come across as rather close-minded on the topic. However neither of us are inherently dogmatic. It’s just that we have reviewed a very large amount of evidence and argument already, so it would take a correspondingly large amount of opposing evidence to change our minds at this point. I strongly doubt that such an amount of opposing evidence exists.
Since you are interested in the topic, you may want to look at a new theory of taxation based on what is known as “Modern Monetary Theory”. It takes a very different view on taxation from the conventional one. But whether it is right or wrong — and I am not sure myself — it is well worth looking at.
Richard,
“That looks like misdirection to me.”
Not at all. Like you I have to eat and need to make the last post. I also have a Libdem branch meeting this evening to prepare the accounts for.
I think on North-South/regional tranfers we have tax transfers now with the Barnet formula, regional growth fund, council tax equalisation funds, public sector employment etc. That is a necessary feature of a currency union where the GDP is disproportionally concentrated in one region of the currency area.
Agree with Adam Smith Fan different take on taxatio of : “Modern Monetary Theory”, but this thread will never end if we start on that. Signing off for now and good luck with the IFS report – I have only had time to browse the executive summary sections of the full report myself sofar.
@All. How about catching a bus sometime? Keep you eyes and ears open, and don’t be afraid of the natives. There is more wisdom there than in your books.
I wish I knew, androo. The Land Value Taxation movement made good progress in the first half of the 20th century but in the second half, it was very much eclipsed.
The main thing that we can do as individuals is to educate others. The rise of the Internet has made that easier in the past twenty years. And when you couple that with the economic problems of the last five years, it becomes easier to point out how the current tax system creates incentives that promote the current problems. However the same can be said for the Libertarian right and the Marxist left. So although we can promote the idea, we are in competition with others. I guess that we just have to do as good a job as we can.
Richard, I catch the bus every day. So be careful what you ask for. You might end up talking to me!
@Richard Dean
Adam Smith put forward a perfectly good theory of taxation. How about starting from that?
Your idea that tax has no overall effect ignores the pattern of incentives and disincentives built into each tax. As you said earlier, contradictorily, taxes can destroy, the LVT is the exception to this rule.
But now that you have convinced me that LVT will be good for the rich, the Campaign will be approaching the half dozen landowners who between them own most of Central London, and we are confident that we shall soon be deluged with so much cash that the bandwaggon will be unstoppable.
Thanks.
It would seem rather unethical to develop LVT primarily as a way of getting at a few rich individuals. If people are acting unfairly in some way, such as monopolistic exploitation, then it is the rules that pertain to that unfairness that should be used to get at them, not a tax that is planned to affect almost everyone in the country.
House prices are high in the South East because of the economic value generated in that area. They can become higher in the North if the North generates more economic value. Fining people for living or owning in London generates no economic value for anyone.
But it’s good to think. Why is there a housing crisis in London? Because London generates a lot of economic value, and people are attracted there because they want some of that value. So, the way to solve everyone’s problem is to invest in other places so that other places generate more economic value, without reducing the value generated by London. Then people will be attracted to those other places and London’s problems will be on the way to being solved.
This is a chicken-and-egg game which will be easier to win if it avoids generating the resistance from London being asked to suffer. It’s got nothing to do with LVT. Don’t destroy value in the South East, but instead create more value in other places. Look for win-win scenarios. This is what Localism is, and this governemnt is leading the way by moving many government offices out of London. They don’t need to be there and they can actually work better elsewhere.
Richard,
the way to bring investment to other areas outside London and the SE is to reduce the deadweight of taxes on enterprise.
The creation of enterprise zones with relief from business rates draws business from other areas of the country and commercial rents tend to capture the benefit of the UBR relief for landowners in those areas. It seems the only way around these unintended consequences is a nationally applied Land Value Tax on commercial land, such that rents and land prices are set by supply and demand and lower land prices/rents in depressed areas are the incentive for the new business to locate there.
I think most of us Londoners realize by now that debt inflated house prices are of no real economic benefit to ourselves, our children or London’s economy.
@Joe,
You are not thinking straight. The land prices and rents outside London are aleady low, so if low rents and land prices attract investment, then investment would already be there. You recommend a tax which you say will lower land prices in London, but by your own argument that will tend to keep existing business in London and increase London’s attractiveness for new business. The unintended consequence of LVT is that it acts in the exact opposite way that you want it to act..
Richard,
I am repeating but I’ll say it again for clarity – the way to bring investment to other areas outside London and the SE is to reduce the deadweight of taxes on enterprise. That means a gradual shift over time from excessive taxes on labour and profits to land.
Lower rents outside London already attract manufacturing business such as car plants in the North and Midlands. Enterprise zones are designed to attract these kind of industries with rates relief, but if the rate relief is absorbed by uplifts in commercial rents and land prices in these zones, the intended benefits are captured by the landowners and not the industrial concerns that they are targeted at . This unintended consequence can be mitigated with a national LVT. This is not a controversial proposition or I would think unclear thinking.
London’s economy suffers from the high cost of housing. We have higher than average unemployment and it is virtually impossible for families to live in London on the minimum wage. Hence the significant need for high levels of housing benefit and social housing in London funded by general taxation.
@Richard Dean
“t would seem rather unethical to develop LVT primarily as a way of getting at a few rich individuals.”
But that is not the point of LVT. Besides which you explained that LVT was for the benefit of the rich, so those campaigning for it are about to be deluged with so much money that LVTwill be unstoppable.
