« US Visas | Main | San Serriffe »
April 01, 2006
Selling the Spectrum
Not sure how others view this. I know the P-G has bad memories of the last spectrum sale but in economic terms this is a damn good idea:
The 40 megahertz of spectrum to be auctioned off is less than half the
amount in the 3G auction of 2000. Frenzied bidding for licences in that
auction raised £22.5 billion for the Treasury. But the spectrum’s
position, in the “sweet spot” — it sits at the 1452-1492 megahertz
frequency — and its potential uses (for mobile television and wireless
broadband access through technologies such as wimax) mean that licences
for the new spectrum are likely to be keenly sought. High demand could
trigger a big windfall for the Treasury.
The point is this. Things like spectrum are, to economists at least, regarded as land. Yes, I know, silly idea. But the thing they have in common is that they’re simply there. People can profit from mere ownership of this natural resource. People can also profit from exploitation of it, from improvement of it, but that’s a slightly different matter.
What’s desired is a way of taxing the profits from mere ownership of such a resource but still leaving room to make profit from the exploitation (and thus offering an incentive for such exploitation) of it. Auctioning it off is a pretty good way of doing this.
In the jargon I’m told that this is taxation of Ricardian land-rents and is generally held to be a very good thing. There are those who go a little too far (Henry George thought that it should be the only form of taxation, for example) but where such rents exist their taxation is, at the very least, the least distorting form of taxation around.
If it were applied to actual land taxation, for example, it would apply only to the unimproved value of the land. Wouldn’t matter what was built on it at all. It would be the value of the underlying land (plus whatever building permits or zoning licences it had), not whether your house had two or three bedrooms or a conservatory or not that determined your council tax, for example.
One other interesting point. As with the 3G sale of spectrum of a few years ago it won’t make the slightest difference to how much you pay for the new services. Doesn’t matter whether operators are given the licences, pay 50 quid for them or 5 billion. The companies will still charge you the maximum they can for the services on offer whatever they pay for the licences. It isn’t a transfer from the customers to the taxman. It’s one from the shareholders to the taxman.
For more information on this you might want to check out Tim Harford’s new book, "The Undercover Economist". He has a very interesting chapter explaining all of this. The whole thing is actually an excellent introduction to the basics of the subject...if you’re not quite sure why economists seem to believe things that are obviously silly this’ll help explain it. In simple and decent language too. No equations and only four or five graphs.
My favourite line:
"Economics is about who gets what and why".
An obviously fascinating subject. With any luck The Telegraph will be carrying my full review of the book today. I don’t actually know whether they are yet as the books pages don’t get posted up until Tuesday or Wednesday. Not quite sure whether this is an added attraction, a super special reason for you to buy today’s edition or not. Rather depends on your desire for an extra dose of Timmy really.
April 1, 2006 in Taxes | Permalink
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c2d3e53ef00d834b521c469e2
Listed below are links to weblogs that reference Selling the Spectrum:
Comments
We need more conservatives to understand land tax, so thank you for explaining it so succinctly! David Curry recently came out in support, and the IEA has recently published a pamphlet on it using the value increases from Jubilee Line extensions as the example - "Wheels of Fortune" by Fred Harrison, IEA 9/2/06 - http://www.iea.org.uk/record.jsp?type=publication&ID=307
I often hear people say that Henry George took it too far or wrods to that effect with the idea that it should be a "single tax" but I don't really see it. Obviously "sin" taxes would be more popular than in his day, where we wanted deliberately to disincentivise some activity or other, but what other taxes do you need on top of that and land value tax, and why?
Would it not be attractive to be able to say, for example, let's get rid of council tax, income tax, inheritance tax, stamp duty, corporation tax, capital gains tax and VAT, just for starters, and put all your tax bill in the current price you pay for your home? Obviously there are transitional issues that many people just get completely hung up on, and one would have to do something to replace all the debt based money currently in the system that would not be needed once capital land values fell, relatively speaking, over time to incorporate LVT.
