01 December 2009

The benefits of LVT seem to be sinking in

Adam Posen, a member of the Bank of England Monetary Policy Committee gave a speech today which, while not directly suggesting Land Value Tax itself, used many of the economic arguments commonly put forward in support of it to promote the idea of using cyclical residential property taxes to combat house price bubbles. From the press release:

In a speech at the MPR Monetary Policy and Markets Conference in London today, Adam Posen – an external member of the Bank’s Monetary Policy Committee – discusses how asset price booms might be addressed in the future. He rejects the notion that monetary policy should be used to tackle asset prices, and believes other tools are needed and better suited for the task. In addition to macroprudential policies – such as those outlined in a recent Bank of England discussion paper – Adam Posen suggests there is merit in considering tools that tackle asset prices directly. In particular, he discusses the idea of an automatic stabiliser for housing prices...

...His focus on housing reflects his view that bubbles in real estate are often more destructive than in other assets. He says: "Real estate bubbles tend to have much higher real economic costs than equity bubbles, perhaps because they involve illiquid collateral and local spillover effects."

So what could be done to limit or pre-empt real estate price booms? He suggests as a complementary policy, changes to real estate taxes and regulation, to provide a counter-cyclical element – automatic stabilisers – to structures already in place in many countries’ housing markets.

Adam Posen stresses that the proposal is "…something modest, without any large implications for tax revenue over the cycle…". He says: "…it would mean having already existing title fees, capital gains taxes, stamp and transfer taxes, varying over time in line with price developments in the housing market more broadly. ...a simple blunt instrument targeted to lean against the wind in real estate prices in an automatic fashion."

So, he isn't suggesting LVT directly, but he's using the underlying reasoning. I think it can be shown fairly easily that property sales taxes, such as stamp duty, won't have the desired effect, as they'll stiffle sales, but they won't restrain rental values, so the underlying bubbles will continue. Take those taxes out of the equation and you're left with taxes on residential property owners varying in line with property prices, at which point you've made a large step towards fully fledged LVT.

The full speech, which can be downloaded from the same webpage as the press release, gives the impression that the argument is there to be won.


Mark Wadsworth said...

Agreed. Even though Posen starts at completely the wrong end and clearly doesn't understand how Stamp Duty and Capital Gains Tax work and does not appear to suggest proper LVT in any way, shape or form.

But don't think for one second that the LVT argument is gaining traction - read the comments under the article in The TImes for some classic Home-Owner-Ist whining and moaning.

Physiocrat said...

They have CGT on house sales in Sweden. In some places it has locked-up the property market as people cannot afford to move due to the potential tax liability.

Why is it that respected economists cannot see the blindingly obvious?

Mark - over the past ten years most of the houses in my street have gone from owner occupation to rental. The constituency with a vested interest against LVT is shrinking.