I haven't done one of these for a couple of weeks, so I'll base today's episode on an email exchange with Ron who said he could see the pro's and con's of Land Value Tax, but wasn't really persuaded either way and didn't see the fundamental point. I explained that point wasn't taxing for the sake of it, but to prevent public generated value being collected privately and to collect it publicly and to dish it out to all and sundry as a Citizen's Income (so that we are all landlords with a 1/62 millionth joint share of the rents).
He responded with this: "I get the importance of handing it back as citizen’s income and this is one of the things that bothers me about the idea - why trust the state to do this when it manages to corrupt everything else? Do you have an answer to this fundamental problem?"
My answer, which I have now padded out slightly was as follows:
Fair point.
But there are two things that can happen to land rents (and other state-protected monopoly rights).
1. They can be collected privately by land-owners, speculators, banks and corrupt politicians. Even the non-cash benefit in kind accruing to owner-occupiers is a massive distortion, as it encourages NIMBYist behaviour and the woefully inefficient allocation of housing (price rationing only applies to newcomers, incumbents don't have to pay).
2. They can be collected by the government. Maybe the government wouldn't pass it all on as Citizen's Income, maybe they'd spend some on themselves and their friends, but to be honest, it is better for democratically elected people (whom we can chuck out again, to some degree) to spend this money than for a self-perpetuating landowning and banking "elite". In practice we observe that in western countries only a quarter of the taxes they collect are wasted on fripperies (leaving aside deficit spending and bank bail-outs); most of the surplus, after paying for the irreducible core functions of the state, is returned to the public as welfare, pensions, roads, healthcare and education (the last two would be far better funded with Vouchers, but that's just a variation on the Citizen's Income idea) etc.
Further, taxes can be split up into taxes on land and other monopoly rights, OR taxes on output, incomes and profits. The very act of raising taxes from output, incomes and profits makes us all collectively poorer, however efficient the government is at spending, the dead weight cost of simply collecting them is about a quarter of potential GDP, which is simply lost. Nobody gets that lost GDP. Taxes on land have no such dead weight costs, and in marginal situations, even have the effect of stimulating the economy (they keep people on their toes).
Similarly, taxes can be split up into in-your-face taxes (like Council Tax, Inheritance Tax or indeed LVT) where there would be political pressure to keep tax bills down and to spend the money wisely; and stealth taxes (just about all other taxes) which are deducted at source from salaries, added to shop prices etc, and which the government can increase and squander more or less at will. It is only a couple of million self-employed individuals or companies who actually have to calculate and pay over the vast bulk of taxes that are collected.
So even if governments are wasteful and inefficient (and they are), it is better for them to collect and squander land rents than it is to collect and squander income tax. Does it really make much difference whether landlords and bankers drive round in Ferraris and Rolls Royces or whether civil servants drive round in Ferraris and Rolls Royces? Not really.
Further, from the point of view of potential first time buyers (or a new business), the future stream of LVT payments is not really a cost at all, because it depresses the price they have to pay for their first home (or first commercial premises) in equal and opposite measure (while the income tax/VAT saving is a real saving).
And finally, in the light of all the Greek/Irish bail out shenanigans, don't forget that the secondary advantages of LVT are that it would keep land prices very low, so there'd be no house price and credit bubbles. We are seeing day by day and week by week what happens when these bubbles burst - the Home-Owner-Ist "élite" just help themselves to another few trillion dollars and walk away laughing and the rest of us are stuck with huge income tax bills and national debt for the rest of time.
Signs Of Desperation From Remainers...
34 minutes ago
23 comments:
WTF is a "home-owner-ist"?
And how much will this cure-all tax be?
How much will this cure all tax be ?
It's cheaper than any other tax.
All taxes cost something to collect in addition to the cost of the tax itself. Most taxes also have a cost associated with the fact that they reduce the numbers of people working. But not Land Value Tax.
LVT is a "cure all" because
a) It is dirt cheap to collect.
b) It doesn't reduce the numbers of people working.
c) It's impossible to evade and the only way of avoiding it is to sell your land and rent instead.
