Monday, 4 February 2013

Do we really need land value taxation?

A Telling Silence

Why we need land value taxation.
By George Monbiot, published in the Guardian 22nd January 2013

You can learn as much about a country from its silences as you can from its obsessions. The issues politicians do not discuss are as telling and decisive as those they do. While the government’s cuts beggar the vulnerable and gut public services, it’s time to talk about the turns not taken, the opportunities foregone: the taxes which could have spared us every turn of the screw.

The extent of the forgetting is extraordinary. Take, for example, capital gains tax. Before the election, the Liberal Democrats promised to raise it from 18% to “the same rates as income” (in other words a top rate of 50%), to ensure that private equity bosses were no longer paying lower rates of tax than their office cleaners(1). It made sense, as it would have removed the bosses’ incentive to collect their earnings as capital. Despite a powerful economic case, the government refused to raise the top rate above 28%. The Lib Dems protested for a day or two(2), and have remained silent ever since. In the parliamentary debate about cuts to social security, this missed opportunity wasn’t mentioned once(3).

But at least that tax has risen. In just two and half years, the government has cut corporation tax three times. It will fall from 28% in 2010 to 21% in 2014(4,5). George Osborne, the chancellor, boasted last month that this “is the lowest rate of any major western economy”(6): he is consciously setting up a destructive competition with other nations, creating new excuses further to reduce the UK rate.

Labour’s near-silence on this issue is easily explained. Under Tony Blair and Gordon Brown, who were often as keen as the Conservatives to appease corporate power, the rate was reduced from 33% to 28%. Prefiguring Osborne’s boast, in 1999 Brown bragged that the rate he had set was “the lowest rate of any major industrialised country anywhere, including Japan and the United States.”(7) What a legacy for a Labour government.

As for a Robin Hood tax on financial transactions, after an initial flutter of interest you are now more likely to hear the call of the jubjub bird in the House of Commons. According to the Institute for Public Policy Research, a tax rate of just 0.01% would raise £25bn a year, rendering many of the chamber’s earnest debates about the devastating cuts void(8). Silence also surrounds the notion of a windfall tax on extreme wealth. And to say that Professor Greg Philo’s arresting idea of transferring the national debt to those who possess assets worth £1m or more has failed to ignite the flame of passion in parliament would not overstate the case(9).

But the loudest silence surrounds the issue of property taxes. The most expensive flat in that favourite haunt of the international super-rich, One Hyde Park, cost £135m. The owner pays £1,369 in council tax, or 0.001% of its value(10). Last year the Independent revealed that the Sultan of Brunei pays only £32 a month more for his pleasure dome in Kensington Palace Gardens than some of the poorest people in the same borough(11). A mansion tax – slapped down by David Cameron in October(12) – is only the beginning of what the owners of such places should pay. For the simplest, fairest and least avoidable levy is one which the major parties simply will not contemplate. It’s called land value tax.

The term is a misnomer. It’s not really a tax. It’s a return to the public of the benefits we have donated to the landlords. When land rises in value, the government and the people deliver a great unearned gift to those who happen to own it.

In 1909 a dangerous subversive explained the issue thus. “Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains – and all the while the landlord sits still. Every one of those improvements is effected by the labor and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived. … the unearned increment on the land is reaped by the land monopolist in exact proportion, not to the service, but to the disservice done.”(13)

Who was this firebrand? Winston Churchill. As Churchill, Adam Smith(14) and many others have pointed out, those who own the land skim wealth from everyone else, without exertion or enterprise. They “levy a toll upon all other forms of wealth and every form of industry.”(15) Land value tax recoups this toll.

It has a number of other benefits(16). It stops the speculative land hoarding that prevents homes from being built. It ensures that the most valuable real estate – in city centres – is developed first, discouraging urban sprawl. It prevents speculative property bubbles, of the kind that have recently trashed the economies of Ireland, Spain and other nations and which make rents and first homes so hard to afford. Because it does not affect the supply of land (they stopped making it some time ago), it cannot cause the rents that people must pay to the landlords to be raised. It is easy to calculate and hard to avoid: you can’t hide your land in London in a secret account in the Cayman Islands. And it could probably discharge the entire deficit.

