If I were representing the wishes of extremely wealthy landlords I'd try and make sure the rationale for killing LVT were something like "it would introduce upheavals and uncertainties" too.
I'm certainly not going to say something like "because me and my mates and people like me would lose a stream of unearned income".
The Inquiry didn't kill LVT, and efforts to promote it haven't stopped just because Lyons didn't recommend it as a solution going forward.
> ... extremely wealthy landlords ... killing LVT
LVT would not be an appropriate method for targeting tax extraction from extremely wealthy landlords. They would (probably) make up their losses through rent increases and additional service charges - effectively passing on the tax to renters and leaseholders. If you want to target the rich you need to use tools that target their personal and/or business income streams - in the UK, for example: Income, Capital Gains, and Corporation taxes.
This has been shown to be false already. Landlords cannot pass tax burden of LVT to tenants.
"The producer is unable to pass the tax onto the consumer and the tax incidence falls on the producer. In this example, the tax is collected from the producer and the producer bears the tax burden. This is known as back shifting."
If the landlords decided to increase rents expecting tenants would foot the bill, they would find out tenants to leave the location because it would be unlivable for them at that cost.
More likely scenario is by introducing LVT the landlord would be forced to do the opposite - ie decrease rent - as other landlords would dump their uninhabited properties back to the market.
Perhaps individual landlords can't raise rents but the burden will still be passed to the tenants in the end. If you cut the profits of landlords enough to be statistically significant then it will cease to be profitable to be a landlord. (Former) landlords will then invest their money elsewhere, leaving people to buy their own property instead of renting, which incidentally means that they're paying the LVT themselves as well. The end user of the property always pays, no matter what clever scheme you cook up to squeeze money out of the underappreciated middleman.
Being a landlord is not some easy path to free money. It is a great deal of trouble and expense for (usually) marginal profit, and yet somehow people manage to be uniquely ungrateful for the services being performed on their behalf even as they freely choose to rent rather than own.
This. It's useful to think of it as an investor. As an example, if you own a property whose value is 250k in land and 250k in a house, and it currently rents for 20k a year and the land tax is priced at 10%, you would be losing 5k a year. So you put it on the market but no investor is going to buy a property that loses money so the price would have to fall out of the land value until the tax based on the value of the land is below the rent you are able to charge.
Now, if you abolish zoning or rezone places in addition to a land value tax, it could work as the investor could build more housing for the same land thus splitting the cost over multiple renters which I'm sure is the intended affect but a land value tax won't work without changing zoning laws.
In the US, the profitability of being a "land" lord is highly dependent on the income tax deductibility of depreciation on the building.
Yes, tenants will be better able to afford to purchase a home -- and will be able to sell it more easily should they choose to, either to upgrade to a fancier house or a better location within the community, or to move to another part of the country.
Yes, they will be responsible for replacing the refrigerator and other appliance, and doing the maintenance (said to be estimated at 1% of the cost of the property, but of course that would vary a lot according to whether land value is 20% of the total, or 80% of the total value of the house-plus-land or condo-plus-share-of-the-land.
And for first-time homeowners, there are always some rude shocks.
Those landlords will have to find productive uses for their money, perhaps investing in young entrepreneurs, or developing land to meet the needs of their community for housing.
>LVT would not be an appropriate method for targeting tax extraction from extremely wealthy landlords. They would (probably) make up their losses through rent increases and additional service charges
Seriously?? If your inquiry concluded this then it certainly was being run on behalf of landlords.
They would no more be able to make up their losses through rent increases than I could make up the loss of being charged extra for a loaf of bread at the supermarket by unilaterally raising my wages. One does not drive the other.
When the supply of housing remains constant and the demand of housing remains constant then prices remain constant. LVT changes none of these variables directly.
>When the supply of housing remains constant and the demand of housing remains constant then prices remain constant. LVT changes none of these variables directly.
Doesn't LVT increase the cost of providing the already existing housing and wouldn't that decrease the supply of housing? This would apply one time when the LVT comes into effect.
>Doesn't LVT increase the cost of providing the already existing housing
No, it just shifts where the land rents go.
Depending on how it was implemented it could lead to a wave of property developers going spectacularly bankrupt and a lot of mortgages secured on the value of land would be defaulted on. Stock market would likely take a hit/tank.
No, LVT adds no cost to providing housing. All land is taxed, so a landowner has to pay the same tax whether the land is empty, or has a single floor house, or a 30 story apartment.
If anything, it encourages building more, so that the income from the rent can be used to the pay the LVT.
I'm not talking about long-term, but the initial effect of LVT coming into effect. If the landlord has to pay more then that's an increase in cost. Landlord income was likely at equilibrium before LVT. Those that could afford to lower prices to outcompete others probably already did so. As a result I don't see how we can expect landlords to eat the cost instead of passing it on.
>If anything, it encourages building more, so that the income from the rent can be used to the pay the LVT.
Sure, but this also requires housing to be as profitable (or more) as other uses of the land. It might make sense to turn that housing into something else.
Just to be clear, I'm not arguing about what it would be like in the long-term. I'm talking about the transition between going from not having LVT to having LVT. It's not at all clear to me that this wouldn't disrupt housing.
> I'm not talking about long-term, but the initial effect of LVT coming into effect. If the landlord has to pay more then that's an increase in cost.
Right, but how does that lead to less housing? It's not like the landlord would stop renting the apartment and just hold it empty right after an LVT is implemented, since they would to pay the LVT either way. Most likely, the landlord would sell the building and land to someone else, who would then develop it to something that would provide enough income to cover the LVT obligations (say, a taller apartment).