” If people are acting unfairly in some way, such as monopolistic exploitation, then it is the rules that pertain to that unfairness that should be used to get at them, not a tax that is planned to affect almost everyone in the country.”
More bureaucracy. Set the system up properly in the first place and it will not need regulation. Import duties cause smuggling, then you need a army of people in uniform.
“House prices are high in the South East because of the economic value generated in that area. They can become higher in the North if the North generates more economic value.”
And why do you thing the North no longer generates the economic value it once did? Geographical disadvantage. Infrastructure can only help so much. If you are manufacturing in Sunderland, you suffer from expenses – transport costs for a start – that you do not incur if you are doing it in the West Midlands. That is why 80% of the population of Britain is squeezed into one-third of the land area. It is not pleasant, it is not efficient, it is socially divisive and it is ultimately going to bring about the break-up of the UK.
“Fining people for living or owning in London generates no economic value for anyone.”
Nobody is being fined. People who live in London have to pay the extra price of land there, and tax on top. People who own land anywhere are creaming off wealth that everyone else has created. If they own land in London they are creaming off more value than those who own land out at the edge.
Apropos of fining people, that is exactly what existing taxes do. They are fining people just for working, rather than staying at home and taking benefit.
Such is the vehemence of your opposition to this proposal, to the extent that, first, you put up objections that are obviously absurd, and now you are running around the edge of the field with the goalposts under your arm, that one must wonder what you personally would have to lose?
@Richard Dean
“You are not thinking straight. The land prices and rents outside London are aleady low, so if low rents and land prices attract investment, then investment would already be there.”
Rents are not low enough or they would have dropped to market-clearing levels, wouldn’t they? Who is not thinking straight.
” You recommend a tax which you say will lower land prices in London, but by your own argument that will tend to keep existing business in London and increase London’s attractiveness for new business. The unintended consequence of LVT is that it acts in the exact opposite way that you want it to act..”
You are asserting with no support to the assertion.
The congestion charge in London has, according to my brother who lives there, worked reasonably well in limiting the number of vehicles in the centre of the capital. But roads there are a fixed resource, and they are land not labour. This shows that the logic of LVT is flawed. Why is it flawed? Because some people have the choice of using different roads, the ones the don’t go through the centre. That is an operation of the laws of supply and demand.
The high rents in London are, in effect, a congestion charge on land. Indeed, people complain that they have to live outside London as a result – This shows that it is working reasonably well in limiting the number of land users in the capital. This is the operation of the laws of supply and demand.
The way you describe LVT, it is messing up the laws of supply and demand, not helping them operate. Libertarian Alliance’s proposals will immediately reduce the price of houses and land in London, as well as put many people there into negative equity and bankrupt some of them. It will immediately inctrease the price of houses and land outside London and the SE, because by buying a house or land there I get the asset itself plus the money transferred from London. Those changes will attract more business to London and less to the regions.
If this party is to win votes, it needs to persuade people that it’s policies make sense. LVT clearly doesn’t.
At the risk of prolonging this even longer, the point about measuring infrastructure improvements in land value changes rather than time vs noise was interesting. I’d not thought of it that before, thanks.
@Richard Dean
” It will immediately inctrease the price of houses and land outside London and the SE, because by buying a house or land there I get the asset itself plus the money transferred from London. ”
It’ll do nothing of the sort. If LVT has a downward effect on house prices, it will be across the board, regardless of region. The reason London house prices are higher than elsewhere is principally because of higher average wages in London (demand, as it’s known). People in London already contribute greater amounts to the general taxation pot than people in other regions. LVT won’t change that in any way whatsoever. What it will do is penalise people that use their land inefficiently in London and Scunthorpe and reward those that use their land efficiently in London and Scunthorpe. There would be no inter-regional transfer of wealth, only a transfer of wealth from those who make a bad use of their resource to people that make a good use of their resource – but that’s just landowners – tenants will be unaffected by LVT.
@Richard Dean
The vast majority of landowners in the UK have little or no mortgage debt. A drop in house prices might be problematic for a small minority of home-owners (those who bought in the last few years), but the vast majority of home-owners bought their property (or inherited property at no cost) when prices were much lower in real terms. A drop in house prices would hardly be unfair on the majority of home-owners.
re: “London’s economy suffers from the high cost of housing.”
Perhaps we need think the unthinkable. Is this really a problem or is it just standard economic principles at work and we are at the stage where pain can be expected, remember London isn’t the first or only city with this problem, Tokyo reached this point by the mid-1980’s but it hasn’t imploded, similarly New York (Manhattan), so that would imply that they are doing something we are not as yet.
Do we really want all that commerce being conducted very efficiently in London, distributed around the country, with the associated and necessary dead weight of increased infrastructure spend? Also as history tells us, our efforts to-date to encourage relocation (of businesses and people out of London) haven’t exactly been runaway success stories. This is not to say that we should not provide incentives/encouragement to businesses to locate (or remain) outside of London, only that we should be very careful in creating economic conditions that actively encourage the break-up of the London economy.
Great comments guys, both for and against,
Keeping discussion of LVT in the public forum will spread both new and old ideas to more and more people as we search for solutions to the dilemmas we face in the 21st century.
The concept of economic rents can be a bit counter-intuitive at first and sometimes tend to engender the kind of reaction that coming off the gold standard did in the 1930’s.
Like others here, the light-bulb switched on for me a few years ago and I have long favoured a switch to site value rating for UBR and council tax. These modest steps may not be considered as going far enough by more committed LVT purists, but I think they are politically achievable together with many of the perhaps more radical tax reforms recommended by the Mirrlees review.
