Killer Arguments Against LVT, Not (439)

Bayard posted this a few weeks ago. He didn’t present it as an argument against LVT but said it was not necessarily an argument for, but nonetheless, it is clearly incorrect:

The argument for LVT: “… the private collection of rent is not only economically imprudent because it periodically destroys the economy, it is wrong!”

Leaving aside the periodic destruction of the economy, I don’t think that it is a valid argument for LVT that it will be an instrument of social justice. This idea has quite some traction, especially amongst the ranks of the class warriors and ties into the populist landlord-bashing cause of enduring appeal.

His argument seems to be that rents will just increase, leaving tenants and first time buyers no better off, i.e. no improvement in ‘affordabiity’, however defined.

There are three overlapping concepts here – “social justice”, “affordability” and “income/wealth equality”. To simplify the way I understand them:

“Social justice” means everybody gets an equal share of whatever it is we are talking about. So, for example, in a democracy, every adult gets one vote ‘for free’, this has nothing to do with income or wealth equality.

“Affordability” means maximising people’s incomes after housing costs, whether it changes income/wealth equality or not.

The best measure of “income/wealth equality” is net incomes after tax and housing costs. Landlords are at the top of the heap, their income IS other people’s housing costs; owner-occupiers and council tenants break even; and private tenants or recent first time buyers are at the bottom of the heap.

Even if a landlord, an owner-occupier, a council tenant and a private tenant/recent first-time buyer have the same earned income from an actual job or productive business, their net of housing costs income varies enormously.

Let’s look at UK housing policy in the 20th century to illustrate.

Back in 1900 or so, only a few people were owner-occupiers and everybody else rented from a few private landlords. This clearly leads to massive wealth/income inequality, as the tenants were left over with the bare minimum and the few landlords lived the life of Riley.

Fearful of a Socialist revolution, councils started building social housing, which was much cheaper and/or better than what private landlords were prepared to offer. Even more fearful after World War I, the UK government introduced rent controls.

The Tories noticed that council tenants are more likely to vote Labour and owner-occupiers more likely to vote Tory, so their counter-play was to encourage new construction and ensure that prices remained affordable by capping mortgages (and hence house prices).

Private landlords were squeezed out of the market – undercut by council housing and prevented from out-bidding private purchasers of new housing by rent controls and high taxation of rental income.

By 1980 or so, 70% of households were owner-occupiers; 30% were council tenants and only 10% rented privately. Between them, Labour and Tories did a great job.

In the UK, council rents were below market rents. The land rent element, which would have been used to pay a Citizen’s Dividend was not collected in the first place. From a council tenant’s point of view, it comes to much the same thing whether he pays £80 a week for the bricks and mortar cost (below market rent), or pays full market rent £200 a week (to include the land/location element) and his household gets a Citizen’s Dividend of £120 a week. That £80 a week is clearly very affordable for all but the poorest couple of percent. The rest of your income is yours to spend on nice stuff!

Apart from a few years paying off the mortgage (capped at just above new-build costs – so little land rent element), owner-occupiers were benefitting from location rents without having to actually pay for them; again, that rent/mortgage saving is like a Citizen’s Dividend. Once you have paid off the small mortgage, the rest of your income is yours to spend on nice stuff!

Therefore, with LVT in place, whether it is used to reduce other taxes or paid out as a Citizen’s Dividend, we would all effectively be somewhere in between council tenants and owner-occupiers; the net housing cost is reduced to little more than the bricks and mortar cost of housing (just like it is for council tenants and owner-occupiers with a small or no mortgage).

That’s “social justice” (everybody gets his share or land rent without having to pay for it), “affordability” (council rents and mortgages minus Citizen’s Dividend are a smaller proportion of earned income subject to lower taxes ) and more “income/wealth equality” (as between landlord class and everybody else, or between Baby Boomers and Millennials, or between people in different parts of the country).

All with the bonus that there is a continual free market allocation (price rationing) of the best and worst sites (you want more, you pay more into the pot to be shared between everybody else).

There is no point arguing that ‘landlords will put up the rent’. If they do, then LVT receipts will go up accordingly, and taxes on earnings and output will go down and/or Citizen’s Dividend will go up, leaving most households unaffected in net terms.