It is altogether remarkable, in these straitened and inequitable times, that land value tax is not at the heart of the current political debate. Perhaps it is a sign of how powerful the rent-seeking class in Britain has become. While the silence surrounding this obvious solution exposes Labour’s limitations, it also exposes the contradiction at heart of the Conservative Party. The Conservatives claim, in David Cameron’s words, to be “the party of enterprise”(17). But those who benefit most from its policies are those who are rich already. It is, in reality, the party of rent.
This is where the debate about workers and shirkers, strivers and skivers should have led. The skivers and shirkers sucking the money out of your pockets are not the recipients of social security demonised by the Daily Mail and the Conservative Party, the overwhelming majority of whom are honest claimants. We are being parasitised from above, not below, and the tax system should reflect this.
7. Gordon Brown, 1st November 1999. Speech to the CBI Conference.
8. Tony Dolphin, June 2010. Financial Sector Taxes. Institute for Public Policy Research.
14. “Ground-rents are a still more proper subject of taxation than the rent of houses. A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground.” Wealth of Nations, Book V, Chapter 2.
15. Winston Churchill, as above.

Personally, I don't agree with what Monbiot is trying to say here (and often elsewhere I might add). Land is essentially worthless. By that I mean land does not generate wealth by its own accord. The money does not magically sprout from the ground with landlords kicking their heels and dancing round it. To make a profit, the land has to be sold, or developed, or farmed, or rented. Sure, you can accuse a landowner of making a profit by-proxy, in that his/her land might increase in value if they are neighbours to plots of land which have undergone development. If the land is increasing in value over time, then surely the right time to tax the land is when someone takes the opportunity to try and make a profit from it. Actual proper, tangible profit - not some pie-in-the-sky nonsense about invisible "windfall gains".

For years, speculators had remained disinterested in obtaining ground rent portfolios because they are notoriously poor at making profit. Ground rents are low. Leases last from anywhere between 99 to 999 years, and in that time are not reviewed, so that time and inflation erodes the value of the ground rent. If you are hoping to make a big profit from them, then you are going to have to accumulate a lot of ground rent payments. And the only "people" who can afford to get their hands on enough land in order to accumulate ground rents are wealthy corporations.

If you tax the land, you are going to force landlords to find the money somehow. LVT is designed to sap away at the personal wealth of landlords. It seems unlikely that they will simply pay the money from their own coffers. Landlords will have to increase ground rents. If this does not suffice, then they will have to either develop the land themselves, or sell it on to developers. What purpose to society is a tax that actively encourages landlords to rob their tenants, and smeer concrete all over green lush countryside?

Because many of the current landlords will be unable to review their ground rents, it may mean that some will  be forced to sell. And these corporations will just snap them up. They will literally own the very dirt beneath our feet, and then they will give it a great big tug. When corporations become landlords, do you imagine that you will ever see a lease that is not reviewed for 999 years, or even 9 years? Not bloody likely. They are going to try and extract every penny they can from it - from you - year in, year out.

One particular example of the investment markets renewed salivating interest in ground rent portfolios has been included below. You'll notice their apparent delight in the prospect of making greater profits by slapping charges upon those that default on payments; in other words, kicking those that are down.

ground rents - sound rents?

Why would any investor or developer want to own ground rents? - seemingly anachronistic low rents - relics of when landed estate owners in earlier centuries leased land at a 'ground' rent, rather than at a 'rack' or 'market' rent,  to speculative builders to enable them to develop the land  - thus ensuring the landowners received an income whilst the development was carried on. Time and inflation, however, have eroded the value of those ground rents as most were not subject to review. Why then do so many wish to invest in them?

Indeed, far from being a Victorian practice, in recent times, more and more ground rents have been created as landowners and developers developed large estates where the units were sold off on a long leasehold basis for a premium but subject to a ground rent. Indeed in the 'boom' years for development running up to the recession millions of new ground rents were created resulting in millions of pounds' worth of rental income for those developers and investors who retained the freehold and ownership of the ground rents.

Investment in property has long been a sound investment but in recent years owing to the poor economic climate, the value of such investment has faltered. By contrast, however, investment in ground rents has not been affected by the recession and lack of fluidity in the mortgage market and is seen by most financial advisors as an increasingly sound investment.