Many thanks to Henry Law and others from the Land Value Taxation Campaign for his extensive and patient answering of questions on this thread.
@Henry Law 14th May ’12 – 4:38pm
“LVT has to be phased in over a decade or two in order to avoid the kind of disruption you are talking about.”
I agree, hence why I’ve largely dismissed it as a viable policy in the short to medium term, particularly given where we are now as a country and the uncertain global environment we operate in. Additionally, given some of the comments here, there is a real risk that LVT would be applied in a distorted form, (ie. an amended council tax that does nothing more than tax the rich further) rather than fundamentally change a dynamic of our economy.
However, that doesn’t mean that there is no point in developing an LVT implementation scenario and strategy for the UK, only that I don’t see it being ready for prime time exposure.
@Steve. The comment about house and land prices referred to the Liberal Alliance’s plans to tax Londoner’s at huge rates and use the money as negative taxes to owners of identical houses elsewhere. See the comment by Joe Bourke 13th May ’12 – 3:52pm It is totally crazy!
My major issue with LVT is that it fails to achieve its stated objectives in the short term, and distorts the political process in the long term. It will take a couple of parliaments minimum to get introduced, and that is too slow. Through mechanisms like what I described earlier, it tends to concentrate power in the hands of landowners, and tends over time to concentrate land ownership in fewer hands. In this long term this is very bad for democracy, and so very bad for an economy whose output depends crucially on the willingness of people to put energy into work..
The modern economy is very different from the one even 50 years ago, let alone the times of Smith and Ricardo. LVT simply isn’t an answer to today’s problems. I agree with Joe that more discussion will help – perhaps a fresh thread could be created?.
@Richard Dean
“Through mechanisms like what I described earlier, it tends to concentrate power in the hands of landowners, and tends over time to concentrate land ownership in fewer hands. In this long term this is very bad for democracy, and so very bad for an economy whose output depends crucially on the willingness of people to put energy into work..”
No it doesn’t. LVT places power and reward in the hands of those that work. Our current tax system does the opposite, by giving excess power and wealth to those do nothing other than own land. LVT does the complete opposite (based on very sound arguments and evidence) to what you say it does (based on nothing more than assumptions that you’ve made up on the hoof).
Yes, the economy has substantially changed since the days of Smith and Ricardo. Planning laws are far stricter, so there is an ever increasing need to introduce LVT.
@Roland
You quoted only half of what I said. The second half was that Council Tax and UBR could be switched over to a land based tax with little disturbance.
@Richard Dean
“The congestion charge in London has, according to my brother who lives there, worked reasonably well in limiting the number of vehicles in the centre of the capital. But roads there are a fixed resource, and they are land not labour. This shows that the logic of LVT is flawed. Why is it flawed? Because some people have the choice of using different roads, the ones the don’t go through the centre. That is an operation of the laws of supply and demand.
The high rents in London are, in effect, a congestion charge on land. Indeed, people complain that they have to live outside London as a result – This shows that it is working reasonably well in limiting the number of land users in the capital. This is the operation of the laws of supply and demand.
The way you describe LVT, it is messing up the laws of supply and demand, not helping them operate. Libertarian Alliance’s proposals will immediately reduce the price of houses and land in London, as well as put many people there into negative equity and bankrupt some of them. It will immediately increase the price of houses and land outside London and the SE, because by buying a house or land there I get the asset itself plus the money transferred from London. Those changes will attract more business to London and less to the regions.”
Oh dear you are missing the point again. LVT does not affect the rental value of land significantly. A more competitive market would tend to reduce rental values but reductions in other taxes would tend to push them up. All that happens under LVT is that a share of that rental value is taken as tax. Total occupation costs ie rents + tax stays much the same.
Your roads analogy is false. People live in London because the work is there. The work is in London because it enjoys geographical advantages. Away from London and the south east is sub-marginal for many business. In these locations taxation is critical, so the businesses never get going or quickly fail.
Outside London and the south east, the reduction in other taxes will make it more attractive to run businesses and employ people, as businesses not presently viable would become viable in the absence of present taxes on labour and capital.
“If this party is to win votes, it needs to persuade people that it’s policies make sense. LVT clearly doesn’t.”
If your party is to win votes it needs members to be able to understand the impact of its policy proposals, whatever they are. Your predictions of what would happen under LVT are exactly the opposite of what is generally accepted to be the case. If it were otherwise, you can be certain that the LVT movement would be awash with money to pay for parliamentary lobbyists, media presenters and all the other expensive paraphernalia of a political campaign.
@Richard Dean 15th May ’12 – 1:27pm
“The comment about house and land prices referred to the Liberal Alliance’s plans to tax Londoner’s at huge rates and use the money as negative taxes to owners of identical houses elsewhere. See the comment by Joe Bourke 13th May ’12 – 3:52pm It is totally crazy!”
Now you are just asserting.
“My major issue with LVT is that it fails to achieve its stated objectives in the short term, and distorts the political process in the long term. It will take a couple of parliaments minimum to get introduced, and that is too slow.”
No it would take about three years.
“Through mechanisms like what I described earlier, it tends to concentrate power in the hands of landowners, and tends over time to concentrate land ownership in fewer hands.”
Have you told the Duke of Westminster? I am sure he would be a keen supporter if he was aware of this. How come he has failed to notice in the past 140 years of LVT campaigning?
“In this long term this is very bad for democracy, and so very bad for an economy whose output depends crucially on the willingness of people to put energy into work..”
