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Can collection of the economic rent of land be equitable?

 
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Brian Chance



Joined: 09 Nov 2008
Posts: 115
Location: Croydon Surrey U.K.

PostPosted: Mon Apr 22, 2013 11:10 am    Post subject: Can collection of the economic rent of land be equitable? Reply with quote

There is a fundamental inequity in the collection of economic rent of land from the present owners because much of it has either already been collected or is in the process of being collected.

The free market price at the date of sale of freehold land, with or without a building on it, is the discounted value of all future annual economic rent in perpetuity. The vendor will receive the increase over the comparable figure at the date of his purchase and the preceding vendors will have received all the rest. It is an irrevocable additional claim on wealth to be earned by the purchaser.

It will be variable, depending on the particular circumstances. The purchaser may already have paid in full, but it is likely that the burden of payment will have been spread over many years by way of a loan at interest. The present owner’s equity interest may therefore vary from a negative amount (“negative equity”) to the full freehold value if the land has been owned for many years.

Should this situation be reflected in the rates at which an annual levy on land value is calculated, or should there be a uniform rate applied regardless of individual circumstances?
Many attempts are made to mitigate the hardships of applying a uniform rate but all produce anomalies and the greater the concessions the more likely it is that opponents will stress the faults and the more likely it is that the project will fail.

It seems that it is impossible for collection of the economic rent of land to be initially equitable, but a uniform rate on all land, payable by the legal owner, remains the only way in which the collection of the economic rent of land can ultimately be made equitable.

The really interesting question is how to deal with the claims resulting from sale of land, other than by inflation, default or jubilee?
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Richard Glover



Joined: 29 Sep 2008
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Location: Ealing, London, UK

PostPosted: Tue Apr 23, 2013 2:44 pm    Post subject: Reply with quote

Brian, You raise a very interesting point. This does suggest that only present rental arrangements and future land purchase transactions should be dealt with via LVT or similar. However, as past land transactions have had a good portion of the the future economic rent already paid to the seller, if any of this ER is to be recovered, another mechanism is required.

The seller may have purchased another property, in which case any recovery of economic rent would have to be from the next seller in line. Ultimately, someone somewhere will be sitting on the proceeds of past mortgages, and their pot could be the target for recovery.

A cash mountain levy or perhaps inflation could help recover some ER, although borrowers could be penalised. Perhaps a levy on interest earning capacity would work. Alternatively, perhaps a levy on all commercial bank "loans" would get close.

This is probably why it is normally suggested that LVT is introduced very slowly; everything will eventually work through and inequities could be minimised.

There again, why worry about inequity? What is the present situation all about?
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Brian Chance



Joined: 09 Nov 2008
Posts: 115
Location: Croydon Surrey U.K.

PostPosted: Wed Apr 24, 2013 10:28 am    Post subject: Reply with quote

I agree that there are many ways of mitigating the inequity, all of which would also be inequitable to some degree. The scale of the problem is somewhat daunting. The total mortgage debt is over one thousand two hundred billion pounds. Even if the amount relating to the past appropriation of future economic rent of land is limited to half that figure, say six hundred billion pounds, compare that sum in magnitude to the two billion that might be raised from a mansion tax. And what about the interest and the probably larger sum that has already been paid for the purchase of future rent?
I suppose the lesson to be learnt is that when there is discussion of the absolute necessity of collecting the ERL for the common good, don't let an accountant spoil the party!
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Richard Glover



Joined: 29 Sep 2008
Posts: 185
Location: Ealing, London, UK

PostPosted: Sun Jun 09, 2013 8:41 pm    Post subject: Justice and equity in LVT transitional arrangements Reply with quote

Here is an attempt to gather some of the scenarios of past, present and potential future inequity, with an initial guess at how justice and equity can be achieved during any transition towards LVT (land value taxation).

1) Property about to be purchased or rented
Applying LVT should have little adverse consequences and many benefits. If a capital purchase, the land element will have adjusted (fallen) to account for the public rather than private collection of ERL (economic rent of land). This will also reduce the ability of banks etc to extract future ERL through excessive fees or interest rates. If rented, the land-rent will also have adjusted. This also stems the flow of revenue from the new "owners" to the old "owners". The effect of this is to help prevent future increases in the level of inequity.

2) Property free of mortgage
Applying LVT should be no problem for many who are still earning. Others may have to defer payment of the economic rent until the property is sold. Perhaps a better option for some is to return outright entitlement of the land to public authority, leaving the building fully owned by the occupant. Some phasing out of Ultimately this would result in a phasing in of LVT.

