Thursday 22 September 2011

People who blather on about 'market forces' without understanding them

Allister Heath: The more rich people, the more tax receipts. Paradoxically, of course, that means axing the 50p tax rate. Just as crucially, it must not be replaced by any other tax and certainly not by a wealth tax or mansion tax.

All sections of society already pay far too much tax. A wealth tax would be a moral and economic disaster, double or triple taxing income and making a mockery of property rights. We need growth and jobs, not hate and punitive taxation. It is time to halt the war on wealth.


What he refuses to accept is that a Mansion Tax is like a very sophisticated form of Poll Tax - it is more or less the opposite of a Wealth Tax (whatever that is); if you reduce the top tax rate/s (hooray for that, let's have a flat tax on earned income) and replace it/them with a Mansion Tax (or more Council Tax bands, or whatever) which is what is being seriously considered, then all things being equal, that is good for higher earners and will make London more attractive to them.

Allister Heath, again: There is something bizarrely enjoyable about Liberal Democrat conferences. It is the occasion to... being nasty to people who own or hope one day to own a nice home in London or the home counties.

Ho hum, editor of a financial newspaper, doesn't realise that a Mansion Tax is just like having a higher interest rate on buying a house. So all things being equal, house prices might fall slightly but the net incomes of those most likely to buy such houses goes up, so this switch would be a massive boon to people who "hope one day to own a nice home in London or the home counties".

Not sure if his maths is that good either. There is a fixed number of nice homes in London and the home counties, ergo what's good for current owners is bad for future potential owners. It is more or less impossible to think up a policy which is bad for both simultaneously because their interests are more or less diametrically opposed.

City Insider, page 48 of today's Evening Standard e-edition: SO what the Lib-Dems now want is to encourage high earners to buy smaller homes in the UK and larger ones abroad, which will do nothing to help the UK economy or public debt. Why don't they put up a big sign saying "Please go and work in Singapore or Dubai or Geneva" instead?

Actually, they don't need to. I think hedge funds and private equity firms are getting the message and it is only a matter of time before a big bank leaves: HSBC, Standard Chartered or Barclays will probably be first.


It's ironic that City Insider names Geneva as a place where these supposed wealth creators might bunk off to - as we well know, Switzerland's income tax rates are lower than ours (good) and it taxes residential land and buildings at higher rates than the UK does, and for really rich foreigners, there's an option to not declare your income at all, you just pay tax every year of about 5% - 8% of the value of the house you live in. There are still plenty of rich people who move there and live there, but actual evidence counts for nothing in a propaganda war.

20 comments:

Sobers said...

Ah, I glad you're finally admitting that LVT is the foreign multimillionaires dream!

Move to London, buy a house, pay LVT of say £250K pa (the rent on a 4 bed house in Mayfair is only c. £5k/week, so the LVT couldn't be any higher), deposit all your cash in a London bank, pay zero income tax, zero CGT on any business deals. You only need an income of £600K or more (ie capital of £12m @ 5%) and you're quids in from the income tax savings alone.

Somehow I can't see the UK public buying this you know.........especially when their parents are sitting in their £300K family home and facing a net LVT bill of £8K (lets say rent is 15K pa taxed at 100%, CI of 2 x £3.5K). If their income is £30K or less they're losing out. Plus the rental value will be rising fast in years to come (as you've pointed out) meaning their LVT bill will be rising too.

Does that sound a fair system to you? Because from where I'm standing (and I speak as a dyed in the wool 'all taxation is theft' demagogue) it doesn't sound fair at all.

Anonymous said...

LVT on land only; on average cutting your imagined LVT bill in half (and with a CI giving them a net rent of a few hundred quid). Even if it was 8K out of 30K, what do you think the old couple pays in current taxes combined in todays tax regime? Oh yeah, rich people wouldn't be taxed that much and you don't think people would stand for it, even if you are against taxes as theft yourself, right? Ok then, hard to argue with the people with you as their strawman.

