Re: Obvious Question From Peter & Dan Snow's "Who Owns Britain?"
- From: mjt <mjt@xxxxxxx>
- Date: Wed, 22 Mar 2006 11:39:45 GMT
I did read http://www.landvaluetax.org/nopasson.htm and it is theoretical to the point of nonsense.
To start convincing me that a land tax will have the effects that the land-taxists would have me believe, I want to see how it impacts upon real people in real economic situations.
I've done my own pro temp figures using different scenarios. You need to examine how it works in the real world - economic theory is insufficient - and how rational economic agents behave to preserve what works for them. How does a land taxist reply to the following scenarios? Scenario 1 is the closest to the pure theory; scenarios 3 to 5 follow from scenario 2.
Scenario 1: undeveloped land of £10,000, currently idle and without planning permission for anything (except farming, but currently unfarmed because farming has ceased to be economically viable and the European Union pays the farmer a fixed pittance *not* to farm the land). An annual land tax of 4% will cost the owner - the already destitute farmer - £400. But because the land has no permission for development, all he can sell is a net liability. Unsurprisingly, there is no buyer for the land. How does the land tax encourage the local authority to grant planning permission?
Scenario 2: a single plot of land of £100,000, bearing only one residential dwelling. The land and building is freehold, i.e. the dwellers own the property. The family has no economic reason to move out of the property. The annual land tax of 4% is £4,000. To fund the tax, the family has had little option but to send their children to the local state school (the original plan was to send them to a boarding school, funded out of income, but non-payment of tax leads to jail). The family obtained a report that suggested that their property would yield some rent, of which the element allegedly related to the land was 5%, so the rental yield payable by the land's tenants is £4,000. The family thought that this might perhaps both fund the tax and contribute to the kids' schooling - the only disadvantage being to find somewhere else to live - so they discussed a rent-based house swap arrangement with their neighbours, only to find that the neighbours faced exactly the same problem (the neighbour happened to work for the tax authority and said that the scheme was a form of illegal tax avoidance anyway). In desparation, both parents approached their employers for a pay rise to fund the tax and/or the kids' schooling. The employers expressed deepest sympathy, but their cashflow was already stretched (see scenario 4). At that point, both parents joined the Anti Poll Tax League - nearly 20 too late - and marched upon Westminster to protest. Bearing in the mind the damage to this family's economic welfare already, how does the land tax provide the family with more utility?
Scenario 3: a single plot of land of £1,000,000, bearing only one office building. The landlord built the office and leases the building to one corporate tenant. The landlord's business model required a rental yield available at the time of construction of 5%pa, so the land element of the rent charged to the tenant is £50,000pa. The annual land tax of 4% is £40,000. This cash outflow is funded by the cash inflow of the rent, so the net cash gain is only £10,000pa, representing a rental yield of 1%. The company's cost of debt is 4.5% - not bad when the rental yield was actually 5% - but the company is now seeking legal advice in respect of its insolvency. The company accountant has networked with other landlords. They all suffer the same problem. The banks - normally quite quick to call in individual loans - recognise that a material chunk of their customer base is likely to go bust within 12 months, with some serious re-percussions for the banks themselves. The market price of land falls as punters expect a glut of land (used and otherwise) to appear on the market. But no-body wants to buy: corporations recognise the harsh cash impact of environmental legislation on owning land, let alone the cost of funding a land tax that has crippled their landlords; individuals aren't interested either, because the tax demonstrably has crippled the landlords. Land just isn't worth owning: it costs too much even when it's in use! Suddenly, the company accountant notices the expiry of a lease, and re-negotiates a high risk strategy: ask the tenant to pay rent of £90,000, or move out. Net of tax, this rent restored the 5% rental yield required to fund the borrowing on the land and the building's construction. The infuriated - but risk-adverse - tenant/customer researches the market, but cannot see any suitable rental property and cannot see the benefit of owning the land (the cost of building maintenance alone is too high risk, for the tenant/customer's own margins are wafer-thin). So, the tenant/customer reluctantly concedes that there is no alternative. The tenant/customer agrees to pay £90,000 per annum. What different could the tenant/customer have done? What different could the landlord have done?