3) Property held with a mortgage
The equivalent to LVT needs to be applied to the outstanding debt in some way. Much of the monthly payment of interest and capital relates to ERL. Hence if a portion of the monthly payment was diverted away from the banks to public authorities, justice and equity should be preserved.

4) Past mortgage advances
Those who have paid or partially paid the mortgage have in effect paid ERL to a private institution rather to a public authority. This could be ignored or written off, but should it be? The previous property vendor has received the capital sum and purchased a larger property (hence will be in above categories) or has the money in savings/investments etc. This is where most of the present money supply has come from, mortgage advances on rising land prices. To tackle this element of LVT, whilst relieving the nation of much inequity, a 2% annual charge on all outstanding bank deposits should be fitting. This reflects the 50 year jubilee of ancient Israel when all credits/debts and other forms of enslavement where dissolved.

Any thoughts on these or other scenarios?
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Brian Chance



Joined: 09 Nov 2008
Posts: 115
Location: Croydon Surrey U.K.

PostPosted: Fri Jun 14, 2013 7:32 pm    Post subject: Reply with quote

The more I consider the transition from the taxation of earnings to the collection of the economic rent of land, the more complex and difficult it appears to be.

It seems to be widely agreed that the transition must be in small incremental steps over a long period of time. This means that land will continue to have value for a long time, but that value will steadily decrease, theoretically to a nominal sum when the process is complete. During the process, future rent will continue to be collected by current vendors.
There will be the immediate question of how long the process will take and of whether it is even likely to continue at all. This will affect the willingness of banks to advance mortgages because the collateral security will be of uncertain value. There will be general uncertainty.

In consideration of the various suggested scenarios:-

1) Property about to be purchased or rented.
This is subject to the uncertainties mentioned above.

2) Property free of mortgage:-
This is the typical situation. The annual levy would increase by a democratically determined amount which would steadily reduce the value of the land to the owner. The tenant would not be affected provided that the lease is properly drafted. I still have to understand the advantages of surrendering the freehold to public authority. Would this not hand over all future rental income which would otherwise be received during the transition period?

3) Property held with a mortgage.
Here I think there is a difficulty. Credit by way of mortgage advance is given by banks on behalf of the community. Any reduction in repayments would be a bad debt to the bank which would be suffered by the depositors, or the taxpayers if the bank had to be bailed out. One might say that bank dividends and bonuses could absorb the loss, but bank dividends and bonuses must be curtailed anyway to return banks to their proper function, so this would not be possible.

4) Past mortgage advances
I have the same difficulty here as with (3) above. Deposits are not necessarily from the proceeds of property sales and the proceeds of property sales are only partly held on bank deposit. Increasingly they come into the hands of the next generation on the death of the land owner and may be used in a variety of ways including the “bank of Mum and Dad” for the third generation to “take the first step on the property ladder”, all at the expense of the landless.
A possible alternative is to charge death duty on the full value and to ensure that homes are sold to pay for final residential care, but even this could be defeated by professional advisers.

Although I hesitate to mention it, is there a case for a clean sweep and fresh start by way of a Biblical jubilee followed by immediate and full collection of the ERL? Dare I suggest that this is more likely to result in economic justice than the long period of hardship for the many, especially young people, while they work to honour the huge claims on wealth resulting from the private appropriation of the annual value of land, particularly that of future years.
Would anyone like to set out the case against?
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Michael Learoyd



Joined: 05 Nov 2010
Posts: 3
Location: Peckham, London, UK

PostPosted: Mon Jun 17, 2013 2:40 pm    Post subject: Can collection of the economic rent be equitable? Reply with quote

The title of this topic is indeed very interesting and can take a number of directions and as a new contributor to the forum I will venture a perhaps almost blasphemous suggestion concerning the collection or non-collection of the LVT aspect of the much wider subject of Economic Rent.

So much of the argument about this phenomenon of economic rent/LVT centres on collecting the perceived community created value as a tax which is accurately assessed and distributed presumably by government and this to be seen as better than individual returning to the community in acknowledgement of a wide and virtuous understanding of what is communal and what is personal.

It's all a question of every aspect of the so-called community receiving its due and fulfilling its proper function. The state empowered with re-distribution of more than its natural share would not be much improvement on the so-called rentiers who are perceived to be receiving what is truly not theirs. Both of these parties, the state and the rentiers, if fulfilling the truly virtuous responsibility of returning to the community, would be equally noble.

The returning to the community is the key and for that to happen a real community has to be in place, otherwise conflict will be the perpetual state of affairs.

