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.

Taxes through the Ages: An entertaining tale from Dominic Frisby

A compelling case for LVT

Dominic is a lively explainer. Previously I read his 2014 book on Bitcoin. This time he’s doing the story of taxes right back to the dawn of civilisation. 

But it’s what Dom has to say about Money and Land that is most interesting. Yes, Land Value Tax crops up right at the start when he tells us why Hong Kong is such a low-tax entrepreneur’s paradise.

But on p144 Dominic pulls out a real gem

“Many people blame high house prices on lack of newbuild, and population growth. But in the 10 years between 1997 and 2007, though the population grew by 5%, the housing stock grew by 10%. (ref to Positivemoney). If house prices were a simple function of supply and demand, they would have fallen slightly over the period. Instead they tripled.

“Mortgage lending over the same period went up by 370% — a commensurate amount. It was the increased supply of money, through the issuance of debt, that caused house prices to rise.”

Brilliant! He gets it!

Only in the last chapter does Dominic make the case that the only way tax can work in future is by Land Value Tax. Like me, he doesn’t like this label.

Instead he calls it L U T — Location Usage Tax. [I’d coined Plot Value Charge for the same thing].

There follows an impassioned, but pretty standard case for LVT/LUT/PVC.

Missing, sad to say, is the By What Means?  Question. How do we get there? Where do we start? The 1909 People’s Budget was shot down by politics.

“But this is Utopia” says Dominic. [No need to answer these difficult yet vital questions!]

A highly commendable effort. A great read, with some real gems.

Read it, you’ll like it.

Full ref: Frisby, Dominic (2019) Daylight Robbery: How tax shaped our past and will change our future UK; Penguin Business

PROPORTIONAL PROPERTY TAX -- PPT

 PROPORTIONAL PROPERTY TAX -- PPT

A brilliant campaign for worthwhile improvements

From their Website Council tax is broken. Help us fix it. - Fairer Share Campaign

Here's the gist of what they propose  (I'll add a version with comments later)

1. Council Tax to be replaced with a simple Proportional Property Tax, charged as a fixed flat percentage of property value of 0.48%, double that for second, empty and non-resident owned homes.

2.  Stamp Duty Land Tax (SDLT) on owner occupied property should be abolished. Stamp Duty should however remain in place for second home and non-resident buyers.

3.  Property tax should be collected directly from owners, not tenants.

4.  A deferral mechanism should be introduced for those owners genuinely unable to pay. 

5. The majority of reliefs and exemptions, including those for single occupants, second homes and empty homes be abolished. The ineffective and unfair “Bedroom Tax” should also be removed.

6.  A revaluation of all residential property must take place as soon as possible, with annual revaluations thereafter, using technology, based on their average value across the last three years.

7.  Property tax should also apply to undeveloped plots of land that have received planning permission to encourage developers to get on with  building not waiting for the value of the plot to increase.

LOOKING AT THESE PROPOSALS IN MORE DETAIL

SEVEN KEY REFORMS

1.  The confusing Council Tax band system should be replaced with a simple Proportional Property Tax, charged as a fixed flat percentage of property value. Based on extensive analysis, we recommend a flat rate of 0.48%, with a higher surcharge rate of 0.96% for second, empty and non-resident owned homes.

--This nationalises CT taking the last vestiges of independent fund-raising away from Local Authorities, a major political power-grab.

--There will be many winners in deprived areas from this, but the main losers will be in the affluent SouthEast and London. In many cases their loses will be huge. 

2.  Stamp Duty Land Tax (SDLT) on owner occupied property should be abolished. This would unleash a wave of housing transactions and help address the ongoing housing crisis. There is clear evidence that Stamp Duty is acting as a barrier to households that want to downsize, hindering the optimal use of existing property and making homeownership more expensive for all.22 Stamp Duty should however remain in place for second home and non-resident buyers.

--SDLT is a very bad tax, economically inefficient, hated by the taxpayers. It's abolition is highly desirable, but is the proposed PPT the best replacement?

3.  Property tax should be collected not from tenants, but directly from owners, who are in a better position to pay. This would bring England into line with international practice, and reduce administration for councils, due to there being fewer owners than individual properties (due to multiple ownership).

--A sop to the local council to make their job of collecting PPT easier! But shouldn't a national tax be collected by HNRC?

4.  A deferral mechanism should be introduced for those owners genuinely unable to pay. Tax and a modest interest charge could be paid at a later date or, if need be, upon sale of the home, thereby avoiding the debt issues that have plagued the collection of Council Tax.

--As always the 'lonely widow' will be used to oppose the change, so sensible to state this early on. 

5. Property taxation should be made simpler and fairer by abolishing the majority of reliefs and exemptions, including those for single occupants, second homes and empty homes. The ineffective and unfair “Bedroom Tax” should also be removed. These reliefs complicate the system and have unintended negative consequences

--Creates another category of losers. Quite right, but wise?

6.  A revaluation of all residential property must take place as soon as possible, with annual revaluations thereafter.23 Improvements in technology make this much more feasible than in the past. Properties should be taxed on their average value across the last three years, to ensure that increases in property value are subject to taxation.