Sobers said...

@Anon: if you earn £30k (one earner) you'd pay c. £7k pa in income tax and NI. If it was two earners, less because you'd get double the tax free allowance.

MWs own figures suggest that LVT would have to be c. 8% of the value of the house. If you are taxing just the site only rental value, that will be much lower than 8% of the capital value initially, but rents will rise (due to the extra income people will have) meaning that after a few years it will be probably close to 8%. Therefore the tax on a £300K house will 'probably' end up as somewhere around £25K pa (the house may no longer be worth £300k, who knows, but the rental value will have risen).

You see this is where I think LVT parts company with reality. At the moment the super wealthy contribute a shed load of tax. I believe there are 13000 people in the UK who earn over £1m gross, and they pay c. £12bn in income tax. Under LVT the tax revenue from them would drop massively. Yes, they probably own some nice houses, but their LVT bills won't be more than £250K tops (if you are taxing rental values, not capital values). Probably much less. So where is that revenue going to be made up? On the rest of us of course! Ditto the big tax cut businesses will have (no corporation tax to pay, no VAT, no employers NI (OK some of that will flow through to higher wages, but only slowly over time), no CGT etc etc. All that revenue has to be made up somewhere too.

AFAICS if you are reducing taxes on businesses and the super rich, taxes must rise on the rest to compensate, if you plan to raise the same revenue as all the existing taxes do. It matters not if you have LVT or income tax or VAT or whatever, lost revenue has to be replaced.

Mark Wadsworth said...

S, you see that's the problem, you Home-Owner-Ists simultaneously stream two completely contradictory lines of propaganda:

a) All the 'wealth creators' would flee abroad, and

b) All the foreign 'wealth creators' would flock to the UK.

Either one is true, or the other is true, or possibly neither. On balance, (b) outweighs (a) so we'd get more tax revenues to dish out as a Citizen's Dividend/Citizen's Pension so we all end up better off.

As to people's parents, I'm all in favour of a decent Citizen's Pension, as you well know, but above and beyond that, who's complaining here? if the grown children (who on the whole have higher incomes but live in smaller houses) get a £2 tax cut and the parents a £1 tax hike, why can't those children look after their own parents rather than expecting Everybody Else to do so?

Finally, the only reason why the aged parents' home is worth so much is because of artificial scarcity (and I know that you are relatively liberal on planning laws). So to halve their tax bill, all the aged parents need to do is to allow more new houses to be built for the young folk - in real terms, they are in the same house; in relative terms, they have traded down.

Anon, taxation of incomes is indeed legalised theft; but so is land ownership. Make the punishment fit the crime, is my motto.

Sobers said...

It has also just occurred to me that there is a circularity to LVT and rents.

LVT is a tax on the site only rental value. We know what rents are currently, and can thus calculate the site only proportion. Apply LVT rate and there's your LVT bill.

BUT. Current rents don't include LVT. Tenants will end up paying at least some of the LVT on top of their rent. So in year two rents will have risen, site only rents will have risen too, so LVT rises as well. Which then requires another raise in rents (as the landlord passes on some of the LVT).

Rinse and repeat. Where does it stop?

Mark Wadsworth said...

S, you really have no clue about how much tax an earner on £30k pays or bears. Once you take means testing, income tax, two layers of NIC and a share of VAT into account, it's more than fifty per cent. It's closer to £15k than £7k.

The DWP's own tables show that a married earner, two kids, has a marginal tax rate of 80% up to about £40,000 a year - and that's excluding VAT and Employer's NIC.

And you don't have much grasp of the statistics either:

" I believe there are 13,000 people in the UK who earn over £1m gross, and they pay c. £12bn in income tax."

True. But quoting Allister Heath again:

"The top one per cent of taxpayers (roughly speaking, those on £150k and above) will pay a record 27.7 per cent of the total income tax take in 2011-12... [That's about £40 billion]

Another astonishing statistic is that the 14,000 people on £1m a year or more will pay £14.2bn in income tax this year.


