Thursday, 17 January 2013

F. LVT is an attack on families

• It's a tax on gardens
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• It's an attack on families who need big homes and gardens

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• BONUS: It's wrong to assume that employers will pass on their NIC savings as higher wages (skip to article)
• BONUS: It's an attack on single people who'd have to pay as much as a couple (skip to article)
• FOOTNOTE: The close correlation between build density and land values (skip to footnote)

1. "It's a tax on gardens"

The short answer to that is: "No it isn't. It's a tax on where the garden is. If you really want to live in an expensive area and have a big garden, then the tax will indeed be very high, but if it's the garden that is important to you then you will always be able to find something affordable. You just might have live in an area where gardens are the norm and where there is no particular premium attached to them (less scarcity value), which is in fact nearly all residential areas."

The long answer (see below) comes to exactly the same thing, but involves actually knowing about land values.

2. "It's an attack on families who need big homes and gardens

."

I have seen people advance The Poor Widow Bogey and this argument together, which just shows that the Homeys care little for logic or any sort of intellectual coherence. The interests of Poor Widows In Mansions and families with children who want to buy a house are diametrically opposed.

A shift from taxing output and employment to taxing land values will increase the tax payable on the Poor Widow's Mansion (and thus will ultimately be 'paid' by heirs who will receive a smaller or no inheritance) but that same tax shift will enormously benefit working families with children, and especially young couples who would like to settle down, move out of their flat into a house and have kids. The heirs' loss is the family's gain.

There's a Zoho Sheet on the Tax Calculator page, which enables you to enter your own figures for earnings/household composition to see how much tax a working family would save. This assumes they've already bought a house and are stuck with the mortgage; in future, the savings to families ought to be a lot more because house prices will go down so their mortgage payments will be lower.

When challenged, the Homeys will then deny that there is any contradiction and then say that shifting to LVT, combined with a Citizen's Income/personal allowances will also "hit" single people hardest, because they get the least in Citizen's Income/personal allowances. The irony of all this is lost on them.

2b. "It's wrong to assume that employers will pass on their NIC savings as higher wages"

No it's not.

Common sense tells us that making employer's pay a payroll tax on wages out reduces headline wages; economic theory tells us that the supply of labour is less elastic than the demand for it, so employees end up bearing most of the Employer's NIC.

Be that as it may, and even if the assumption is wrong (which it isn't), there is an easy answer to that, assuming we want wages to be taxed at an overall flat rate (20%), we just replace all the different rates of Employer's NIC (from zero to 13.8% with lots of intermediate rates) with a flat rate of (say) 5% on the total wage bill and tax headline wages/salaries at 15%.

If the employer business is currently VAT-able and we can't wriggle out of the EU-imposed requirement to have VAT, then if VAT is reduced to 15%, residual wages/salaries paid out by that business would only be liable to 5% PAYE anyway, so employees of currently VAT-able businesses would quite simply be paid their current headline wage/salary gross with no further tax deducted.

Sorted.

3. "It's an attack on single people who'd have to pay as much as a couple or a family"

Bullet point 2 makes a mockery of the other argument that the best kind of tax is a Poll Tax, which would automatically mean that families with children would pay twice as much as the Poor Widow.

I even once saw the non-logic taken to its perfectly circular non-logical conclusion: the Poor Widow In A Mansion would be "forced" to pay more than the millionaire City banker living in a small flat; the Hard Working Family would be "forced" to pay more to live in the sort of home with a garden which the Poor Widow lives in; and... [drum roll] a single adult would be penalised because they would be "forced" to pay as much as a family.

If you mention Citizen's Income then the Homeys get even more rabid, because clearly this doubles-up the discrimination against single people (Poor Widows or not) and is simultaneously a subsidy for feckless single mothers. Actually, the people who will benefit most from this are larger households, i.e. families.