That combination means that every honest taxpayer has less to pay than they do under the current tax regime*.
And that's what makes it the cheapest way of raising taxes.
Any taxpayer interested in reducing their tax bill should be supporting it whether they support small government or big, because it would save the vast majority of them a bundle...
-----------------------
*Unless they own millions of pounds worth of land. Even then they can choose to sell up and buy some cheaper land if they don't want to pay so much tax. So only people who want to pay a lot of tax in order to get the benefits of expensive land need to pay a lot of tax.
SW, I did a separate post on the difference between 'owner occupier' (which is a nice way of doing things) and 'Home-Owner-Ist' here.
As to how much I (personally) would like it to be, see the power point presentation here. Feel free to choose a higher or lower tax rate.
Derek, ta for back-up as ever.
Actually it's the only tax, that stops other privately collected taxes from happening.
So if you don't have an LVT, you have double tax i.e. State transfer Taxes and a Privately collected LVT.
"... don't forget that the secondary advantages of LVT are that it would keep land prices very low, so there'd be no house price and credit bubbles."
Here we go again.
I have challenged this assertion before and not received a persuasive answer, but being a nice chap I'm happy to ask again. How will LVT (i) cause prices to reduce and then (ii) keep them "very low"?
The position you put is not just that LVT will keep prices "very low" because they are not very low now; it includes the assertion that LVT wil cause prices to fall dramatically. How can this happen unless LVT is set at such a high level that it reduces disposable incomes substantially?
What level of LVT will cause prices to fall? What level of LVT will be required in order to ensure prices do not then rise?
TFB, do you mean how high would LVT have to be to keep prices low, assuming all other taxes remain the same? In which case we know the answer - until 1963 we had Schedule A tax and Domestic Rates (that between them amount to a crude Property or Land Value Tax) and house prices were fairly low and stable for a very long period.
Or do you mean if all other taxes were scrapped? In which case the answer is "There's only one way to find out".
LVT acts like a higher interest rate. Prices are mainly remaining as high as they are because because interest rates are currently being artificially depressed, and income and gains housing is very lightly taxed compared to employment or business income) that everybody has been piling in to the pyramid scheme.
If, conversely, the effective interest rate on a house were about ten per cent higher, and there were no taxes on income and profits, where do you think people would be concentrating their energies?
TFB, further, it's about psychology.
If the government said "We are going to keep hiking the rate until house prices fall back to a sensible level" and clearly stated what that level is, and then hiked the rate a per cent or two each year (and cut other taxes at the same time) then it's a fair cop.
If people insist on paying more than that clearly defined level for a house, well they are warned - next year, the LVT rate in that area will go up. And if LVT brings in more than is required for government spending, then fantastic, we can pay off the national debt instead.
MW, interesting links - thanks.
But I see difficulties for the idea. House prices are high because
a) there aren't enough of them to go round
b) there has been too much easy credit which has caused a bubble
a) isn't solved by your LVT
b) is only solved if the LVT is set at such a confiscatory level people no longer have money to buy.. causing a slump in the market. A gentle let-down through squeezing credit & inflation at 5% or so for a few years will be much less painful for all concerned. Of course an increase in supply is also needed.
LVT will never happen, not least for 2 simple reasons. Firstly because those of us who own homes are not going to vote for something which deliberately sets out to reduce the value of our asset, which we have sweated to acquire, and secondly the political cost of the proverbial asset-rich/cash poor old Granny widow who on her meagre pension will not be able to afford a confiscatory LVT. (I can see it now... "how very brave of you, Minister")
I am particularly perturbed by your comment "If people insist on paying more than that clearly defined level for a house". Government setting market pricing? That used to be called communism. The effects are somewhat dismal.
As to schedule A taxes & the rates... the English property market has behaved the same way for centuries, like any other market, with price swings & corrections based on the market situation. What happened post '45 was a huge amount of house building (i.e. plenty of supply) combined with controls on credit. Combine a lack of housing with excess money supply, and you get a bubble. It seems screamingly obvious to me that the solution to that problem is not comprised wholly in a tax change but rather proper controls on credit & an increase in home building.
