PERVERSE TAX EFFECTS WITH THE WRONG INCENTIVES

 HAS THE UK GOT THE WORST PROPERTY TAXES?

Yes (almost) PART 2. PERVERSE TAX EFFECTS WITH THE WRONG INCENTIVES — UK property taxes are the third LEAST EFFECTIVE at damping down surges in house prices. UK taxes make a bad situation WORSE.

Fair enough! The UK may have the heaviest tax burden on property, but it doesn’t have the worst performing. That prize goes to Japan, then the US.

This comes from some clever analysis by the OECD, on "The stabilisation properties of immovable property taxation". These guys have used advanced econometric techniques to squeeze some tentative answers from a huge international set of data. No doubt their methods could be challenged, recast with different techniques and maybe others might have come up with different results. But for now this is what an independent well-funded, respected organisation has come up with. tortured the data from a rang

Economic Stabilisers In economics it is well known that some taxes, such as VAT act as stabilisers against inflation. Because the tax rises in proportion to the price charged the total price rises faster. This is the principle behind the plastic bag levy, and the reason why the public accepts ‘sin taxes’. Pushing prices up faster than the market price deters consumption.

Turning the argument around — if we must have taxation, then it is better if it encourages more of what we want. Do we want to slow down or stop faster-than-inflation property price rises? Make sure whatever tax is levied supports this aim.

HOW TO USE TAX TO SLO DOWN HOUSE PRICES

No not a mis-print! Slovenia and Slovakia, two new breakaway European states are highlighted as having property taxes which are best at stabilising prices. According to the OECD Report their property tax regimes are best in slowing down house price movements, up or down. 

Something like VAT would be a stabilising tax. As prices rise, and without any need to change rates, so the tax take increases. The discouragement to the purchaser is proportionate to the price rise.

WHERE PROPERTY TAXES MAKE THINGS WORSE

In the naughty corner, Japan’s property taxes are the worst for making the swings up and down in  house prices even worse. Then comes the USA, followed by Great Britain! Despite us having the highest burden of property taxes here in the UK, the taxes are inflicted in such a bad way as to make house-price rises and falls more extreme.

 Economic de-stabilisers: What should we call taxes which make a bad situation worse? Trend exacerbators might be a good name but what about ‘Wobble-makers’?

Taxes which make things worse: The usual example given in the text books is UK whisky duty. Currently it is a flat-rate of £28.74 per litre of alcohol. This is the same amount whether it’s Aldi own-brand or Single-malt. This is good for discouraging alcoholism, but unless the Chancellor uprates the Duty every budget, its effect will be worn down by inflation.

Over the years neglecting to fully uprate duty on these flat-rate taxes has led to cheaper whisky and more alcoholism. That’s why the devolved administrations in Wales and Scotland are resorting to minimum pricing.

 

What is so good about the property taxes of the ‘SLOs’?

Here I am going far beyond the OECD paper. They merely report the fact of stabilising taxes. I can only draw very tentative conclusions about the property tax regimes. This is what Wiki tells us

Property Taxes in Slovenia: a bit vague, not much info

Property Taxes in Slovakia:

“According to the type of property there are classified 3 kind of taxes: tax on land (land tax), tax on building (building tax) and tax on apartment (apartment tax). The amount of annual property tax is mainly dependent on the area of the occupied land(measured in sq. meters), purpose of the property, number of floors etc. The amount of annual tax rate is highly effected by the specific tax rates that are set by municipal authorities. “

A significant amount about Land Taxation here!

Property Taxes in Japan

Not very easy to find out, but there seems a lot of transaction taxes

 

 

 

Full citation Blöchliger, H., et al. (2015), "The stabilisation properties of immovable property taxation: Evidence from OECD countries", OECD Economics Department Working Papers, No. 1237, OECD Publishing, Paris, https://doi.org/10.1787/5js0cqq93djg-en.

The ‘al’ referred to are Hansjörg Blöchliger, Balázs Égert, Bastien Alvarez and Aleksandra Paciorek

HAS THE UK GOT THE WORST PROPERTY TAXES? PART 1. TAXES TOO HEAVY

 UK home-owners pay the highest property taxes

 Hansjörg Blöchliger is not a well-known name in housing market analysis, but under the aegis of the OECD he has produced TWO papers which add greatly to our understanding and insight. I’ll deal with the second paper in my next posting, but here I’m looking at his curiously titled

“Taking care of the unloved: Reforming the tax on immovable property”

Bizarre title! On this blog at any rate certain kinds of ‘tax on immovable property’ are loved and cherished! We love Land Value Tax or Plot Price Charge as I prefer to call it!

This is an OECD economics department working paper 1205, produced in April 2015.

[OECD Organisation for Economic Co-operation and Development is a 37-member rich countries’ club, excluding Russia and China. It produces high-quality research reports, which is the source used here.]

And here’s what the report shows about property taxes:

Just in case there is any doubt ‘GBR’ is the shorthand for us here in the UK. And GBR is the clearly the biggest loser, with the highest property taxes amongst all of these 37 economically advanced countries!