4. "FOOTNOTE: The close correlation between build density and land values"

For most towns and cities, the "centre" is literally in the centre, but in some places, such as seaside/tourist towns, the "centre" is the beach. What people pay for is the view over the beach and the sea and that value to the individual is largely unchanged whether you share the view with a hundred other tourists or a hundred thousand other tourists. So the value of the land along the beach front is infinitely high. The value of the land further back is much lower. So we observe that in newer resorts, there is a solid row of ten storey hotels along the front and behind that are ordinary size homes/residences. Whether you have to walk two minutes or ten minutes to the beach scarcely matters so the land values in the hinterland are much lower and more or less flat, so the huild density is much lower and more or less evenly spread. Picture from here:

We can see that with our own eyes and understand it, but the key to all this is that the same general principle applies to normal towns and cities. Even though the physical land in the "centre" is the same as anywhere else, the same effect (massive disparity in values between the "centre" and surrounding areas) is observed. When discussing land value tax, it soon becomes apparent that people do not have a clue about land values (in terms of absolute rental values or relative or absolute selling prices).

a) So let's completely put tax reform to one side for the moment and look at actual figures:

- Rental value of farm and forestry land (per acre) = between £5 and £100 a year.

- Site premium of a residential plot with a semi-detached (around a tenth of an acre) = between £3,000 (bottom decile) and £11,000 (top decile) a year, with more or less no upper limit in the top decile.

- Rental value of city centre shops and offices = a huge range. They start roughly where residential leaves off. Rents for offices in Manchester are £30 per square foot per year. The upper reaches are pretty insane. Rent for the best retail space in London is £1,000 per square foot per year (allegedly)

b) So the ratio between the rental value of average residential land and average farmland is about one thousand; the ratio between land used for office space in Manchester (assuming a ten storey block etc) and average residential land is one hundred; and the ratio between central London and normal Manchester is another ten (or whatever) on top of that. Multiply all those up and there is a ratio of one million between the highest and lowest rental values on a per area basis.

c) Even if you are baffled by these numbers or the fact that the ratio between the highest and lowest rental values is something like one million (meaning that Central London has a higher rental value than the whole of Aberdeenshire), land values are made clearly visible by how densely built an area is.

For example and simplifying this a bit and looking at residential only in a typical large town and ignoring particularly posh or grotty areas:

City centres = skyscrapers with no gardens and just a few public parks. There can be hundreds of dwellings per acre, depending on how tall the skyscraper is and how big the flats are.

Inner suburbs = blocks of flats or terraced housing, between twenty and fifty dwellings per acre. Small gardens if any.

Outer suburbs = mainly semi-detached, between ten and fifteen dwellings per acre.

Commuter towns, market towns, rural areas = have the most detached houses, densities of less than ten homes per acre, could be less than one for scattered farmhouses. There is a premium attached to being in The Green Belt (the Faux Bucolic Rural Idyll) but this is offset by the negative premium attached to being far away from town centres (where the best paying jobs are).

d) The density is fairly proportionate to land values. We can plot this thusly:


e) "Hang about here," shouts the crowd, "If we divide the rental value by the density, the answer is always about £4,000. Do you mean to say that the site premium is about £4,000 wherever you live? That flats cost as much as semi-detached houses?"

Yes, that is exactly how things are.

If you go to BBC House Prices and choose a small area (like Aberdeen City), you get the following average prices:

Semi-detached - £224,152
Terrace - £161,975
Flat - £148,775


which is what you would initially expect. But if you look at a larger region (the whole of Scotland) you get the following:

Semi-detached - £148,147
Terrace - £131,792
Flat - £122,915


which is a smaller spread. The figures for the whole of the UK are as follows:

Semi-detached - £209,098
Terrace - £209,808
Flat - £245,533


Yup. The average selling price of a flat is higher than the average selling price of a semi-detached because a disproportionate number of flats are in very expensive areas (i.e. central London) and they have disproportionately high prices.

f) So the long answer to bullet point 1 is exactly the same as the short answer. The rental value of most dwellings is in a surprisingly narrow band, everybody makes a trade-off between convenience/no garden (city centre) with less convenience/big garden (outer suburbs) with terraced houses falling somewhere in the middle.

Which debunks the stupid argument "If we had LVT, some evil developer would come along and get planning to demolish my house and build flats in my garden instead". For most residential areas, certainly in the outer suburbs or in smaller towns, the optimum use of land is building houses, detached or semi-detached. There is no latent planning gains uplift to be gained by knocking down a house and building two or three flats, because there would be little demand for those flats. People are prepared to live in flats but mainly only because they are in city centres or inner suburbs, where the convenience outweighs the fact they have no back garden and less privacy. Add to that the fact that our hypothetical builder has just knocked down a perfectly good house and has to pay the cost of building the flats, the optimum strategy for 90% of houses is to leave them exactly as they are.

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