Wednesday 27 April 2011

Killer Arguments Against LVT, Not (117)

Over at The Cobden Centre, 'Chef' (presumably ChefDave?) does his finest and earns this:

mrg: Current has given examples in the past of how usable land isn’t necessarily inelastic in supply. Marshland can be reclaimed, trees can be planted in deserts, etc.

In general, the value of land can be increased significantly by investment. Most people in the UK could afford to buy a property in the North East, but most wouldn’t want to live there. Investment could change that.

If you tax according to the value of land, you discourage the improvement of it.


The simple, real life example of Business Rates (a tax on the rental land and buildings which falls mainly on the land element) shows that this is clearly not true. As it happens, a derelict or vacant site is not liable to Business Rates, and the liability is only triggered once buildings are built, but commercial buildings are built nonetheless.

Further, a lot of investment is carried out by the government; if they know that they can build a new road for £1 million and that this increases rental values by £200,000 a year, provided they can collect half those extra rents in tax, then the new road is worth building. In the absence of the tax, there is little incentive to build the road.

Or try this thought experiment: you inherit two identical plots of land; one to the north of Basel (in Germany) and one to the south (in Switzerland), upon either of which you could build an office building which you could rent out for the same profit of CHF 200,000 a year/EUR 155,000 a year. Happily enough, you have also inherited enough money to pay for the construction.

Germany has negligible taxes on land; Switzerland has much higher taxes on land, let's say it's EUR 100 a year on the German plot and CHF 100,000 on the Swiss plot (whether the land is developed or not); also, let's assume rental income is tax-free in Switzerland and taxed at 50% in Germany (I made up that last bit).

All things being equal, which plot would you develop first?

The answer "I would sell off the Swiss land" doesn't hold water, as you can only sell it to somebody who assumes the CHF 100,000 a year liability, so the selling price of the land is depressed accordingly.
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UPDATE 20.50: seeing as nobody has answered the question yet, here's the answer (click and highlight to reveal): The Swiss land tax of CHF 100,000 is due every year whatever you do, so it is a sunk cost and can be ignored in decision making. Your choice thus boils down to (a) build an office block in Switzerland and earn CHF 200,000 net of 0% income tax; or (b) build it in Germany and earn EUR 77,500 net of 50% income tax. CHF 200,000 > EUR 77,500, so you would build it in Switzerland.

11 comments:

chefdave said...

Busted! I feel like I've been caught cheating. :) I send over some virtual flowers.

The Cobden Centre comments section is a hub is anti-georgist rhetoric, one of their regular contributers even asked me not to post there!

Apparently 10-15 Austrians against 1 Georgist isn't fair, so they felt the need to even it up a bit with some post moderation.

Mark Wadsworth said...

CD, I thought you were making good progress with one of them.

And I see Georgism as quite compatible with Austrian-ism (the goals are much the same), it's just that they are blind to the influence of land values ("We're not an agricultural economy, so surely land isn't that important any more" etc).

chefdave said...

I don't really like the Austrians, I can't even rely on them to analyse the money supply correctly. But I suppose this state of cognitive dissonance is the result of using a two dimensional model to explain the world. It's never going to work & something has to give, but instead of going back to the drawing board they try and shoehorn reality so it fits with the theory.

Whatever way you cut it that's just bad science.

Mark Wadsworth said...

CD, to be fair, I agree with them that credit bubbles are A Bad Thing. Where we differ is that they think these can be prevented with better bank regulation, and they wail on about gold standard, sound money, FRB, fiat money etc without really understanding banking (or why such rules are largely ineffectual).

I'd say that dampening land price and hence credit bubbles is merely argument number 74 in favour of LVT, this is the sort of thing that LVT sorts out on its weekends off.

Derek said...

Yeah, CD. I have noticed you too on my daily trawl for LVT/Georgism discussion. And it's not just the Cobden center. Kudos to you for getting out there and doing providing some good discussion.

