Urban Planning in the absence of a Land Value Tax

In the rarefied atmosphere of the Institute of Economic Affairs (IEA), “planning” is generally considered to be a rude word. The patron saint of the IEA wrote his most famous book attacking economic planning and the IEA has generally adopted a libertarian position on most things since then.

Yet few would argue that towns could exist without planning. So Wednesday’s panel debate on Urban Planning was an unusual affair in which the speakers generally accepted that planning was necessary, but sought to root it in market principles and so enable it to work more successfully.

The problem cannot be denied. The UK is building tens of thousands few houses than we need each year; Council’s see little gain and significant costs (both financial and political) in allowing increased urbanisation; the quality of the homes we are building are poor by European standards.

As Dr. Oliver Marc Hartwich noted, in every other walk of life our increasing prosperity has led to our being able to afford more and better, but in housing we have seen regress: houses are getting smaller even as we get richer. Real house price inflation has averaged 4.1 per cent since 1971; if only wages had done the same! Yet planning alone was not the problem: Germany is so regulated that it drove Dr. Hartwich to move to England (had he heard of Gordon Brown?!), yet German cities manage to plan successfully. The reasons are simple (and go beyond urban planning): fiscal federalism and tax competition between authorities led them to compete for citizens, increasing their tax bases so as to reduce individual tax rates. Germans cry out for more housing so that more shoulders will bear the tax burden.

Dr. Hartwich’s comments about shrinking homes echoed two of the four false beliefs about Britain that Professor Alan Evans highlighted:
1) Britain is not overdeveloped – only 10 per cent of the UK is urbanised (less than, say, The Netherlands);
2) “Brownfield” land in the UK is not former industrial land but any land that has previously served an urban purpose, meaning that in many cases regulation to build on “brownfield” land actually means building on gardens, allotments and sports fields;
3) High density housing does not – as commonly believed – reduce fuel consumption; and
4) People do not want to live in flats – despite the planners’ desire to cram us all into flats, around 60 per cent of the population wants to live in a dethatched house with a garden.
In this respect, Urban Planners are like economic planners: they seek to tell us what we should want, rather than give us what we do want.

Dr. Richard Barkham alone focussed on something other than housing. He noted that while industrial and agricultural rents have fallen over the past 30 years (as supply has outstripped demand) residential and retail rents have risen because of supply constraints. This had forced retailers to be more productive – which in itself is no bad thing – but that had driven small, marginal retailers out of business and fuelled the rise of the out-of-town shopping centre and the Clone Towns. Those who would like to “Save our town centres” and preserve independent retailers may wish to take note: the only solution other than harmful subsidies may be to free up retail development.

The problem, noted Professor Stephen Nickell, was the Derek Hatton effect: for a quarter of a century, central government has not trusted local authorities to raise or spend their own money. This was unlikely to change, an the result was that we would continue with a Stalinist approach of top-down solutions to planning.

Which is a shame, for Dr. Timothy Leunig had a perfectly good solution to the problem. This is in fact already Liberal Democrat policy, appearing in two separate policy papers. However, the policy paper that addressed it specifically (rather than instituting it as part of another policy) was referred back to the Federal Policy Committee by the September conference – a sign, noted Dr. Leunig, of the confusion and illogic that characterises the policy making process of the party to which both he and I belong. Dr. Leunig’s plan is to capture planning gain (the unearned wealth that accrues to land purely as a result of its being re-classified by local authorities from, say, agricultural to domestic). Local authorities would be given a monopsony on buying land for development, and would then sell that land on to developers. By using sealed auctions by both sellers and buyers, the local authorities could buy land cheaply (for, say, five times its current value) and then sell it expensively (for a large part of its new value after the council had granted planning permission). The result would be more land available for development, local authorities with an incentive to build (because they would make a LOT of money) and Nimbies turned into Imbies because of the benefits local people would gain from seeing tens of millions pouring into their local authorities’ coffers (such as a six year moratorium on Council Tax or an enormous urban renewal programme). One could even literally bribe the electorate to accept development: build a million homes around Cambridge and one could probably give each existing household hundreds of thousands if not of pounds compensation.

