Thursday, 17 January 2013

P. LVT is a wealth tax

As explained in O. Land values are real capital or wealth, the rental value of land (excl. the rental value of buildings and improvements thereon, or services provided in connection with) is not net wealth, and it certainly is not net private wealth. Ground rents are merely the amount of 'national wealth" which passes from the productive economy to the passive economy, and selling prices are merely the capitalised value thereof.

Unfortunately, even some supporters of LVT bracket in LVT with "wealth taxes" so we might as well deal with the issue.

• If you tax one kind of wealth, it will end up being extended to all wealth (skip to article)
• Why is there no tax deduction if you have a big mortgage?

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• It will increase the tax burden on London and the South East

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• It's an attack on wealth/the wealthy; wealth/the wealthy will disappear abroad

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1. "If you tax one kind of wealth, it will end up being extended to all wealth"

a) That's about as daft as claiming that "If you have Business Rates, quasi-LVT on commercial land and buildings, it will be extended to other assets owned by businesses" or "If you have Council Tax, it will be extended to other assets owned by households".

b) Admittedly, Business Rates taxes the rental value of the building and not just the ground rent, so if you make improvements which are part of the fabric of the building (air conditioning, lifts, solar panels etc) then you increase your tax bill. Under LVT this would not happen, but even Business Rates goes not further than that. It does not extend to moveable assets in the building (plant and machinery, office equipment, furniture etc).

c) An important part of the shift to LVT would be to get rid of these scattergun taxes which hit true private/personal wealth and privatised slices of national wealth alike (Inheritance Tax or Capital Gains Tax). Those two taxes only raise about £5 billion a year, which pales into insignificance the amount of LVT which could be collected (£200 billion a year from residential land).

d) There is no need to tax the value of income-generating assets anyway, as the income would be liable to income tax (at a suggested flat rate of 20% for the time being). So if the income from bank accounts or shares is about 5% of the amount invested, that's pretty much the same as a "wealth tax" of 1% per annum. Having a wealth tax on top would clearly be double taxation which is what a flat-tax system is trying to avoid.

e) Trying to tax "wealth" generally (as opposed to ground rents) is a non-starter in practical or administrative terms anyway, even if there were any intellectual merit to it. The problem with valuations would be enormous, there would have to be long lists of things which are included and things which are exempt, and evasion and avoidance would be rife. Not only that, but the total yield would be minimal with enormous collection and compliance costs.

f) "Yes," they will wail, "but once the principle is established, taxes on other wealth will not be far behind." Anybody who says that has not understood the principle behind LVT, go back to square one.

2. "Why is there no tax deduction if you have a big mortgage?

"

Because there has to be symmetry and coherence in a tax system:

a) People's savings are not liable to LVT, so why would there be a deduction for negative savings, i.e. mortgage debt.

b) LVT is a tax on the consumption of ground rents, so why would it make any difference how the consumer pays for it? That would be like saying "If I pay for petrol with a credit card without paying off the balance, why do I have to pay the petrol duty?"

c) Grounds rents are only ever positive not negative, the lowest possible ground rent is zero (i.e. land which is not worth owning). Ground rents can never be negative, but allowing a deduction for loans secured thereon would mean that a mortgage free neighbour pays it but his heavily indebted neighbour does not.

3. "It will increase the tax burden on London and the South East"



This is a variant of the Poor Widow Bogey, because that is where most Poor Widows In Mansions live.

It is a stupid argument, because by and large, a disproportionately large share of most taxes (apart from Poll Taxes like Council Tax and the TV licence fee) is collected from people and activities in London and the South East.

As other taxes would be reduced, the two effects would cancel out on a territorial level, but there would of course be a shift between productive people and businesses and passive land owners, and its effect might be even more marked in London and the South East.

We get exactly the same wailing in Ireland, of course: "Property tax is a tax on people who live in Dublin". The whole thing is self-cancelling, you can't argue against a tax on rental values on the basis that the tax would be highest where rental values are highest; if this line of argument is correct, then we can throw income tax straight out of the window because income tax is highest where wages are highest etc.

4. "It's an attack on wealth/the wealthy; wealth/the wealthy will disappear abroad

"

a) Yes, as mentioned above, taxes on vaguely defined "wealth" would lead to evasion and avoidance as people register assets abroad, even though the underlying assets remain in the UK. And those people who love being surrounded by moveable wealth, such as antique furniture or paintings or classic cars might move abroad with them.

b) LVT is not a tax on vaguely defined "wealth" (moveable or immovable) it is a tax on a very precisely defined annual flow of wealth or benefits, being that which flow from the productive sector to the passive sector via ground rents being collected from immovable land.

c) You cannot take land abroad. The rental value of land depends entirely on the location and what goes on around it. You cannot take land abroad and you certainly cannot take any of those things abroad. Even if somebody physically dug up his whole mansion and beautifully arranged garden and moved it abroad brick by brick and plant by plant, the location would still be exactly where it is.

And the rental value of that location is unchanged, there will always be somebody happy to build a new mansion and lay out new gardens in its place. So clearly, it would be cheaper and better for the existing owner to simply leave the bricks and plants in situ and sell the whole thing to the next owner.

d) I have already explained that reducing taxes on earned income and publicly collecting ground rents would mean that high earners find the UK a much more attractive country to live in and would be flocking here. That's easy enough. So, even though the maths and logic is more complicated in the other direction, there is no reason to assume that those high earners who are already UK resident would all move abroad, they would be cutting off their noses to spite their faces.

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