Scenario 4: the customer tenant is the employer of the family in scenario 2. Before the rent hike, its turnover was £20,000,000, with a gross profit of 30% and a net profit of 1%. The company thus had an excessive operational risk (i.e. large fixed costs, a small percentage fall in turnover has a disproportionately large fall in net profitability), hence the reason why it was risk adverse and preferred fully-managed rental properties to outright ownership. It had already researched the rental market (and even the freehold market) when the land tax started, but all the options were riskier than staying put, even though it forecasted that the landlord would likely push to the rent. The landlord duly increased the rent by a eye-watering £40,000. Net profits fell to 0.8% of turnover (a 0.2% fall in profits from a 0.8% increase in fixed costs). The company accountant calculated that a 10% drop in turnover would reduce profits by 375% (whereas, before the tax, it was only 300%). No sooner had the ink dried on the new rental deal, then more than half of its staff all demanded a pay rise to pay for the land tax that *they* had to pay. Some of the better staff did indeed leave the company - some of them migrated overseas, where the tax burden was lower - leaving the company with less productive staff. The company's directors depressingly realised that the risk of a drop in turnover of 10% was now more likely than not, and announced a redundancy plan to protect the company and the surviving employees. All because of land tax! What different could the company have done?
Scenario 5: The company's bank - co-incidentally the same as the landlord's - was now in a state of freefall panic, because now it saw that more than just its property lending portfolio was at risk of bankruptcy. Being a listed company, it announced a profit warning and cancelled its dividends. Pension fund investors fulminated at the lost dividend, accusing the bank of ignoring tomorrow's pensioners, but then saw its own rent increase to fund the land tax: the pension fund had no choice but to liquidise (to encash) more of its investments to pay the fund, thus sacrificing some compound growth of its fund. Needless to say, its pensioners included the family in scenario 2... Why would these effects *not* have happened?
One further observation: all of the reading material you cited pre-suppose a widespread situation of "greed-hog landlords". I understand exactly why you consider the pure economic theory as attractive, even applicable in the real world.
But each citation failed to describe how the tax would work in the real world. Each of them assumed substitution, which is simply wrong. Worse, each of them assumed that the supply of land is fixed. In fact, the supply of land is irrelevant: it is the supply of *useable* land that matters. Now, I don't know how American planning permission works. But the in the UK (and generally in Europe), the planning permission system works like the Doomesday Book. OK, "works" is perhaps an overstatement, but you get the drift. An American probably won't understand scenario 1; every European will, painfully so.
In the UK, a more liberal planning permission regime would benefit society precisely because it *would* increase the supply of land. The greatest obstacle is not parasitic speculative land-investors, but a) myopic local authorities, who monopolise the use of land (not the ownership); b) "not in my back yard" existing home-owners who object to the extention of a house 10 miles away on the other side of a hill "because it blocks out my view of my garden pond", encouraging the local authorities to deny planning permission.
So, for any land taxists still standing, would you explain how the scenarios would fit the land tax theory?
(Real world answers please, anything couched in economic theory or mathematics is, by default, an admission of failure: tell it as if it impacted you personally, and you might start to make sense!).
In message <nb70-2-0.20060312.212956.16@xxxxxxxxxxxx>, S G <nwsgrp@xxxxxxxxxxxx> writes
On 12 Mar mjt wrote:Maths For Fun And Insight writes:
[...]From an economics point of view, taxing the land would help to ensure
that it was either put to efficient use, or used for the common good.
Having read the URLs presented later in this thread, it is clear that[...]
the LVT Campaign is misguided.
In short, if the landed gentry needed cash to fund taxes, they would put
rents up. The LVTC is wrong when claiming that it would be impossible
to pass the tax onto tenants. The market rate of anything always moves.
The land tax would need to apply universally, tenants will find the
market rent rise by almost exactly the same magnitude as the tax! The
so-called analysis on its website is flawed: tenants will *not* face the
choice that the author assumes.
Here's (some of) what you purport to have read:
Why Land Value Tax Cannot be Passed On
http://www.landvaluetax.org/nopasson.htm
Economists agree that the form of Land Value Taxation
(LVT) proposed by the Campaign cannot be passed on.
The following note is intended as clarification.
