Mark Wadsworth

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Tag Archives: Land Value Tax

Killer Arguments Against LVT, Not (148)

Just to show that the idiocy goes right to the top, here are two paragraphs from HM Treasury’s “Tax policy making: a new approach” as reported in Hansard:

11. In this inquiry, we received many submissions advocating radical change to the tax system, such as the imposition of a land value tax. (1) The supporters of such a tax consider that it would tax economic rent rather than economic activity and would meet the OECD criterion that recurrent taxes on immovable property were the least harmful tax. However, as the CBI notes, “the OECD acknowledges that it is politically difficult (2) for governments to shift the tax base onto property.” (3) The ICAEW warned “Our initial conclusion is that, even if such a move was desirable economically (4) and let alone whether it would be politically acceptable,(5) it would involve a major rebalancing of the UK tax system which would take time to achieve (6) and risks introducing considerable distortions and behavioural changes.” (7)

12. Not only are there political difficulties: practical matters, such as the way in which such values would be assessed and the extent to which such a tax should take account of the current or the potential use of land, would also need careful consideration. (8) We also note concerns that “While such a tax system would avoid distortions in economic behaviour, (9) it would be highly unlikely to yield sufficient revenues to fund socially useful expenditure (10) without producing substantial inequity.” (11)

1) Oops. I think I missed that one.

2) It is only “politically difficult” because the government and the powers that be generally have spent decades brainwashing people into thinking a) that taxing economic activity and wealth creation is a reasonable way of doing things and b) that house price rises are good for us.

3) I wish they’d say “land and buildings” to make it clear what they are talking about. In any event, the CBI ought to be speaking from the point of “British Industry” who are perfectly accustomed to paying Business Rates, which are so close to Land Value Tax as makes no difference.

4) It’s “were” not “was” and actually it “is” and they must know that.

5) See (2).

6) Everything takes time, it all depends which taxes you replace first. So let’s start by rolling all existing taxes which relate to residential land and buildings or ‘wealth’ generally into a flat tax on residential land values. The only real constraint on how quickly we did this is how quickly people can be de-brainwashed.

7) No! It’s the current system which creates “considerable distortions”, the fact that people would behave differently if there were no taxes on economic activity and only taxes on economic rent is an argument in favour of the latter.

8) They already have two models – Business Rates for commercial land and buildings and Domestic Rates in Northern Ireland. All the info we need is already held by HM Land Registry or on the Council Tax register after that it’s just a question of bunging in the [current tax rate + a percentage of current selling prices] in each defined area to get a fair approximation of the rental value of land in each area, you tot these up to give you the rental value of all residential land in the UK (the tax base, Y); you then decide a figure for how much tax you want to raise (X), divide X by Y to give you the tax rate, apply X/Y to [the local rate x size of each plot in each area] and we’re away.

It’ll never be scientifically perfect, but any over- or under-estimates will iron themselves out, but so what anyway? Does the rate of VAT automatically adjust itself down so that marginal businesses are kept afloat, does it automatically adjust itself up on businesses which appear to be making super-profits (banks, from 2000 to 2007 or thereabouts)? I think not. Would it not be better to have a tax which allows the markets to decide the rates?

9) That’s not what they said at (4), is it?

10) Wot? Do they not realise the circularity involved?

a) Even under current rules, the residual rental value of UK land is about £150 billion per annum. If we taxed that at 100% we could get rid of VAT and National Insurance and be left over with a flat income tax of about 20% – 25%. Would that not be “socially useful”?

b) Shifting from taxes on activity to taxes on rents gets rid of the dead weight costs caused by the former, and this extra growth goes £ for £ back into higher rental values, so it’s a virtuous circle.

c) Forecast total tax revenues for 2011-12 are £531 billion (excluding booze, fags and fuel duty), that works out at an average £20,000 per household (including taxes borne by ‘businesses’ which are indirectly borne by households). If the average household no longer has to pay £20,000 in income tax, VAT, NIC etc, there is no reason to assume that they wouldn’t be able to pay that much in LVT.

d) Then there is the invisible half of the Laffer Curve which few people talk about. Although income tax revenues would be zero if the income tax rate were zero per cent, by how much would the economy grow? A tenth? A fifth? A quarter? There’s only one way to find out! Most of that growth would go into higher land rental values, so in effect, the land value tax would pay for itself, and a household’s average net income would increase by something approaching £20,000 per annum.

