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Will Land Value Tax rescue the economy?

In the comments of the 2012/05/19 entry, a discussion was started for how Land Value Tax would solve a number of economic problems. Quote from the information site:
Properly applied, Land Value Tax would support a whole range of social and economic initiatives, including housing, transport and other infrastructural investments. It is an elementary fiscal measure that would go far towards correcting fundamental economic and social ills.
and:
This policy is a prerequisite if chronic economic problems are to be eliminated.

It is stressed that LVT will be a replacement tax, not an additional one. I am highly skeptical that this would ever come to be for when things are changed, it is Joe Public that loses. Decimalisation, the change to the Euro, I could go on. I, frankly, absolutely do not believe that wages and goods would no longer be taxed, with something completely new replacing it.

In his comment/reply, Mr. Henry Law (the Honourary Secretary of the campaign) says: "There is everything wrong with taxing wages and goods. It is, nothing more than legalised state robbery.".
I've heard opinions like that before. Usually from people earning enough to be in one of the higher tax categories...

He continues: "Taxing land values in the correct way, as explained on the web site, will cause rents and land prices to drop to market-clearing levels, which is a prerequisite for economic recovery."

Okay. With this in mind, let us consider LVT. As a basic concept, it is not without merit. Here in France, I pay two taxes. One (taxe d'habitation) is based upon the habitable area of the property (as a digression, this is why you'll find property converted by English people to have stuff like one bedroom and three games rooms - you pay more tax on a bedroom). The other tax is taxe foncier and this is based upon some notion of the value of the land. The closer you are to the bright lights, the more you pay.

Land tax is, however, in addition to all the other various taxes.

Now, a problem with LVT as I see it, is that land is. Excepting minor variations for coastal erosion and reclamation development, land just... is.
Spain is sliding into the crapper and Greece is already there. The countries are the same size they were last year, and the year before.

People change, trends change, economies change. Taxing transient objects reflects these changes - if the good times return and we all buy iPhones, the government will receive income from this.
The alternative, taxing land, would require constant adjustments to the perceived value of land to cope with changing situations, and one wonders if this would even make it possible for somebody to predict their level of taxation.

Furthermore, with automatic VAT on goods and PAYE on salaries, some of the main taxation is automatically taken care of. You don't need to stash away money for the future, especially a future where the amount may be unknown.

Then we get to the catch. From the site: ""Land" means the site alone, not counting any improvements." and "The valuation would be based on market evidence, in accordance with the optimum use of the land within the planning regulations.".

So, already, we are seeing a potential disparity. Land is not valued on what may (or may not) be there, but rather upon some notion of "optimal use". What, exactly, qualifies as "optimal"?

Unfortunately, Mr. Law decided to reply beginning with "Your criticisms show that you have not taken the trouble to find out what is actually being proposed but have rushed to criticise and ridicule nevertheless.". Yes, I poked fun in a typo of "Patsy" (and as a site making this sort of proposal, you will need to have a higher standard of writing than some random blog such as this). However, Mr. Law, in your reply (and thank you for bothering to reply), you didn't actually address one single question that I posed.

So, please allow me to repeat a question and provide a few observations:

  • What happens in cases of scrubland, moors, roads? Land owned by people who cannot afford to pay, or have otherwise abandoned it? The Crown (and local councils) own large tracts of land. Will they pay taxes accordingly?
    From the site: All land makes its full contribution to the Exchequer,
    I assume "All" means all, thus the question stands. Who pays for Crown and Public land? There is a lot of it.
  • You may well consider this to be more of my mindless criticism. Let's see. ☺
    From the site: "allowing reductions in existing taxes on labour and enterprise". This directly contradicts a few paragraphs above where it states "It would replace, not add to, existing taxes.". Replace and reduction are not equal concepts.
  • Quote more: "The reverse is the case with a tax on land values, which is payable regardless of whether or how well the land is actually used. It is a payment, based on current market value, for the exclusive occupation of a piece of land."
    One could raise a flag to say that this is deeply unfair. With taxation on objects, you purchase what you can afford. You are auto-taxed accordingly. With a land value taxed (based, as previously stated) upon some concept of optimum use, you are taxed on what the land could do, not what it is doing. This will surely have the effect of making those responsible for paying on large tracts looking for ways to best make use of the land. I can see a catch 22 where some lowish rent buildings don't make up sufficient value for the "optimum" use, so the area is redeveloped for better housing which ultimately pushes away the blue collar workers as development in the area pushes prices and taxation levels up which encourages development which... if you want a poster child for this sort of madness, look at Beijing.
    You say "the reverse is the case". Can you actually prove this?
  • And the final quote: "IMPOSSIBLE TO PASS ON IN HIGHER PRICES, LOWER WAGES OR HIGHER RENTS." (their capitals, not mine).
    This I don't believe either. Competition would indeed suggest that landlords will have to keep their prices down to acceptable levels, however different buildings have different attributes. Within the loose boundaries of the law, a landlord is pretty much free to set whether price they feel their property is worth. If there are plenty of people and not enough places for them, they can just wait. Somebody will turn up, if only because they have run out of other options. There is, of course, the concept of price fixing. Supermarkets have done it. It seems mightly strange that petrol prices are all the same in an area. Why not the same with landlords. If they organise to push up prices, it will benefit all of them.

