Thursday, 17 January 2013

I. LVT would not raise enough revenue

• LVT will never raise enough money to pay for all government spending (skip to article)
• LVT will never raise enough revenue to replace all taxes (skip to article)
• Why focus on one narrow asset class? Taxes should be broad-based (skip to article)

The collapsing revenue theories:
• Everybody will cram into the smallest houses, so not much tax will be collected (skip to article)

• Rich people will avoid the tax by trading down or moving abroad (skip to article)
• The best way to tax rich people is higher rate income tax or taxes on luxuries (skip to article)

These arguments are the equal and opposite of the arguments covered in H. LVT would [allow the government to] raise too much revenue. Surely they can't both be correct?

The claim that "Everybody will cram into the smallest houses, so not much tax will be collected" also sits uneasily with the claim that Landlords will pass on all the tax to their tenants. Again, the two arguments cancel out. Broadly speaking, we would expect gross rents to increase by the amount of the reduction in the tax on earnings. Thus illustrating that a £ for £ shift from taxing earnings to taxing the rental value of land is perfectly feasible and plausible.

1. "LVT will never raise enough money to pay for all government spending"

In which the current tax system is failing miserably as well. And that's not because the government isn't collecting enough in tax; it is because since 2008 or so, the UK government has been throwing everything it can at propping up the banking sector, the landowners and house prices. According to official HM Treasury figures, about 40% of UK government spending goes on corporate subsidies in one form or another.

If spending had been kept at 2004-05 levels (which were hardly lean years) in real terms, then this year, the public finances would have been in a break-even position, there would have been no deficit! (see Public Sector Finances Databank, Tabs A2 and C2).

2. "LVT will never raise enough revenue to replace all taxes"

In the short term, no, but so what?

We already have quasi-LVT on commercial land and buildings (Business Rates) which we can put to one side for now. The simple fact is that the total site-only rental value or site premiums of UK residential land is currently about £200 billion a year. Explanation and calculations here.

If we collected that in LVT, that would be enough to replace the most damaging taxes, those specifically on output and employment i.e. VAT and National Insurance, which currently raise £200 billion between them. VAT is sold to the gullible public as a tax on "consumption" but it is no such thing, it is a tax on final output or gross profits.

Getting rid of nuisance taxes such as Council Tax, SDLT, IHT, CGT, the TV licence and Insurance Premium Tax (total receipts approx. £50 billion) would be part of this initial shift, of course, because income/corporation tax receipts would increase by that much anyway once the economy is released from the burden of VAT and NIC.

That must be worth considering, must it not?

Having got as far as a halfway house tax system where approx. half of all receipts are from LVT, fuel duty or the bank asset tax (good taxes) and the other half are from a flat income/corporation tax (second least bad tax), there is no reason why we cannot shift from the latter to the former. If a typical working household is paying £5,000 in LVT and £8,000 in income tax (before personal allowances or Citizen's Dividend), surely they can just as well afford to pay £8,000 in LVT and £5,000 in income tax? Why would it make any difference to them, especially if all tax were collected via PAYE?

We know for a fact that rents are a function of people's net disposable incomes after tax, so if taxes on income are reduced, rental values (and hence the tax base for LVT) will go up, probably £ for £.

We can illustrate this quite simply by comparing the square metre cost of apartments in Nice and Monte Carlo, two towns on the south coast of France which are very similar in most respects. The only big difference is that Nice is in France with very high rates of income tax and Monte Carlo is a little tax haven with very low rates of income tax.

So the average selling price of an apartment in Nice (City Centre) is €4,500/sq metre and the average selling price in Monte Carlo is nearly ten times as much, €39,000 per square metre. That extra €3 million you would pay for an apartment in Nice is merely the amount which very high earners are prepared to pay in exchange for not having to pay high taxes on their incomes if they lived elsewhere in Europe.

2b. "Why focus on one narrow asset class? Taxes should be broad-based."

a) For LVT purposes, land is not an "asset" let alone an "asset class" or a "capital asset". The tax is levied on the annual rental value of land/locations", i.e. that flow of wealth which would otherwise go to landlords, landowners, bankers or property speculators ("rents", whether capitalised or not).

b) And those rents do not generate themselves, they are merely wealth which is siphoned off from a myriad different kinds of productive activity (or exploitation of natural resources or local advantages).

c) Clearly, it would be silly to try and raise a disproportionate amount of tax from any one "asset class" (cash, buildings, jewellery, works of art, plant and machinery or share prices); from any one particular kind of land use (residential, commercial or agricultural/extractive); or from any one particular kind of economic activity (manufacturing or services or any sub-division thereof).

