More from Mark "externalities are internal" Wadsworth

Naturally, Mark, who bombarded the comments on this site when I pointed out the stupidity of his statement (comments I left for others to see, being quite happy for people to make their own minds up about the merits of the argument), has deleted a comment I posted on his site, that simply pointed at this response to his nonsense. Spot the bloke who knows he's wrong. Now we know exactly how much intellectual credibility these LVT advocates have.

But Paul, you are saying that the "benefit" of having an externality imposed on your property is that the value of that property goes down. Maybe that's a benefit to the tenant (you can't know without discovering whether the reduction is more valuable to him than the imposition), but certainly not to the landowner. It is the landowner whose property rights are infringed, without compensation.

There are clear losers in this - the landowners next to a development that imposes negative externalities on its neighbours. That may sound like the best option to you, but that puts you in the position of advocating arbitrary, involuntary appropriation or infringement of someone else's property rights.

Maybe you think that's justifiable (Mark's cowardice in deleting my comment that linked to this post suggests that he isn't so confident). But it still wouldn't make this a question of externalities being internalized, but of choosing to disregard or misvalue externalities. By definition, this was, and will forever be, a load of old clap-trap from Mark.

Paul, It doesn't matter how you define the role of freeholder. Ultimately, he has property. It may be that his property derives from a tenancy held in perpetuity from the Crown, but it is still property. So long as his use does not intrude on others' rights, he has the right to continue to use and dispose of that property without imposition or constraint by others. You are proposing major infringements of those rights.

I am not proposing the pure Coasean solution of bi-lateral contracting between all affected parties. That's why I referred to my suggestion as imperfect. I am suggesting that the planning authority acts as proxy for those whose properties would be affected by the externalities, and attempt to internalize those externalities by some combination of imposition of conditions to minimize them and agreement of a value that compensates for them. Some will not agree with the authority's judgment, but at least the process tried to take account of the possibility of Coasean bargaining to improve the efficiency of the outcome, and the property-holders at least have recourse to the ballot box if they dislike the bargains that the authority strikes on their behalf. Highly imperfect, I agree, but less imperfect than the current system, which makes little attempt and has little incentive to strike Coasean bargains to mutual advantage, and less imperfect than the LVT, which demonstrably cannot compensate property-holders for the full cost of negative externalities imposed on them.

Paul, I am suggesting that, because of transaction costs (which we agree prevent a pure Coasean solution), the closest you can get to a market for externalities is to have a proxy negotiate on behalf of those who suffer the externalities. And the appropriate point in time to do that is when the developer is applying for permission to develop the use that will inflict the externalities. And that the least bad proxy at that point is probably the planning authority, because they are already responsible for negotiating about the impact of externalities, and there is some sort of democratic pressure on them to represent the interests of those who will suffer the externalities. But instead of being restricted to instructing the developer what they may or may not do, the planning authority will also be empowered to negotiate with the developer whether some restrictions might be traded for a monetary contribution.

It's a long way from perfect, but it's a darn sight better than a system where the same authority is applying more draconian control because it has no flexibility to monetize some of the external costs (so let's not pretend that this is control vs market, or at least if it is, it's the other way round to the way you think), and where there is not even an attempt to internalize the externalities through some sort of market. I explained in the original post why LVT does not internalize externalities, and you have yet to give any explanation, other than assertion, of how it does. Feel free to demonstrate how it does at any time.

The government is not picking winners in my proposal. The freeholder may propose any use he likes, and may choose to do nothing if he prefers. But he may not choose to inflict whatever harm he likes on his neighbours, without adequate recompense. So long as he is willing to agree adequate compensation for infringement of others' property rights, he is free. And a lot freer than under a LVT system, where he may have some of his property rights infringed without compensation.

LVT is no more a market for externalities than my greengrocers is a market for carbon. In fact, it's not a real market at all, because there are no voluntary transactions - you pay it or sell up. It's a tax, not a market. And a tax whose value neither takes rational account of externalities inflicted on others, nor obeys any of Smith's four maxims for the design of a good tax (proportionality to their revenue, certain and not arbitrary, levied in a convenient time and manner, as little expense of collection as possible). There is at least some attempt at voluntary negotiation within my system. That is an essential part of a free market, in my book. It is entirely absent, other than the gun-to-the-head option of selling if you don't like the valuation, from your system.