We're getting to the fundamental economic problem. Not how tax is levied, but greed. I think it would be a much more practicable thing to sort out the greed first. Then sort out the banks. Then worry about how tax is collected.
Take, for example, the Spanish Bancia (did I spell that correctly?). Why is one bank needing a bail out that is threatening the Spanish economy, the Eurozone, and by extension the already jittery world economy? The government should insure and protect people's investments to a specified limit (say, savings of up to €25,000 per bank), and if a bank fails, it fails.
If my company fails, we're all out on our asses. If I start a company and it doesn't work, I'll feel the pain. We aren't bailed out. How come the banks are? This, in turn, gives the banks a sort of safety net where they don't necessarily have to be as prudent as we'd like them to be.
I quote from the Wiki page of R.B.S.: The large RBS bonus payments subsequent to the UK government bailouts have led to controversy. Staff bonuses were nearly £1 billion in 2010, even though RBS reported losses of £1.1 billion for 2010. More than 100 senior bank executives were paid in excess of £1 million each in bonuses.

Mr. Law - no change in taxation is going to sort out these problems. Without sorting out these problems, the fundamental issue will still exist. The markets call the shots, the markets want all they can get. Therein lies your problem.

For those who are interested in finding out more, here's the description of LVT, and yes, I did read it...

 

Your comments:

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Stewart Goldwater, 10th June 2012, 03:42
You broached the subject of the banks - a subject much in the public mind these days, but have you done any research on how the banks got into the mess they're in, and why? 
Try this: http://janusg.co.nr/crash8.htm 
 
About 150 years ago Pierre Proudhon wrote this: 
"As long as the land monopoly is maintained, the few can take possession of what Nature free of charge has granted to everyone, and usury will penetrate the whole society, and we will have banks, which instead of being servants for the exchange of goods will become powerful extorters."
Rick, 10th June 2012, 03:50
"we will have banks, which instead of being servants for the exchange of goods will become powerful extorters." 
Can't argue that..! 
 
Power and money have gone hand in hand since before biblical times, I'm not certain if this isn't an aspect of the human condition?
Robin Smith, 10th June 2012, 11:53
Rick. I think it is. A tendency that if left unchecked will always grow in intensity. Have you noticed historically how poverty always springs up right alongside the increasing power of a civilisation to produce wealth? There must be some relationship.  
 
Its not that we cannot produce enough wealth for a growing population which is clearly a preposterous idea. But maybe it is that the wealth that is produced is unjustly distributed and that distribution grows horribly the more produced.  
 
So the question to ask is how come? It seems like a paradox. If we look closely and ut down ALL our prejudices for a moment, we can see very clearly that those producing the wealth do not get most of it. And those producing almost nothing get most of it. A kind of aristocracy. 
 
Across all ages this has been the tendency, becuase social organisation has failed to adapt itself to the growing power to produce wealth by assuring it distribution is done with justice. 
 
Across all ages the primary injustice is always rooted in private property in land and high taxation protecting that privilege. 
 
The writer of this post would do well to pause... and think very carefully about this. If he feels fleeced in any way, it will be rooted in that. And probably then send a note of thanks to Mr Law who has devoted his life to pointing this out to the people, without reward.
Robin Smith, 10th June 2012, 11:57
Apologies for the typos (:
Henry Law, 11th June 2012, 13:45
“LVT will be a replacement tax, not an additional one. I am highly skeptical that this would ever come to be for when things are changed, it is Joe Public that loses.” 
 
