Urban Planning and the Poor

Many government interventions in markets though they are often justified in terms of the ‘public interest’ work to the disproportionate benefit of organised interests – often the rich or relatively rich – and at the expense of the unorganised and often relatively poor.

One area of public policy where this pattern is particularly evident is that of urban planning. In the United States, as Jane Jacobs showed so powerfully, the subsidised construction of luxury hotels, civic centres and highways has often paid precious little attention to the fate of the people and small businesses that have been ‘relocated’ to make way for politically high profile ‘regeneration’ schemes. The principal beneficiaries have often been large scale property interests who secure access to land on terms that would not have been available in a free market. In the United Kingdom meanwhile, large scale ‘slum clearance’ programmes in the post war era saw hundreds of thousands of low income people ‘relocated’ to high rise blocks – a process which often destroyed local community support networks but secured jobs for thousands of middle class local government housing managers and for large construction contractors which built what turned out to be some of the worst urban housing projects anywhere in the developed world.

As well as crimes against the poor in the name of urban renewal, urban planning has often prevented low income people from accessing housing in suburban and semi-rural areas where new and better paying jobs have been created. The primary culprit here has been restrictive zoning regulation – and in the British context the creation of development free ‘green belts’ around major towns and cities (now imitated by some US cities such as Portland). The effect of these controls has been to restrict the supply of land for housing forcing up the price well above free market levels. The major beneficiaries are of course existing home-owners in areas of high housing demand who benefit from increased property values and who use land use regulation to keep out ‘less desirable’ residents. In the UK specifically many analysts have pointed to a ‘drawbridge effect’ where the middle classes move out of the cities to rural and suburban areas and then promptly demand tougher regulation to ‘keep out’ the less well-heeled and the new building that would be needed to house them. Similar processes operate in the US where ‘large lot’ zoning ordinances that mandate minimum lot sizes of several acres in many states have been used to maintain neighbourhood exclusivity.

Read the rest of the article on the Pileus blog.

Dr Mark Pennington is the author of Robust Political Economy: Classical Liberalism and the Future of Public Policy.

IEA Fellow of Political Economy

Professor Mark Pennington is a fellow in Political Economy at the Institute of Economic Affairs and is also a lecturer in Political Economy at King's College, London. Mark holds a PhD from the London School of Economics, has been published in a number of publications and is co-editor of The Review of Austrian Economics.

10 thoughts on “Urban Planning and the Poor”

  1. Posted 31/08/2011 at 12:51 | Permalink

    Land Value Tax would sort most of this out.

  2. Posted 31/08/2011 at 14:20 | Permalink

    “The big question that needs to be asked is why, in light of this evidence, so many British ‘socialists’ and American ‘liberals’ who profess to be concerned about ‘social injustice’ continue to support it. ”

    Not sure if they’re aware of the consequences. I’ve recently read a LibDem paper lamenting the increased concentration of housing wealth, which did not include a single reference to planning/zoning laws.

  3. Posted 31/08/2011 at 14:55 | Permalink

    Kris, that’s the whole point.

    If NIMBYs deliberately ration supply to push up rents and house prices, they’ll just be driving up their own tax bills 🙂 It’ll all sort itself out – what young people lose on house price roundabout they will gain in income tax reductions, funded by NIMBYs extra LVT payments. If NIMBYs want young people to pay more tax, they’ll have to allow more houses to be built for them to live in.

  4. Posted 31/08/2011 at 16:19 | Permalink

    @Mark Wadsworth – it’s rarely a good move to attempt to resolve the effects of government intervention with more government intervention in the form of taxes (I think I’ve made this point to you on LVT before, there are many downsides to a LVT as there are with any tax). The optimal solution is not a tax, but a liberalisation of the planning regime which would allow a proper market for demand and supply of land to emerge. What you call NIMBYs are merely people acting rationally under the circumstances – they are harnessing available government power to further their interests. That’s not NIMBYism, it’s simply pursuit of one’s own self-interest (nothing wrong with that, if government wasn’t involved). What needs to happen, as Mark Pennington suggests, is that instead of gaining such benefits for free via government mechanisms, they need to pay for them directly. In reference to such a scheme it’s worth pointing out the deadweight costs of those tax ’roundabouts’ you’re talking about. It may also be that such ‘NIMBYs’ do not want young people to pay more tax and won’t act in the way you assume.

  5. Posted 31/08/2011 at 17:41 | Permalink

    Yes of course liberalising planning laws is in and of itself a good thing (or the good things about it outweigh the bad), I take that as a given, I was just going one step further. The fact is, it is centripetal forces (such as ‘agglomeration’) which push up land values in town centres and by definition there is a limited amount of land in town centres, and the more you liberalise planning laws, the richer the urban landowners become (even if the unit cost of housing goes down). So why not tax that extra bit rather than taxing the incomes of people who live there?