On the topic of Austrians in general, it's not the original Austrians that are the problem. In fact quite a few of them came to LVT independently of Ricardo/Henry George. It's just the Rothbard/von Mises crew that seem to have gone off the rails.

You can make a good case for LVT using neoliberal/Austrian supply and demand concepts instead of the Law of Rent. You just have to talk about taxing goods in inelastic supply. A simple supply and demand diagram (which is based on the subjective value paradigm) makes it clear why taxing goods in inelastic supply is far better than taxing goods in elastic supply: lower deadweight costs, etc. Oh, and if you put off mentioning the L word as long as possible, you'll probably get further.

And yes, many modern Austrians (though not all) are totally clueless about money. Funny how many of them are clear that value is subjective and then insist that we should use money with intrinsic worth. Spot the contradiction or what...

Mark Wadsworth said...

C, D, ironic that these people named themselves for Richard Cobden, reknowned land value taxer of his day.

chefdave said...

MW, I agree that credit bubbles are A Bad Thing, but that's only because they're a consequence of a lightly taxed land regime, the Austrians over at the CC seem to think that credit and banking is the primary cause. It's classic faux-libertarianism in all it's glory.

Derek, that's a good point about the subjectivity of value and gold. I'm going to have to, ah-hem, 'borrow' that one off you!

Sometimes I sneak a pro-georgist comment in over at Douglas Carswell's blog, if you mention LVT openly it doesn't get through moderation, so I have to be crafty with my wording.

Derek said...

Feel free to borrow away, CD. I know you'll make good use of it. And having followed up on MW's comment about Richard Cobden, Land Taxer, I've found this article which contains lots of good Cobden quotes on land monopoly and land tax. I'm sure the posters over at the Cobden Centre would love it! I know I did. Particularly the excerpt from his Speech at Derby, 1841.

Mark Wadsworth said...

D, I was referring to that. Jock Coats (ALTER guru) quotes from that at every available opportunity.

exx said...

I advocate Land Size Tax rather than LTV, but Public Goods is the hardest to reconcile.

My problem is the assessment of Value.

A good Civil Servant Can assess land based on position and size, and in 10 years time its position and size will not have changed (barring any exceptional seismic activity). This is not the case for LTV, as we have seen over the past 20 years the centralised valuation of property is very difficult to do.

With a land size tax, I would make it a new and major part of the tax base, reducing other taxes to compensate. Local government would administer the tax and refund a percentage, probably 50% of two local government central government. Public goods would then be administered by a rental from central government to local and the land size tax could be offset against this.

Local government could then set a land size tax, variable by use (residential, agricultural, industrial, retail, and so on).

The main point would be taxing a scarce resource.

So although a land size tax would not cope with Public Goods as well as a land value tax, it would be better at incentivising economic efficiency of a scarce resource.

I am very interested to hear why you favour a land value tax over a land size tax when you have pinpointed land size and use as a major factor?

Mark Wadsworth said...

Exx, I'm speaking from a UK standpoint here, but land falls into three categories:

1. Farmland, nature reserves, mountains etc, which is very low value and barely worth taxing (sells for up to £10,000 per acre).

2. Most residential or commercially used land. The selling price varies between £100,000 and £1,000,000 per acre and there are fairly smooth 'contour' lines around towns and cities from North to South.

3. Much smaller areas in the centres of towns and cities, especially London, which sells for up to £100,000,000 per acre.

It would be foolish to subject all land to the same rate of tax per acre or per square yard, as most residential land would be hugely overtaxed and the small very valuable areas would be hugely undertaxed.

Therefore, it is better to put an approx. valuation on land in each smaller area, work out a relative rate and then multiply that rate by the size of each plot in that area.

So, for example, the tax on the following three would be the same:
- a half-acre, multi-storey department store in the centre of town
- 500 houses on 50 acres of residential land in the suburbs
- a five hundred acre car assembly plant out at the edge of town.