Your claim also assumes that the LVT will be greater than the current property tax obligations. I don't think that's a given. The LVT for buildings that are using land efficiently probably would be lower, since the would no longer have to pay tax on the building (which is higher for a multi-unit building compared to a SFH).
As a side note, I am in favour of the government providing a subsidy to current landowners when a LVT is implemented, to compensate them from the lost land value (essentially "buying them out"), but I don't think that would be economically necessary.
> It might make sense to turn that housing into something else.
Yes, this is a possibility. But if that happens, then it's a sign that the demand for new housing is a low, so it makes sense to not build new housing (or convert existing housing). In regions where there's a housing shortage, a developer would be able to make a large profit building new housing, and thus would do so.
A housing shortage doesn't necessarily mean that new housing would be more profitable than something commercial. I do agree that this would encourage landowners to improve their buildings more in theory. I'm from a country that has a land value tax and frankly it just doesn't matter much. Maybe I just haven't seen the distorting effects that property taxes have.
>Those that could afford to lower prices to outcompete others probably already did so.
Why on earth would you assume that a landlord charging market rent would lower their prices when there's nothing forcing them to?
>As a result I don't see how we can expect landlords to eat the cost instead of passing it on.
Heavily leveraged landlords would be able to pass the costs on in the form of defaulting on mortgages. Non-leveraged landlords being forced to eat the costs would likely be very unhappy about being forced to "eat the costs" (lose their stream of unearned income), but they would have few other options. Violence would be a significant possibility.
> They would no more be able to make up their losses through rent increases than I could make up the loss of being charged extra for a loaf of bread at the supermarket by unilaterally raising my wages. One does not drive the other.
Do you have research, or an evidence base, for this?
> [...] it certainly was being run on behalf of landlords.
Try here (starting on page 39). Whether it answers your question - I have no idea. It was part of the research commissioned by the Inquiry to inform its work. The Inquiry's terms or reference were to review options for local government funding streams; LVT was one option among many.
It might have not been directly funded by landlords but it might have been approved for publishing with the same motives as opposed to the other studies which came to opposite conclusions.
It was an Inquiry into the role, functions and funding of Local Government in England. Landlords no doubt had a stake in the Inquiry's conclusions but then so did everybody else living and working in England at the time (not least central, and local, governments).
> They would (probably) make up their losses through rent increases and additional service charges - effectively passing on the tax to renters and leaseholders.
Since no land can be created or destroyed, the supply-demand curve is fixed. This means that the land tax cannot be passed onto the renter, because the market conditions haven't changed. The rent is not calculated based on the landlord's costs plus some extra, but instead is whatever the market equilibrium price is.
Another way to think about it: if landlords have the market power to raise rents, why wouldn't they just do it now, rather than wait until an LVT is passed?
> Another way to think about it: if landlords have the market power to raise rents, why wouldn't they just do it now, rather than wait until an LVT is passed?
Exactly. Because they hold monopoly pricing power over tenants they could in theory increase the rents 10 times even today. They don't do that, because better strategy for a parasite is to maximize profit and not to kill the host.
If the land tax is greater than what you can make renting, then that means your land is improperly priced. You can prove it by putting it on the market and no investor will buy it at that price because they would lose money and thus it would have to fall until the land tax is less than what they can make from rent.
Now, if you abolish zoning or rezone places in addition to a land value tax, it could work as the investor could build more housing for the same land thus splitting the cost over multiple renters which I'm sure is the intended affect but a land value tax won't work without changing zoning laws and at the end of the day, it's all passed onto renters.
Wouldn't the current zoning of the land be reflected in the valuation (and thus LVT paid)? For example, why would a land zoned for SFH be valued as if a 20 story apartment could be built on it? Ie. The zoning should put a cap on the valuation.
> … if landlords have the market power to raise rents, why wouldn't they just do it now, rather than wait until an LVT is passed?
That logic only works in a non-competitive market. The reason they don't raise rates is obvious: There are other landlords around and any one landlord raising rates would lose business to the others. If you raise costs for all landlords, however—for example, by imposing a LVT—then there is no risk of defection. Landlords either raise their rates or lose money with every rent payment. Any that don't raise their rates will go out of business to be replaced with others who do. And if you use price controls to prevent them from raising rates despite losing money then they would go out of business without being replaced, leaving individuals and businesses to buy their own property outright rather than renting, in which case they will be paying the LVT along with all the other costs formerly handled by the landlord.
TL;DR: Don't assume that the market equilibrium price is fixed and independent of cost!
You can't extract more rent if you charge maximum of what your customer can afford. If landlords raised rents collectively then people would simply sprawl out to suburbs.
City rent is an aggregate monopoly - there is not enough supply of housing to have effect on downward pressure for rents. Demand is overwhelming supply.
Landlords' rent prices are not driven by competition but determined by what the market can bear.
As I understand it the point of LVT is to punish landlords with few or no tenants in localities with high demand for housing and commercial space (where land values tend to be high).
The problem it targets is not the wealth of landlords. The problem it targets is land owners who are not landlords making money, often as a by-product of consuming a luxury good (a home in a city center), without actually providing the social functions which in principle justify their compensation (anticipating demand, managing housing at scale, high-quality construction on a budget, etc).
I'm certainly not going to say something like "because me and my mates and people like me would lose a stream of unearned income".