I note you do not attempt to address the question of infringement of property-rights, which I batted back to you in the last comment.

Paul,

"You prefer to have decisions regarding compensation for externalities made, as far as possible, by the government, whereas I prefer to have them made by market forces."

I am happy for people to read this exchange and decide for themselves whether this characterization, or much else of your comments, holds water.

"The word “flexibility” in this context fills me with dread."

They already have arbitrary power through the planning system. And boy do they use it (including corruption and rent-seeking). Giving them incentives to be more reasonable and the flexibility to find a compromise doesn't strike me as a way of making that worse. Giving them incentives to refuse permission in order to raise land values and therefore revenue from LVT certainly does.

"What I find odd is that you use Smith to criticise LVT"

Smith is contradictory in this. Tax on ground-rents is not proportional to revenue, because for many people there will be no revenue (e.g. those who occupy their own houses) and for many of them the tax may vary in no relation to their revenue from other sources (e.g. pensioners in a town where refusal of planning permission is driving up prices). Tax on ground-rents is arbitrary and not certain - it relies on valuation by the authorities and whilst in theory I like your scheme for discovering that in certain circumstances, to my mind (and others, from the comments) it works for these purposes only for unoccupied land and not for land that has been built on, because of the transaction costs of taking your house apart brick by brick and moving it. Tax on ground-rents is not levied in a convenient time and manner, because, if you are going to tax wealth rather than revenue, the convenient time to tax it is on disposal, not when it may be yielding no revenue. And tax on ground-rents does not incur as little expense of collection as possible, because you need the apparatus of assessment to support it. Taxes on transactions are simpler because it is clear at that moment what the product being exchanged is worth to the two parties.

I think part of the explanation, reading Smith's passages on this, is that he seems to have expected that ground-rent values would be relatively static and therefore anticipatable. He lived at a time before persistent inflationary monetary policies and when there was not yet such pressure of population for development, and public-choice incentives for authorities to create artificial shortages, that ground-rent bubbles were not something he appears to have considered. We can never know whether he would have advocated ground-rents in the conditions in which we currently live, but if he would have, he would have been a fool (and he was certainly capable of folly, as demonstrated by his labour theory of value).

"You tried to claim that a state granted privilege can be considered property and I’d already said that I don’t consider that to be the case."

This is the key point. I accept that a lot of what you say flows logically from this position. But to me, this undermines the basis on which many of us transact and invest in a free market. If freehold does not give us exclusive possession of rights in the property in perpetuity, we will be afraid of having whatever we choose to do with the property undermined in the future. That will very much reduce our incentive to invest. By a definition of landowning that I (and I suspect most people) would recognize, you seem happy to threaten arbitrary dispossession (in the sense of loss of some aspect of one's property, not necessarily the whole) and thereby to inhibit investment.

The work of Hernando de Soto has been to look at the outcome of your sort of world, where people do not have confidence in their property-rights. It's not a good outcome, and the solution is to give them confidence in their property rights. I don't see that moving us in the opposite direction will have a good effect on our economy.

If people understand that your argument for LVT relies on a denial of their rights in the property that they hold freehold, I don't think you'll find many backers for LVT. Maybe those that don't hold property freehold (nor hope to) would support it, which illustrates that (if implemented) this would mainly be a policy of envy. Maybe it's a philosophical position not based on envy for you, but it wouldn't get through without the support of those for whom dispossession is a justifiable act of vengeance against those more fortunate than themselves. That's not a world I would be advocating. I would be confident enough that Britain was economically screwed if a government adopted your attitude to land ownership that I would look to emigrate to somewhere that had a more conventional attitude to property-rights. That is why I fight so passionately against LVT. This isn't just an intellectual exercise. You are flirting with undermining our economic foundations.

"Even if, for the sake of argument, you treat exclusive possession of land as a property right, in the main the externalities which have been discussed wouldn’t infringe it. In order to violate my property rights, you have to take my property from me or damage my property."

Again, you have a narrow definition of property rights that (I believe) most people would not recognize. If I cannot enjoy my property as I choose (within constraints of not infringing my neighbours' property-rights) because you have made it hazardous or intolerable to do so, you have effectively deprived me of my property rights without actually taking it from me or damaging it. You may not accept that, but it seems to be a fairly well-established principle in this country.