11) Even if it’s only half that, well it’s not to be sniffed at, is it? Deliberately depriving every household of £10,000 or £20,000 income every year out of political cowardice seems like “substantial inequity” to me.

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Killer Arguments Against LVT, Not (147)

Accountancy Age did a brief write up of the Telegraph’s brief write up of the OECD’s tax simplification proposals.

The comments open with this:

With the majority of the more expensive properties in the UK being owned by people who have or are about to retire(1) (assuming any of us ever do retire that is) a tax based on the market value of a property would hit anyone on a fixed or low income very badly.(2)

Also, when interest rates go up what about people overstretched when times were good and who now find themselves in a negative equity situation.(3) They won’t be able to sell (4) and will probably only just manage to afford the mortgage repayments, how would they cope with a large increase in any form of tax?(5) Would they just hand the keys back before the house was repossessed? With the housing market barely limping along, this idea would probably finish it off.(6)

1) At least she brazenly admits that the Baby Boomers have bagged all the housing for themselves and have no intention of letting young people ‘get on the ladder’ without paying a massive ransom first.

2) The first paragraph is fairly plain vanilla version of the Poor Widow Bogey (concepts like “Give them exemptions or discounts or just increase the State Pension” are far too complicated for their tiny little minds). The PWB is fundamentally a huge great lie of course: they always wail about the tax hitting ‘people’ but it’s not a tax on people it’s a tax on land values, so if you don’t want to pay it, you’ll just have to live somewhere smaller or cheaper (most people would be able to find something within a few hundred yards of where they live now) etc.

3) The Homeys like to show how kind and caring they are, so they choose diametrically opposed examples [old, low income, expensive house, no mortgage] with [young, high income, smaller house, big mortgage] to illustrate that such a tax would hurt both, which is nonsense, it’s like smokers whining that tobacco duty hits non-smokers as well. Crocodile tears.

4) Who says? You can sell anything if the price is right.

5) A sensible borrower budgets for the fact that interest rates might increase by a few per cent in the first few years of the loan. The taxes which the OECD proposed to replace (Council Tax, SDLT, IHT, CGT) would average out at about one per cent of the value of every house, so for a sensible borrower this is no big deal – it’s like the interest rate on the mortgage going up by one per cent but OTOH, he no longer has to pay Council Tax. So that’s more crocodile tears. And if young people with a big mortgage and possibly young kids can afford the tax, why on earth can’t older people – with no mortgage and the kids our of the house – afford it?

6) Does this woman have any idea what ‘a market’ is? It’s where people come together to buy and sell things. Housing transactions have more or less ground to a halt, because what sellers think their houses are worth is about a third more than what FTBs can realistically afford. This is not ‘a market’. Turning up the heat a little bit on the smug and complacent Homeys might just give them the nudge to drop their price and sell; the FTB can by definition afford the tax as he will adjust the price he pays up or down accordingly. So more transactions and a more active market, everybody ends up paying as much or as little tax as he wants. The tax would be good for the market.

Killer Arguments Against LVT, Not (145)

It appears that even the Home-Owner-Ists realise that can’t just keep playing the Poor Widow Bogey (or Subsistence Farmer Bogey), so it now appears to be tradition to play the double and contrast them directly with a Hate Figure Du Jour:

Exhibit One:

So a single millionaire in a one bedroom flat will pay less than a family of 5, on average income, in a four bedroom house. Size of property does not automatically indicate an ability to pay higher taxes. Good to see Unison still in the 19th century mindset of social envy.