I was so worked up I forgot to add something.... your "poor widow bogey" argument has an obverse. Rich millionaire pensioners (exhibit 1: Sir Fred Goodwin, that deserving chap) exempted from LVT? Aside from that the 1/6 that pensioners own is increasing as the proportion of old codgers increases (me included, soon) so over time your taxable base will gently erode.
You have to concede, if you have any regard for practicality & political possibility, that at some point you end up deciding which pensioners can be exempted and which cannot. Which leads to administration costs. And eventually, you end up taxing income instead because everyone can see that that is FAIR.
"But I see difficulties for the idea. House prices are high because
a) there aren't enough of them to go round
b) there has been too much easy credit which has caused a bubble"
a) There aren't enough of them to go round because of the draconian planning rules and because the buy-to-let landlords can pay a good deal more than first time buyers can, and then make their money back by charging high rents (which are in turn justified by the high prices at present). It's something of an upwards spiral.
b) A lot of the easy credit is due to the house prices rising. A loan secured on a house gets a much lower interest rate and can be for a whole lot more than an unsecured one.
Lessen the planning rules and introduce LVT and prices would drop.
Regarding the Rich Millionaire pensioners - I'd personally rather see the pensioners paying along with everyone else. "The house is my only asset, and I saved up all my life to buy it" is a bit disingenious unless purchased very very recently, most of the pensioners I know live in houses they bought for a much smaller amount years ago.
TFB: How would it keep prices low?
It's all about return on investments.
Suppose you have £100k. You want a return of 5% per year, so you buy a small house/flat and rent it out for £500 per month. This gives £1k per year for maintenance/repairs and £5k return on investment.
If LVT is introduced at 1%, then you'll be paying £1k per year on that, so your return becomes £4k. This means that the capital value of the property to you on the same basis that you bought it is £80k (so you're still getting a 5% return).
Of course, actual returns on property are not just based on rent, but on appreciation (i.e. you can get £5k per year rent, plus at the end of the year your property is worth £110k instead of £100k, so you've made a total of £15k - albeit £10k of that is dependant on selling and £5k of that will be based on inflation only). I beleive the current estimated return on property investments is in the region of 9% per year overall, which is considerably higher than for just about any other investments.
LAND taxers need to keep au fait with what's happening in Ireland.At face value the so-called SVR they've intro'd appears to be a form of uniform poll-tax,but more reliable sources than the Brit Press,say that the uniform payment is just phase one during which they do a full land valuation pending implementation proper of a veritable SVR/LVT.
Does anybody know what is really going on?
TFB, a third and final point. Business Rates are not a million miles from being LVT, and are much higher than Council Tax, which is closer to being a Poll Tax.
So if you happen to own or buy a vacant half acre plot just between the High Street and the residential zone in Anytown which would be suitable for EITHER offices OR for housing, if you get planning for housing you make twice as much planning gain than if you 'only' get planning for offices.
i.e. build a 3 storey block of flats with 6 flats, that's about £6,000 council tax a year. If you can only build an office block that's exactly the same size, the Business Rates are about £12,000 in total - that future tax payment is 'capitalised' into the value of the land.
SW, RA seems to have answered your questions quite adequately, so briefly:
"Government setting market pricing? That used to be called communism."
The target price/value for land will be "very, very little", i.e. maybe £5,000 or £10,000 for a residential plot. That's not Communism, that's just the result of collecting 90% of the rental value. The vendor's loss is the purchaser's gain. No value is harmed during the making of this film. In the same way, the government has decided that a packet of fags 'should' cost £6, and so that's what they cost.
"... at some point you end up deciding which pensioners can be exempted and which cannot."
Agreed, because this whole 'exempting pensioners' is a POLITICAL thing and has nothing to do with sound economics.
I'd far rather charge them the normal rate and dish it out as a doubled or trebled State Pension (so this is redistribution from pensioners who 'over occupy' to pensioners who 'under occupy'); pensioners as a whole would not lose out (and there'd be more winners than losers).
RA, thanks for back up.
DBC, who knows? But with revenues of €530 million, it's barely more expensive (pro rata capita) than the TV licence in the UK.