I don't want to live in your world, where neighbours could force me off my land or devalue it, without my having any recourse. Neither, I suspect, would most of the population of this country.

"Flexibility generates corruption."

Like that famously flexible regime, the Soviet Union, you mean? In countries like Italy, where there are arthritic, inflexible, bureaucratic systems, corruption is people's response to get round them. Corruption is typically a response to inflexibility, not flexibility. Where people face inflexible barriers within the system, they are forced to go outside the system to find ways round it. Back to front, I'm afraid, Paul. 

"In other contexts, you describe as arbitrary what you describe here as flexible."

By arbitrary, I mean inflicted by an authority without negotiation and based on non-demonstrable assessment. Nothing is inflicted under my proposals. The balance between higher valuation and fewer attenuative measures or lower valuation and more attenuative measures is subject to negotiation, and the developer can always walk away if he doesn't like the options, look at alternative options for development, or leave it undeveloped. At this point, he has not invested much and does not lose much if the negotiation is not successful. Both parties have incentives to agree. Once agreed, the landowner/developer/tenant is protected from arbitrary revaluation by the authority. None of this is true for LVT. There is a material difference in the degree of arbitrariness.

"Refusing planning permission may raise land values on surrounding plots, but it will prevent an increase in value on the plot where planning permission is refused. Any credible argument needs to acknowledge that both exist."

I do. I dealt with this in the exchange with Mark. Unless elasticity of demand for industrial land changes dramatically, permitting a 10% increase in the total amount of industrial land available is likely to have more than a 10% depressive effect on prices, because the marginal impact (which determines prices) on land available for rent is greater than the aggregate impact on total industrial land in the area.

There is also a question of public-choice incentives. Even if the additional revenue from the permitted land exceeds the loss of revenue from the existing industrial land, unless the difference is significant, voters would probably have preferred not to have the development. You need to assume an improbably low price elasticity of demand for industrial land, so that there is little reduction in price of existing plots (compared to what they would otherwise have been) from the permitting of additional plots, if your system is not to produce a general disincentive to permit. Under my proposal, permitting of additional plots would have no impact on the revenue that the authority receives from the existing plots, which helps to counter the public-choice incentive to refuse as much as possible.

"If they are seeking to increase revenue, they would have to pursue the course of action which would create the highest total land value."

We have been running an accidental experiment in that for the past several years. What we have learnt is that a combination of keeping supply tight (because of NIMBY resistance to development) and expanding credit dramatically will result in a massive bubble in the value of development or developed land, without a concomitant increase in people's disposable income. Clearly, keeping suppy tight is the winning strategy for local authorities, even without increasing their incentives to refuse by introduction of the LVT.

"At least with LVT, the scope for rent seeking is massively reduced."

Under LVT, you've still got as many planning restrictions as ever, and the authority is making judgments about the value of your property. Strikes me as plenty of potential for rent-seeking.

"If one party loses out as a result of the authority's decision, they will see a compensating reduction in their tax bill."

It is not clear whether you mean in the case that you are refused permission, or in the case that development is approved on a neighbour's plot, which affects the value of your property.

If you don't get permission for development, presumably your land is worth the same as it was before you applied. I can't see how this translates into a reduced tax bill. Unchanged would be more appropriate. 

If the value of your property is reduced by neighbouring development, your tax bill will go down by a proportion of the reduction in value. That leaves the balance of that proportion as a loss you have to shoulder yourself, rather than being passed on to your neighbour, as would be appropriate. Unless you intend to have 100% LVT, the victim is guaranteed to be out of pocket. It is only partial compensation. That is not justice.

"That doesn't mean that it isn't a viable system."

I agree, for certain circumstances, but not for many of the circumstances relevant to this discussion (i.e. where the land has been built on). 

"It is much harder to disguise transactions and income than it is to disguise landholding."

Did you mean "easier"? "Harder" seems to support the opposite argument to yours.

"Even if you had a large apparatus of assessment, it would still be much smaller than that required to administer the current tax systems and that's before you start allowing for the externalised costs of administering income tax, VAT, etc. which are paid by businesses rather than the state."

 It depends which of the current tax systems you are referring to. The directly comparable schemes are current Business Rates, my proposed modification to Business Rates, and LVT. Under my system, every plot of development land has a fixed rateable value, and therefore requires no assessment, only collection. There is no reason why collection should be more difficult than under a LVT, so the difference between them is the cost of annually reassessing the value of every plot in the constituency.