Exhibit Two

Suppose there are four earners in that £100,000 house, all generating masses of rubbish, using the roads heavily and placing a generally high demand on local services? Then suppose there are two independent-minded retired people in the £1m house (which doesn’t have to be a palace these days) whose call on council services amounts to little more than emptying their kitchen bin once a fortnight.

Exhibit Three (via Mike R):

It would be rather odd if Rupert Murdock could own a 1/4 acre lot like my landlady and both would pay the same in taxes. Murdock’s income shows he in benefiting 100x as much from Society as she does, I would suppose, and should therefore owe Society more.

Exhibit Four:

Try explaining to the electorate that under your new scheme Lakshmi Mittal is tens of millions better off, and Granny is going to lose out. Not going to go down well I suspect.

Exhibit Five:

A couple on £500k living in an apartment would pay little tax as they occupy very little land. A couple on £50k in a house with a decent sized garden – where they could grow vegetables and let the kids kick a ball about – would be heavily taxed. What’s fair about that?
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I look forward to seeing other wealthy Hate Figures Du Jour being used as an argument against LVT, I’d like to suggest: love rat Ashley Cole; tax evader Philip Green; bank ‘rupting Sir Fred Goodwin; pint sized Bernie Ecclestone; the conspiracy theorist Mohammed Al Fayed; polluter of children’s minds J K Rowling; telly bore Sir Alan Sugar; Russian oligarch Roman Abramovich, Baby P neglecting Sharon Shoesmith etc etc.

You’ll notice of course that these people’s income is largely a result of successful rent-seeking, for example, if Boris Yeltsin had introduced LVT instead of privatising everything, Roman Abramovitch would still just be a senior manager in an ooil company somewhere; of course civil servants like Sharon Shoesmith are vastly overpaid – out of taxpayers’ money; Sir Fred Goodwin and other bankers could only make so much money because the government wanted them to etc etc.

Killer Arguments Against LVT, Not (144)

Sobers, who has the attention span of a rather annoying child, played the car-d for the umpteenth time. He refuses to address the difference between how cars come into existence and how land comes into existence and then waffles on endlessly about ‘ownership’, having stared out of the window and picked his nose while teacher was explaining it the last umpteen times, but for those who weren’t paying attention, the Homey or Faux Lib typically re-opens the debate as follows:

“Everything only has value because others can be excluding from having/possessing it. If I cannot enforce ownership of my car what use is it to me, or anyone else?”

The patient Georgist then has to remind the Homey or Faux Lib of how things work in the real world:

“We have covered cars a dozen times, and I do wonder sometimes whether you don’t understand or simply don’t want to – to recap briefly.

1. A car has to be manufactured, individuals have to invest their own skills, time and money into making it. If demand increases, the price does not go up – all that happens is that more cars are made.

2. They exchange the car for the equivalent value of somebody else’s output.

3. A car depreciates over time. Its value does not depend on where it is parked. I cannot increase the value of a car by buying one in Newcastle and parking it in Sandbanks, Poole, Dorset.

4. A car is not created ‘by the community’, title is not created by fencing off a pre-existing car and getting the force of the government on my side.

5. Possession of a car is largely a physical thing. A car with good security, locks etc is worth more than one which can be easily stolen. If your car gets nicked, there is little that the police can do to recover it.

6. And yes, there are areas where the police is quite good at recovering stolen cars and deterring car crime – land values in these areas are higher.

7. As a matter of fact, car owners/users pay full whack £55 billion a year in taxes on depreciating assets worth £350 billion – what they are really paying for is the right to use UK roads. If you take your car abroad, its value is unchanged (barring the LHD RHD debacle) and you pay a commensurate amount of tax elsewhere.

8. If taxes were levied on land and buildings at the same rate as taxes on cars, that’d be enough to replace all other taxes.

“The idea that land is somehow uniquely guaranteed by the existence of society is nonsense.”