-------------------------------------------------
As far as the user of land is concerned, in practice there is no
difference between land value tax and rents paid today for the use of a
site. The rental value of a site is determined by its productive
capacity over that of a similar size site at the margin. Marginal sites
are those that are on the verge of going out of business with average
labour and entrepreneural effort because of their position or natural
resources. The rent that can be commanded by the landlord or owner of
the site is this differential productive capacity (over the marginal
site), reckoned as termly (weekly, quarterly, yearly or multi-year term)
paid money amount.
Under a LVT system, part of the rent would be claimed as public revenue.
It is sometimes argued that the landlord would simply put up the rent to
cover this tax. This could not succeed for the reasons developed by
examining the following examples.
Suppose a producer on a high value site put up prices in an attempt to
recoup the amount paid as LVT. If the effect of his increased prices
could be sustained, then other producers would quickly follow suit and
raise their own prices until they were at the new higher level
throughout the market for those products. The producer at the marginal
site, paying no tax, would find a windfall return from these higher
prices and his site would no longer be marginal. Thus, if the higher
prices persisted, the value of all the sites would rise by that
cumulative increase in prices and the result would be higher land values
and higher rents and LVT.
But it is more likely that the marginal producer would keep his original
prices and take a larger market share. Thus the turnover on the higher
value sites would decrease, and the attempt to pass on the tax would
fail. In either case the intention to pass on the tax to the consumer
would be defeated by normal market forces.
If the tax is paid by a landlord who then tries to pass this levy on to
a tenant, again the attempt would be negated. Assuming that, as commonly
applies, landlords have pressed their claim to the maximum that the
rental market will bear, they will simply force the tenants to find
alternative sites from which to operate. Because the tenant is already
paying the maximum rent that the site can sustain, any attempt to
increase it beyond this point would put the business in jeopardy; the
tenant would either have to take less in wages, salary or profit, or
find a more viable site.
Since, under LVT many more sites would become available, the threat of
the tenant to vacate would leave the landlord with a hard choice: either
to attempt to find a tenant who was prepared to take a lesser return -
to work for less, or to risk having to pay the LVT on the unused site,
which would still bear the full tax. Thus the landlord's attempt to
offset the LVT would fail.
What prevents the LVT from being passed on are:
* market forces that determine the differential site values in the
first place,
* market forces that determine that occupiers pay the maximum rent
(or equivalent sale price or mortgage) that the site will bear,
* market forces that ensure that product prices are kept
competitive, i.e. absence of monopoly,
* the fact that alternative sites will be available to tenants
because vacant and unused sites will become more available by
the operation of LVT.
NOTE: LVT would be paid by the "beneficial owner", which may be
shared between the freeholder and a tenant, but which in any case
would be due whether the site was used or not.
See also: http://homepage.ntlworld.com/janusg/hgh/shift.htm
Most devasting of all would be that the tax would impact upon cumulative
investments, most notably pension funds (institutional investors, who
generally rely on land as a key plank in its investment strategy). The
tax would reduce the gain on that land, thus reducing the available
pension fund to the pensioner.
See: http://www.progress.org/dividend/index.shtml
As for the LVTC's claim that taxing land would encourage landowners to[...]
develop brownfield sites, I cannot see how a rational landowner would do
that. The most fundamental block to any land development is *not* a
lack of tax (enforced liquidity), but a lack of planning permission.
Here you may have a point - see Don Riley's article at:
http://www.libertarian.co.uk/lapubs/econn/econn089.pdf
LVTC's claim that valuation is a relatively simple exercise: the value
of land depends upon its potential use, and potential use depends upon
planning permission, so if planning permission is haphardly implemented
(as it is), then how is land valuation simple?
Presence or absence of PP does not affect the ability to value land
apart from improvements: it only affects the current land value.
So, in short, a land tax would actually fail to meet any of its
objectives. Worse, it would undermine the base of nearly all
investments. After all, we all need land, so if it's for the common
good, why arbitrarily raise its price?
The effect of LVT would be to /lower/ the selling price of land. In
discussing these issues it is vital to understand the meaning of the
term 'rent' (in the sense that the classical economists used it) or
'economic rent' - see http://www.landvaluetax.org/econrent.htm
Other useful docs:
http://tinyurl.com/oxz9l
http://tinyurl.com/o974s
http://www.progress.org/archive/chester201.htm
http://homepage.ntlworld.com/janusg/scieco/ch03.htm
http://members.aol.com/_ht_a/tma68/geo-faq.htm
http://tinyurl.com/qkg9y
--
mjt
.
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