LVT means reduced taxes on work. It would make people more willing to put their energy in that direction. At the moment the best brains in the country are engaged in the tax avoidance industry. How is that good for the economy?
“The modern economy is very different from the one even 50 years ago, let alone the times of Smith and Ricardo. LVT simply isn’t an answer to today’s problems. I agree with Joe that more discussion will help – perhaps a fresh thread could be created?”
Land values are a couple of orders of magnitude higher than they were 50 years ago. What are you talking about.?
Are you a shill Richard? If not a shill what is it about the Lib-Dems that attracts you as it seems to me that LVT is the Lib-Dems USP even if they are shy about proclaiming it too loudly. I now can see and understand that LVT is the reason that the Lib-Dems still exist despite Labour dropping Clause 4. What is the Lib-Dem USP for you then?
@Henry
Yes, rereading my comment, I see that it would of made sense for me to have included the second part of your comment directly before my second sentence that expressed my concern about how a switch from Council tax might get hijacked.
@Henry Law. Thank you for the plug on http://www.landvaluetax.org/
The thread started by Richard’s observation on Joe Bourke 13th May ’12 – 3:52pm made me reread Joe’s original comment. Yes parts of it don’t make rational sense.
Firstly the quote from the libetarian Alliance:
“… I would official record the surveyor’s view as to the site value (the value of the unimproved land) separately at the time of the house purchase, and then impose a windfall levy of 100% of the increment in site value when the house is next sold. … it would capture the increase in the site value—an increase created by society as a whole in the form of investment in private and public facilities nearby—and prevent the “windfall” from being passed on as a legacy.”
The 100% windfall levy, assumes that the owner of the house (a member of society) has played no part in the creation of the increase, it also offers no incentive or reward for being a good citizen and working to increase a site’s value. If we take a new house for example, the unimproved site value is the plot in the middle of a field; remember part of the cost of a new house are charges to cover:
1. Common infrastructure within the development such as estate roads, sewers etc.
2. Enhancement of existing (council owned) access roads and junctions.
3. Provision of community assets and services as agreed between the developer and the council as part of the planning process; in the case of my current property this included: an infant and junior school, a community centre, social housing, landscaping/woodland/parkland, sports field, children’s play area, subsidized bus service for 10 years.
Secondly, Joe’s method for calculating a site levy is flawed as it ignores the part of the property value I referred to in a previous comment as ‘premium’. ‘Premium’ includes the charges I listed above and the sum of things such as: the property is the only 4-bedroom house in the area, the house has been placed on the site so that it has a south facing garden, it is in the catchment area of an ‘outstanding’ school etc. etc.
So in summary, getting to an agreed site value is not quite as cut-and-dry as some would like you to believe.
@Roland
“Where is the ‘Proposal’ for the UK?”
“I look forward to seeing on http://www.landvaluetax.org a section outlining how LVT could be implemented in the UK today and what it would look like to the person standing in the bus queue.”
Actually, this stuff is on the LVT site, but it’s not immediately obvious. You can find a 2003 version of Implementing The National Land-Rent Charge (“LVT”) at:
http://janusg.co.nr/inlrc.htm
Roland is right to address the importance of site valuation. Two things are important. Firstly the valuation must be roughly accurate. Secondly it is important that valuation is done often. At least annually so that changes in local rents are captured. One of the major ways that property taxation goes haywire is when politicians freeze the valuations. For instance the Council tax is based on valuations from the 1990s. As time goes on this becomes less and less accurate. It also becomes more and more difficult to revalue since revaluation may lead to large changes in taxes due.
From the late 17th until the early 19th century, the main source of revenue for the UK government was property tax. However it was based on 17th century land valuations which were never updated. As a result the Land tax raised less and less revenue even though the Industrial Revolution raised the value of British land enormously. By the early 19th century the need for extra revenue was such that “temporary” measures like the Income tax were introduced and the introduction of new taxes and complexification of the tax code has continued ever since. It is rather galling to think that if annual revision of the land values had taken place since the 17th century, then we could have run a modern welfare state without introducing any other tax. Even more so when we realise that so many of the new taxes are business-unfriendly and worker-unfriendly in a way that the Land tax never was.
@Roland, Joe Bourke
LVT requires the creation of a self-consistent data set of annual rental values. They do not have to be absolute values, but in the correct relationship to one another. Annual rental value includes the tax actually being paid, since this is part of the value. Thus initial rental values on the first valuation will also have to take account of Council Tax and UBR.
Individual sites are valued on rental and sales evidence and the data set is then “smoothed” to take account of transactions which are obviously anomalous. These show up when the initial survey data is plotted on a map using a Geographic Information System. This is the method used by, for example, the Swedish valuation office, unfortunately they use selling prices which is problematic as the latter are reduced by the tax, though as it is small it makes little difference.
The method is described here
http://www.landvaluetax.org/download-document/109-whitstable-1973.html
http://www.landvaluetax.org/download-document/108-whitstable-1964.html
http://www.landvaluetax.org/frequently-asked-questions/how-is-land-valued.html
To suggest that it is difficult to produce land valuations is not borne out by practical experience. On the contrary, computer based Geographical Information Systems make it easier than ever.
However, it is mistaken in principle to try to tax INCREASES in land value because ALL land value is continually sustained and renewed by the presence and actions of the community. It is also a mistake to base an LVT on the SELLING PRICE of land, since these prices are only loosely related to the revenue stream the land can yield ie its RENTAL VALUE. It is rental value that is the primary value of land. Selling price is a derived value.
