Killer Arguments Against LVT, Not (295)

David E. Cooper, himself an LVT supporter, in the comments to an article at ConHome slagging off an article which he wrote recently:

Your points [i.e. those from Team LVT] are welcome, but please don't overstate the advantages of LVT. There is no evidence it eliminates property booms - look at the recent news from Taiwan, where LVT is used, and there is an ongoing property price boom.

Indeed one possible consequence of of LVT is that the government, finding that its revenues rely on property prices, takes active steps that encourage ever higher property prices. Something like this occurs in Hong Kong, where most revenue comes from the sale of long term land usage rights, and as a consequence the government is very keen to spend money on infrastructure which enhances their sale value.

Booms and busts will always happen.

Taiwan and HK are separate topics, let's look at the UK.

Commercial land and buildings are liable to Business Rates (pretty close to LVT, the implied rate on site values alone is around fifty per cent) while residential land and buildings are only liable to Council Tax (about as far from LVT as an annual land tax can get; it's more of a Poll Tax plus premiums for larger homes minus reductions for low-income households, making it a bit like Local Income Tax), and which is only about a fifth as high as Business Rates would be on a similar building used commercially.

Apart from that, these two types of land (or land use) face exactly the same other influences (state of the economy, interest rates, planning restrictions etc). So, if the claim (that LVT dampens bubbles) is true, then the bubble in commercial prices would have been a lot smaller than the one in residential, yes?

Oh, it was...*
Call me jaundiced or something, but it seems fair to say that:
- Commercial prices rose fifty percent over four years, reverted to the old level within two years and have since undershot their old level.
- Residential prices rose one hundred and fifty per cent over eight years and are still nowhere near their old level (admittedly, the UK government has been throwing everything it can at preventing them falling back below 2004-05 price levels).

Common sense also tells us that you can make a windfall gain by buying commercial land and buildings (the price of which is depressed by Business Rates, i.e. quasi-LVT) and obtaining permission to change them to residential use (which are only liable to Council Tax, which reduces the annual tax bill by 80% or something). This is pretty much common knowledge among property developers.

* Chart from the Bank of England's Feb 2010 Inflation Report (click to download Powerpoint slides, via the ever reliable Tutor2U