I acknowledge that many of you LVT advocates expect it also to displace some other taxes. Some of them will be more bureaucratic than others. But you have to completely replace a tax, not just reduce the amount collected by it, to make an administrative saving. That rules out savings on the big ones (income tax, VAT and corporation tax) unless you want LVT to be prohibitively heavy (i.e. approaching or exceeding 100% of land values). And (thanks to complex rules) income tax, VAT and corporation tax are particularly complicated and bureaucratic (much of which could be saved by simplification, rather than replacement). You may displace some small ones (e.g. IHT, various types of stamp duty, or some types of excise duty), but I would likewise propose tax-simplification to get rid of some of the nit-picking, bureaucratic taxes. Ultimately, administrative savings would be attributable not to the nature of LVT or my modified Business Rates, but to the elimination of minor taxes, which could be done in a number of ways.

"So, you are happy to quote Smith as an authority figure to defend your points, but are also happy to dismiss him as a fool when there is a danger of his work contradicting you."

I was suggesting that Smith's maxims for designing a good tax are sensible. You are welcome to disagree. They are not true by virtue of whether Smith said them, any more than anything else is. They simply strike me as a pretty good guide. If you differ, I will not suggest that you are wrong because Smith must be right. I don't think I've done that so far, have I?

Anyway, I did not dismiss Smith as a fool. I said that if Smith would have supported LVT in our current circumstances, very different to the circumstances he knew and assumed, then he would have been a fool. We cannot know whether he would or would not.

"All of the points Smith made in regard to land rent are just as valid today as they were when he made them."

So you say. If you, unlike me, regard Smith as authoritative on this subject, perhaps you'd like to address the following extracts from Wealth of Nations:

A proportional tax upon this particular article of expence might, perhaps, produce a more considerable revenue than any which has hitherto been drawn from it in any part of Europe. If the tax indeed was very high, the greater part of people would endeavour to evade it, as much as they could, by contenting themselves with smaller houses, and by turning the greater part of their expence into some other channel.

Houses not inhabited ought to pay no tax. A tax upon them would fall altogether upon the proprietor, who would thus be taxed for a subject which afforded him neither conveniency nor revenue.

If rated according to the expence which they may have cost in building, a tax of three or four shillings in the pound, joined with other taxes, would ruin almost all the rich and great families of this, and, I believe, of every civilized country. Whoever will examine, with attention, the different town and country houses of some of the richest and greatest families in this country, will find that, at the rate of only six and a half or seven per cent upon the original expence of the building, their house-rent is nearly equal to the whole neat rent of their estates.

The ordinary rent of land is, in many cases, owing partly at least to the attention and good management of the landlord. A very heavy tax might discourage too much this attention and good management.

In other words, the tax ought to be at a modest level or it would result in mass avoidance, ruination of the better-off, and degeneration through lack of maintenance. It would be too high at 15-20% or even 6.5-7% of house rent. And empty properties ought not to be taxed.

Current Business Rates and Council Tax are set at a level very much higher than 15-20% of the rent that could be obtained from them. But you want LVT not only to replace these taxes, but hopefully to displace some others too. And you want to apply the tax to empty properties, to try to drive landlords to find tenants. How will you do that and follow Smith, all of whose points are still valid today, apparently?

By the way, this isn't a question of the distinction between built-property-rent and ground-rent. Smith was referring to built-property-rent in the passages referring to these percentages, and so am I when I compare current local property taxes with rents. Your LVT would need to be levied at a lower rate than current BR and CT to comply with Smith's advice.

"'you seem happy to threaten arbitrary dispossession (in the sense of loss of some aspect of one's property, not necessarily the whole) and thereby to inhibit investment.'

That's wrong. You are working on the false basis that land tenure has at some point been given obligation free."

Nice selective quotation. The full sentence was "By a definition of landowning that I (and I suspect most people) would recognize, you seem happy to threaten arbitrary dispossession (in the sense of loss of some aspect of one's property, not necessarily the whole) and thereby to inhibit investment." I had already acknowledged that a lot of what you say flows logically from your concept of ownership. But my point was that I doubt your concept of ownership matches most people's concepts, and that by what I should think is a more common concept, where we do have significant rights over the land we have bought, your are advocating dispossession and incomplete compensation.