It also happens that about nearly two per cent of homes in the UK are in the £1 million+ bracket (from HMRC Stamp Duty statistics), call it £100,000 LVT each on average. So that's half a million homes @ £100,000 = £50 billion.

Ho hum. Top one per cent of earners pays £50 billion in income tax, or top one per cent of homes pays £50 billion in LVT?

Where's the big difference?

Sobers said...

I don't think I've ever said that the wealthy would go abroad under your system. Its entirely possible they would under the Vince Cable Mansion tax idea, because that's just an extra tax on top of all the current ones. AFAICS no-one else is suggesting your idea of reducing all the normal taxes in favour of LVT. They just want to 'soak the rich' with their mansion taxes. In which cases the wealthy might well leave.

And if the wealthy did flock to the UK, would we get any extra revenue from them? I can see that houses prices (at the top end) would rise, as they would be bringing their capital with them and bidding up houses prices. But rental values would remain relatively steady as rents are based on ability to pay and the general level of income would not change much if 10000 new multimillionaires came to the UK. So top end rental values (and thus LVT payments) wouldn't rise much.

Ah I just read your last comment. Property is theft eh? But LVT isn't the nationalisation of land though?

Tut tut MW, I think the mask slipped a bit there.

Robin Smith said...

Oh dear Sobers fell right into the 'pass on lvt trap'

Beautiful.

If anyone hears of any bankers threatening to leave let me know and Ill drive them to the airport.

Mark Wadsworth said...

S: Current rents don't include LVT. Tenants will end up paying at least some of the LVT on top of their rent.

So in year two rents will have risen, site only rents will have risen too, so LVT rises as well. Which then requires another raise in rents (as the landlord passes on some of the LVT).

Rinse and repeat. Where does it stop?


Surely you know better than this?

Logic and observation (i.e. taxation of rental income in the 1950s and 1960s) tells us that gross rents will only rise to the extent that tenants' disposable income rises. Compare and contrast:

a) They hike taxes on earned income (without changing tax on rental income). The rents that landlords can charge falls so their net income falls.

b) They hike taxes on rental income (without cutting taxes on earned income). The tax is borne by landlords and their net income falls.

c) They CUT taxes on earned income (without cutting tax on rental income). The rents that landlords can charge RISES and their net income RISES.

d) They CUT taxes on earned income and HIKE taxes on rental income. Gross rents rise, but the share that landlords keep stays much the same. It is merely shifting taxes from earned to rental income. Both parties end up with the same net income.

It is Scenario (d) which I envisage. Very few people will end up better or worse off.

Sobers said...

"how much tax an earner on £30k pays or bears. Once you take means testing, income tax, two layers of NIC and a share of VAT into account, it's more than fifty per cent. It's closer to £15k than £7k. "

I don't know what you mean by means testing, but a £30K taxpayer pays £7K pa income tax and NIC. Employers NICs are another £3K, not all of which would come back to the employee, particularly in the short term. Yes wages would rise over time to compensate but you can't say that you gross income would rise from £30K to 33K overnight. As for VAT I though you used to say that VAT was NOT a tax on customers? You've always described it as a tax on the turnover of businesses.

So which is it? A tax the customer pays (in which case all your previous arguments on the nature of VAT are void) or a tax on the business (in which case you can't say the abolition of VAT will benefit the customer).

Mark Wadsworth said...

S: "AFAICS no-one else is suggesting your idea of reducing all the normal taxes in favour of LVT."

Aha, that's why you should read the papers more. AFAIAA, the Tories are determined to get rid of 50p rate (I concur wholeheartedly) and Vince and Nick are determined to bring in a Mansion Tax (I concur wholeheartedly), and the latest thinking is that they will to a deal, to everybody's overall benefit. Win-win.

You're falling back on Homey propaganda again:

"Property is theft eh? But LVT isn't the nationalisation of land though?"