Anyone criticising LVT should ask themselves whether, starting from scratch, they would advocate the damaging, ramshackle and chaotic system of taxes in Britain today. Or almost everywhere else, for that matter.
@Adam Smith Fan
It is even more galling to realise that if land values had been updated throughout the period from 1600, there would have been no need for an all-embracing welfare state.
The concept, incidentally, derives from Bismark, who employed it to buy off revolution, gather support for the modern state and propel Europe into two world wars. Belloc called it “The Servile State”.
@Henry
Agree that, with respect to taxation, insufficient use has been made of the Land Registry’s database.
However, I’m not totally convinced that it is “mistaken in principle to tax INCREASES in land value”; the particular case of ransom strips comes to mind, where I suggest their value can potentially massively exceed their size.
The flaw in the moral argument for LVT is that landowners and community develop symbiotically, not independently. If the community is justified in taxing land, then land is just as justified in taxing community!
“LVT means reduced taxes on work”
How can we be sure of this? What countries have found that LVT produced reduced taxes on work?
Richard,
“and is just as justified in taxing community!”
With all due respect, I can’t make heads or tails of these comments. LVT has been Libdem policy for quite sometime and consistently advocated by the LibDem Tax Policy group. A review of this thread shows overwhelmig support for LVT from Liberal Democrat members and others.
As the Tax Justice Netework A tax that can curb corruption stated “there is no intellectual argument against this tax that can withstand any scrutiny.”
I think Roland hits the nail on the head when he says “….that doesn’t mean that there is no point in developing an LVT implementation scenario and strategy for the UK, only that I don’t see it being ready for prime time exposure.”
The Libdems do not have a fully developed implementation program for LVT in the UK and it remains debateable as to the extent it should replace other forms of taxation. The Mirrlees review gives us a good platform to work from and the fact that LVT is recommended to replace UBR is a strong endorsement of the economic incentives intrinsic to LVT.
In many respects LVT on residential housing is a side issue, as its initial implementation is most likely to involve little more than a reform of council tax to a more progressive system of banding and a change to site value rating. As to whether we move towards increasing tax on residential land while reducing tax on income in the future, I think, will be determined by the public experience with these initial reforms.
@Richard Dean
“The flaw in the moral argument for LVT is that landowners and community develop symbiotically, not independently. If the community is justified in taxing land, then land is just as justified in taxing community!”
You have moved the goalposts yet again. First you asserted that LVT would be passed on. When that argument was demolished you claimed that it would benefit the wealthy at the expense of the poor. Now you claim that landowners have a moral right to keep the rent of land.
Landowners and community indeed developed symbiotically. It was stolen from people in three successive rounds of enclosure, in the thirteenth and fourteenth centuries, at the Reformation and between 1760 and 1840. There was a fair amount of outright fraud as well – that was the origin of the Grosvenor Estate in London.
But how exactly would the community be taxed by land? Would yuu care to explain?
@Richard
Some real life observations that support the theory behind LVT:
1.Rents are not correlated to mortgage costs. These vary a lot depending on the central bank interfering with the money supply. Rents tend to increase steadily at about the same rate as wages. Since a landlord’s biggest cost is their mortgage, this is strong evidence that they cannot pass their costs onto tenants. A mortgage and a tax are no different, they both have to be paid if you want to keep your title to the property.
2.As mentioned before in the comments, enterprise zones clearly demonstrate that any reduction in UBR leads to higher rents. Increases in rates also lead to lower rents, the business only has x amount to spend on rates+ rent, one goes up, the other goes down.
I wish that LVT could be implemented in full but I think that even a partial implementation would be hugely beneficial. Replace UBR, council tax and stamp duty with LVT. I suspect however hat until homeowners become a minority, we will not see a shift in taxation off labour, turnover and profits.
Voter,
How can we be sure of this? What countries have found that LVT produced reduced taxes on work?
Hong King and Singapore both generate a high proprtion of their public revenue from land and property levies. Both are considered business freindly low tax regimes.
Property owners in Estonia pay an annual land tax based on the market value of the land. The rate varies between 0.5% and 2.5% and is set by the local authority. Income tax and capital gains is paid at a flat rate of 18%.
@Voter 16th May ’12 – 1:29pm
“LVT means reduced taxes on work”
How can we be sure of this? What countries have found that LVT produced reduced taxes on work?”
Because LVT is an ALTERNATIVE way of raising public revenue and because it reduces unemployment and the massive tax bill associated with it.
“Income tax and capital gains is paid at a flat rate of 18%”
okay, but what reduction can be drawn from that? The flat rate figure may be lower than the UK figure for many reasons.
@Henry, Joe. I am glad that you have accepted the principle that the creation and development of value involves a symbiotic processes in which owners and tenants assist each other and in which the actions of either one can increase the value of the assets of the other. One simple implication, of course, is that landlords are members of what we call “society”, just as tenants are. There are other implications, which I am sure you can agree too, but perhaps we will discuss these at some other day.
That is my one thought for today. I may have another one tomorrow. In the meantime, there is no need to worry about official LibDem policy. The yellow flag just means that someone has paid membership dues. It does not mean that the person speaks for the LibDem party as a whole. Like any other party, the LibDems allow differing views to exist within it, and the recent heat over the NHS reforms demonstrates one of the possible consequences of this important adherence to the spirit as well as the letter of the meaning of the words “liberal” and “democrat”.
@Richard Dean 16th May ’12 – 4:12pm
“@Henry, Joe. I am glad that you have accepted the principle that the creation and development of value involves a symbiotic processes in which owners and tenants assist each other and in which the actions of either one can increase the value of the assets of the other. One simple implication, of course, is that landlords are members of what we call “society”, just as tenants are.”
