Can Tax Avoidance Save Housing Associations From "Right to Buy"?

So the Conservatives are pressing ahead with their plans to extend the right to buy to tenants of Housing Associations.  There is almost unanimous agreement among everyone who knows anything about Housing policy or even just basic economics, that this is a monumentally bad idea.  The right to buy your council house was part of what led local councils to stop building council houses.

With the resultant drop off in the overall UK housing supply that has led to the dramatic increase in prices with all the consequences I have written about elsewhere.

Essentially, the Right to Buy is a tax on Housing Associations, raiding their assets and transferring them, at a hefty discount, to the most privileged social housing tenants.  Others have already written eloquently about how Housing Associations fund their home building activities by borrowing against their existing asset base (see Martin Wolf in the FT in particular).  If that asset base is now subject to state confiscation, it will not provide banks with sufficient surety against the loans they need to fund house building. 

State confiscation of this sort is essentially little different from a tax.  Let’s not dwell too long on the absurdity of a Conservative government, which purportedly believes in the “Big Society”, having found a way to tax charities, and simply ask a different question.  Who has been particularly good at avoiding tax, and is there anything that Housing Associations might be able to learn from them?

The essential point here is that the “Right to Buy” will never to extended to the tenants of private landlords.  So Housing Associations should find some way to make sure that their tenants are not actually, on paper, the tenants of the Housing Association, but the tenants of some private landlord.  The same tenants should still be paying the same rent to live in the same properties, but the assets themselves would not be liable to seizure.

One way to do this would be to transfer all the houses owned by the Housing Associations to some private company.  The Housing Association would then lease the properties from this company and sub-let them to their tenants.  All of these rental agreements would, of course be happening at sub-market rents.  Right to Buy would not then apply as the Housing Association cannot sell to the tenant what they do not own.  The downside of this solution would of course be that the Housing Association would not own the properties and so would not be able to borrow against them in order to build more homes - though this could be done by the entity into which ownership of the homes was transferred.  

Of course, elaborate legal arrangements would be needed between the Housing Association and the firm that owns the houses.  Ideally the Housing Association would own all of the shares in the house owning firm, but this might make things a bit legally tricky in claiming that the Housing Association does not own the house.  

One solution might be to turn the  Housing Association itself into a private company, which owns houses and rents them out, nominally for a profit, they just agree not to make a profit.  The loss of charitable status might lead to an increase in costs because of taxes they would now be liable for, but this would be a small price to pay for securing the assets.  This solution might present legal problems because of the nominal duty of a management board of a private company to make profits for their shareholders.  Some structure would have to be constructed where the firm was effectively owner-managed.

My purpose here is not to suggest the precise legal structure through which Housing Associations might protect their assets from “Right to Buy”, I’m an economist, not a lawyer dammit!  I merely wish to suggest that such an arrangement should be possible.  Afterall, since the “Right to Buy” is effectively an asset tax, it should be as liable to tax avoidance as any other tax.  Maybe that army of lawyers and accountants employed by large multinationals to avoid taxes could be directed towards some socially useful activity in helping Housing Associations to re-jig their legal structure to avoid the “Right to Buy”.

To Control Letting Fees or Not To Control Letting Fees ... Really Isn't the Question

The coalition has frequently trumpeted their “help to buy” policy where the government guarantees the mortgage of someone buying a new home.  Some fairly basic economic analysis will show you that all it really does is to push up prices and benefit the people who already own homes.  See my analysis here.  Now Labour have proposed some housing market reforms, claiming that they will help Generation Rent, but some relatively simple analysis shows that once again, this will only help home owners, in this case landlords.

The policy in question involves banning letting agent fees.  First of all, let’s look at the scale of the problem.  When renewing a lease (and maybe changing one or two terms in it), or getting a new lease, estate agents will charge the tenants for things like changing the contract, or credit reference agency checks.  Labour’s research (reported here) suggests that these fees average £902 across the country and £1,700 in London.  This may sound like a lot, but compared to the average cost of renting, is it?

