Shock Horror: John Prescott Had a Good Idea

Oxley Woods Housing
Image by Oxley Woods Photos via Flickr

Oxley Woods: Cheap but Stylish Housing – and Very Expensive Land

In 2004, John Prescott had one of his better ideas. Which wouldn’t be hard, to be frank.

But this idea was a new scheme to build low cost homes. Mr Prescott challenged the building industry to find ways to build houses for a construction cost of £60,000.

His suggestions included using more modern building methods, like pre-fabricated construction.

The crucial part of his plan, though, was that the land would not be included, but leased from the government. Therefore buyers would simply pay the £60,000 to buy themselves a house, and then pay some kind of lease charge to the government.

We own the land; it’s a valuable public asset. We don’t need to sell it off. We can keep it in trust and we can lease it for essential housing.

The BBC has been reviewing where the scheme got to.

Apparently ten developments were approved, and eight have gone ahead.

The BBC takes the example of a development in Milton Keynes. The developers did not quite manage to meet Mr Prescott’s target of a £60,000 construction cost. The construction cost came out at £85,000, according to the government agency responsible. But still, a far cry from the normal price of a house in that area.

But crucially the land was never separated from the buildings. This means that the average selling price of the homes in that development was a stonking £231,000.

The BBC takes the example of a first time buyer who bought a property in the development for £210,000. She was forced to borrow some money from her parents to fund her “deposit” (sic). That allowed her to get the mortgage she needed – but it still wasn’t enough. She went to the government’s Homebuy scheme, which gave her yet another loan to cover the shortfall.

The BBC does not quote how much cash that buyer had before borrowing from her parents, the bank and the government. But if it was 10%, or £21,000, then she had the money for a quarter of the construction cost of the house.

Instead of borrowing £64,000, as Mr Prescott’s scheme would have envisaged, she ended up borrowing £189,000.

£125,000 of her borrowing was simply to buy the land on which her house was built. The capital repayments alone for her house will cost her £630 a month for the next 25 years – and that’s before you even start on interest.

Once again: of the very large loan payments that she will be forking out to the bank, two thirds will be to cover the cost of the land.

So who benefits?

Did that buyer benefit? Did she heck. Although she is apparently very happy with her house, she will be a debt slave for the next 25 years to pay for it. She will be skimping and scraping, and spending as little as possible on other things, so she can pay the ransome to the bank.

What was that again about high house prices being good for the economy?

The BBC quotes a spokesman for Shelter as saying

Unless we release more land and are careful about how house prices rise, and then we start to build enough homes in the right places and the right kind of homes, none of these schemes will make up for that fundamental lack in government policy.

Well, I agree with that. Milton Keynes is not a place where building land supply is contrained by the physical amount of land (like in central London for example). In Milton Keynes, the building land supply is contrained by planning laws.

Just to save Mark W the trouble, I’ll write his comment for him:

“Or you could introduce a Land Value Tax.”

And I don’t agree with that. But at least surely to God any sensible person ought to agree that we really have to stop all that madness about loving rising house prices?

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Land Value Tax is Still a Tax

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Mark Wadsworth, in his blog, has been promoting the idea of a Land Value Tax to replace most other taxes. He was kind enough yesterday to declare that I have “nearly got it”, so I decided he deserved a more detailed response.

The idea of LVT is that the tax would be levied as a percentage on the market value of all land. This would of course have the effect of depressing land values. So the idea is that what people pay in the tax, they save in mortgage payments (because they pay less for the land). (Those who own their land without a mortgage would have the same benefit, because they would have less wealth tied up in the land, and therefore be foregoing less interest on it.)

Because the LVT would be a tax on assets rather than on productive effort, it would not depress economic activity. And because it would (so the theory goes) not cause economic distortions, it would not carry “deadweight costs”. (These are broadly the costs to the economy of the distortions caused by a tax.)

The idea is not new. In fact, it was a topic for debate in the 18th century. In the 19th century, Karl Marx was opposed, believing it to be an attempt to protect the domination of capitalists. He commented about Henry George, a leading proponent of LVT:

“His fundamental dogma is that everything would be all right if ground rent were paid to the state.”