Try telling that to an olive grower in the West Bank when the Israeli Defence Force marches in, turfs him out and builds a new Jewish settlement. If he sees them coming, he can flee and take his goats, car, TV, steel ingots, whatever, with him. It is now up to the Israelis to decide who ‘owns’ the land.”

The bored child having stared out of the window while teacher was explaining it then re-sets the clock to where they were five or ten minutes earlier and starts again…

I’m not talking about the in and outs of how cars are made, whether they appreciate or depreciate in value etc etc …Ownership of land is EXACTLY the same in this way, as ownership of anything. If you can’t admit as much there’s no point even continuing to reason with you.

Jesus wept.

If we want to drag legal concepts or man-made law into this, there is a certain hierarchy of ‘ownership’. If somebody has just created something with his own hands and somebody else grabs it and runs away with it, then by the standards of a young child, an animal or the most primitive society, the first person ‘owns’ it and the other person is ‘a thief’. If that somebody else comes along with a lot of his big and tough mates and they grab it, they are still thieves.

But if people bumble around doing their best, creating stuff with their own efforts, and then somebody else comes along and grabs half of it because he has the bigger and tougher mates (which is how income tax works, or how rents are collected), claiming that he has the law on his side, then to whom does that ‘stuff’ belong? The people who made it or the people who took it? Who’s the ‘owner’ and who’s the ‘thief’ in this scenario?

Killer Arguments Against LVT, Not (142)

It would be quite unnecessary to have full-on LVT to achieve this – it is quite sufficient to align the tax rates on commercial and residential land/buildings; for example, Business Rates could be halved and Domestic Rates (or LVT, or whatever you want to call it) set at about 2% per annum of the current selling prices of housing. This would raise about £100 billion a year, which would allow us to replace COuncil Tax etc (see below) as well as cutting VAT to 10% (for example).
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* For my part, I have always suggested rolling Council Tax less Council Tax Benefit, Stamp Duty, Capital Gains Tax, Inheritance Tax, Insurance Premium Tax and TV licence fee into an annual LVT on residential land and buildings of about 1% per annum on current selling prices (in Northern Ireland, Domestic Rates are already calculated as 0.7% per annum on 2005 selling prices, so for them it would be no particular upheaval).

By and large, few people would pay more or less over their lifetime than they do now, and only a quarter would pay noticeably more on a year-by-year basis – the increase being the annualised amount of one-off taxes such as CGT, IHT and SDLT which they no longer have to pay. Of course, CGT and IHT would be scrapped on everything – land, buildings, shares, other investments – so that there is no tax advantage or disadvantage to investing in some things rather than in others.

Together with Business Rates, this would mean about £65 – £70 billion a year is raised from land taxes, which is only about a fifth of the total amount needed to replace all the Bad Taxes (VAT, National Insurance, income tax and corporation tax), but at least it’s a step in the right direction. In Year Two we then increase the “about 1%” rate and reduce Bad Taxes a bit, and so on and so forth, the whole process would take five to ten years at its very fastest.

Prediction/outcome.

Back in 2009, there was much bleating and wailing about the Business Rates revaluations, for example this from the Evening Standard:

The Government is revaluing the amount companies will have to pay in each region of England. The changes will mean while most regions will pay less, London will pay an average 10 per cent more before rebates are taken into account, with offices hardest hit with a 19 per cent hike.

Politicians and business leaders are alarmed that the capital’s firms face a “triple whammy” of increased charges from next April, when the revaluation takes effect. Westminster council has calculated this could add up to 25 per cent to bills in central London, once a new levy being imposed by Boris Johnson to help pay for Crossrail and an annual inflation-linked rise in business rates are included.

Businesses with offices in central London, such as Google, Diageo, Apple, Marks & Spencer and the John Lewis Partnership, could be hardest hit. The council fears jobs could be at risk if firms are forced to cut costs or consider relocation. But business rates in the South East outside the capital are due to fall five per cent, by seven per cent in the West Midlands and 10 per cent in the East Midlands.

