Thursday, November 27, 2014

'No Land Tax' does not know land tax: part 2

We discussed the other day the merits of a broad-based land tax, and how the 'No Land Tax' (NLT) campaign gets things wrong. Today we'll consider a few more claims made by NLT, specifically in relation to the effect of land tax on housing – both rental and owner-occupied – and how these claims too are wrong: completely, upside-down-and-back-to-front, wrong.

Rental housing 

NLT claims that 'Land Tax raises rents – making it harder for families and small businesses to make ends meet'. 
Wrong. Land tax does not increase the rents tenants pay; assuming normal market forces are at work, landlords cannot pass land tax on to tenants in the form of higher rents. In fact, if there was no land tax, rents would probably be higher .
Here's why. Think of landlords as vendors of a service (shelter). The ability of a vendor to pass on the cost of a tax liability to a consumer depends on the vendor being able to withhold the service from the market, and hold out for a higher price that covers the cost. Their ability to hold out depends on how that tax liability applies. 
If the vendor is liable to pay the tax only if and when they've made a sale to the consumer, this tends to allow the vendor to hold out for the higher price. This is how a sales tax, or the GST, applies, so a vendor can generally pass on these taxes. 
But with land tax, it's different. 
The liability to pay land tax cannot be put off until the vendor has found a consumer willing to pay the vendor's price. Instead, land tax is due every year, regardless of whether the property is let or what price it is let for. This tends to restrain the vendor from holding out for the higher price, and instead encourage them to come to meet the market.
(An aside: this assumes, as we said, that normal market forces are at work. We know that during a tenancy, the operation of market forces is inhibited by the high cost to tenants of moving, so landlords may be able to extract a higher rent than they would achieve on the market. This problem should be dealt with by the Residential Tenancies Act's provisions about excessive rent increases. We encourage tenants to use these provisions, especially where the landlord claims that the increase is the result of land tax. These provisions are underused, and should be reformed to make them fairer and more useable by tenants.)  

To reinforce the point about land tax and rents, let's look at the issue the other way. Say NLT had their way and there was no land tax. Would landlords pass on this saving to tenants? No – they've gotten the rent that the market will bear and there's no force operating on them to reduce it. On the contrary, if there was no land tax, we might expect more landlords to do the lazy thing and have their properties sit empty. The result would be a withdrawal of supply from the rental market and hence an increase in tenants' rents.   
Owner-occupied housing 
NLT claims that 'Land Tax hurts first homebuyers by making new housing more expensive to build'.
Wrong again. In fact, land tax, properly applied, reduces the price of land and makes new housing more affordable.

That's because land tax discourages land owners from holding land in idle speculation, and instead encourages them to put land to its most valuable use, or sell it. Land tax, therefore, helps bring land to the market.

The problem is that our present system of land tax exempts land used for owner-occupied housing and primary production, so speculative holding still takes place under these uses.

For example, a land owner might own a big block of land that would do nicely for some new houses. If the owner has their own house on the big block, or puts a few cows on it (or bees!), there's no land tax payable, and the owner can sit back and watch the value of the block go up as the demand for housing rises. If, on the other hand, land tax did apply, the owner would be spurred to get on with doing the subdivision and selling the lots to would-be home builders.

As we say, NLT's claims about land tax and housing are completely wrong. Properly applied, land tax helps make housing – rental and owner-occupied – more affordable. The thing to do is to reform our present system of land tax to fully realise its beneficial potential, particularly by broadening the base. 


  1. Absolutely correct, Chris.



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