It depends on the politicians Joe Public chooses. 
"There is everything wrong with taxing wages and goods. It is, nothing more than legalised state robbery.". 
 
“I've heard opinions like that before. Usually from people earning enough to be in one of the higher tax categories” 
 
It does not change the fact, regardless of who expresses it. 
 
“Here in France, I pay two taxes. One (taxe d'habitation) is based upon the habitable area of the property (as a digression, this is why you'll find property converted by English people to have stuff like one bedroom and three games rooms - you pay more tax on a bedroom). The other tax is taxe foncier and this is based upon some notion of the value of the land. The closer you are to the bright lights, the more you pay.” 
 
I don’t know about French taxes but you say yourself that if each bedroom is taxed, people knock down the walls between them. Which is part of the case for LVT. 
 
“Land tax is, however, in addition to all the other various taxes.” 
 
Does not have to be. The French government could collect the same amount by a higher rate of tax on land value instead of having three different taxes.  
 
“Now, a problem with LVT as I see it, is that land is. Excepting minor variations for coastal erosion and reclamation development, land just... is. Spain is sliding into the crapper and Greece is already there. The countries are the same size they were last year, and the year before.” 
 
Exactly. It is not going anwhere. 
 
“People change, trends change, economies change. Taxing transient objects reflects these changes - if the good times return and we all buy iPhones, the government will receive income from this.” 
 
All these things tend to increase land value. 
 
“The alternative, taxing land, would require constant adjustments to the perceived value of land to cope with changing situations, and one wonders if this would even make it possible for somebody to predict their level of taxation.” 
 
Land rental values do not change as quickly as all that. Quinquennial valuation is sufficient or the Swedish rolling three-year cycle for land valuation. These days too, there are GIS systems and satellite surveys which reduce the amount of legwork. 
 
“Furthermore, with automatic VAT on goods and PAYE on salaries, some of the main taxation is automatically taken care of. You don't need to stash away money for the future, especially a future where the amount may be unknown.” 
 
There is a massive deadweight cost with the taxes you mention. The GDP is down by, depending on whose figures you take, 12% and 30%. The lower figure is bad enough. It adds up to a massive welfare bill that has to be paid out of taxation to keep people doing nothing. 
 
“Then we get to the catch. From the site: ""Land" means the site alone, not counting any improvements." and "The valuation would be based on market evidence, in accordance with the optimum use of the land within the planning regulations.".  
 
So, already, we are seeing a potential disparity. Land is not valued on what may (or may not) be there, but rather upon some notion of "optimal use". What, exactly, qualifies as "optimal"?” 
 
The use for which planning permssion has been given. The valuers need only to look in the planning register. 
 
So, please allow me to repeat a question and provide a few observations:  
 
“What happens in cases of scrubland, moors, roads?” 
 
Scrubland and moors have little commercial rental value so little LVT is payable on it, perhaps to reflect the value of shooting rights. 
 
“Land owned by people who cannot afford to pay, or have otherwise abandoned it?” 
They let it or sell it. Nobody has to pay more than the land is worth. 
 
“The Crown (and local councils) own large tracts of land. Will they pay taxes accordingly?” 
 
The rents from Crown land go direct to the Exchequer. In the case of leases at historic rents, then the leaseholders have some liability. It is a valuation matter. The same applies to land owned by local authorities. 
 
“From the site: "allowing reductions in existing taxes on labour and enterprise". This directly contradicts a few paragraphs above where it states "It would replace, not add to, existing taxes.". Replace and reduction are not equal concepts.” 
 
When existing taxes are reduced, then land values tend to rise by roughtly the same amount in aggregate. But the extent of replacement is a political decision. Given the massive welfare bill resulting from the deadweight losses arising from existing taxes, there plenty of scope for reducing total government expenditure. 
 
“Quote more: "The reverse is the case with a tax on land values, which is payable regardless of whether or how well the land is actually used. It is a payment, based on current market value, for the exclusive occupation of a piece of land." 
 
One could raise a flag to say that this is deeply unfair. 
 
What is your definition of fairness? It is a flexible concept. I suggest that people should pay for what they get and get what they pay for. Do not forget that land has a value only because the government will protect and uphold the land holder's title and provides, continually, the infrastructure to sustain that value. 
 