Let’s take a somewhat unscientific approach to gauge the scale of this problem by looking at the rental prices of some 3 bedroom properties.  In order to do this, I am using Rightmove’s ability to look at properties on a map and selecting a property at random on the outskirts of a city.  On the outskirts here means just inside the Ring Road.  I’m not going to claim I have found the average rental price in these cities, but this will give us an idea

• Oxford: This 3 bed semi costs £1,500 pcm, so fees would be 5% of annual rental cost. 
• Bristol: This 3 bed flat costs £1,395 pcm, so fees would be 5% of annual rental cost.
• Southampton: This 3 bed semi costs £925 pcm, so fees would be 8% of annual rental cost.
• Manchester: This 3 bed house costs £1,495 pcm, so fees would be 5% of annual rental cost.
• Birmingham: This 3 bed house costs £1,000 pcm, so fees would be 8% of annual rental cost.

Overall, based on a quick but unscientific survey, we are talking about fees representing between 5% and 8% of the rental cost outside of London.  In London, this 3 bed flat is available for £2,275 pcm, so the fees would represent 6% of the annual rental cost, this is within the range for the rest of the country.

This is small, but could be significant, but it is all rather beside the point anyway, because the policy will not save tenants anywhere any money whatsoever.  The reasoning, once again, is the fixed supply of housing which cannot increase at anything like the rate at which it needs to because of the UK’s planning regime.  Tenants have no reason to distinguish between money spent on housing in the form of estate agent fees or money spent on housing in the form of rent.  So if the estate agent fees go down, the money they are willing to spend on rent will just go up by exactly the same amount.  From the perspective of the landlords, the abolition of estate agent fees is just like an increase in the quantity of housing demanded at any given price.  But the planning regime means that the supply of housing barely responds to changes in the price of housing, so we can think of the supply curve as being virtually vertical.  

The  result is an increase in prices and tenants are no better off.  The real beneficiaries will be the landlords who will start to see higher rents.  So just like the coalition's "help to buy" policy, this policy, which as advertised as being on the side of Generation Rent, actually benefits those who already own homes, rather than the people it is supposed to be helping.  Still at least this policy transfers resources from estate agents to home owners, rather than help to buy, which transfers the resources from the people it is supposed to be helping.

Is This a Tax or a Subsidy I See Before Me?

So Edward Samuel Miliband, the leader of the Labour Party, has finally promised to abolish the spare room tax, or should that be the spare room subsidy?  I’m not entirely clear.  Every Labour party politician assiduously refers to this as the spare room tax and every member of the Conservative party assiduously refers to the spare room subsidy. Their various supporters in the press follow suit, so which is it?  In essence, this is about the use of language to bias a debate.

• If it is a tax being imposed on poor people, then that is more evidence that the people imposing it are heartless Tories.
• If it is a subsidy being withdrawn, then that is further evidence that people who oppose the policy just want to spend money and would explode the deficit if they got power.

This kind of labelling is an old (and quite transparent) trick, and one that I have already used twice in this post alone (although you may have to know what my own political bias is in order to spot one of them).

Technically speaking, I have more sympathy with the Conservative description of the policy as what is happening is that a subsidy is reduced if the family living in subsidised accommodation is judged to have more than sufficient living space.  I suspect some quick witted Conservatives will start saying “there he goes again making promises he can’t keep: You can’t abolish a tax that doesn’t exist.” 

Although withdrawal of a subsidy can have effects similar to the imposition of a tax.  Indeed, a subsidy is simply a negative tax rate, and so there is a point that if a subsidy is reduced, that is mathematically the same as increasing a tax. This often leads some people to cast a reduction in tax rates, or a refusal to tax a good they think should be taxed as subsidising the good in question.