The worst taxes are things like VAT, a flat percent of turnover of non-favoured productive industries which allow high-margin industries to thrive but condemn low-margin ones to oblivion, and the more "targeted" a tax is, the more distortions it causes (the same goes for "targeted" tax breaks and subsidies). So "broad based" is clearly good - it's just that the Homeys don't like it when they are included in that "broad base", despite the fact that owner-occupiers create two-thirds of the wealth, pay two-thirds of all the taxes and occupy two-thirds of all the land, measured by value.

d) But land rents are derived from all these uses and activities, and are that part of any industry's income which is not necessary to sustain that industry, they are pure surplus (or the price a retailer pays for having a monopoly position on the High Street). So the least-bad tax on farming is a tax on that extra income (revenue minus costs and the value of the farmer's own labour) which would otherwise go into rent or higher land prices (on average, about £20 per acre). And the least-bad tax on retail is that element of profits which would go into rents. Manufacturing businesses are happy do make do with marginal and out-of-town sites (they need more physical space but central locations are not so important - they need access to stuff like motorway junctions and railway sidings which make places a no-no for residential use) so the tax collected from manufacturing would be minimal. Etc etc.

e) And we all have to live somewhere. The least-bad tax on earned income is a tax on that element of people's income which is paid as rent or mortgage repayments (which for an average household is the excess of income over the cost of the "basic minimum" standard of living and for higher earning households is "conspicuous consumption"), but unlike income tax (where you get nothing in return for paying it), the LVT is taken out of/included in the rent and when you pay LVT/rent, you get something in return (somewhere to live).

f) In urban areas (which is where 95% of land rents arise), these land uses are are all intermingled. It could be retail or services at pavement level with offices on the first floor and flats up above, with a car repair workshop in the alley behind. The rental value is fairly constant, it does not matter what that shop sells or what services are provided, it does not matter whether the offices are used by a financial adviser, physiotherapist or fortune teller. And it does not matter how the residents above earn their living or whether the car repair workshop specialises in second cars or tuning brand new Maseratis.

g) All of these uses compete. If people want to buy mobile phones instead of CDs, then the CD shop shuts down and is replaced with a mobile phone shop (or the canny CD retailer starts selling mobile phones on the side). The flats will be occupied by the people who work in the most profitable local industries, they might lose their job in the CD shop and be taken on by the mobile phone shop. Etcetera.

h) Occupiers who have to pay rent will always be the people who are best able to capitalise on the opportunities offered by that location or who can earn most by working within commuting distance of that location. So making people pay rent is not in itself a bad thing (price allocation is the best kind of allocation); where it goes wrong is allowing a privileged class to collect those rents rather than pooling them for the common good.

So as we see, land is not a narrow "asset class" and land rents themselves are a very broad-based and inherently stable stream of revenue/flow of wealth, which can be taxed with impunity.

NB, a slightly different version of this article is at the LVTC site.

3. "Everybody will cram into the smallest houses, so not much tax will be collected"

a) No they won't, because for most people there is little incentive to downsizing.

Here is the table for the site premiums for semi-detached houses in the first nine deciles (the top decile goes off the scale; the top one per cent of homes, mainly in certain small enclaves in London cost £100,000s a year to rent and £millions to buy):

How many people in the ninth decile would really want to trade down to the eighth, merely to save £2,000 a year? How many in the eighth decile would want to trade down to the seventh in order to save £1,000 a year?

No more than would be willing and able to trade up, providing house prices adjusted down accordingly, and by definition they would. And by definition, those people in the ninth decile could already be saving themselves £2,000 a year if they sold their homes worth currently £260,000-plus and bought a house in the eighth decile costing £210,000-plus, because that would knock £2,000 off their mortgage payments (or rent).

4. "Rich people will avoid the tax by trading down or moving abroad "

a) People who spout this do not understand how rich people behave. The argument is about as plausible as saying "If private schools start charging £10,000 or £20,000 per pupil per year, then the top 7% who currently send their children to private school will send them to free state schools instead."

b) Clearly, high earners won't move abroad, because as the French 75% income tax experiment demonstrates, what high income people are most sensitive to is income tax rates; with a flat income tax of 20% and houses which have fallen in price to compensate them for any LVT thereon, they'd all be flocking to our shores.