It may not, however, be in the economic interests of a small investor to own ground rents but for larger scale investors or developers with sizeable portfolios of ground rents then this sort of investment can prove not only to be sound but also recession–proof. Before the recession took hold many developers or ground rent owners may have been ambivalent about the income derived from ground rents and may not even have bothered to collect in the rents but now that the development potential and the finance with which to undertake it  has been curtailed in this economic market, ground rents are being recognised as a viable source of income and a sound investment.

The reason for this is that ground rent ownership provides a secure income [by way of the rents generated - albeit individually low] and also the low risk profile most investors seek. Such ground rent investment is an ideal way to diversify portfolios and manage exposure to the vagaries of the property market in a low risk manner. The reason the risk is low is that the investment is secured in every case against the value of vacant possession of the long leasehold interest.
The worth of ground rent ownership is a combination of the rental income and the ever increasing value of the decreasing terms of the long leasehold interests. In most modern leases the freeholder or developer should seek to review the rent upwardly as this has a beneficial effect on the rental income for the ground rent owner.
But ground rent ownership also provides other income streams in addition to rent which enhance the attraction of such ownership, for example:
  • Lease extensions - as the lease term gets shorter and, as a result, the ability to secure mortgage lending declines, so the value of the ground rent ownership increases as, subject to statute [Leasehold Reform, Housing and Urban Development Act 1993], ground rent owners are able to secure a capital payment from leaseholders in return for the grant of a new lease; or
  • Management fees - in most leases the leaseholders require the consent of  the  ground rent owner/freeholder for assignments; underletting; alterations and works to the property; certificates of compliance for land registry purposes on sales of the property - all of which can produce an income for the production of those consents; or
  • Development potential - ground rent owners may be able to take advantage of the possibilities afforded by spare land at the development or flat roofs or unused buildings to create and develop more units to derive substantial capital and additional rental income; or
  • Insurance commissions - most leases provide that the freeholder/developer effects the insurance for the whole block thus affording a chance to negotiate insurance commissions with the insurance company on the premium; or
  • Interest on late payments - most leases provide for interest to be charged on late payment of ground rents accruing from the date they fell due and usually at a rate of 4% above the base lending rate of the bank specified in the lease. This sum could easily be considerable if there has been ineffective collection in the past; or
  • Administration charges - if the lease permits administration charges can be levied by the ground rent owner on late payers and, again, this could be a considerable sum if arrears have been allowed to build up. 

As can be seen, therefore, ground rent ownership is a valuable investment opportunity but one that is readily traded should the owner wish to raise funds for other acquisitions or to raise capital generally.
It should be noted, however, that there is a statutory bar to selling on ground rents /reversionary interests without first giving the leaseholders the right of first refusal to acquire. The Landlord and Tenant Act 1987 obliges owners to serve a 'Schedule V' notice on all qualifying tenants offering to sell them the reversionary interest on the same terms as it wishes to sell to any other party. Those tenants have 2 months within which to respond and a further 2 months to nominate a purchaser if they are interested in proceeding - if they do not respond within the requisite time frame then the sale may proceed to the other party as normal.
If retaining ownership of ground rents then owners should be aware of the practicalities of securing the payment of the rents. Section166 of the Commonhold and Leasehold Reform Act 2002 provides that long leaseholders are not liable to pay ground rent until the landlord has given them a statutorily prescribed form of notice advising of the amount and date for payment of the rent. This notice must also contain other prescribed information. For a template of a Demand for Ground Rent - (Click here to view).
The limitation period for collecting ground rents is 6 years from the date the same fell due for payment [section 19 of the Limitation Act 1980]
The ultimate sanction for non payment or persistent arrears is forfeiture of the lease provided the sum outstanding is greater than £350 or the sum has been outstanding for 3 years or more.
SLC Solicitors are experts in ground rent arrears recovery working as they do for major ground rent portfolio owners and developers in this niche area. We can also provide assistance to ground rent owners with management services such as licences to assign and underlet; deeds of consent for works and alterations and provision of Certificates of Compliance for Land Registry purposes on sales.  We also have the expertise to provide guidance on the Section V notice requirements and sales of ground rent portfolios.

