Some questions on LVT
sinister
URL http://timlambert.org/2005/09/no-typos/#comment-9588
I told the commenter that a better place for an exchange is USENET, so I'm
posting his remarks here. Not sure if he knows how to post here, though.
Anyhow:
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I don’t want to dismiss your idea out of hand because I have given it some
thought and I need some time to digest it.
I want to add a few comments and then may visit the website you suggested.
Imposing much higher property taxes in the US would immediately cause a fall
in the price of land. As you know, a very large % of loans are property
based and therefore you would experience dislocation in the loan markets.
Needless to say it would have some very adverse economic consequences, as
valuations would sink against which loans are based.
One good example of what can happen means revisiting the 1986 Reagan Tax
changes. The 1986 Tax changes plugged the real estate taxation loop-holes
and forced all those real estate tax rorts to close. Combined with that, the
end of decade closing down of the S&L balance sheet deposit insurance
protection caused a real estate down turn right up to the mid 90’s. Real
estate prices did not recover in NYC where I lived for 7 years. In other
words tax rorts that were no longer there and a real estate focused credit
crunch forced real estate values to drop big time.
Raising property taxes would immediately cause land values to fluctuate
wildly. Why? Because carry costs would increase. A good example of this
again is the NYC co-op market where carry costs are very high. A four-
bedroom apart., say on Park Ave, can run you $6,000+ per month in
maintenance costs comprising of property tax, service people, etc. This is
all well and good when jobs are plentiful in NYC. However the moment Wall
Street catches the flu co-ops can drop 20-30% in value. It’s hard servicing
monthly charges of that magnitude if you lost your job.
So in effect, your suggestion is the economy ought de-leverage from real
estate (and not in a painless way).
You understand that under your tax system real estate would become a very
volatile “commodity”. A friend did a volatility model for Australian real
estate and figured that historic volatility for Aussie R E is about 10%. I
would say US would be about the same.
My other question is: I assume that under your proposal, nothing would
change in terms of how people use their land, right. In other words John and
Betty would not be thrown out of their apartment under your suggestion,
right? You are moving the tax anchor away from labour- generated earnings to
property tax. Is that correct?
I don’t really see a big problem with this. However, try selling it to
Congress. It has as much chance of getting through as Saddam becoming the
next head of the UN.
ruet...@outgun.com
the rent of land driving land values to 0. This should not be a
surprise to anyone.
People need to understand that this is not a bad thing, however, which
is something that many have trouble wrapping their minds around. We
have been conditioned to believe that high land values are good and
that rapidly increasing land values are a sign of prosperity. That is
incorrect. People watch their land appreciate and they feel as though
their financial situation is improving because of it, yet they wonder
why they are working more and more and falling further and further
behind. Most have not made the connection between the two.
joe c
joe c
Another problem I see with such a system is that it would, if property
tax were too high, be can great cause of instability. How so, well, we
would still have recessions. What would happen to people who were
unable to meet much steeper property taxes? I would assume they would
be forced to sell their homes etc.
You state that land takes away capital that could be used in a better
way. However raising taxes on land would still in a sense have the same
effect as people would now be paying higher property taxes.
I am thinking out aloud here. So pardon what seems to be scattered
thoughts.
looking forward to a reply.
ruet...@outgun.com
>tax were too high, be can great cause of instability.
The opposite is actually true. By discouraging land speculation, it
would increase the stability of the system.
>How so, well, we
>would still have recessions. What would happen to people who were
>unable to meet much steeper property taxes? I would assume they would
>be forced to sell their homes etc.
The tax would float with the value of the land. If the value of the
land decreased, so would the tax.
>You state that land takes away capital that could be used in a better
>way. However raising taxes on land would still in a sense have the same
>effect as people would now be paying higher property taxes.
But they would no longer be paying tax on their labor OR capital.
ro...@telus.net
wrote:
>Imposing much higher property taxes in the US would immediately cause a fall
>in the price of land. As you know, a very large % of loans are property
>based and therefore you would experience dislocation in the loan markets.
>Needless to say it would have some very adverse economic consequences, as
>valuations would sink against which loans are based.
Deflation resulting from plummeting deadweight costs is one of the
very few valid concerns about LVT. If implemented suddenly or
clumsily, it could disrupt financial markets. However, the gradual
reduction of land lending resulting from a patient and measured
increase in land taxation is actually an economic benefit of LVT: land
lending often finances idle speculation at the expense of genuine
investment in productive capital. As long as the monetary authorities
were vigilant and ensured sufficient monetary expansion to prevent
deflation during the transition to LVT, there should be no problem.
>One good example of what can happen means revisiting the 1986 Reagan Tax
>changes. The 1986 Tax changes plugged the real estate taxation loop-holes
>and forced all those real estate tax rorts to close. Combined with that, the
>end of decade closing down of the S&L balance sheet deposit insurance
>protection caused a real estate down turn right up to the mid 90’s. Real
>estate prices did not recover in NYC where I lived for 7 years. In other
>words tax rorts that were no longer there and a real estate focused credit
>crunch forced real estate values to drop big time.
?? And housing being more affordable through elimination of
fraudulent and dishonest tax rorts is bad how, exactly...?
>Raising property taxes would immediately cause land values to fluctuate
>wildly.
No, it would cause them to decline pretty much monotonically.