Let this be a warning to all Georgists! GBR already has the highest property taxes. Expecting LVT to yield fantastically higher amounts is wildly unrealistic.

But it is also a blessing: There’s a lot of tax revenue to play with. British taxpayers are used to paying more. Could the burden of tax be changed for the better?

Could moving the property taxes around, changing the way the tax falls do  something to fix the housing? Yes, but that’s for the next posting.

 International Comparisons

The Economist (Feb 2020) identified 3 countries where ‘the housing market broadly works’ — Singapore, Germany and Austria. Singapore is not in the OECD, but what of DEU (Germany) and AUT (Austria)?

DEU and AUT are both pretty low tax regimes, as are the two countries either side of DEU. They are SVN — Slovenia and SVK — Slovakia. I’ll have a lot more to say about these two ‘Slo’s next post!

So does low tax = housing market fixed? Some evidence here.

But what of the opposite? High tax = dysfunctional housing market? Maybe. As well as our homeland GBR, notice that JPN — Japan is also a high property-tax regime.

 

 

Full citation for this paper Blöchliger, H. (2015), "Reforming the Tax on Immovable Property: Taking Care of the Unloved", OECD Economics Department Working Papers, No. 1205, OECD Publishing, Paris, https://doi.org/10.1787/5js30tw0n7kg-en.

 

FROM CROWNHOLD TO LEASEHOLD FROM THE STATE

Two Chinese islands, Hong Kong and Singapore.

 Despite their rulers’ ignorance they have been amazingly successful at collecting land value, but have they fixed housing? 

We are very lucky to have someone like Andrew Purves to explain the particularly beneficial land-ownership situation in Hong Kong and latterly in Singapore. His book “No Debt, High Growth, Low Tax” is a real eye-opener, and should be read by anyone trying to implement LVT. It is all the more valuable because it is derived from field work in Hong Kong. 

He has extended his analysis onto Singapore in a paper “Models of fair public ownership: lessons from Singapore and Hong Kong”. 

Put very simplistically, both places share a colonial heritage where first The Crown, then the local administration own practically every parcel of land. Of course land is made available for development — industry, commerce, transport and housing — but only as short-term (30 to 60 year) leases. The revenue from these leases makes up a healthy one-quarter to one-third of all government revenue. This, Andrew explains is the real secret of the economic success. All other forms of taxes — income tax, VAT, excise duties — are either much lower or non-existent. 

So what we have here is the happy fulfilment of many commentators dream scenario for fixing the housing crisis —Public Ownership of HouseBuilding Land. (See Ryan-Collins, Danny Dorling, Brett Christophers calling for public trusts, local authority ownership as well as state ownership. Even Halligan wants Land confiscation at current-use price). 

So has public/state ownership of all housing land ensured that Hong Kong and Singapore have achieved reasonably priced housing of good quality available in abundance? 

The Economist (Feb 2020 Housing Supplement) identified just 3 places in the world where ‘the housing market broadly works’ — Germany and Switzerland (which are well-known to us housing researchers) but also singled out was Singapore. The fact that 80% of Singaporeans live in government-built flats, because the subsidies are irresistible—but come with social controls (Economist headline 8.8.2017) is surprising. It suggests a highly controlled environment, which might not appeal to us westerners. 

If Singapore is a housing winner, what about the other nirvana of public-ownership of land, Hong Kong? On price of housing it is named as the most expensive in the world. Maybe that’s just for outsiders trying to buy in. How fares the largely Chinese population of 7 million? It could be worse, but due to massive government intervention in colonial days, sufficient tiny apartments are available, but at a price. 

So Hong Kong is, like the UK, another housing market failure. An observation: In fairness neither of these city-states have the familiar favelas — shanty towns built illegally on the outskirts. In all parts of the developing world, even ‘advanced’ South Africa these are commonplace. Favelas provide cheap housing for the many, but obviously not to the minimal level of decency you’d expect. 

One might wonder why these two paragons of public-land ownership virtue have either failed, or only achieved housing success through hyper-active government intervention ? As Andrew Purves has pointed out  (for me mainly in his exposition at an ALTER meeting in 2015), the administrators in both places don’t really know what they are dealing with. Yes, they realise these resource-poor over-crowded islands must provide the conditions for economic success. The land needs to be leased in a way which supports this. 

But drawing on Georgist ideas they could have gone much further. Land has obviously been leased at way below its full value. Leaseholders can sell their homes at far above the building value. If the authorities had acted like rent (profit) maximising landlords instead of economy boosters they could have achieved two things          

—higher revenues, making all other taxes superfluous. Indeed land-revenues might have been high enough for a citizens’ dividend, a form of basic income. (This is plausible given the ‘island-in-a-sea-of-prosperity’ position that these city-states occupy, akin to the parasitic role the City of London exerts over the UK.)           

— economic growth would have been even greater, in part because of lower labour costs, subsidised by the citizens’ dividend, and the low (reasonable) cost of housing. 

An even more intriguing Chinese-related possibility presents: That the gurus who guide the policy of the CCP realise this and apply it to the PRC generally. What an unparalleled advantage it would enable them to take. The capitalistic-rentier democratic US economy would be left for dead.