LVT - a cart and horse inverse juxtaposition?

Perhaps the greatest mystery about Land Value Tax is the absolute certainty with which those who support it voice the benefits that will accrue. Land prices will fall and then be kept stable, the cost to business of employing staff will be reduced thereby leading to greater employment, there will be no speculative expectation pressure on land prices, malaria will be no more and England will win the World Cup until the end of time, and so the list goes on.

In my last missive I asked how LVT will cause or contribute to a fall and then stabilisation of land prices and received some jolly interesting comments, none of which made a case I find in the least bit persuasive. A number of points made deserve a more detailed answer than comments allow, so I'll do my best to explain my continued puzzlement.

The first puzzle is: how does LVT cause prices to fall? One way this question can be addressed is by asking whether LVT would have prevented the house-price bubble engineered by Gordon Brown from about 2000 onwards. My first line of enquiry must be to ask what actually caused the bubble and then to ask whether LVT would have negated that cause. My view, which I have stated before at tedious length, is that the bubble is exclusively (or almost exclusively) the result of lenders advancing unaffordable loans, a state of affairs encouraged by the government despite the knock-on effect it had on the value of the lenders' assets. The entire state of tits-uppedness in which many banks and other lending institutions found themselves a couple of years ago (and still but they don't mention it now) was the result of making bad investments - specifically, making bad loans to prospective house purchasers. Although it is to state the bleeding obvious, if Mr & Mrs Ordinary suddenly find they can borrow £200,000 rather than £150,000 there is more money chasing the same goods and prices rise. Value doesn't rise, but prices do. We saw exactly the same thing happen in the mid and late 1980s (although it didn't cause a banking crisis because securitisation and credit default swaps did not get out of hand). How was the crisis solved in 1989? Simple, by letting the market adjust naturally. Borrowing became more expensive sbecause interest rates were set to a level that was appropriate to risk so that good loans paid for bad loans and, in consequence, prices fell dramatically. LVT didn't cause prices to fall because there was no LVT. What deflated the bubble was to withdraw the very hot air that inflated it in the first place. Would LVT have prevented "liar loans"? Will LVT remove that hot air from the current bubble? I don't see how it could or can unless it is set at such a high level that people can no longer afford to pay both their mortgage and their LVT.

And that is the core difficulty I have with the argument that LVT will cause prices to fall. Because LVT is recycled through the Citizen's Dividend it can only ever increase the cost of housing by less than the additional tax charged, because part is repaid to the taxpayers themselves through the Dividend. What level of LVT is sufficiently high to cause prices to fall below current levels? No one seems able to tell me. To my mind it is a false argument. To reduce a bubble you have to look at how the hot air got into the balloon and address that, seeking to deflate it by reference to something else entirely might work but it can only do so circuitously and will, inevitably, have other consequences that might or might not be beneficial.

It is then said that LVT will keep prices stable. How it will achieve this is the second puzzle. One argument is that it will remove the prospect of speculative profit and that this will mean people won't pay over-the-odds now in order to secure a windfall gain later, but this assumes the very stability it seeks to cause. In other words it is a consequence of stability and a factor that maintains stability but it cannot be a cause of stability, so how does LVT cause that stability in the first place?

There can only be one answer because only one factor can prevent price bubbles, namely the dampening of demand. That can happen in a number of ways. You can increase supply of housing to reduce the price pressure on each individual property, you can limit the amount potential purchasers can borrow or you can reduce the income of purchasers so that they can only afford to service a smaller loan. What is unavoidable is that LVT can affect only the third of these factors and it can only do so by being set at a rate which is more expensive to the landowner than the aggregate of the amount he saves through the abolition of taxes on his income and the amount he receives by way of Citizen's Dividend.

A marginal increase won't have any more effect than increases in other bills, a few quid or even a few hundred quid a year won't necessarily do it, people adjust because they save on matters they consider less important. For existing homeowners it will be an inconvenience like recent rises in prices for food, electricity and gas. They are not suggested by anyone to have had any significant effect on house prices, so why should a tax unless it really bites into their income? And it is not enough that it makes life more expensive for existing homeowners, it must be sufficiently expensive to deter potential purchasers from paying what they otherwise might be prepared to pay. So, how high would it have to be? I have no idea but it is, I think, reasonable to suggest that it would be so much that the whole thing would be politically impossible to implement.

Warning to those of a delicate disposition - the following paragraph appears to be nonsense from beginning to end and has been retained to remind me to read what I write before hitting the "publish post" button.
My puzzlement doesn't end there. The whole exercise assumes a transfer of money from landowners to non-landowners because of the Citizen's Dividend that stands alongside LVT to prevent the government making a windfall gain. The non-landowners receive a double benefit. They no longer pay Income Tax, National Insurance or VAT and they receive the Citizen's Dividend that increases as the take from LVT increases. One would think the natural result of them having so much more in their pockets and of their landlords being hit by LVT is that their rent would go up. Assuming that to be the case the acquisition of houses and flats to rent would appear to be an even more attractive business than it is now. There's no income tax to pay and your customers suddenly have many thousands of pounds a year more in their pockets, it sounds like a wonderful arrangement for landlords; all the more so because Capital Gains Tax is to be abolished too. They only need to raise rents by the difference between existing taxes and LVT and they are quids in, after all their tenants will be in profit by a lot more than that. And the effect on property prices? It hardly sounds like a downward pressure to me.

Much more puzzles me, but that's enough for today.