The irony of course is that LVT will not end the monopolisation of land by landlords. It is bizarre to try and suggest as such. LVT will simply deflect monopolisation from small, independent landlords to large, ruthless corporations. And that's why big business is now backing LVT.

You will find that the arguments used to support LVT can't wait to quote Winston Churchill and his speech on "land monopolists". And they can't wait to throw in some figures about all this supposed money that our society is losing (which it isn't), and how awful it is that these landowners (which includes private landowners by the way!) are "freeloading" and sucking up all our wealth (which they're not). The following quote below is a good example of this sort of argument, and was gleened from Prospect Magazine, in an article entitled "The rise of the freeloaders":

The ability of individuals to make something for nothing is so pervasive that it even has a special name: “economic rent.” It was identified by the great eighteenth-century economist Adam Smith as one of the three main types of income. In The Wealth of Nations, Smith divided income into wages, profits and “rent.” He refers to “rent” in a way that confuses the modern reader, so I’ll use the term “economic freeloading.”

Freeloading, once it is recognised, provokes instinctive revulsion. Recent studies indicate human morality evolved partly as a response to the damage done by “free riders.” In primitive societies, anyone hitching a free ride was lethal to the social group, since hunter-gatherer existence required everyone to pull their weight. Humans had to develop a finely tuned sense of fairness and root out free riders, or their social group would become extinct. Most people (except Private Schulz) feel guilty when they hitch a free ride on others, and therefore avoid doing so.

One group engages in economic freeloading on a gigantic scale: landowners. This group, consisting of commercial property owners and private homeowners, sucks billions of pounds out of society each year. The average homeowner would be shocked and indignant at being described as a freeloader. A house is somewhere to live. Freeloading suggests some sort of sneaky behaviour, but those buying a home are overwhelmingly law-abiding and responsible, supporting themselves and their dependents without calling on assistance from the state. But the tax system makes them freeloaders, whether they know it or not.
In a speech supporting the Liberal government’s “people’s budget” of 1909, Winston Churchill explained why this counts as freeloading:
“Roads are made, streets are made, railway services are improved, electric light turns night into day, electric trams glide swiftly to and fro, water is brought from reservoirs a hundred miles off in the mountains—and all the while the landlord sits still… To not one of these improvements does the land monopolist as a land monopolist contribute, and yet by every one of them the value of his land is sensibly enhanced.”
There is nothing a property owner can do to change the value of his plot of land. The value per square foot depends on its location. Is it near a station? A good school? All of these factors are determined by the actions of society, not the individual efforts of the owner. Any increase in the value per square foot of his plot is a pure free ride, towards which he has done nothing to contribute.
The scale of this free ride is huge. The total value of the private housing stock in the UK has risen from about £1.3tn in 1992 to about £4.2tn today. This increase is largely due to inflation and growth in land value; the stock did not substantially increase during this period. If the increase had been due to inflation alone, this would have taken the value to £2.3tn. The additional £2tn reflects the increase in the value of the land that the houses are built on. So landowners, including homeowners, have gained almost £2tn over 20 years from a rise in land values.
A specific example of landowners getting a free ride at public expense was the construction of the Jubilee line extension in London in the 1990s. This cost £3.5bn and led to an increase of £13bn in the value of nearby land. The cost of building the line was almost exclusively borne by the general taxpayer, but the £13bn benefit was pocketed by local landowners, most of whom had contributed no more to the building of the Jubilee line than any other British taxpayer.
I love the way this article portrays landowners has having accumulated all these lost billions. But of course there are no lost billions. Nobody has pocketed billions of taxpayers money. What is happening is that LVT supporters are imagining how much money the land is making, so they go on to accuse the landowner of hogging all this imaginary money, and they get all worked up and angry about it. And then they want you to get all worked up and angry about it too.

I mean, is it really the landowners' fault that somebody decided to build the Jubilee Line in their backyard? Maybe they didn't want the Jubilee Line. They might even decide to sell the land and move elsewhere. This then is the perfect opportunity for the government to step in and slap on a tax. A tax which is applied to real money, real money that one can let slip between their fingers, and comes from an actual profit being made; a tax which can quite happily reflect upon the capital gains made by a landowner over time, and deduct monies accordingly.

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