As Dr. Mark Pennington noted, this is a far more effective way of measuring people’s priorities than simply asking them. Ask anybody if they’d like to see fields or flats outside their window and they will say fields; “preserving the greenbelt” is an easy sell when there is no opportunity cost. But offer them thousands if not tens of thousands of pounds in return for agreeing to develop green-field sites that are not in direct line of sight and they will probably jump at the chance – and if they don’t, if they really want to protect the green spaces so much that they will forego wealth to do so, then they would remain free to do so. Dr. Pennington also argued in favour of private property rights, noting that private landlords (such as at Bluewater, the Grosvenor Estate and other planned communities) could attach conditions to the sale of property to regulate planning without the need of government.

There was one gaping hole in all this, however (or two, if you count the empty chair from which the Rt. Hon John Gummer MP was supposed to speak): not one of the speakers mentioned Land Value Taxation. Unable to believe my empty ears, I raised this with the panel. It received almost no response except for the repetition of two common criticisms, both expressed in one sentence: “It doesn’t work in practice” said Dr. Barkham (who has clearly not been to Denmark, Australia, New Zealand, the Baltic States, Jamaica or Hong Kong); “It is not politically possible” said Prof. Evans (which is probably what they said about denationalisation or controlling inflation 30 years ago).

Not satisfied with these answers I took this up again in the reception afterwards. I am not a committed Land Value Taxer: I consider it to be an interesting and intriguing idea that appears to have merit, and I have yet to hear a truly killer argument against it (despite Dr. Hartwich’s best efforts), but I remain open minded. However, within the halls of the IEA the idea was universally reviled (proving, if ever there was doubt, that the IEA really does not have a corporate view on anything). Whether or not Henry George was right about other issues of Land Value Taxation, in one respect he was clearly correct: the ranks of the economic establishment are clearly lined up against it.

How the “Asset rich, income poor” can afford their Land Value Tax

Julian H. has asked a perennial question about Land Value Taxation, which I will seek to answer below, namely

…how it's possible to tax something so illiquid.

For example: suppose I have owned the land my house is on since 1990 - in which time its value has increased from £100k to £1m. Yet I am a school teacher and my income during that period has merely risen from £18k to £28k per annum; enough to live off but no more. I have no money investments beyond my pension. How do I pay a LVT on the £900k that my land's value has increased by? I have not seen that £900k cash and never will do because my lazy kids are still living at home and anyway I am sentimentally attached to the house so I'll live in it until I die.

In doing so, he has highlighted the one serious obstacle that land value taxation faces, which is how it affects those with big assets but small income: fashionably called the “Asset rich, income poor”. The most obvious example of these people are pensioners – those whom we cite so often when criticising the Council Tax (which is, when all is said and done, a property tax, albeit a badly flawed one).

There are two possible solutions to the knotty problem of paying tax on an illiquid asset. One would be to permit the taxpayer to defer payment indefinitely, with a proviso that the debt must be paid when the asset is sold, including giving the tax debt priority in the estate of deceased landowners still owing land tax debts. This would result in low yields from LVT in the first few years, but after a while it would begin to settle down and average out. It would also reduce house prices, as profits would be significantly curtailed as significant portions of any profit earned could be owed in back tax.

The other solution would be to create a far more sophisticated market for turning illiquid into liquid assets. Better than the above – which is effectively a government loan scheme – would be for markets to lend money secured on the property. This would require only a small change to existing rules. One can currently withdraw equity on a property; the only difference would be for asset-rich, income-poor households that would wish to defer payment on the new loan. That problem is hardly insurmountable.

Creditors (be they state or private) could either charge a set return, as they do now (5% per annum; 0.75% over the base rate; etc.) or take a stake in the premises (perhaps without charging a fee, as they would then be sharing in the impressive return on the land values themselves). After all, if LVT was set at 1%, and fell only on the land value rather than improvements (considered to average less than two thirds of property prices), then even if one bought a house and lived in it for 30 years, never paying one’s own LVT, when one came to sell/died after 30 years one would only have ceded less than a fifth of the (value of the) property to the person or institution that had paid 30 years of LVT on your behalf.