SW, RA
House prices are high because
a) there aren't enough of them to go round
It is very tempting to think that a lack of supply is pushing up house prices (classic supply/demand behaviour) but Spain and Ireland have a surplus of housing and a huge housing price rises. The key to the rise in house prices is that the market is a bubble, that is buyers are buying because they think the value of what they are buying will appreciate considerably. When you have a bubble in a necessity like housing, everyone else is panicked into buying, too as they are afraid that if they don't buy now, later they will not be able to afford to. Thus people who might have been happy to rent now want to buy, so the purchase of new properties by landlords helps push the prices up, which it wouldn't if there wasn't a bubble.
As to Sir Fred Goodwin and the like, WTF should you care? People like him are a tiny minority and it is not a good idea to skew the whole tax system of the country to keep an envious few happy. (OK Sir Fred is living off ill-gotten gains, but there are plenty of rich people who aren't) Once you start introducing means-testing it all gets complicated again and the person who pays for that complication is you, the taxpayer. In any case, exemption was only one option, another being that the tax was simply deferred and payable on death of the pensioner or sale of the property.
The Goodwins of this world will tend to live in expensive areas and thus pay a lot of tax.
MW: LVT will raise house prices. How many times do I have to say it?
Real Reform: LVT will raise the price of houses
CI will minimise this effect.
There is little risk it would not be distributed fairly if it employs an agency corporation model like that used by the:
Alaska Permanent Fund
Sebastian Weetabix: There are plenty of homes to go around. A million of them stand empty in England in the most valuable locations and can be occupied very quickly. Easy credit just made an already bad situation much worse.
And please, I don't want to hear anyone mention planning authorities being he problem.
RS: "LVT will raise house prices. How many times do I have to say it?"
1. LVT itself will not raise house prices - it is the scrapping of all other taxes that will raise land rental values.
2. If the LVT captures 100% or more of the uplift in rental values once income tax etc. is scrapped, then house prices will go down.
3. If LVT captures less than 100% of the uplift in rental values once income tax etc. is scrapped, then house prices will go up.
4. As we could phase this in over three or four years, we could see what the effects are every year and tweak it so that house prices stay flat in nominal terms (which is the politically expedient thing to do).
1. Yup...!
2. Whats with the income tax in 2 & 3?
4. Tendency to corruption. Do not fiddle
RS: "What's with the income tax in 2 & 3?"
Which income tax?
"4. Tendency to corruption. Do not fiddle"
I'm an economist, not a politician, but we do have to take into account 'politics' to some degree, i.e. exemptions or deferment to deal with the Poor Widow In A Mansion. The fact that it makes economic sense for her to trade down counts for little with the Home-Owner-Ist foot soldiers.
The most important fact is that Home-Ownerist policies made her have a house that's larger than they'd like, blocking someone into a house that's smaller than they'd like.
SW: "You have to concede, if you have any regard for practicality & political possibility, that at some point you end up deciding which pensioners can be exempted and which cannot.
Which leads to administration costs. And eventually, you end up taxing income instead because everyone can see that that is FAIR."
I don't have to concede anything. I am telling it how it is - the fact that the Home-Owner-Ist propaganda has convinced most people otherwise does not affect facts and logic.
As a matter of 'practicality and political logic', the state pension age is rising in most countries - if this is politically do-able, then it must also be politically do-able to keep the number of exempt pensioners below a certain level.
'Politics' is all about bribing people with money robbed from others, which works best when small, identifiable groups. i.e. 1/6 pensioners are being bribed with money from the other 5/6 of the population.
Once the bribed group is large enough (say 1/3) the cost of the bribes to the robbed group (2/3) is so large that the robbed group are prepared to stand up and fight.
And why is income tax "FAIR"? Why is is "fair" to tax people on their own efforts, but not to make people pay for the benefits they receive from 'society in general'? Didn't the Tories always used to yap on about financing government with 'user charges' rather than 'taxes'?
MW: "Which income tax?"
The income tax you mention your notes 2 & 3 !!!
RS, what's not clear about "scrapped"?
Post a Comment