Complete in as few or as many words as possible:

"LVT is nationalisation of land rents; whereas income tax, corporation tax, VAT and National Insurance are nationalisation of ...."

Mark Wadsworth said...

S; "I don't know what you mean by means testing"

I mean the cash and non-cash benefits he would get if he earned £nil.

The point is that a £30k earner loses all his benefits and pays £7k income tax and bears £2k VAT, pays £1k council tax etc etc, and ends up with a lot less than £15k more disposable income than somebody earning £nil.

We've done the bloody VAT thing to death. At the point of sale, it's borne 2/3 supplier 1/3 consumer, but suppliers are ultimately human beings (employees or shareholders) and consumers are also human beings (most of whom are also suppliers of something or other) and so it's simplest to look at VAT as about 7% of gross income.

Whether you call it 11% of your net income which you spend (as a consumer) or between 0% and 20% of the income you generate (as a supplier) is neither here nor.

Sobers said...

Well you've changed your tune. I remember you vehemently berating people for suggesting the incidence of VAT fell on the customer at all.

"LVT is nationalisation of land rents; whereas income tax, corporation tax, VAT and National Insurance are nationalisation of ...."

I don't believe in the nationalisation of anything.

Anonymous said...

"It matters not if you have LVT or income tax or VAT or whatever, lost revenue has to be replaced."

Sounds strange coming from a "dyed in the wool tax is theft-" kind of guy. Either the design of LVT could be revenue-neutral, such as MW has suggested, or it couldn't. Personally, I would like the budgets to be decided by the LVT-receipts, and they would probably hover around 25% GDP if 80-90% of rental value is taxed. Are you against lower receipts for the state?

"It has also just occurred to me that there is a circularity to LVT and rents.
Rinse and repeat. Where does it stop?"

It just occured to me that there is a circularity to property owners and the state beefing up house prices so that each new generation is more and more in debt, when will that thing stop? LVT ie rental values will reach an equillibrium with income. Today's debt laden property economy will only reach an equillibrium when the state quits turning up new ways to prop up the banks and property owners.

"I don't believe in the nationalisation of anything."

Except income tax, VAT etc., because it is presumably fair for old parents and does in the rich people. What's your tax utopia? Because revenues has to be replaced right?

Sobers said...

@Anon: What I mean by 'revenue has to be replaced' is that MW suggests raising the same revenue that we do now from all the range of taxes we have just from LVT. The wealthy, particularly the super-wealthy, contribute large amounts of tax revenue at the moment, via income tax mainly. Businesses also contibute large amounts of revenue, via corporation tax, VAT, employers NICs, duties etc etc. Under LVT those two sectors would be net gainers. The LVT paid by the super wealthy would be less than what they pay now, as it would for businesses (they already pay LVT, as business rates, so it would just be a big tax cut for them).

So if your aim is to raise revenue of X, and you are cutting revenue from sections A and B, someone else has to replace that revenue. That someone else is the broad mass of the population. Simple as that.

I personally would want as little taxation as possible beyond that necessary to defend the country (not go around starting wars overseas), run the police and legal systems, maintain the roads, and a very basic pension and welfare safety net. Perhaps 15-20% of GDP.

I also don't agree with the mantra that 'house price rises are good' either. Houses should be machines for living in, not investments. But the way to solve that problem is liberalisation of the planning system, to increase supply, not LVT. Perhaps coupled with more stringent rules on how much money people can borrow relative to their income, and minimum deposit required.

Mark Wadsworth said...

S: " I remember you vehemently berating people for suggesting the incidence of VAT fell on the customer at all."

Can you show me where I ever said that? You can click the "Business Tax 2" link in my "Words of wisdom" widget for my take on it. What I have berated people for is for repeating the politicians' mantra that VAT falls entirely on spending and does not affect the productive economy at all, which is clearly a big fat lie.