The role of the landlord is to wait for the rent to arrive. That is not symbiotic. The word is parasitic.
Voter asks how can we be sure that LVT means reduced taxes on work.
This is fairly straightforward to demonstrate. Just remember that the purpose of taxation is to fund a government’s spending program. This may be a large program (in terms of GDP percentage ), as in the Scandinavian economies, or a small one as in Singapore or Burma but whatever it is, taxes will be set at such a level that they fund some proportion of it, leaving the rest to be funded by borrowing if the government concerned chooses to run a deficit.
Most countries run a mixture of taxes. Some, such as sales taxes, production taxes or payroll taxes, are taxes on work, others, such as resource taxes or property taxes, are not. A few, such as income tax or corporation tax, are a mixture since they tax income from work and income from property.
So each government is trying to raise a target amount via a range of taxes in a proportion of its choice. If it increases the proportion that it raises through income taxes, it can reduce the proportion that it has to raise via non-income taxes. If it increases the proportion that it raises through resource taxes that will reduce the proportion that it raises through non-resource taxes. And if it increases the proportion that it raises through non-work taxes such as LVT, that will necessarily reduce the proportion that it raises via work taxes such as income tax. QED.
Voter,
Estonia as a newly independent country that has the benefit of being able to design a tax system largely free of historical inconsistencies and anomalies that the developed west has.
In the UK we raise taxes in a myriad of forms – income tax, national insurance, company taxes and capital taxes, VAT, excise duties etc. Historically, there is a limit to the % of national income that can be effectively raised – typically around 38%.
If a larger proportion of overall tax raising comes from Land Value Taxes – we are free to reduce tax on those activities where it might be considered a drag – or deadweight – on the economy e.g. Employers and employees National Insurance, fuel duties or Stamp duty land tax etc.
@Joe Bourke 16th May ’12 – 6:03pm
If a country raises public revenue though taxes on wages, goods and services, this cuts into land rental values and reduces the amount it CAN raise through a tax on land value.
This is the situation in Sweden where there is some LVT, but other taxes are so high that land values outside the big cities are low, giving little scope to raise more through LVT. However, once other taxes are cut, more can be raised from LVT, and the boost this gives to the economy reduces the size of the government’s massive welfare bill – a double win.
Henry,
Is there any support among the mainstream political parties in Sweden for a shift in the tax burden away from income and consumption towards Land Values as a means of tackling unemployment and welfare?
@Joe Bourke 16th May ’12 – 7:07pm
Not much support for a further shift to LVT but there is a widespread appreciation of the harm done by existing taxes on employment. The trouble is the socialists are antediluvian.
I wonder if we might all appreciate a bit of light entertainment at this stage of the debate? Here are the lyrics of “Visions of Johanna”, a song by Bob Dylan from quite a long time ago. It seems very descriptive of modern times. I imagine Henry Law will be particularly interested in the second line of the last verse, and of course we probably all want to get to the tenth line. Unfortunately for some, and fortunately for me, you have go through the whole madness of the going to get there, but hell, insanity is such fun!
Ain’t it just like the night to play tricks when you’re tryin’ to be so quiet?
We sit here stranded, though we’re all doin’ our best to deny it
And Louise holds a handful of rain, temptin’ you to defy it
Lights flicker from the opposite loft
In this room the heat pipes just cough
The country music station plays soft
But there’s nothing, really nothing to turn off
Just Louise and her lover so entwined
And these visions of Johanna that conquer my mind
In the empty lot where the ladies play blindman’s bluff with the key chain
And the all-night girls they whisper of escapades out on the “D” train
We can hear the night watchman click his flashlight
Ask himself if it’s him or them that’s really insane
Louise, she’s all right, she’s just near
She’s delicate and seems like the mirror
But she just makes it all too concise and too clear
That Johanna’s not here
The ghost of ‘lectricity howls in the bones of her face
Where these visions of Johanna have now taken my place
Now, little boy lost, he takes himself so seriously
He brags of his misery, he likes to live dangerously
And when bringing her name up
He speaks of a farewell kiss to me
He’s sure got a lotta gall to be so useless and all
Muttering small talk at the wall while I’m in the hall
How can I explain?
Oh, it’s so hard to get on
And these visions of Johanna, they kept me up past the dawn
Inside the museums, Infinity goes up on trial
Voices echo this is what salvation must be like after a while
But Mona Lisa musta had the highway blues
You can tell by the way she smiles
See the primitive wallflower freeze
When the jelly-faced women all sneeze
Hear the one with the mustache say, “Jeeze
I can’t find my knees”
Oh, jewels and binoculars hang from the head of the mule
But these visions of Johanna, they make it all seem so cruel
The peddler now speaks to the countess who’s pretending to care for him
Sayin’, “Name me someone that’s not a parasite and I’ll go out and say a prayer for him”
But like Louise always says
“Ya can’t look at much, can ya man?”
As she, herself, prepares for him
And Madonna, she still has not showed
We see this empty cage now corrode
Where her cape of the stage once had flowed
The fiddler, he now steps to the road
He writes ev’rything’s been returned which was owed
On the back of the fish truck that loads
While my conscience explodes
The harmonicas play the skeleton keys and the rain
And these visions of Johanna are now all that remain
@Richard Dean
What has any of that got to do with the price of eggs?