--Annual revaluations are VITAL if the PPT is going to have a beneficial effect on the housing market. It is so easy for politicians to 'postpone' these, especially if big changes are threatened. So all praise to the authors of PPT for going for a smoothed 3-year average (elsewhere it was a 5-year average), so the annual change is gradual. But will this prevent mass-revolts by the home-owning voters?

--The old canard that the task of revaluing all 24 million properties annually is impossible has been blown away! Technology really can do it. I know, because I showed how multiple regression analysis made this possible 27 years ago in a paper in the Journal of Valuation! 

7.  Property tax should apply to undeveloped plots of land that have received planning permission from the local council. This would discourage developers who purchase land and refrain from building while they wait for the value of the plot to increase.

--Whacking the likes of Carillion is always good fun. But why do they hoard land? Not just for the fun of it, so this proposal doesn't solve their underlying difficulties.

CREDO FOR FIXING THE HOUSING MARKET

 “To fix the Housing Market, take Plot-Price out of ‘house’-prices using LVT”

Firstly, to be affordable, ‘house’ prices must be driven down. The cost of building a house (and   additional modern built-in features) has added a bit to the purchase price of houses, but the main locus of the force which drives up ‘house’-prices is on the price of the plot on which they stand.

Inherent Plot Value:

Owners can add some value to a plot by drainage, fencing, etcetera. It is axiomatic that owners are entitled to keep (not be taxed on) the fruits of their own labour.

Nature may provide more value to a plot with views, freedom from floods, soil and bedrock conditions. We can claim that the gifts of Nature are God-given and belong to all of humanity, equally. This is one of the motivations for a LVT.

A serviced plot in an affluent city has extra value created by communal effort. This could be called the ‘Jubilee Line’ effect. A major new, publicly-funded Tube line boosted plot prices near local stations, to a far greater extent than the cost of construction of the railway. This is a motivation to levy LVT to capture some of the private landowners’ gain from public expenditure. More generally all of the value created by community efforts could be subject to an LVT.

 

Monopoly rent price

Plot-prices soaring above inherent values are due to a combination of politically designated factors:

               - intentional restrictions on plot supply and usage, due to Planning Laws. This can be traced in the main to the 1947 TCPA. This creates a monopoly premium on all available plots, not just those recently given planning permission. Attempts were made to capture the newly created premiums through Betterment Levies, and latterly by S106 agreements. No attempt to capture the monopoly premium on plots already in use. This could be achieved by an LVT. 

               - full exploitation of the monopoly premium was restricted from 1947 to 1970 by limiting the finance (building society and bank) sector’s ability to lend on mortgages. After that date successive financial de-regulation has led to a lending frenzy on the collateralized value of housing plots (plus a small amount for the value of the building). This business could expand continuously in the confidence that government bail-outs will always be available however reckless the lending.

The proximate cause of soaring house prices is the incontinent lending by banks using the security of plot-prices. This enables buyers of houses new and old to bid up the plot-price to the maximum they can afford.

House-plots have become an asset, and anticipation of future capital gains adds to the price. Costs of holding this asset are minimal so there is little incentive to sell, either. One could argue that the banks have acted like ‘the canary in the mine’ in discovering the maximum amount of monopoly rent that can be extracted from a mortgaged property.

One obvious way to fix this situation is to constrain bank lending, but failing that (and we can be confident that trying to control banks will fail), there is only one solution. Take away house-plots as a form of collateral. Remove the price of the plot from the price of a house. This can be done in one of two ways:

Take land, in particular all plots used for housing into public ownership (as in Singapore or Hong Kong). Socially responsible entities can then decide what price to charge for plot use. By definition social charging will be lower than bank profit-maximising mortgage cost. Thus ‘house prices’ will be driven down.

or

House plots could be devalued as a collateral asset by levying a charge equivalent to its value. Since this levy operates continuously and evenly throughout the home-buyers tenure then initially they will pay much less than today’s front-loaded mortgaged house+plot-payer. Over the lifetime of the tenure the total paid should be less than the bankers’ maximizing monopoly rent amount. By this means ‘house-prices’ would be driven down, and total lifetime payments probably less than currently.

Of these three options, only Plot Value Charge seems like a potentially practicable idea. Even so it made need further adaption if it is to survive practical politics.

So.

The best way to fix the Housing Market Crisis is by Plot Value Charging. The closer the charge approaches to the full value of each plot the more the housing market will be fixed.

We will know that the housing market is fixed when there is an abundance of good quality homes available at prices most can afford (as in 1930s England) .

 Chloe Bright New Star of GenerationRent
 

There’s a bright new star writing about the crisis in the housing market, and specifically the lost ‘Generation Rent’. Because of sharply rising house prices far fewer youngsters can afford to buy a house, and are forced to carry on living with their parents or try their luck on the for-rent market. Chloe isn’t just reporting the generally horrid facts about the reality of renting in England today, she has got out there and interviewed many of the ‘players’.

But Chloe doesn’t stop at the ‘point-and-sigh’ stage, she wants to know what is causing the problem, and why. The main cause of the crisis is that prices have been allowed (by politicians) to get completely out of hand, rising to absurd levels. She gives a very good explanation of how we have arrived at this sorry state through the liberalisation of credit and mortgages, pushing up prices. The alternative public rental sector has been starved and shrunken via sale of council houses. Governments respond by Help-to-buy schemes which only make things worse.    Read on