And I didn't ask whether you 'believed in' income tax etc, I asked you what it was nationalisation of.
-------------
Anon, you're good at this! Probably better than I am, keep up the good work. Yup, the estimate that LVT would be about 25% of GDP looks about right to me, but GDP would also be a lot higher.
------------
S, you then talk about LVT being much better for businesses. So what? Are we not all employees of or shareholders in businesses? Businesses are just people who have organised themselves. So what your argument boils down to is 'LVT would be good for people but bad for people'.

As to the 'super wealthy' you are playing the Homey card again. There are two kinds of super wealthy - successful businessmen, entertainers, inventors (who would benefit enormously) and rent-seekers (bankers, quangocrats, council CEOs, landowners etc) whose income stream would largely dry up.

Under an LVT-CI scheme, bankers etc would probably pay a lot less tax because they would not be skimming off so much rent in the first place. But their nice houses would still be their, and the real wealth creators would get to live in them instead.

And I wish you would state your own opinion instead of shuffling between your Miliband and Cameron hats, with your Miliband hat you whine that high earners would end up better off and with your Cameron hat you whine that LVT is an attack on the wealthy and then you cram one hat on top of the other and whine that 'the squeezed middle' would be hit.

All of which is complete nonsense and you know it - I don't need to be reminded that politicians and vested interests talk like this, I'm interested in your opinion.

Georgism has no bias or prejudice towards any economic activity or any group of people; you decide what sort of house you want to live in and pay the tax accordingly, how you earn your money is up to you, in the same way as people currently decide what sort of house they want to live in and pay the mortgage accordingly.

As to planning, please apply commonsense. If planning laws were liberalised, then the total rental value of UK land would go up (try the reverse logic where there were forced demolitions of all existing buildings) and would be good for the economy, further boosting land rental values.

So while planning liberalisation is A Good Thing in and of itself and might reduce house prices at the margin, it will still be a massive boost to land owners taken collectively (one land owner's gain will far outweigh the other land owner's loss).

Anonymous said...

"...maintain the roads, and a very basic pension and welfare safety net. Perhaps 15-20% of GDP."

And these funds would be aquired how? Ofcourse you disagree right in the face of mosts economists of the favourable characteristics of LVT as opposed to today's taxes, so I guess that means income taxes and VAT then?
Sure, liberalise the planning systems, there would still be land value, especially in favourable locations, and without other taxes they would without doubt reach your 15-20% of GDP target.
Why should the state meddle in minimum deposits and maximum debts? Just take out the "gov will take the fall" from risk analysis and these things will be sorted out.

Old BE said...

In MW's defence I think he has always said that VAT is a tax on the consumer (and, in addition, that it is a horrendously expensive way of collecting revenue).

The theoretical argument about the exact rate that an LVT/property tax would have to be levied etc. to replace all other taxes is a bit academic and pointless because that is never how it would be introduced. It would only ever be introduced in the way that VAT was introduced i.e. piecemeal and then slowly increase while other taxes are reduced or spending is increased. And that is right because if an LVT brings huge changes to rents and land values as both sides predict it would be quite nasty and chaotic to bring it in overnight.

People in the mainstream do now seem to be coming around to the idea of a "mansion tax" or higher bands of council tax and the way the Lib/Con tussle seems to be going it might well replace other taxes £ for £.

Mark Wadsworth said...

BE, and being fair to Sobers, I have said that VAT hurts producers even more than it hurts customers. Either way, it's a tax on economic activity and it has massive dead weight costs.

"It would only ever be introduced in the way that VAT was introduced i.e. piecemeal and then slowly increase while other taxes are reduced or spending is increased."

Correct. The way forward is probably to collect it via PAYE codes and/or knock it off people's pensions before they are even paid out.

But LVT is an in-your-face tax so other taxes would have to be cut quite markedly to make it politically acceptable, and up to a third of government spending is entirely wasted/stolen anyway.

Anonymous said...

Damn,

A load of rich people who move here to live here employing people!

We NEED more unemployment!

AC1