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Work and prosperity
25 June 2013

The massive tax on London that rich people don’t seem to mind

Like the Deep End, the Economist does not have bylines. On its many excellent blogs, however, the authors are identified by their initials. Thus we learn that ‘R.A.’ is moving from Washington to London – which allows certain comparisons to be made:

  • “London is extraordinarily expensive. It's the kind of expensive where even when you are accustomed to relatively expensive real estate (Washington is not the cheapest place to live) and know that London is far worse you are floored by how expensive it is. To rent a property roughly the same size, quality, and commute distance to work as the one we now occupy in Washington would have meant paying between two and three times as much in rent.”


But why should this be? Why should London be so much more expensive than the capital city of the richest, most powerful nation on the planet?

  • “Construction costs in London are higher than in some places but not remarkably so. The marginal unit in London will be in a building that is shorter than the marginal unit in New York, for instance, and taller buildings are more expensive to build. Topographically speaking, London is far, far less constrained than New York or San Francisco. London's big supply problem is almost entirely due to extremely tight land-use restrictions. It's quite simply very difficult to get permission to build.”

An attempt has been made to quantify the effect of the planning system on London property prices:

  • “In a 2008 paper, Paul Cheshire and Christian Hilber estimated the ‘shadow tax’ imposed by such regulations on office prices in London and other major cities. They found a shadow tax rate of planning restrictions (above construction costs) of about 800% in London's West End, and of nearly 500% in the City of London. The comparable rate is about 300% in Paris, 68% in Brussels, and 50% in Manhattan.”

Thinking about planning constraints as a ‘shadow tax’ is a useful exercise, because it begs the questions as to who gets the money:

  • “When a London firm brings someone to London, they do so, presumably, because the move generates a productivity increase which generates gains that can be shared between firm and worker. But the lion's share of that increase flows not to the firm or the worker but to the owner of the firm's office space and the worker's flat.” 

In other words, this is the most damaging kind of tax – one that shifts vital resources from wealth creators to rent seekers:

  • “As a result, London winds up with many, many fewer firms and workers than it could otherwise expect to have. As does Britain, because firms and workers deflected from London are more likely to wind up in New York or Hong Kong than in Newcastle.”

London is not exactly without influence in this country. You’d think there’d be powerful interest groups seeking reform. But the thing is that London’s most powerful interest group are those who own it. If they can take a nice fat slice of the city’s money-making potential just by raking-in the rent, there’s no reason why they would press for change. 

There are other considerations too. For instance, many people – whether they own property in London or not – would want the city to protect “its most beautiful streets and buildings” from “charmless new construction”. 

R.A., on the other hand, seems ready to send in the bulldozers, but there’s no need. London – including much of its centre – is full of charmless old construction that should be bulldozed instead.

Planning reform is necessary, but it should be used as a scalpel not a blunt instrument.


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