Having ventured into this forum I hope to be able to offer perhaps a new voice to argue with, with views that might be disagreed with but at least they will be there for discussion and evaluation. The main point of this post is that the economic rent/LVT does not all have to be collected but is received and distributed where it arises. This must be more efficient than yet another tranche of government involvement dictating all economic activity. I will add that government has its rightful expenditure to be met and this of course can be met by tax from the community. The community will contribute willingly when the state is seen to be part of the community, no more no less.
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Brian Chance



Joined: 09 Nov 2008
Posts: 115
Location: Croydon Surrey U.K.

PostPosted: Fri Jun 21, 2013 1:49 pm    Post subject: Reply with quote

This opens up a wide view. The first step seems to be to decide what constitutes a community. Clearly it is that which ‘holds in common’ and this suggests that it could include every living thing on Earth, all of which hold the Earth in common.
A more limited view could be that a nation state is a community, but a nation state is in turn made up of many smaller specialised or local communities.

Every community is made up of individual parts, all of which constitute the commonality. From this point of view all members contribute as part of the community. The giving comes first and this is why the only right is the right to work, so that the needs of the community can be supplied.

The way in which the needs are provided seems to be the matter under consideration and this may be a matter of convenience rather than of principle.

For those engaged in providing goods and services, convenience is provided by markets, and some form of money allows them to work efficiently. This is the case for all exchanges between individuals in the community. Those who provide services to the community in general cannot be provided for in this way by direct exchange but provision is made nevertheless in the nature of things.

I believe that as these communal needs increase because of the size and complexity of the community, so by natural law the work of all produces a surplus, the economic rent of land, which is always sufficient to meet those needs. It is only necessary to collect the surplus and distribute it where it is needed. It is not a matter of returning anything because nothing has been taken. The surplus is freely given by those who prefer to live or work at that place because it still leaves however much is needed to offer to others in the market.

There has to be a mechanism for this collection and distribution and its size and nature depends on the size of the community and its complexity. Some will be needed centrally and some more locally. The exact method can be communally determined together with the type and size of the communal services to be provided. I cannot see how it could be distributed directly where it arises. It has to be collected and then distributed.

The state of nobility depends on the level of consciousness in the community but the government can be democratically elected whereas rentiers tend to be a law unto themselves. It is the failure of electors to be vigilant that allows rentiers to gain power.

Is this a useful contribution to the debate?
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Michael Learoyd



Joined: 05 Nov 2010
Posts: 3
Location: Peckham, London, UK

PostPosted: Fri Jun 28, 2013 10:32 am    Post subject: Can collection of the economic rent be equitable? Reply with quote

Thank you Brian for your response to my post on this forum. I have been reading and reflecting on what you wrote all week and continue to do so. Also the posts by Richard on this post as well. I feel that all the issues raised so far are important reflections and have implications that require debate from a wide spectrum of opinion and common held prejudice and agendas. The subtleties that have been raised confirm the need for complete openness in addressing what has been posted so far.

A point raised as 'what constitutes a community' can be as wide as you wish to make it or as narrow as you can actively participate in. They both affect each other. Another phrase that came to mind is to substitute the community for the idea of the good society. This carries in my mind the idea of a community working lawfully with the interests of all being expressed. In the good society the economic rent is actively working in the most efficient way. I am still inclined that the collection of the economic rent and then redistributed by a sort of Quango has to be reduced to avoid another corruption being available for manipulation.

A thought also occurred this week that economic rent can only be returned in arrears as it were. What I mean by this is it has to be created first and only then can it be actively proved and measured. A presumed advantage to the monopoly holder of a site, for instance, has to be receiving that advantage and only then can he be expected to return it. Almost an aside is the influence of planning permissions of what is permitted by the state has a profound bearing in this whole question. The phrase 'you might not get back as much as you put in' is used in investment jargon because the circumstances have changed. A flexibility and light touch and mercy in LVT demands will need to be exercised if true justice is the name of the game.

You raised an interesting point, Brian, when you said 'I believe that as these communal needs increase because of the size and complexity of the community, so by natural law the work of all produces a surplus.' I don't necessarily feel that the size and complexity necessarily produces a surplus. It could well produce a loss, and that a subsidy is required from the community to restore a balance with the rest of the community. We allow considerable privileges to charities in the form of tax free benefits on the basis that their contribution is in a different currency as it were to the community.

I still feel that an area to be explored is where most of the economic rent is distributed where it is created. A simple example is that if a site is selling shoes and it's a good site for selling shoes, the advantage to all the customers to that site can receive the advantages that that scale of selling can offer. I have no time at the moment but I feel you will probably want to explore this question and I keep it in the pot and will return to it.

Again many thanks Brian for your reply and I will return later on many of the points raised in this topic.

Best wishes

Michael
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