In answer Julian’s specific example, then:

Assuming a typical property, £60,000 of Julian’s original £100,000 was the stake for the land rather than the building on it. This has grown to £600,000 over 17 years, giving Julian half a million pounds in unearned growth. Consequently, either:
a) 17% of the land (but not the buildings thereon) is owned by somebody else – government or financial institution, or
b) Julian borrowed the money at a commercial rate of interest, and currently has a financial commitment (which I can’t be bothered to calculate because it is complex) which he has no need to pay until he sells the house or dies.

Either way, Julian need not worry. If, as he says, he is “sentimentally attached to the house so [will] live in it until [he] die[s]”, he need never pay off the debt. Instead, he can die still owing the tax/debt, and his “lazy kids” can pay it off out of the enormous sum of money they make selling the family home.

Even if Julian lives for 100 years after he buys the house, his children will still get the return on the buildings (a third of the overall value - £400,000 so far according to his original example), which will still provide a nice start in life now that they have to go out there and fend for themselves.

I hope that explains how LVT might be affordable for the asset-rich, income poor. It’s a better position than they currently find themselves in when the Council Tax bill arrives. And it would help damp down the housing market, too.

A house-price crash will save the Government from finding a policy solution

I’m sure Henry George was spinning in his communally-owned grave last night (though having seen this, I wonder if he’s been spinning for some time!).

Newsnight devoted most of their programme last night to housing. (Not that you’d guess by reading the first comment on the Newsnight blog, which drips anti-Semitic bile). Gavin Estler chaired a debate between Housing Minister Yvette Cooper, a Tory shadow less aristocratic than Michael Gove, the owner of a chain of estate agents and somebody from pricedout.org. It was interspersed with a few reports.

In the first instance, just about everybody agreed that more housing was needed. The Government recognised that 220,000 new houses were needed each year, but blamed Tory councils for blocking planning permission. One commentator then noted that it had taken the Government ten years to raise house-building from 100,000 to 110,000, whereas in the 1950s the Tories managed to raise house-building from 200,000 to 300,000 in a couple of years. The lady from pricedout.org agreed that more housing was needed. Everybody agreed that there was a supply problem, but nobody explained how it was to be solved, or why we are tearing down houses in the North of England while building new ones in the South.

There followed a series of truly bizarre proposals, including the usual anti-capitalist assault on second-homers and those buying to let (in an example of economic illiteracy, Ms. pricedout argued that more supply would merely be mopped up by wealthy buy-to-let landlords and so would not benefit first time buyers, which showed a total ignorance of the most basic principle of economics). Poor hippies could no longer afford to buy houses in the bohemian paradise of Totnes, lamented one Newsnight reporter, who seemed to wilfully ignore the fact that those selling their houses to property magnates and .com millionaires were the very hippies and artists who had given the place its character, and were now happily cashing in on the very material windfall that they had enjoyed.

It’s all the fault of the money-lenders, went up a cry that would not have been out of place in twelfth century York. House prices are over inflated because people are now able to borrow vast sums of money (up to ten times their salaries!). The words “credit control” appeared on the screen. The panellists happily discussed whether there should be a cap on the amount one is allowed to lend. Apparently, it is the job of the lender to lend responsibly. I had always though that it was the job of the borrower to borrow responsibly – it is they, after all, who must meet the repayments or lose their house – but nobody spoke up for the freedom of the individual to borrow whatever sum they deem necessary (or desirable) to make whatever arrangements they see fit.

At one point the Newsnight team mentioned property taxes. Apparently, they solve the whole problem. But Middle England wouldn’t like it, so it was brushed aside with a politically expedient waive. There was only one thing for it, they concluded. A nice house price crash will sort it out; but lets hope its not too hard, added the politicians.

It is a shame that Dan Rogerson was not available, as a Lib Dem might have tried to keep the discussion about property taxes alive for just a little longer. Like the issue of road user pricing (which is a Lib Dem manifesto pledge, though we have cooled to it since two million people signed a petition objecting to it), it is the right policy and one that needs to be defended, explained and pursued.