Man does not live by eggs alone! In my case, indeed, man does not live by eggs at all, they’re too expensive and full of cholesterol
If LVT causes rents to increase, then there is a danger that this will be regressive as rents are often paid by those less well off.
The Lib Dems should be aiming for progressive values
Luckily it doesn’t, as many of us pointed out earlier on the the thread, Voter.
Land Value Tax no more causes rents to increase than Income Tax causes rents to increase. LVT is a tax paid by those who own land, not those who rent land. And land is often owned by those better off so that makes it a progressive tax. In fact a person who is twice as wealthy as another is likely to own land which is more than twice as valuable as the other’s land. So Land Value Tax is more than progressive. The Lib Dems should be aiming for progressive values. So they should be aiming for progressive taxes like LVT.
@Richard Dean
“In my case, indeed, man does not live by eggs at all, they’re too expensive and full of cholesterol”
Are you on statins?
Why tax we the produce of anyone’s toil
While it raises the price of the land,
And limits the sale, by enhancing the price
Of the food which the poor must demand?
It raises the price of the product of land,
And lowers the wages of toil,
So the workers have little their wants to supply,
And nothing to purchase the soil.
With little to buy, they have little demand
For the produce of anyone’s toil;
So the workers are idle, as well as the land,
While weeds grow on much of the soil.
Men perish, tho’ labour and land would afford
What would keep them in comfort and joy,
While the blessings of health and the comfort of wealth
Would follow their steady employ.
No taxes on aught that our labour can make,
For these would diminish free toil;
But so much per acre all over the land,
So that no one should hoard up the soil,
For the landlords have robbed us, for ages before,
Taxed all but the land which they stole,
Our food and our drink, our paper and ink,
To enslave us in body and soul.
May we reap the reward we’ve endeavoured to sow,
Of free land and the freedom of trade,
That the taxes may henceforth be all on the land,
And never on labour be laid.
– Edwin Burgess
“If LVT causes rents to increase, t”
The theory and evidence shows that it doesn’t.
Re: If LVT causes rents to increase
Applying commonsense and working through a couple of scenario’s show that it does and it doesn’t.
Firstly, if we assume that the amount of LVT payable is the same as the current council tax, we can see that all that is happening is that the responsibility for paying the ‘council tax’ component of the rent is being transferred from tenant to landlord/land owner. Hence the total rent payable on the property hasn’t changed, but the amount the tenant pays the landlord would in all probability increase, but since they are no longer paying the council this wouldn’t be an issue (to many). However, as Douglas McLellan (10th May ’12 – 7:43pm) pointed out, this action has ramifications with respect to housing benefit, council tax rate reduction schemes and some low income groups.
Secondly, one of the objectives of LVT is to reduce land speculation, depending upon the extent to which this happens the (capital) returns a landlord can expect from holding a property will decrease, meaning that more of the profit will have to come out of the charges made to tenants (revenue) hence rents are likely to increase. Interestingly, a reduction in land value in this market is likely to have very little impact as a fair rate for the accommodation would of been established by the market.
Thirdly, LVT isn’t a direct replacement for Council tax, the basis of valuation is different, as is the method by which the final amount due is calculated. For example, under LVT the whole of say Westminister City Council’s area would be in a single band (it’s central London), whereas under council tax an area has properties in several bands. So whilst the total revenue collected from a local government area may stay the same, the amount due from any particular property may significantly change, which in turn will ripple into the prices tenants pay for accommodation.
So like all taxes there will be winners and losers, with LVT I’m highly skeptical that the losers will just be the “better off” and the winners “those less well off”; what is obvious is society needs more of “those less well off” to become “better off”.
@Roland. Yes indeed. And the history of business shows that big businesses can absorb costs and risks better than small ones, and can then use market power for good (or bad) purposes – look at the rise of the supermarkets for instance.
Any unrecoverable cost imposed on a small business makes it more likely that the business will be bought by a larger one. There is no reason why landlords should be exceptions to this law of reality. Costs include, not only to the cost of LVT itself, but also to the cost to landlords of administering the payments. That is one way that LVT will lead to a concentration of land into fewer hands.
Not all landlords are nasty – some town councils charge quite small rents and give good service, and in some cases they have allowed tenants to buy eventually at a cheap price – but the ones that are indeed nasty will be sure to find a way around new rules.
Well, perhaps the Voice could do an article which explores the evidence, including listing modern economists who back up the claims made for LVT
Roland,
Firstly, before we had council tax and its predecessor the community charge – we had rates . Relief was always available for lower income homeowners then as now, as it would continue to be, Simarly, housing benefit is based on a % of market rents in the area – whatever they are.
Secondly, as we have established, rents (inclusive of council tax or LVT) are determined by what a tenant is willing to pay (supply and demand( and not what a Landlord might like to charge. The rental market continues to be determined by supply and demand, regardless of the level of LVT that a landlord has to pay. If anything, an increased supplt of land should see rents reduce as more property is devekoped on hitherto undeveloped land and brought onto the market.
Thirdly, LVT is not intended to be a direct replacement for council tax. Council tax is a very regressive tax that hits the poorest hardest. According to the Office of National Statistics, the poorest fifth of households pay 5 per cent of their household income in council tax. The middle fifth pay 3 per cent and the richest fifth pay less than 2 per cent. LVT is assessed in proprtion to land values and not on 1991 property valuation bands.
Councils like Westminster have a local area plan. Planning/Zoning determines how land may be used and developed (residential, industrial and commercial) within the area. The planning authority regulates the supply of the different types of land available and this in turn determines, subject to demand, the rents that can be achieved at any point in time.
