Tuesday, July 27, 2010

LVT case study

Rising house prices reveal first Olympic winners

The last paragraph spells out the LVT case clearly: "homeowners in the neighbourhood have more substantial reasons to be glad the Games are coming to London, But homeowners and taxpayers elsewhere may not share their joy – although all of us will certainly share the costs." How would LVT deal with the Olympics? Raising taxes on people who just happen to own property near the Olympics doesn't really seem right. Imagine being disinterested in sports yet getting a big LVT tax raise for Olympics infrastructure improvements. Perhaps part of the problem is that substantial sums of centrally raised taxes are being injected into a small part of the country leading to economic distortions including a local property boom.

Posted by quiet guy @ 08:43 AM (2736 views)
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12 thoughts on “LVT case study

  • The solution is to combine planning, LVT, taxes for maintenance of common land, and donations for maintenance of charity trust owned land into one.

    If you remove the right to own land and instead people can only own fixed term leases then you can put planning permission into the lease. If you put the purpose to which the land is to be put into the lease then you can incorporate the command land maintenance and charity trust requirements. The last thing is how do you handle the financial aspects to simulate donations to the charitable trust or LVT.

    What you can do is have a pot split into two halves, for, and against. The pot is created when the lease is proposed and people put money into the pot on whichever side they want to win. At a stated date the pot is examined and the larger side wins and the lease is either granted or not granted. The money in the losing side is returned to those who put it in along with the same amount of the money in the winning side.

    Thus, the winners pay the losers for the privilege of excluding them from owning the lease and/or for not taking the kind of lease that the losers want taken.

    This way, the planning and operational lease for the olympic stadium would be bid for by the residents in the area and against by residents in other areas (who would want the value of their homes to go up instead), the residents in other areas are thus paid by those beside the stadium.

    The system would be more complex, obviously, because you need to account for the fact that you could just keep asking for a lease and costing the against money over and over so your against bids would have to be in effect for a fixed term, perhaps with the right to revoke them pro-rata when a different lease comes up for consideration.

    Leases for residential purposes could be sub-leased by the primary lessee as they wish, so “homeowners” might bid for the lease to be continued when it comes up for reconsideration, and shorthold tenants might bid against to get some of their rent back (thus this acts like LVT to keep rents low).

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  • karl deeter says:

    It is amazing that we allow public expenditure to be privatized via property prices and then we don’t tax that gain, it is one of the few times that revenue escapes unabated. Fred Harrison has a great book on the topic ‘Boom Bust, the depression of 2010’ and it argues in favour of a land value tax or site value tax. Leamar also wrote a paper ‘the housing cycle is the business cycle’ which offers come compelling arguments in favour of obtaining a better understanding of the housing cycle in relation to the wider economy, one of the ways to avoid a bubble is via LVT. With any luck we’ll have one introduced soon in Ireland

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  • quiet guy,

    “Imagine being disinterested in sports yet getting a big LVT tax raise for Olympics infrastructure improvements”.

    Forget the Olympics or sports; they have very little to do with the property value. It’s the infrastructure improvements which will increase land values the most. Yes, some people will complain when a new train or tube station opens, if it affects their tax bills. However I would expect that there would usually be more people in favour than against.

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  • mark wadsworth says:

    QG, I’m a land value taxer and a democrat. If we expect landowners in East London to chip in extra tax to build the olympics infrastructure which will push up their land values or rental income, then they also ought to be allowed a vote on it

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  • @Mark Wadsworth
    “they also ought to be allowed a vote on it”

    Fine. I also note Drewster’s comment that “there would usually be more people in favour than against.” which is somewhat related to the voting principle.

    To me, this seems to infer that there is more to LVT than an accounting change. To take account of local sensibilities when planning changes that could impact LVT would require modifications to the way we allocate tax resources. I’m not saying that’s necessarily a problem but I don’t recall discussing changes to the voting system on this blog when we discussed LVT in the past.

    Do you have any specific comments about this w.r.t. LVT? Connecting local accountability with infrastructure upgrades seems to introduces some interesting new angles to large public works.