Land is a finite resource that owes nothing to the ingenuity or effort of mankind. It has more in common with fossil fuels or spectrum band-width than labour or capital. Because it is both limited and essential (unless one is a pirate radio station), it’s value constantly rises as society grows richer: money chases more and better goods, so prices actually fall in real terms (imagine how much a brand new ZX Spectrum would be worth now – kitsch value aside); wealth outstrips population growth, so real incomes slowly rise; but land is static, so rising wealth and demand must push prices up. Land value inflation is inevitable.

The most efficient way to prevent land becoming the preserve of the wealthy few (which George argues must inevitably lead to the impoverishment of those who do not own land, as any extra wealth they produce will be taken in rent) is for the state to capture rent and distribute it among the populous. The Lib Dem proposals are rather more modest; they would tax property values at 1 per cent per annum, with a view in the long-run to taxing only land values and not the value of improvements.

The result would be to calm house price fluctuation. It would discourage hoarding; it would be costly to own land that was not in use. It also rewards improvement: a field would have the same land tax whether or not a block of flats were built on it, so the owner’s interest would be in developing his land. It would capture a proportion of the wealth (as opposed to income) that would otherwise entrench privilege in families, and would capture unearned income (that deriving just from owning a rising asset). From an economic perspective, it would have a far more benign effect than taxation of labour or capital, both of which we should encourage. And it is devilishly hard to evade.

Middle England’s objection comes primarily from the fear that it will lead to a net increase in taxation. This is – or at least, ought to be – misguided. If land value taxation were the preserve of local authorities, it could replace the hated Council Tax. If it yielded higher returns than the Council Tax, the Government should respond by reducing the grant it gives local authorities and tax labour and capital correspondingly less (that is to say, reduce income, capital gains and business taxes). This would additionally hand much more fiscal authority to councils and so promote the devolution agenda. Tax changes should be at worst neutral, but would be altogether fairer, simpler, greener, more local and more efficient. Sound familiar?

EXCLUSIVE: Mervyn DID draft a letter to Gordon!

It's amazing what one finds in the rubbish bins behind Threadneedle Street!

Obviously the person who drafted this letter realised they didn't quite need it after all:


Dear Gordon,

As you may have noticed, inflation appears to be spiralling out of control. The consumer price index (CPI) is now at its highest since 1995, while the retail price index (RPI) is at its highest since 1991. I imagine it must be pretty embarrassing, presiding over an economic record worse than that of the Major administration, which Labour have been criticised so vocally over the past decade.

I feel duty bound to provide an explanation for this rising inflationary tide. I attribute it to a number of key factors, none of which are beyond the wit of man to cure.

1. House prices

House prices have spiralled over the past decade. This has a direct impact on RPI and has also facilitated unprecedented levels of equity withdrawal, fuelling consumer price rises.

House price rises are largely to do with property speculation. While interest rates can curb house prices to a degree, they are a blunt tool in that they also affect other lending and borrowing. High interest rates would, for example, reduce investment. One means of curbing property speculation without harming investment would be to introduce land value taxation, which economists recognise is among the least distortionary form of taxation. Sadly, the Government has shown no willingness to investigate this option.

2. Public spending

A grotesque rise in public spending over the past five years has increased inflation. A particularly egregious example has been overly-generous public sector pay rises that bear no relation to productivity gains.

3. Public borrowing

The Pre-Budget Report forecasts net debt at the end of March 2007 of £503.9 billion. This budgetary imprudence has injected massive liquidity into the public sector and the economy more widely. Effectively, more money is chasing the same number of goods.

4. Taxes

In the pre-budget report the Government added 1.5p/litre to petrol duty. This has been the major factor in the 2p rise in the cost of a litre of petrol, which in turn accounts for two-thirds of the rise in CPI last month.