The problem with using this logic to cast the failure to impose taxes you like as a subsidy and the failure to give out a subsidy you like as a tax is that it is highly vulnerable to reductio ad absurdum.  A friend and I were once discussing an article which referred to the withdrawal of a tax on mortgages (which happened about 20 years ago) as a subsidy for private home owners. At the time we were sitting in Oxford’s economics department which is one of those buildings where all the external walls are made of floor to ceiling windows, so I had to point out that the abolition of the Window tax in 1851 meant we were in the most subsidised building in Oxford.  Indeed, under that view, the Shard of Glass in London is receiving an eye wateringly large subsidy (adjusting the taxes that were charged for inflation).

To go one step further into the absurd, before breakfast, I could claim that books have been heavily subsidised by the government’s failure to tax them at £1,000 per book. After breakfast, I can claim that books have been heavily taxed by the government’s failure to subsidise each book by £1,000. The only thing that has actually changed while I was having breakfast is my reference price, not the policy.

So there must be some reference where we can refer to the good as either being taxed or subsidised.  One extremely convenient one would simply be to look at whether the government is paying out money (in which case we should probably refer to a subsidy) or whether the government is taking in money (in which case we should probably refer to a tax).  The key advantage of this way of labelling things is simplicity, to know whether a policy is a subsidy or a tax, you just need to look at what happens to the government’s budget. Under this convention, the Conservatives are correct and the housing benefit changes constitute a reduction in subsidy rather than an increase in tax.

However there is another way of looking at this which allows us to be more sympathetic to Labour. We could say that a policy is a tax if it raises the price above the market price that would prevail if there were no market imperfections, and that it is a subsidy if it lowers the price below the one that would prevail if there were no market imperfections. One attractive property of this way of labelling policies is that we can refer to the refusal to tax petrol in a manner that takes the price of the carbon externality into account as a subsidy.  In this labelling scheme, any policy that involves any kind of subsidy or tax is per se inefficient. Since the price of housing in the UK is kept artificially high by imperfections in the housing market, this would allow us to cast the benefit changes as a tax and say that Mr. Miliband is correct to talk about abolishing the bedroom tax.

If this labelling scheme appeals to you, then I just have one question for you and Mr. Miliband: So you are going to be taxing those who are ineligible for housing benefit how much?

I thought so. It is probably best if we just stick with the definitions of tax and subsidy that refer to the effect on government spending and income. 

None of this makes any comment on whether reducing housing benefit in this way is the correct policy, it is just about whether we should call it a tax or a cut in subsidy. Now might be a good time to start openly discussing the merits of this particular subsidy and whether it should be reduced or not; and if it should be reduced, is this the right way to go about it?

Pampered or Rational?

So a recent post about why Generation Y is so miserable caused a bit of a fuss recently, and a response can be found here. I’m not going to try and endorse or deny the stuff about entitlement. For one thing I am of Generation Y myself, so if I bite on that bait, I will only be providing evidence for the other comment about Generation Y that they don’t respond well to negative feedback. My main point is simply as follows: The trends identified in the “waitbutwhy” article are actually rational responses to a changing work environment. In particular pensions used to provide incentives which dramatically increased the financial value of careers which would give rewards only after many years’ hard work. I don’t want to get drawn into too much of the institutional detail here, if for no other reason than that those details differ on different sides of the Atlantic, so I’m afraid it is going to be pretty broadbrush at this point.. 

While institutional details differ, the general pattern is similar.  In the immediate post-war years, with greater faith in what the state could achieve, many Western countries set up “pay as you go” pension systems, where each generation would pay the pensions (and other retirement benefits) of the one that preceded it through the tax system. A bit of nominal ring-fencing goes on, but ring-fencing like that is normally just window dressing.

There is nothing wrong in principle with a pay as you go system.  Indeed, it can be an important way to ensure that the generations alive and approaching retirement when the pension system is set up do not miss out.  However when there is a baby boom (as there was in the immediate post war years), the system can be put under a great deal of strain.  When the baby boomers reach working age, there are a lot of them to spread the burden of supporting the older generations. When they retire, there will be a lot of them who need to be supported by the subsequent generations.