As Mark Wadsworth put it:

“Why is “land” different to other assets? It is because the location value of land has nothing to do with the efforts of any individual, and certainly not the individual who happens to own the land at any one point in time. The value of the location is the result of a nigh infinite number of other factors, positive and negative. What you own, or what you pay for when you buy or rent, is the enjoyment of, and the right to exclude others from the particular bundle of advantages, created by society in general.”

Which really brings me to the first objection to the LVT idea. An individual does not “happen to own” land at a point in time. At one point in time, hundreds of years ago, when enclosure of common land was happening, the “happen to own” phrase really did apply. But that is lost in the mists of the past. Individuals who now own land mostly do so because they bought it, often with money earned from productive activity.

A switch in taxes from taxing wealth generation to taxing non-wasting assets, e.g. land, sounds seductive. It sounds as if it is taxing something unproductive (the land) instead of productive economic activity. But in reality, it simply represents a switch from taxing present wealth creation to taxing past wealth creation.

That brings me to the second objection. To introduce such a tax would be grossly unfair, however it were done.

Those who already own assets would be hit. Those who have yet to buy would benefit at their expense. And that is why often the proponents of LVT turn out to be people who do not currently own land.

This is a more general case of an often-cited objection to the LVT, namely the example of a widow living on her own in a house that she and her husband bought many years ago. She is income-poor, but asset rich.

Mark, in the past, has tried to escape this objection by proposing distortions like allowing pensioners to defer LVT liability until their death. But this is only a partial solution, and if it is extended beyond pensioners, renders LVT simply another form of inheritance tax.

The third objection to LVT is that, like other taxes, it does carry “deadweight costs”. Clearly, it is transferring resources away from land-owners (who pay the tax) and onto wealth-creators (who don’t). Perhaps this might be beneficial (and Mark has certainly argued in the past on his blog that it would be). However, the fact is that with LVT, people would act differently than they do without it.

For example, it would be very hard to leave land idle, because the tax would still be payable. Therefore landowners would be more likely to carry out economic activity with the land, even if this activity is, in the absence of the tax, unprofitable and therefore wealth-destroying. LVT would be creating economic distortions, and therefore deadweight costs.

The fourth objection to LVT is, why single out land? Mark admitted in his blog post that “for the purposes of this discussion, land values include broadcasting spectrum and landing slots at Heathrow” because, of course, those things too have natural scarcity. I do not believe that LVT proponents have suggested taxing broadcasting spectrum or Heathrow landing slots, or indeed any of the other naturally scarce things in this world. They pick on land because it is visible and solid, and easy to tax. But it is not justifiable to tax land and not those other things. To take a simple example, an LVT would tax the providers of an airport but not the airlines flying from it. Therefore there would be likely to be fewer but more congested airports. More economic distortion, and more deadweight costs.

The Wikipedia entry http://en.wikipedia.org/wiki/Land_value_tax on Land Value tax has a more detailed treatment of the objections to LVT.

The truth is that ultimately, State services can only be financed by taking the fruits of economic activity away from taxpayers. However it is dressed up, whether you tax assets or wealth creation, that is what you are doing.

Of course, some ways of levying taxes are more damaging to the economy than others. There are many reasons why LVT might be rather less damaging than many taxes. However, there are also objections to it, the biggest being the difficulty of going from where we are now to an LVT-based tax system.

To my mind, there are more important debates to be having, debates that are likely to be more productive.

The key debate is the basic one about how much tax the State should take from the people. At the moment, it takes too much. It should take less.

A secondary, but still vital, debate centres around how to reduce the enormous inefficiencies that result when the State provides services using those taxes. Another question is how to make the tax system simpler and more fair overall, without introducing revolutionary changes that could destabilise the economy and our social fabric.

I am sure that most proponents of LVT could find a great deal of common ground with others on all these issues.

There are enough battles to fight to last all of our lifetimes, without chasing a will-o-the-wisp like the land value tax.