Roland, those are reasonable points. The current situation with housing benefit, etc is indeed complex and would need to be taken account of so that those least well off do not lose out. However these “ramifications” were dealt with when the change was made from the rates to the poll tax and again from the poll tax to the council tax. So they are not unsurmountable issues. I have no doubt that they could be dealt with satisfactorily in any future change from the council tax to a land value tax.
On your second point, any landlord whose expected profit includes a speculative increase in capital value may, as you say, try to replace it with a higher charge on the tenant. As noted above by myself and by others earlier this won’t happen to any significant extent because rents are set by the market, not by what landlords want to charge. What is much more likely to happen instead is that landlords will see a lower return on their investment than they hoped for. Some will decide to sell their worst-performing properties as a result. Because of increased supply of properties for sale, prices will drop and some tenants will decide that it makes sense to buy at the new prices rather than to rent. So the end result is likely to be more owner-occupiers and fewer landlords and tenants. In addition properties which were being kept vacant are more likely to be sold or to appear on the rental market, particularly at the high end which are currently not heavily taxed by the council tax. So the market will now have about the same number of rental properties and fewer tenants which will drive down rental prices.
On your third point, you say “the amount due from any particular property may significantly change, which in turn will ripple into the prices tenants pay for accommodation”. While this is undoubtedly true, it does not bring out the point that for the vast majority of tenants, the significant change will be a significant reduction owing to the fact that LVT taxes property which escapes taxes under UBR/Council tax. No doubt there will be winners and losers but the vast majority of the less well-off and the better-off will be winners. The losers will be found almost exclusively among the much better-off.
Roland, you have made some good points.
1) Benefits will need to change but this should not be a problem. Incidentally it addresses the “poor widows” argument.
2) Under LVT rents will settle at market-clearing levels. These will inevitably be lower than present rents which are self-evidently higher than market-clearing levels or there would not be so many vacant properties. You do not get this to anything like the same extent in Sweden were there is some LVT.
3) Demonstrates the difficulty of making LVT a local tax. We in the Campaign have always argued that it should be a national tax. Your example of Westminster illustrates the difficulty of localising LVT – some areas have a substantial tax base and others have a poor one. The same applies to any tax – resources need to be transferred, but this would be true of a local income tax or a local sales tax. A two-part tax ie local and national components would be one way of solving it, particularly as an interim measure, but why do local authorities need to be setting their own revenue? Why should they not have a pot of money to spend how they want? There are other sources of revenue as well, such as charges of various sorts including parking and congestion charges.
3)
@Richard Dean
There were some perfectly good objections against LVT that were made, and more that could have been made. But you did not make them. You made only false and unsubstantiated assertions without a backing of reason. Either you hate the idea of LVT so much, for reasons of your own, that you will say anything at all, or you have lost your ability to set out a rational argument. Could it be the statins? Perhaps you should eat an egg or two a week, with toast and butter.
@Richard Dean
“Any unrecoverable cost imposed on a small business makes it more likely that the business will be bought by a larger one.”
That applies to existing taxes. Could it be one reason why business is being concentrated into ever fewer hands?
“There is no reason why landlords should be exceptions to this law of reality. Costs include, not only to the cost of LVT itself, but also to the cost to landlords of administering the payments. That is one way that LVT will lead to a concentration of land into fewer hands.”
This idea has been around in its present form for 130 years. Can you explain why the big landowning interests have been most vehement in their opposition? I assume now that you are part of the landowning interest. There is no other explanation for the way you have attempted to deny the obvious. Unless it is statins. Have you looked up the side-effects?
@Henry Law. You really shouldn’t be eating those eggs! 🙂
@Richard Dean
The reason that calculation doesn’t work is because land is in fixed supply, so landlords are, in general, charging as much as the market will bear already.
The landlord will always charge around as much as the market will bear, so increasing a tax on the land will not cause the landlord to increase prices because the market wouldn’t bear it.
It’s the “tax that can’t be passed on”.
@Richard Dean
” This is basically what Vince is saying too. But … why stop at land values?
Roads and street lights are also created by the community, through their payment of taxes to the government,…”
Hello again,
Taxing land DOES tax roads and street lights. When you build a road where none was before, the land values go up nearby.
The tax would collect from those who have the potential to benefit the most from access to the road/lights/infrastructure.
“When the government increases tax on petrol, does the price of petrol rise? Do petrol sellers charge the most they can get? If VAT increased to 25%, would prices go up? Same for rent.”
Petrol sellers don’t have a monopoly. Land ownership is a monopoly.
There are not two Time Squares. There is more than one petrol station. The same value can be gotten from any petrol station.
If I owned a house beside Central Park in New York City, I would charge, say $2M/yr. If you’re willing to live there, you’re not staying there because you need a place to live, you’re staying there because of its location.
I’m charging you exactly as much as I can get for being beside Central Park. It’s worth $2M. If I increase my prices by the 50% LVT and say it’s not $3M, you probably wouldn’t stay there. It was only worth $2M to you.
Land ownership is a monopoly.
” Suddenly, LVT appears at 20%, and the tenants don’t budge on the rent. The landlord’s consumption now goes down to £800, damaging the local economy by $200 .”
By that logic, we should just give all our money to the landlord so he can consume more lol
After the land value tax is instituted, the highest incentive with regard to renting would be to construct mult-unit buildings. The landlord might make MORE than before, but he has to actually compete and try to get more tenants into his property. His rent would be according to the value of his building rather than the land.
More construction jobs = more money = higher average propensity to consume = better economy by many more than $200.