But there has been another trend, which means that each retired baby boomer will be an even larger burden for subsequent generations than the pensioners they supported in their working life.  The baby boomers will live much longer, their lives being preserved by expensive medical treatments (courtesy of the tax payer again), but retire at virtually the same age. In the UK, the age at which people most commonly die has increased by 10 years for men and by 5 years for women since 1980. This means that the typical man enjoys twice as many retirement years today as the average baby boomer did. There is nothing wrong with extra longevity, but it does mean that there are more pensioners whose pensions and other benefits need to be paid for by a relatively smaller population of workers.  That means a larger burden for each worker to bear.

Most of the solutions to this problem amount to moving the stable door from wide open to ajar once the entire team of horses have got out into the wild and are well on the way to producing more horses. Broadly speaking, the plan among those countries that are planning to do anything is to slightly raise the retirement age long after the baby boomers have retired. As with any “solution” to a problem which fails to go far enough, this simply means that more drastic actions will be required later, probably just as Generation Y is nearing retirement age. That age will probably be substantially raised, and the retirement benefits they will enjoy have already been drastically reduced compared to those that will be enjoyed by the baby boomer generation.

However this offers some insight into one of the differences highlighted between generation Y and their parents. Their parents expected to work until they were 65 and then enjoy a good 20 years of retirement. In those circumstances it is rational to look for a career purely on financial criteria. Generation Y’s parents will also, for the most part, benefit from pension schemes based on their final salaries.  This dramatically increases the financial benefits of a career which sees very large salaries right at the end, because that has a huge effect on pension income.

Generation Y is probably expecting to live to about 90 and retire at 86 (yes I am exaggerating, but the point is they will work longer and enjoy fewer years of retirement). The closure of most final salary pension schemes also means that sudden salary rises at the end of their careers will not have such a dramatic effect on their lifetime incomes as it did for their parents.

All this adds up to two things:

• Rationally the early financial rewards to their careers are more important to Generation Y than they were to their parents; and

• Rationally their careers will be a much bigger part of their lives and so Generation Y should be looking for a career where they can follow their passion rather than one that merely provides a living.

So maybe the feelings of frustrated expectations and the desire for earlier rewards from their career, and a career that provides a lot more job satisfaction are more than simply the selfish demands of a pampered generation. They might simply be rational responses to the environment they face.

Olympic Touts

First, I have been informed that "tout" is something of a British - English word, so I'll start by explaining that a tout is someone who hangs around sporting venues selling tickets.  Normally someone else's unwanted ticket that they bought.

I have to confess something here.  I am an Olympic Refusenik.  The only "benefits" of the games I have seen so far are: 

• It is much more difficult to get on the tube.  
• One only has to spend 5 minutes or so at a major train station before Boris Johnson's irritating voice comes up telling us that "This is… The big one" and advising us to go to an utterly useless website to re-plan our journeys.

However one Olympic story has grabbed my interest.  (OK, two stories if you count Boris and the zip wire!)  The twin outrage at empty seats in the arenas and ticket touts making money off the games.  As a friend pointed out on Twitter, it is wrong to draw too much of a connection between these two issues.  Most of the empty seats are, in fact, those that were reserved for the "Olympic family" of VIPs and dignitaries associated with the games.  If this is the case, it is highly unlikely that these would be the seats that touts are able to sell on.

However the attitude to touts is interesting in itself.  People do get genuinely very angry about touts, even those selling genuine tickets, and this often drives some economists crazy!  From our perspective, touts who sell genuine tickets are fulfilling an important economic function, moving goods and services from people who don't value them very much to people who place a great deal of value on them.

Let's go back to the point where tickets were being sold.  People were getting up very early in the morning to enter a "lottery" where they said which events they wanted to go to and would then "win" their tickets or not.  If you "won" the tickets, you still had to pay for them, but this way the tickets themselves could be priced below the market price so that the games could be enjoyed by everyone.  The fear is that otherwise the games will be a rich person's pleasure.

Naturally some enthusiasts entered the lottery for many events and ended up with nothing.  Others entered the lottery and won almost everything they said they'd want to go to.  People who won tickets to nearly everything they entered the lottery for would be spending far more money on Olympic tickets than they wanted. 