5. Trade barriers

Cheap imports of goods from emerging Asian manufacturers has applied downward pressure on prices, particularly in clothing and electrical goods. Sadly, the Government and the European Commission (led by Trade Commissioner Peter Peter Mandelson) have imposed additional and ongoing quotas on Chinese textile imports. This is in breach of our commitments under the World Trade Organisation. The result is that customers have been forced to purchase more expensive European products, pushing up retail prices.

6. Immigration

The low inflation enjoyed by the UK over the past two years has been in part due to immigration. As my colleague, David, pointed out a couple of weeks ago, the availability of highly skilled Eastern European workers has kept wage demands within sensible limits. Sadly, the Government has decided not to take advantage of another wave of immigration from Romania and Bulgaria, instead imposing a daft and distortionary quota system. This has removed a further buffer against inflation.

As you will see from the above factors, there is a clear single cause of inflation. Sadly, it is beyond my authority to do anything about it. I think it’s over to you, old chap.

I remain your humble servant,

Mervyn.

The tyranny of the majority may condemn us all to gridlock

The Number 10 petitions website continues to fascinate me. I have resisted further temptation to sign up to stuff, even the delightful suggestion that we replace our stolid national anthem with Gold by Spandau Ballet.

Since my earlier criticism, which was picked up by Peter Riddell in The Times, I continue to be concerned that petitions imply apparent support for opinions with no opportunity to register dissent. However, this is not the end of the story. The petitions page could, in theory, garner in excess of 30m signatures for a particular policy. Would the Government then be compelled to legislate? If so, could this usher in the tyranny of the masses?

As a liberal I am concerned that democracy not excuse tyranny. The fact that a majority want something does not automatically justify it, especially if it is detrimental to others.

The petition that is concerning me at the moment is the most popular by far, out-polling even the repeal of the Hunting Act. An impressive 15,493 signatures have so far been appended to a petition calling upon the Government to Scrap the planned vehicle tracking and road pricing policy.

The thinking behind this petition is confused and wrong. The text of the full petition states that “Road pricing is already here with the high level of taxation on fuel. The more you travel - the more tax you pay.” While this does address the global environmental cost in the form of the carbon and other pollutants produced, it does not address the other main environmental concern – congestion. It is as expensive for me to drive a mile across the Highlands as it is across Piccadilly, yet roads in the Highlands are far more costly per mile facilitated as they are rarely used, while urban driving causes more lethal pollution (it is concentrated and hovers around pedestrians and residential properties) and slows other traffic, costing time and thus money.

Then, in a startling example of counter logic, the petitioners conclude “Please Mr Blair - forget about road pricing and concentrate on improving our roads to reduce congestion.” In fact, only road pricing can reduce congestion, because congestion is a natural by-product of free access; consumption unlimited by cost will expand until the consumer can gorge no more. Compare two other commodities: Britain has been awash with food since the Corn Laws were abolished (a bout of ill-conceived war-rationing aside) because we pay per loaf, but every year we are issued with hose-pipe bans because we pay a flat fee for unlimited water. As long as we can use the road without having to pay for it, we will use it without constraint.

An what about road improvements? Transport policy has always been a shambles as it has failed to compete for tax-money with more immediate concerns (health, education, war). To forestall one traditional liberal comment, Land Value Taxation would go part way to convincing those who benefit to fund infrastructure. But there is still a compelling case for the user to pay, at lest for the running costs if not for building in the first place (in fact, few infrastructure projects and no railways can be built if they rely on recouping their costs from users, as the stories of Railtrack and the Channel Tunnel both amply demonstrate).

Sadly, this argument has yet to be broadly accepted. Too many people in Britain have become used to free and unlimited road use. Thus, as with so many other “free” services, we are bedazzled by the joy of unlimited consumption to the point of being blind to the real costs that appear in the gap between our gross and net salaries.

Thus I fear Number 10’s petitions page. Government has a duty to lead, and with its decision to consider road user pricing, this Government has shown uncharacteristic leadership. Yet it has form for caving in to populism. I would love to sign a counter-petition to debunk the growing impression that people oppose road user pricing. But if I am in the minority I hope the Government still presses ahead. It is effective, it is efficient and it is fair.