Hey folks, me again. As I’ve mentioned previously I’ve been spending a lot of time looking at economics and thus at politics recently, and I’ve drawn a few conclusions, which I’d like to spell out over the next few posts. Now I realise not many people read this blog, but I figure this is my best opportunity to air my opinions, as I tend to explain myself better in writing, so here goes.
There are three areas of the way things are done today that I think cause more problems than any other. In fact, I think if we look at whatever irks us, it’s likely that it could be improved if we fixed these three root problems. The first of these (I’ll save the other two for later posts) is land ownership.
What originally got me thinking about this was my highly abortive attempt to move out of home. It very quickly dawned on me that at current prices I will never be able to afford to buy a home. Just won’t happen. A good friend of mine recently said that he studied law so that he could afford to have children. That was a sentence I never thought I’d hear in my lifetime, but that’s the state of affairs we find ourselves in.
Upon finding that house prices are ludicrously high, I wondered how that could come about and why nobody had noticed. (By the way this started around 2005/06) My search for answers led me to sites like Priced Out and HousePriceCrash. What became clear to me was that speculating on house prices causes bubbles. Presently, you can buy a house and just wait for its price to go up, which it will eventually (it might take a decade or two, but it will). If everyone starts doing that (as happened during the Buy-to-let rush of the past few years), prices are pushed up because the people who actually need houses to live are now competing with those who want houses for speculation. This, of course, rewards speculation thus encouraging it, thus pushing up prices, etc etc. Ultimately, however, you reach a point where people just can’t pay the crazy prices and thus the boom collapses.
What enables speculation is the ability to buy a house and then just hold onto it and do nothing. Essentially it’s house hoarding and I wondered if there was a way to stop it. It was then that I saw a post on HousePriceCrash mentioning Land Value Tax, and thus I discovered proposed solution number one.
The rationale for LVT starts with the principle that land is different from other property for the simple reason that we did not and cannot create it. In this sense, land refers to the natural world. While it is possible to increase ground area to a very limited extent, as the Netherlands have done, there are obvious physical limits to that process because we can only use what’s already here. We cannot add to the natural world, we can only control how we use it.
This has some consequences for economics:
1) The value of land mainly relates to demand, because total supply is fixed. While relative supply in various sectors can change due to planning laws and the freeing up of land by current occupants, there is a hard limit to how much space can be controlled in total.
2) Land cannot truly be owned by man (for man did not supply it). We can exercise dominion over it, but it cannot be said that it is ours. To the extent that we do have exclusive claim over it, that claim is dependent on everyone else agreeing to it. The ownership of land is a social function. I often hear people say that all war is fought over religion. I say it’s fought over land with people trying to use religion as a convenient grouping mechanism to define who we’re going to take the land (or power to control land) from.
3) Any economic benefit that comes because of the qualities of a particular piece of land (including location) over another piece of land results in a revenue stream that flows to the owner of that land. In economics this is called Economic Rent. It should be noted that it is not just benefits of the land itself that causes economic rent, but also what is present nearby, even if it’s just other people.
The question becomes, is it just that the benefits of Economic Rent should flow to a private landowner, to which LVT supporters say the answer is no, because it is not the landowner who created those benefits. If economic rent goes to the private landowner, then the landowner essentially gets free money forevermore (for both an amusing fictional and a scarily real life example of this see these videos – “Robinson Crusoe” and “Victoria Coach Station”)
Land Value Tax then, is government claiming the benefits of Economic Rent, instead of landowners. This is done by charging landowners for the rental value of the land (and just the land – buildings etc. would not be taxed) that they control and would be collected directly from the landlord rather than any tenant (as is currently done with, say, Council Tax). In the long term, landlords would not be able to get tenants to pay for this by increasing rents (although they would certainly try), as by definition, landlords already try to get as much rent out of someone as they can.
This brings several benefits:
1) Public services are paid for out of the land value that they create (most urban land value comes from proximity to public services e.g. train stations). Public services are thus more easily funded and accounted and are paid for by those who most benefit from them. This also means that the crazies who don’t want public services (or to be near people! 🙂 ) and who hate having government take their money, can go somewhere where nobody else is and no services are and thus pay little or no tax.
2) Land speculation becomes unprofitable as holding land becomes a cost. Land prices thus come down meaning house prices come down (and yes, that is a good thing – let me know if I need to do another post explaining why). This also makes urban renewal easier as land that previously was too expensive to build on, becomes available.
3) Whatever income comes to government from Economic Rent does not need to come from other forms of taxation, so income tax, vat, business rates, national insurance etc. can all be reduced without loss of revenue. As these taxes are a burden on employment, reducing them increases employment.
4) Administration costs are reduced as LVT is easier to collect and harder to dodge (its not like you can hide land in a swiss bank account!)
There are also challenges with LVT too however:
1) Because it is not a direct tax on income, those who are low income but live in a high value area will have difficulty paying the tax. The most prevalent example of this would be pensioners. Theoretically, the obvious solution is for such people to move to a lower tax area (either by location or plot size) but that is not culturally familiar.
This is the flipside of benefit 2, in that under LVT you need to have an income that is suitable for the tax rate you’ll be paying or you need to vacate the land. While this fights hoarding and speculation, it also discourages retirement, or at least adds something that needs to be planned for. Culturally, we are not used to vacating a family home when our kids do and even though economically and socially it makes sense, people develop attachments to their home and will be reluctant to leave just because they no longer work. (As a side note, one proposal is the ability to defer the tax for pensioners until death and have it removed from any inheritance instead of a direct inheritance tax).
2) If an entire community is deprived, there is little tax income with which to provide services. Depending on the situation and the people, this would result in either people coming in attracted by the low tax rate (which would begin a virtuous circle of tax income and investment) or the town being abandoned by the people fleeing deprivation (thus causing a vicious circle). It can be argued that at times this is what actually *should* happen, but again the entire abandonment of settlements is not something we really consider a possiblilty culturally. It is expected that LVT will tend to cause people to concentrate in density.
In addition, because the value of land is dependent in great part to the decisions of others, people could find their tax rate varying due to circumstances outside their control. Now that’s something that happens presently and (I would submit) to exactly the same extent, but it’s much more obvious under LVT.
3) In a more general sense, the benefits of LVT take time to appear because adapting to it requires cultural change. However those who find themselves at the sharp end of this change would find themselves inconvienced very quickly.
Finally, it should be noted that the benefits of LVT can be greatly undermined by other economic decisions. For example, bad planning legislation or implementation can distort the land market just as badly as privatised rents. Also, LVT, being a fiscal measure, can’t protect from monetary mischief such as fractional-reseve banking. That’s something for later, but in part 2, I’ll divert slightly into a less financial bugbear of mine: the political party.
Update: Doh I knew I’d missed something. Number 4 under challenges is the actual valuation itself. While any cursory look at the housing market shows that land can be valued, it isn’t always clear how. Any implementation of LVT would have to have public confidence that the valuations were accurate.
Also, a little factoid. The Parliament Act of 1911 came about as a result of David Lloyd George’s attempt to institute a land value tax in the UK which was blocked by the Lords. After having to climb down over the tax, and having called an election after only one year to get a mandate, the government, with the help of King George V, passed the Parliament Act which ironically was never used to get the LVT into law. Although it did get fox hunting banned nearly a century later! 🙂