“With taxation on objects, you purchase what you can afford. You are auto-taxed accordingly. With a land value taxed (based, as previously stated) upon some concept of optimum use, you are taxed on what the land could do, not what it is doing. This will surely have the effect of making those responsible for paying on large tracts looking for ways to best make use of the land.” 
 
Exactly. Are you suggesting that it is a good thing that people do not make the best use of the land? And nobody is forced to own land they cannot afford. The land has its own ability to pay the tax - it can be developed and rented out or the land sold. 
 
I can see a catch 22 where some lowish rent buildings don't make up sufficient value for the "optimum" use, so the area is redeveloped for better housing which ultimately pushes away the blue collar workers as development in the area pushes prices and taxation levels up which encourages development which... if you want a poster child for this sort of madness, look at Beijing.” 
 
Things are not like that in the real world now. Desirable areas get gentrified. But there are only so many gentry so some areas have never got gentrified. Under and LVT system the blue collar workers – there are not many of them around but never mind – get to live in better housing. 
 
“You say "the reverse is the case". Can you actually prove this?” 
 
Do a “thought experiment” and work it out. 
 
“And the final quote: "IMPOSSIBLE TO PASS ON IN HIGHER PRICES, LOWER WAGES OR HIGHER RENTS." (their capitals, not mine). 
 
This I don't believe either. Competition would indeed suggest that landlords will have to keep their prices down to acceptable levels, however different buildings have different attributes. Within the loose boundaries of the law, a landlord is pretty much free to set whether price they feel their property is worth. If there are plenty of people and not enough places for them, they can just wait. Somebody will turn up, if only because they have run out of other options.” 
 
There is another part of the case for LVT. It will cost landlords money waiting for the tenant to turn up who will pay the extortionate rent. Under LVT they will have to be content with as much as they can get, as soon as they can get it. That is a critical difference. 
 
“There is, of course, the concept of price fixing. Supermarkets have done it. It seems mightly strange that petrol prices are all the same in an area. Why not the same with landlords. If they organise to push up prices, it will benefit all of them.” 
 
At present, IN THE ABSENCE OF LVT, landlords act as if there was an organisation driving up prices to the maximum. But under LVT they are all under the same pressure to drop rents to market-clearing levels. 
 
“We're getting to the fundamental economic problem. Not how tax is levied, but greed. I think it would be a much more practicable thing to sort out the greed first.” 
 
Greed is not a matter of economics. How would you turn everyone into selfless saints? But if perverse incentives are built into the system, the result will be undesirable. 
 
“Then sort out the banks. Then worry about how tax is collected.” 
 
But the bank crisis was caused by a credit-fuelled land price boom and that would not have happened had there been a substantial LVT in place. So what is, and is not, taxed was critical to the entire chain of events. 
 
“Mr. Law - no change in taxation is going to sort out these problems. Without sorting out these problems, the fundamental issue will still exist. The markets call the shots, the markets want all they can get. Therein lies your problem.” 
 
LVT changes the entire circumstances in which markets operate. Under LVT there is no incentive for banks to behave as they have been doing.” 
See this http://www.landvaluetax.org/the-lvtc-blog-by-henry-law/bank-regulation-is-not-enough.html
Rick, 11th June 2012, 16:14
Mr Law, thank you very much for your detailed response. 
 
"if each bedroom is taxed" 
Bedrooms are taxed on area. Two bedrooms of 20m2 is "bedroom area 40m2" regardless of whether or not there is a wall in between. This is why the wheeze is to change room function. 
 
 
"It adds up to a massive welfare bill that has to be paid out of taxation to keep people doing nothing." 
 
Are you suggesting unwarranted welfare needs are down to taxation, as opposed to - say - lazy people pulling sickies and those who just don't want to work? Would it not be the case that the attitude is the problem, not how tax is collected? 
 
 
"It adds up to a massive welfare bill that has to be paid out of taxation to keep people doing nothing." 
 
No, I am more concerned that people may be forced off of land they cannot afford. This scheme, the taxation on optimal usage of land, would seem to favour developers and those able to invest in making the land pay its returns. I repeat - look at what is happening in Beijing as the city is "modernised". 
 
 
"But the extent of replacement is a political decision." 
 
So although promoting LVT as a replacement to existing taxes, you accept that it may be used instead as an augmentation? 
 
 
"Greed is not a matter of economics. How would you turn everyone into selfless saints? But if perverse incentives are built into the system, the result will be undesirable." 
 
