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This is a spare 'blog in case my main 'blog at markwadsworth.blogspot.com isn't working

May 19, 2011

Posted by on I don’t know much about higher maths, but I do know some things: the above fraction is quite simply true.

Applied to my favourite topic, shifting taxes from incomes to land values, what it means is this:

__X = the required tax take__

Make up your own figure, but the total tax receipts from incomes or output in the broader sense (income tax, National Insurance, VAT, corporation tax) are around £340 billion a year (which is only enough to cover about half of total government spending – the rest is made up of an infinite number of other stupid little taxes; other income and receipts; and a MASSIVE GREAT ANNUAL DEFICIT – but we’ll deal with that later)

__Y = the tax base__

A. If we decide to raise that sum of money from incomes and output, then let’s guesstimate total wages at £750 billion (30 million workers x £25,000) plus £100 billion corporate profits, we have a tax base of £850 billion, so the required average rate is 40% (which looks ‘about right’ – the average marginal rate is about 50% if you take into account Working Tax Credits withdrawal, but the personal allowance and the Working Tax Credits themselves reduce the average rate).

So X = £340 billion, Y = £850 billion, X/Y = 40% and 40% times Y = £340 billion.

B. If we decide to raise that sum of money from the rental value of land, we could simply take the total market value of residential and commercial land and buildings, which at current selling prices (as a proxy for rental values) are worth (say) £4,250 billion, which gives us an average rate of 8%, which looks ‘about right’ to me (but I’ve done these workings a thousand times). The purists say you shouldn’t tax the value of the buildings, but we can deal with this via personal allowances (or a Citizen’s Income).

So X = £340 billion, Y = £4,250 billion, X/Y = 8% and 8% x Y = £340 billion.

That’s the same amount of money raised from the same people – us. (Again, the fact that the government should be spending a lot less and spending it more wisely is a separate debate).

Clearly, incomes are not distributed the same way as land ‘ownership’ is. The former is skewed, but that has largely to do with people’s inherent differences; the latter is far more skewed, and that has largely to do with the government defending the interests of land ‘owners’ above all else. To put it crudely, the top ten per cent of earners earn thirty per cent of all profits or wages; the top ten per cent of landowners own seventy per cent of all land (or whatever the figures are).

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The basic formula will always hold, at all times in all situations.

The defenders of privilege (Homeys and Faux Libertarians alike) say that if we were to tax land values instead of taxing incomes and output, that value would be ‘destroyed’ (so the tax base would be eroded), and that everybody would be scrambling to move to the lowest rated houses, and so the selling prices of these would be pushed up and the selling price of the highest rated houses would fall.

Well, firstly, neither of those things would happen: all that would happen is that lower earners would trade down and higher earners would trade up. But even if they did, so what?

In Year Two, we would simply work out what the new tax base (‘Y’) is, maybe the total theoretical selling price would fall to £3,400 billion; maybe it would increase to £4,860 billion (scrapping taxes on incomes and output would be an enormous boost to the economy), and plug it back in to the formula.

In the former case, the nominal LVT rate goes up to 10%; in the latter case it falls to 7%. Either way, X (which is the figure we really care about) remains the same, and total tax revenues are £340 billion.

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Footnote: LVT is ultimately on the rental value of land, so when the formula is recalculated, the actual rental value of any house would be taken to be [existing tax on that house] + [notional residual rental value, being selling price x 5%], which would greatly soften the up- or downward swings, it’s a slightly circular calculation which would quickly settle down to an equilibrium. Whether you go to the bother of deducting the rental value of the bricks and mortar or just make sure than there is a personal allowance or a Citizen’s Income to cover it is just details.

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