This is a prime example of an allocation mechanism that will create the conditions for a thriving secondary market.  On one side of the market we have people who really wanted to go to some Olympic events but ended up with tickets to far too many.  On the other side of the market we have people who wanted to go to lots of Olympic events but ended up without any tickets.  We should find some way to get excess tickets on one side to people who really want tickets on the other side.

If someone came along and offered to coordinate this process, giving of their time to match ticketless sports fans with over-ticketed sports fans and broker a deal, would we say that they were doing something wrong?  Is that something that should lead to an arrest, conviction and criminal record?  If they are doing it for free, then I, and I suspect a great many people, would say no.  It is only when they are making money from this activity that people seem to have a problem with it.  I have to admit to being puzzled as to why.  The process of brokering takes time.  Furthermore, if the tout reallocates tickets by purchasing them from those who don't want them and selling them on, then they are taking on considerable risk if they cannot find a buyer.  People need to be compensated for taking risks.

Tim Worstall suggests that it is a Victorian attitude to the grubby business of trade.  True wealth ought to be inherited rather than made.  There is something not quite right about this explanation being applied to modern Britain.  Two of the most popular television shows in the UK today are The Apprentice and Dragon's Den, where participants show off their business acumen, and these have propelled the businessmen involved to a celebrity status.  On the whole, Britain today is more comfortable with wealth creation than it has been in a long time.

I suspect that the explanation lies elsewhere.  I suspect the issue is the source of the wealth that is being generated by touts.  Tickets were sold in the primary market below market price and assigned via a lottery to ensure that the Olympic games were for everyone and could be enjoyed by everyone, not just the rich.  Had the tickets been sold at the market price, the games organisers would have made more money and the return on the investment in hosting the games for UK Plc. would be higher.  A similar argument could be made about touts at football matches and other sporting events.  The tout's profits are the profits that organisers decided to leave on the table so that the events would be "for everyone".  I suspect that this is the real source of the anger felt towards touts and it is why touting is illegal.  However, just because this is the source of the anger does not necessarily mean it is rational or sensible to make touting illegal.

While this argument may apply to other sporting events, it does not quite work for the Olympics.  The Olympic organisers chose (in the form of a lottery) an extremely inefficient means of allocating tickets that was always likely to create this secondary market.  There were alternative mechanisms that would have ensured tickets were initially held by enthusiasts for the sports involved.  Tickets could have been given away to the relevant sporting clubs across the country.  For example tickets for Olympic Judo could have been given away to local Judo clubs who would then have decided how many to sell; how many to allocate to members and so on.  If you want to find out who the e.g. badminton enthusiasts are, a badminton club is a good place to start.  Such an allocation mechanism would have been very good for the clubs allowing them to enthuse their members or raise cash for sporting equipment according to their own needs.  Such an allocation mechanism would not eliminate the problem of ticket touts, but it would have resulted in a smaller secondary market.

However, to an extent we have to accept that the premise of making the games something that was "for everyone" is a bit shaky.  We have the problem of touts because the people we are trying to "help" by giving them low cost tickets to sporting events would prefer to have the market value of the ticket rather than the ticket itself.  It is entirely possible that there are some people who lack sufficient disposable income to pay the market price of a ticket, but would not sell it at the market price if you gave it to them.  The question is how to distinguish them from the people who would sell their tickets at the market price.  Asking them to put their hands up does not seem to have worked.  

However, even if we could perfectly identify them, there would still be a secondary market.  Life happens and plans change, the events people thought they could make when the bought their tickets they can no longer get to.  Under these circumstances, it is understandable that they should want to get as much money as they possibly can for their ticket, and, in some ways, tickets like this should be reallocated through the price mechanism.  We could view this as redistributive - moving money from richer sports fans to (on average) poorer sports fans.  It might be better to accept that the secondary market exists and to start regulating it to protect punters from fraud rather than trying to stamp it out.