As any fule kno, Business Rates is pretty close to Land Value Tax (especially in London, where the location rent is a huge proportion of the total rent payable), thus there’s no reason to assume that it harms the economy, and if anything has a modest stimulating effect.

And the outcome?

According to Colliers in July 2011:

… it was found that increased competition for Grade A office space is likely to ensure a high take up rate in London. In the first half of 2011, 1.8 million square feet of office space was let, with the West End seeing its fastest rate of occupancy since the second half of 2005. The occupancy rate of West End office space is now 94 percent with availability declining by 55 percent.

Central London availability of Grade A space has also fallen to a 30-month low of 17 percent. It is expected that the take-up of top-quality premises has reached a peak at its current level due to few new commercial properties becoming available. The lack of available space is leading to higher rents, with some locations seeing increases in the double digits so far in 2011.

And they are still constantly building new office buildings in London, it’s not as if supply is decreasing or anthing.

Roger Bootle On Top Form

Writing in The Telegraph, of all places:

Since 1946, UK residential property prices have risen by almost 12,000pc, equivalent to an average annual compound increase of about 8pc. In real terms, the respective figures are 280pc and 2pc.

But the facts about commercial property – offices, shops and industrial buildings – are less well-known. Over the same period, commercial property prices have risen by only 800pc, or 3pc as an annual average. That means that in real terms, they have fallen, by 70pc in total, or 2pc as an average annual rate. So the ratio of residential to commercial property prices is now about 13 times what it was 65 years ago.(1)

What explains these radically different trends in the two types of property? Residential living space is something that we demand more of as we grow richer. Indeed, even without the current huge tax privileges to owner-occupiers, (2) the proportion of our income that we wish to spend on it probably rises as we become richer. (3)

1) He suggests other reasons for this divergence, but overlooks the impact of Business Rates, which is like Land Value Tax for commercial land and buildings (it’s a flat percentage of the total rental value – and what’s left is subject to income or corporation tax). If residential land and buildings were subject to the the same tax rates we could replace a huge chunk of taxes on income and output – the calculation is a virtuous circle, as lower VAT or income tax means that people have more money to spend on rent, which increases total rental values, which increases the tax take therefrom, allowing further reductions in VAT, income tax, more or less ad infinitum.

2) Bonus marks for that sideswipe.

3) Yup, that’s as predicted by Ricardo’s Law of Rent as modified by Henry George: as the economy grows, an ever larger share goes into land rents. If that growth is capitalised into higher selling prices we then get house price/credit bubbles, each followed by financial crisis, recession.

Alison Seabeck edition] Killer Arguments Against LVT, Not (141)

Another snippet from yesterday’s meeting between Priced Out and Caroline Flint and Alison Seabeck:

I had briefly outlined why replacing other taxes with Land Value Tax would genuinely help, re-establish the balance between generations and so on. Ms Seabeck said that this was all well and good but what about people being ‘forced to move away from their families, communities being uprooted’ etc.

I forgot to mention that as things stand we already have this: there are a lot of young (and not- so-young) people who cannot afford to buy a house anywhere near they grew up; certainly nothing as nice as the one in which they grew up, so under current rules it is the young and not-so-young who are being ‘forced’ to move further away, to cheaper areas while all the Baby Boomers and pensioners stay put (and then complain that none of their children can be bothered to ‘settle down’, i.e. have grandchildren, or that their ungrateful children or grandchildren never visit them), and launched directly into the retort I had rehearsed:

I – much like Ms Flint or Ms Seabeck – have been round every street in my area, delivering leaflets at election time (I didn’t mention for which party) and that, just like most places, there are big detached houses with big gardens; semis, small terraced houses (the ones where you can post a leaflet in one door and then lean over the fence to do the one next door); blocks with big, grand flats and blocks with much smaller flats – all within a radius of a few hundred yards.

So even if pensioners were ‘forced’ to downsize, they’d all be able to find something affordable within a few hundred yard radius (or certainly within a few minutes’ drive, a couple of bus stops, or whatever), so they can give or sell their old house to their children and move into somewhere affordable close by, problem solved.

