torsdag 6 september 2007

For LVT geeks - Capital or Annual Values

There has been a email discussion on this for the past couple of weeks. A lot of US supporters of land value taxation advocate Capital Value (CV) lists as the basis of assessment. The argument against is that the tax erodes its own base and is arithmetical nonsense once the rates get high. I quoted a figure of 5% as the most that could be raised without knocking CVs down to the point they would be meaningless as a revenue base. And a response came back like this...

New Hampshire has ad valorem rates of 4%, and no problems. Kiaochow, which probably recovered the highest fraction of land rent in history, used an ad valorem rate of 6%. You appear not to understand the effect of an increase in the ad valorem rate on capital value.

Yes. It knocks it down. Unless other taxes have come off at the same time or there are other factors pushing up the price.

If you are taxing 6% of assessed capital value, then the capital values must be around 45% of what they would be in the absence of the tax. Try a worked example.

If assessed capital value is £100,000 then the tax is £6000. Using a 20 years' purchase (YP) figure, this means that the true CV is £220,000 (what it would be in the absence of the LVT) and its AV is £11,000. And you are actually collecting 55% of the land rent (£6000/£11000) and 2.7% of the real CV. Which is a good figure. And isn't it good to know precisely what is going on, which you can do when the thing is annualised.

But note how using CVs means that what is actually going on is less transparent than using AVs.

Now see what would happen if 80% of land rent is collected. 80% of £11000 is £8800. £2200 is now left with the land owner and so the CV has dropped to £44,000. Which is good in itself but the problem is that this would mean levying a 25% rate on this discounted value, which is what the value for assessment purposes would be to collect what is really 80% of land rent. It just obscures what is going on. And if somebody tried to collect 100% of land rent, the land bwould have no capital value and the revenue raising would have to be on a list consisting of a string of zeros! Whilst the rental values would have remained intact.

A system running on CVs can obviously remain as it is until an opportune moment arises or there is a desire for real tax reform in which LVT is the principal source of public revenue. But where CV assessments have caused problems, or where AVs are used already, and in new schemes, where there is a bubble element in the price of land, they are not a good idea and it is better to adhere to the original concept of taxes on the rental value. Especially where there is some property taxation already in place which affects capital values and makes it difficult to determine what the capital values would be in the absence of the tax.

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