    People have been coming up with flimsy anti-LVT arguments since the dawn of time and I’ve never seen one that was in any way coherent or wasn’t “people harnessing the power of government to further their own interests” as you would put it. And it certainly has the lowest dead weight costs of any tax, and its dead weight benefits more than make up for any dead weight costs. Plus I never said “more tax” I’ve always recommended it as a replacement for other taxes. Most taxes we have are very bad taxes indeed with huge dead weight costs.

    “It may also be that such ‘NIMBYs’ do not want young people to pay more tax and won’t act in the way you assume.” Quite possibly not – but that’s their choice isn’t it? If the NIMBYs are happy to compensate the priced-out generation via the tax system, then so be it. It’s the same as people in the front rows of the theatre paying more for their tickets than those at the back – the people at the back benefit from cheaper tickets, those at the front from the better view and this is a free market solution. People at the back can’t complain that people in the front rows are blocking their view, can they?

  6. Posted 01/09/2011 at 09:13 | Permalink

    I think there are several problems with a land value tax which, on balance, lead me to oppose it:

    1. it requires somebody to somehow split off the underlying rental value of land from that part of its value arising from capital and labour inputs. This is an artificial and very expensive exercise.
    2. From a political economy point of view, I think it would be problematic at the current time. The very fact that it is relatively non-distortionary means that it can be imposed with fewer economic consequences (just distributional consequences). I cannot believe that, starting from here, it would not be used in addition to existing taxes rather than instead – and the lower the distortions caused by taxes, ironically, in a democracy, the higher taxes tend to be.
    3. We are talking about a society that is spending over 50% of national income. A land value tax would have to be extraordinarily high to raise that sort of sum (though I accept that neither of the Marks would want taxes that high). In turn, therefore, we are talking about huge land value taxes being levied on people who have bought houses/land on the assumption of there being no such tax. In other words, the “no tax” situation will be discounted in houses.

    My own preference is a tax on the imputed rental value of all non-let property (though argument 3 applies to that problem too).

  7. Posted 01/09/2011 at 09:40 | Permalink

    “1. It requires somebody to somehow split off the underlying rental value of land from that part of its value arising from capital and labour inputs. This is an artificial and very expensive exercise.” HM Land Reg could do this at the press of a button, they have records or 14 or 15 million sales all over the country, together with precise maps, addresses, size of plot and price paid. Even Pickles admitted it would only cost £250 million to do a full council tax revaluation – that’s £5 per house!

    “3. We are talking about a society that is spending over 50% of national income. A land value tax would have to be extraordinarily high to raise that sort of sum (though I accept that neither of the Marks would want taxes that high).” I’m glad we are agreed on something at least! But it all depends which taxes you replace with LVT, just to get the ball rolling – ideal candidates would be Council Tax, IHT, SDLT, CGT, TV licence and Insurance Premium Tax (and the 50p top rate and the non-dom levy AFAIAC), which would require a annual flat tax of about 1% of capital selling values of housing, a tax on imputed or actual rental income (land element only) of about 50%, or indeed a tax on imputed or actual rental income of approx. 25%. For sure, it would cost a few quid to get things up and running, but think about the massive savings in bureaucracy from scrapping the other taxes.

    My 1% is not in any way pie-in-the-sky, they don’t have Council Tax in Northern Ireland, they have an annual 0.7% tax on capital values (capped at £400,000 and with roll up for pensioners) based on a full revaluation on 1/1/2005, which for most people comes to much the same thing as Council Tax would.

  8. Posted 01/09/2011 at 09:50 | Permalink

    @Mark – then what you are proposing is not a land value tax on the underlying rental value of land but a tax on the value of property (the whole lot including the capital aspect of it). The point of a land value tax is that it does not cause distortions because if you live next door to me we both get charged the same tax per sq ft of land. If I spend £100k (of already taxed income) adding £100k of value to my property then I should not get taxed again (under a proper lvt). What you are proposing is a capital tax on property only which is, essentially, the double taxation of income (I already bought my house with taxed income).

  9. Posted 01/09/2011 at 10:07 | Permalink

    Philip, no I mean exactly Land Value Tax, i.e. two identical plots in the same area would pay exactly the same amount. I quite agree with you that the improvements paid for by the owner should be ignored. As I’ve no high opinion of planning restrictions I would even ignore these in working out the value, there would just be a rate in £1/sq yard for each smaller area (local authority, local authority ward, postcode sector, whatever takes your fancy) x by plot size (which is known to HMLR and can easily be verified or checked by the owner).

    I just use “1% of selling prices” so that people can guesstimate how much they would be paying – for half of households it would be no more than Council Tax is currently (and so clearly no need for an extra Mansion Tax!). Whether you call it 1% of selling price or 25% of imputed rental income of [selling price x 4%] or 50% tax on the location rental value [ignoring improvements] is neither here nor there. Let’s not split hairs, clearly, people in blocks of flats will end up paying a bit less than 1% and people with big gardens will end up paying a bit more than 1%; people who keep their houses in good condition will pay less than 1% and people who let their houses fall derelict will pay a lot more than 1%, and so on.

  10. Posted 01/09/2011 at 10:28 | Permalink

    I see. I still err away from your position but not as strongly!

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