>Why? Because carry costs would increase.
You claim land values would fluctuate wildly, which can only mean
rapid up and down movements. Perhaps you can explain why higher carry
costs would often make land values go up, and not just down...?
>A good example of this
>again is the NYC co-op market where carry costs are very high. A four-
>bedroom apart., say on Park Ave, can run you $6,000+ per month in
>maintenance costs comprising of property tax, service people, etc.
I'd like to see some documentation of exactly what "etc." consists of.
>This is
>all well and good when jobs are plentiful in NYC. However the moment Wall
>Street catches the flu co-ops can drop 20-30% in value.
Again, housing becoming more affordable is bad how, exactly?
>It’s hard servicing
>monthly charges of that magnitude if you lost your job.
If you don't have a job that makes a Park Avenue location
advantageous, you should perhaps seek accommodation more suited to
your needs and means.
>So in effect, your suggestion is the economy ought de-leverage from real
>estate (and not in a painless way).
Justice is rarely painless to those who are accustomed to benefiting
by injustice.
>You understand that under your tax system real estate would become a very
>volatile “commodity”.
In fact, I know beyond any possibility of doubt that real estate is
not a commodity at all, and would become less volatile under LVT.
>A friend did a volatility model for Australian real
>estate and figured that historic volatility for Aussie R E is about 10%. I
>would say US would be about the same.
In fact, real estate tends to be less volatile in the US states with
the highest property taxes -- New Hampshire, Wisconsin, Oregon,
Connecticut, etc. -- and more volatile in those with the lowest
property taxes, like Alabama, Arkansas, California and Wyoming. Japan
provided a classic case history of increased land price volatility
resulting from the gradual reduction and ultimate elimination of its
land value tax.
>My other question is: I assume that under your proposal, nothing would
>change in terms of how people use their land, right.
Wrong. Land would be used more productively, idle land would be
brought into productive use, vacant and abandoned properties would be
redeveloped, etc. Urban sprawl (and its attendant immense energy and
environmental costs) would be to a large extent reversed.
>In other words John and
>Betty would not be thrown out of their apartment under your suggestion,
>right?
Depends if they paid their property taxes or not.
>You are moving the tax anchor away from labour-generated earnings to
>property tax. Is that correct?
Yes.
>I don’t really see a big problem with this. However, try selling it to
>Congress. It has as much chance of getting through as Saddam becoming the
>next head of the UN.
Right. It is necessary first to elect honest and competent
Congressional representatives who have the best interests of the
country at heart, rather than just the private financial interests of
their wealthy corporate owners.
-- Roy L
ro...@telus.net
>Another problem I see with such a system is that it would, if property
>tax were too high, be can great cause of instability.
Do you notice remarkable instability in New Hampshire, with its 4%
property tax rate? Or is instability more characteristic of say,
Alabama, with its 0.4% rate?
>How so, well, we
>would still have recessions.
Actually, some economists claim, and with considerable justification,
that recessions are largely caused by land speculation, which would
simply end under LVT.
>What would happen to people who were
>unable to meet much steeper property taxes?
First, they'd have all the money they are currently paying in other
taxes. If that was not enough, there are always two easy ways to meet
"excessive" property tax bills: use the property more productively, or
sell it to someone who will.
>I would assume they would
>be forced to sell their homes etc.
Some who are currently not using their land anywhere near as
productively as others could would no doubt find it to their advantage
to sell it. That is one of the great benefits of a free market:
productive resources moving into the most productive hands.
>You state that land takes away capital that could be used in a better
>way. However raising taxes on land would still in a sense have the same
>effect as people would now be paying higher property taxes.
?? Nonsense. The land tax money would come out of idle rent
receipts, not productive effort and capital investment as current
taxes do.
>I am thinking out aloud here. So pardon what seems to be scattered
>thoughts.
OK. Pardon me stomping on those scattered thoughts before they can
get away and hide under the furniture.
-- Roy L
imout...@mac.com
> >I don't really see a big problem with this. However, try selling it to
> >Congress. It has as much chance of getting through as Saddam becoming the
> >next head of the UN.
>
> Right. It is necessary first to elect honest and competent
> Congressional representatives who have the best interests of the
> country at heart, rather than just the private financial interests of
> their wealthy corporate owners.
I see it more likely happen on a state level.
Here's the tax load on a $100k income in California:
~$15,000 federal income tax
~$11,000 FICA
~$3,000 medicare
Effective Federal taxe rate: 29%
~$7,000 California Income tax
~$1,000 1% VLF + sales taxes
~$2,000 property tax (improvements)
Effective State & local tax rate: 10%
~$2,000 LVT proper (property tax on land value apportionment)
I don't begrudge the medicare tax (I consider it forced charity
basically), and I figure about half the FICA crap will eventually come
back to me as retirement checks, so I figure the actual effective
federal burden is ~20% of income, making the non-LVT state-level tax
burden (10% effective rate) about one-third of the total tax burden.
So just going state gets us about 1/3 the way there.
Lowering corporate tax rates by replacing corporate income tax with the
LVT regime would be a significant secondary effect, plus we can assume
the economic stimulus from this would also be significant, such that
should California go with the LVT regime its citizens should actually
see the bulk of the returns even if the Feds continue sending us 1040s.
(and the picture is even better for lower-income Californians, since
they pay less Federal tax to start with)