Greed may not be in the strict definition of economics, but it is inherent in human nature. Look how many more people were playing the Euro lottery as the winnings topped €150M. Is the standard 15M not sufficient? Employees want to be paid more, employers want to keep more. The economy is, to me, a fine balancing act of who gets what. 
Yes, perverse incentives are certainly built in - who deserves an "executive bonus" for doing their job? Once upon a time, people made personal risks and were entitled to reap benefits (or suffer the losses). Now it seems to be an accepted thing regardless of job performance. How did it get to this? 
 
 
"But the bank crisis was caused by a credit-fuelled land price boom and that would not have happened had there been a substantial LVT in place. So what is, and is not, taxed was critical to the entire chain of events." 
 
The bank crisis in America (and nowadays, Spain) was mostly down to throwing money at people to raise mortgages that they didn't have a hope in hell of actually paying for. I believe the same thing would happen with LVT if somebody wanted to buy something beyond their means and the bank was willing to lend the money. There was an issue of artificially inflated house prices and that bubble bursting, however how can we be sure that the same would not happen with LVT? If LVT deals with the land and its abilities, properties upon the land still carry a value and that value could be higher than warranted. 
 
 
"Under LVT there is no incentive for banks to behave as they have been doing." 
 
Good point - however the banks will simply transfer their activities to a different sector? If greed is inherent in the system and the system is set up in such a way as to promote greed, a change to LVT won't make everybody think "this is fair, let's be nice people now". Instead they'll just work out how much they stand to lose from this, and apply those losses elsewhere. Regulation of the banks is not the sole answer, neither is LVT. Ideally, the entire system needs an overhaul. And, yes, one as dramatic as a change to LVT, if not moreso. However, as you point out in the linked blog article - there are plenty who are doing okay within the current system so resistance to change will be quite extraordinary. 
 
 
Thank you again for taking the time to reply. 
Stewart Goldwater, 11th June 2012, 16:55
"Are you suggesting unwarranted welfare needs are down to taxation..." 
There's a nice video here http://www.c4ej.com/ that explans it. 
Henry Law, 15th June 2012, 01:10
"Bedrooms are taxed on area. Two bedrooms of 20m2 is "bedroom area 40m2" regardless of whether or not there is a wall in between. This is why the wheeze is to change room function." 
Bureaucrat bonkerdom. There is a case for levying the property tax on site values only. 
 
"Are you suggesting unwarranted welfare needs are down to taxation," 
Very much so. Look at the difference between the cost of employing people and the actual purchasing power of their wages. This was well reported in the 1980s when it was known variously as the "tax wedge" or the "poverty trap". 
 
"No, I am more concerned that people may be forced off of land they cannot afford." 
Can you give an example? And why are you not concerned also that people are excluded from land that they could afford if prices were at market-clearing levels? 
 
"This scheme, the taxation on optimal usage of land, would seem to favour developers and those able to invest in making the land pay its returns. I repeat - look at what is happening in Beijing as the city is "modernised". " 
The Chinese example is due to the ABSENCE of LVT. It tends to lead to overdevelopment in a dysfunctional market where some sites get (over) developed and others are held vacant in the hope that they will be worth more later on. 
 
Of course any tax could be misused. LVT could be used to keep a few medium-size wars going. If people will tolerate politicians that will waste public revenue in that way, then that is what will happen. But then again perhaps wars are what the people want and will pay for. 
 
If you look at over-paid executives, you will find that they are almost invariably employed by firms that enjoy huge revenue streams from monopoly profits. Often as in the case of banks, they consist largely of land rent. LVT would get rid of that. 
 
"however how can we be sure that the same would not happen with LVT? If LVT deals with the land and its abilities, properties upon the land still carry a value and that value could be higher than warranted." 
LVT reduces the selling price of land by the capitalisation of the amount of tax actually payable. At a rate of 100% LVT, land has not selling price - it is the same as a rental lease at current market value, which will change hands without a premium. Thus banks could not use land as collateral for their loans. They could still lend on the value of the building itself. And the value of the properties on land is pretty much rebuilding cost. 
 
With the banks unable to run Ponzi schemes based on credit for land purchase, they will be hard pushed to find another way of making abnormal profits. They would be forced to fall back on the proper functions of banking - the provision of safe places to hold deposits, money payments and transfers, and the provision of legitimate credit.
Rick, 12th July 2013, 00:53
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