There wasn’t much they could say to that, really.

[Caroline Flint edition] Killer Arguments Against LVT, Not (140)

As background: this evening I attended the ’round table discussion’ (the table was distinctly long and rectangular) which Priced Out had organised with Caroline Flint and Alison Seabeck.

The topic turned to subsidies aimed at ‘helping first time buyers onto the ladder’ and one attendee (Gary F) pointed out that this was futile – in Australia, they had introduced a $7,000 First Home Owner Grant, the result of which was merely to inflate the selling prices of homes to first time buyers by $7,000. We have observed exactly the same wherever this has been tried (and the reverse where it has been withdrawn), it’s fairly basic economics.

Everybody seemed to agree with that.

I asked Ms Flint whether she’d heard from the Labour Land Campaign (and clearly she didn’t know who they were) and explained that if we reduced other taxes (I mentioned VAT and Employer’s NIC as the worst taxes and Council Tax because it is a poll tax) and replaced the shortfall with LVT, this would discourage land-hoarding, over-occupation, speculation etc. and hence lead to more efficient use of land and housing, everybody gets what they pay for, problem solved.

NIMBYism wouldn’t really be an issue, because if the NIMBYs drove up the price of housing then they’d be shooting themselves in the foot because this would merely drive up their own LVT bills.
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So far so good, people seemed to agree with that as well, but Ms Seabeck then went for the old fallback: “If we had LVT, then surely landlords would just ‘pass it on’ to the tenant in higher rents?”

After the meeting ended I pointed out to her that Gary’s example illustrated that subsidies to housing merely result in higher prices and do not help first time buyers; and seeing that a tax on something is the opposite of a subsidy, then quite clearly (as borne out by real life evidence) if a subsidy increases the price then a tax reduces the price, so tenants (or indeed first time buyers) would not be affected.*

* To be fair, scrapping Council Tax and reducing VAT and Employer’s NIC would increases people’s disposable incomes and some of this saving would result in a higher total amount being devoted to housing costs, so some of the LVT would be borne by tenants, but so what? It’s only a small proportion of people who rent privately or who buy their first home every year and LVT would still function as an admirable rationing measure.

Also thanks to Dana C for the pint afterwards.

They’ve not thought this one through either.

Spotted by DNAse in The Grauniad:

… as of Friday, the state government of New South Wales will pay residents A$7,000 (£4,500) to leave [Sydney]. It’s part of a new scheme to boost the population and economy of country areas.

“Regional NSW is a great place to live, work and raise a family – these $7,000 grants will provide extra assistance,” said the NSW deputy premier, Andrew Stoner.

The one-off grants to move to country areas will be payable to individuals or families provided they sell their Sydney home and buy one in the country. The country home must be worth less than $600,000 (£390,000), something that won’t be hard in most rural areas. It will cost the taxpayer up to $47m (£30m) a year.

As much as boosting regional areas, the scheme is also about making Sydney more liveable. The city’s population is 4.5m and predicted to grow by 40% over the next 30 years, putting unprecedented pressure on infrastructure and housing.

The immediate point is that this is a subsidy to rural land values – the price of a country home will merely go up by $7,000 because yer ex-Sydney household has $7,000 more to spend. And of course, it’s only Sydney homeowners who get the bribe if they move, not Sydney tenants, so indirectly it must be a subsidy to Sydney homeowners as well.

But why encourage people in Sydney to sell their houses? How does this get the population down – won’t they sell their houses to, er, somebody who wants to move to Sydney?

Slapping Sydney homeowners with Land Value Tax would be a much more sensible way of going about things – such a tax tends to increase the population, of course (because small households will be replaced with larger households who are more able to share the cost), but they expect the population to increase anyway, so why not cash in?

This gives the government the money to pay for infrastructure improvements in Sydney, if appropriate, or they can spend the money on making the countryside a more attractive place to live, or paying for resettlement grants or a Rural Citizen’s Basic Income or something.