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  • mark wadsworth says:

    QG, i explain it thusly:

    Imagine a block of flats with separate owners for each flat, if the roof is leaking, or some people would llke a playground built or to employ a concierge or whatever, then this will benefit everybody – even if they don’t have kids they know it will boost their resale value in the future; even if your flat is on the ground floor and not affected by the roof leak yet, it will be one day.

    So the only way to decide on whether to incur these costs is to have a vote, and if the expenditure is approved by a majority, then it goes ahead and is divvied between the owners of each flat.

    There are a lot of things that the government currently does which increase rental values or property prices, i.e. from national defence and the existence of a land registry which creates land ownership in the first place; all the way down to building a kids’ playground at the end of your street.

    I see no ideological reason why all of these should not be voted on individually and landowners who benefit then have to chip in proportional to the value they receive via LVT – it is already the case that tenants have to chip in for the extra value they receive e.g. from the existence of new train lines around Olympic stadium etc, only they have to pay to their landlords, of course.

    Of course on a practical level, we can’t have a referendum on absolutely every last thing, so the council or government has to do a vote by proxy by just working out whether the item of spending would increase land values by enough so that the extra LVT receipts exceed the cost.

    Building new train lines or roads is almost always a good idea – even if you build them at random across empty countryside, then suburbs and towns will grow up around the stations and junctions.

    Employing another couple of policemen might be a good idea, if not, you can run down the number of policemen again. Employing street football coordinators and race relations advisors is probably a bad idea, and so on and so forth.

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  • Just to interject in this LVT love-in, the claim that investors have profited in recent years from the Olympics is bunkum. I know someone with BTL property in Bow and the price has plummeted in recent years. They have not therefore made a profit so much as not lost quite so much as other BTL flat owners.

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  • quiet guy,

    You may be interested to know that this already happens in America. Most states have property taxes – not quite as good as LVT – which are based on the value of the land+house. These are often quite steep – for example in Fort Lauderdale, Florida the owner of a $250,000 house would pay around $5,000 a year in tax. The amount varies by state and even by county; some people are paying more than twice that. In general the country compensates by having lower income tax and lower sales tax.

    When an area is gentrified or somehow increases in value over time, the property tax rises. Thirty years ago you could buy a nice house fairly cheaply in the rural area south of San Francisco. Then along came computers; the region was nicknamed “Silicon Valley”; and the yuppies and millionaires moved in. Your property tax would have gone through the roof. But the value of your house has also increased; and furthermore there are lots of new employment opportunities around. Few people complain.

    (Some quick online searches indicate that $5,000/year is a fairly typical property tax in the USA. If you know more, please share.)

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  • the number cruncher says:

    Paul – far out man

    Peace, love and LVT – What a wonderful world it would be…

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  • @Drewster

    American property taxes seem to be quite variable because they are administered in different ways in different states. One notable aspect of property taxes in some states is that they are sometimes revalued every five years. CHS has pointed out that this can make a huge difference to those who purchased at the height of the boom.

    “And then there’s the fairness issue. Is it fair to all property owners that recent buyers are paying two, three or four times more parcel taxes than their neighbors? Clearly, it is not fair. But local government is letting the bubble buyers pay more rather than ruffle the feathers of all property owners by demanding a fairer tax structure.”

    http://www.oftwominds.com/blogapr06/prop-taxes3.html

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  • mark wadsworth says:

    Paul, whether a speculator makes a profit or merely a smaller loss as a result of the government spending other peoples money is irrelevant for the purposes of this discussion.

    QG, it does of course seem ‘unfair’ if recent purchasers pay more than earlier purchasers (which is the case in some places in the USA but not in others) – unless you are an earlier purchaser, in which case it seems very ‘fair’ indeed, doesn’t it? Which is why it is best to ignore special interest groups dictating what is fair or not and concentrate on measurable things like economic efficiency and simplicity.

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  • Quiet guy,

    Yes it varies heavily by state and even by county. Much of the difficulty arises because the American system isn’t pure LVT. To make matters worse, over the years they’ve added thousands of rules, exemptions, limits, caps, add-ons, supplementary fees, and so forth. The example you gave, of pre-bubble buyers paying less tax than bubble-era buyers, is unfortunate – but there are many solutions available. (Also, I’ve heard of similar problems with new-build homes in the UK being assigned an unfairly high council tax band.)

    Don’t let the perfect be the enemy of the good

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