Some even argue that even though UK income tax rates would be low, UK high earners would earn their money in the UK and then live abroad to avoid the LVT. Well, that makes them resident and thus liable to pay income tax somewhere else, so they would lose on the income tax side and gain nothing on the LVT side, because if instead of buying a cheap UK home with LVT on it, they would have to buy a more expensive home elsewhere with lower LVT on it, so best case they break even on the 'housing costs' side.

That part is easily dealt with.

c) And what do people like talking about? They'd love to talk about how much they earn, but for some reason that is taboo, but it is perfectly acceptable to complain bitterly about how much tax you pay (from which the astute listener can work backwards and work out what the complainant earns). So people use conspicuous consumption (spending money you don't have on things you don't need to impress people you don't like) to drop hints as to how much they earn. And people also just love showing off about how much their house is worth.

So think about it - it would be the winning card at keeping-up-with-the-Joneses poker at dinner parties: high earners can "complain" about the fact that their house is in LVT Band P (or whatever), knowing full well that everybody else's houses are probably only in Bands M, N or O, thus subtly signalling that they've got shed loads of money; that their house is worth a lot; and giving them the satisfaction of whining about how greedy the government is and/or the opportunity to show how generous they are in paying so much into the system for schools'n'hospitals. Having bands rather than individual valuations will make the poker game all the more satisfying, because those peasants down in Band L won't actually know off by heart how much the tax in Band P costs, they'll have to work it out in their heads, thus giving our poker player time to move on his next favourite topic.

d) Yes, there will be a lot of down-sizing, up-sizing and right-sizing generally in the first couple of years, but by and large, people will be swapping places, there is no reason to assume an overall downward shift.

That leaves us with the people who live in the top decile. Where are they going to go? We know that there are enough people happy to pay rents of from £15,000 up to £100,000s a year, you only have to look on Rightmove or Zoopla. And there are others prepared to commit millions to buying a house, this is conspicuous consumption at its best. How many of them would really want to lose face with their peers by admitting that they can't afford it?

e) Remember: according to HMRC Table 2.5, the top one per cent of income taxpayers (that's 300,000 people) declare incomes of £120 billion a year. They pay (currently) £40 billion in income tax alone, a surprisingly low effective rate of 30% or so (Employer's NIC and VAT are on top of that), it must be at least 40% overall.

We can only guess what the true total incomes of the top per cent of UK residents is, many of whom pay the non-dom charge of £30,000 per person per year in return for not having to declare their overseas or true incomes.

These top one per cent are already effectively paying £20 billion a year (in actual cash or notional cost terms) to live in the top one per cent of homes; with a flat 20% income tax, no Employer's NIC, no VAT, no Inheritance Tax or CGT, no non-dom charge and a complete exemption for overseas income and so on they will be savings £20 billion a year in income tax etc. Why would they not be perfectly willing and able to spend their £20 billion income tax saving on £20 billion in LVT which would be collected from the top one per cent of homes? It's really no skin off their noses, is it?

f) Just to fill in the gaps, let us now return to our Poor Widows In Mansions. According to arch-Home-Owner-Ists the Centre for Policy Studies, only 15% of high value London homes have been owned by the same person for more than twenty years, so the actual number of Poor Widows is no more than 10,000 or 20,000. Perhaps LVT would give them the nudge to cash in and sell up and buy a smaller flat closer to their no doubt equally poor offspring who will have bee priced out of the prime central London market decades ago?

And for every Poor Widow who moves out, there will be at least one high earner, oligarch, oil sheikh, foreign kleptocrat or French tax exile willing to move in and pay the tax out of petty cash.


5. "The best way to tax rich people is higher rate income tax or taxes on luxuries"

We can rule out higher rate income tax; taxing land values is far better; at the very top end, every penny of an income tax cut comes back in higher rental values and hence LVT receipts.

And here the argument goes full circle. Not only are "luxuries" difficult to define but any tax thereon is ultimately a tax on the people who provide them. A film star or a celebrity footballer wedding or birthday party "costing" £150,000 may superficially seem like wild extravagance and hence a luxury, but that £150,000 ends up in the pockets of all the dozens of caterers, waitresses, flower arrangers, taxi drivers, marquee builders, decorators, pole dancers etc; exactly the people who buy the cinema tickets and season tickets in the first place.

But if a film star lives in a £5 million house with an annual site-only rental value of £150,000, how much of that money will the caterers, waitresses etc ever see? Not a penny. And that house is a surely a luxury just as much as the wedding or birthday party. So why not get that £150,000 into their pockets via the tax/welfare system and make the wedding or birthday party tax-free?

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