But it has imeccable liberal economists' pedigree - you've already mentioned Ricardo, but also Adam Smith, Milton Friedman, JS Mill, von Thunen and others thought it was the best base on which to charge tax.
Tim adds: The problem with land tax as a single tax is that such rents are only about 15-20% of the economy. Not enough to run a modern welfare state (not that I’m particularly enamoured of such but I don’t think reducing tax to 20% of GDP is really a starter...because too many people don’t want govt spending to be only 20% of GDP).
Posted by: Jock Coats | Apr 1, 2006 11:03:21 AM
We Georgists (though I'm not a purist - tainted as I am by monetary reform issues!) would say that under LVT you wouldn't have to run so much of that welfare state.
Everything else being equal, if a business has the choice to spend £1m on LVT in the overheated Thames Valley and where your employees have to spend that much more of their incomes on their own land needs for housing, or spend £100,000 in Hull and have another £900,000 more to disburse through salaries (of which they also have more disposable because their housing land costs are lower in Hull than in Reading), profits, and other economic goods, you're going to start to bring up the economic prospects of Hull without the government having to lift a finger.
LVT seems to me to be an inherently economic liberal tax (as evidenced by its historic supporters), making the market itself do more of the work of genuine redistribution.
Also, reducing, as it would, the capital costs of land (because you'd pay less to the vendor in a big one-off hit when you purchase land since a portion of that economic rent would be going in tax) is, over time, going to reduce M4 lending drastically, so opening up the opportunity to increase M0 to compensate and to provide enough currency to the rest of the economy to function. So tax is no longer the only way of financing some of government expenditure.
Tim adds: That’s the bit of Georgism I don’t quite get. Smacks of handwaving to me.
Posted by: Jock Coats | Apr 1, 2006 1:00:47 PM
In other words: we are too concerned that any tax shift has to raise the same amount, and not realising that a lot of the work that tax take currently does (or doesn't) achieve can be done "organically" simply because of the effects of the tax on economic activity.
Posted by: Jock Coats | Apr 1, 2006 1:08:18 PM
If you refer to my but about lower borrowing, I don't think that's anything to do with Georgism. That's my tainting of it with monetary reform! But it is an effect of LVT:
Say, I currently want to buy a property that costs £200,000, of whiich half is land value. At present that land value is paid up front to the vendor and I likely have to borrow £200,000 to buy it. (I also of course have a liability anyway under Income Tax and others for maybe £10,000 per year).
With a 100% land tax (just for simplicity as I don't know anyone who advocates that seriously - though I have sympathy with the idea) the vendor would only be getting the £100,000 for the buildings/improvements and I would have a liability for, say £10,000 a year in land tax, but I'd only be borrowing half of what I do without land tax (but I wouldn't have a liability as well for income tax and others of course).
That borrowing is, so far as I can see, required for the economy to function. It's what creates the bulk of our broad money supply in M4. So for the same level of economic activity, you'd have to replace that reduced M4, surely, with something?
It's not an idea promoted or even supported or understood by many Georgists, just my idea for reducing our reliance on expensive debt based money supply using the hole the M4 that would be created by LVT.
Posted by: Jock Coats | Apr 1, 2006 2:03:52 PM
"Doesn’t matter whether operators are given the licences, pay 50 quid for them or 5 billion. The companies will still charge you the maximum they can for the services on offer whatever they pay for the licences."
... yes indeed, the companies will charge the most that they can, and in the short term the price will not reflect the cost. In the longer run they will however compete on price with each other and drive prices down towards costs, so in the end prices will reflect costs.
Posted by: johnny bonk | Apr 2, 2006 2:08:30 AM
"Economics is about who gets what and why".
Surely economics is more about who makes what and how ... it can't be "got" by anybody until it has been made.
Posted by: johnny bonk | Apr 2, 2006 2:52:43 AM