You seem to have a binary view of property rights. It seems to be your contention that either you have rights without obligations, or you have no rights at all. I imagine most of us could cope with the idea that we have rights and obligations, that both are limited, and generally protected from arbitrary adjustment at the whim of authority. I am not working on the basis that tenure is obligation free, but that the obligations are limited and rights protected.

"In reality, freehold has always carried the obligation of paying tax. You are complaining about people losing something that they never had in the first place."

Indeed. And as you may have noticed, I am proposing that freeholders continue to pay tax. What a bizarre straw man. I am saying that freeholders should be protected from infringement of their property-rights by the actions of other individuals, or adequately compensated, not from taxation by the local authority. I would say (in agreement with Smith) that the weight of local taxation should be kept to a level that does not excessively burden the property-owners and drive some of them out of their properties, but I have not suggested for a second that tax should not be paid. This only follows (if at all) from acceptance of your view of property rights, which clearly I do not accept.

"Of course, if we follow your position to its logical conclusion, you would not accept any level of taxation on any activity as being acceptable. Nice in theory, unworkable in practice."

Even more bizarre straw man. You could at least try to make them look a little convincing.

Only if we accepted your definition of freehold property-rights might we get there. I don't. I clearly accept the need for taxation, as we have been discussing alternative approaches to taxation.

It seems to be your position that property-rights imply that no one, even the state, can deprive you of any part of it, including taxing it. My position is that there can be no tax without property-rights. We can't have value or trade without property rights. And without them, we have no way of applying any tax.

"Your definition of tolerable may be different to mine."

Which is why we have the law. 

"Even though I might find it intolerable, to claim that I have a property right which allows me to control absolutely what may be in the air above land I occupy is clearly absurd."

One need not have absolute control in order to be protected from the worst impositions. I don't need to be able to control the level of H2S in the air above my land to the nearest 0.005 ppm, in order to be protected from concentrations of 10 ppm or more. I maintain that my right to enjoy my property includes a right not to have the air on that property polluted by the actions of another to the extent that I am likely to suffer eye irritation (or worse). It seems to be your position that a neighbouring landowner and the council should have the right to permit and develop a process that emits those concentrations onto my property.

"Your argument seems to be an example of the Texas Sharpshooter fallacy. You are creating a definition of property so that it fits your argument that property rights have been infringed."

And from my perspective, that is exactly what you are doing (defining property in a way that is absurd but necessary to justify your position on LVT). The alternatives are fairly lengthily explored here. We'll let each reader (if any of them have dragged themselves this far down what is becoming an increasingly tedious thread) decide for themselves which definition of property rights seems to fit better with the way they see the world working, shall we?

"Of course, we both know that is untrue, as I explicitly favour LVT as a form of recourse."

I don't regard partial compensation through a reduced tax-bill, or the right to sell and move on, as meaningful recourses to the devaluation of my property. I think I've made that clear. Why on earth should I take what you regard as property and reasonable recourse as my guide to what I find acceptable? The arrogance of that sentence is breathtaking.

"On the flip side, I don't want to live in your world where my neighbours could prevent me ever having a barbeque on the basis that they have an absolute property right over the air above their garden."

And another straw man. Useful when you haven't got a leg to stand on, aren't they?

Again, this is based on the false, binary view that property rights are all or nothing. Is it inconceivable to you that the law might protect our property rights from serious impact but not from minor impact? And that we depend on the law to defend our rights, which are therefore defined with reference to what we can expect the law to protect us from?

We seem to have reached the conclusion that neither of us wants to live in the other's world. Let's put that into practice, shall we? I think we have established the fundamental definitional differences between our positions, and this debate is clearly going nowhere beyond that, so you might as well go back to your world.

Paul, Thank you for visiting. I don't regard any of those "points" as rational, and am bursting to address them. But this is degenerating into "he said, she said". In order not to drag out an increasingly pointless and snide debate, I will leave it at that. There is more than enough there for whatever few readers may visit this thread to make their own judgments. That is the ultimate arbiter, not whether you think you are right or I think I am right.

(But I just have to point out, for the record, not in contradiction of anything you have added in the latest comment, that the system I agreed was viable in certain circumstances was not LVT, it was your suggested approach to self-valuation.)