• LVT is not a panacea for everything (skip to article)
• LVT would be a great idea if we started again from scratch, but it's too late now, it’s too difficult to implement (skip to article)
• LVT won't prevent the boom-bust cycle
(skip to article)
• Hong Kong has LVT and it still has property boom-busts (skip to article)
• LVT still takes money out of the economy as it has to be paid out of earned income (skip to article)
• If some people downsize, then other people will upsize. So if you keep the total tax take constant, everybody will still end up paying the same amount of tax as before. So what's the big difference? (skip to article)
• There will be more losers than winners (skip to article)
• You underestimate people's atavistic desire to "own" their own home because it makes them feel independent/like a fully-paid member of society (skip to article)
• Over sixty per cent of voters are home owners and turkeys don't vote for Xmas (skip to article)
1. "LVT is not a panacea for everything"
Nobody says it is.
But are income tax, VAT, National Insurance, corporation tax and all the other crappy little taxes a panacea for anything at all? No, they just raise money for the government to spend on alleviating all the problems caused by levying those taxes instead of sticking with the old system of Domestic, Agricultural and Business Rates, which used to cover the bulk of government spending.
The current system provably causes unemployment and business failure, a trade deficit, and a regular boom-bust cycle in finance and land prices, recessions etc. And has been doing since banking, private land speculation and income tax were invented. Taxes on land values quite provably do the opposite. That does not mean that nobody would ever be unemployed or that no business would ever fail, but so what?
If the choice is between stick with the status quo or do something which is better, regardless of whether that's "a bit better" or "a hell of a lot better", why not go for "better"?
2. "LVT would be a great idea if we started again from scratch, but it's too late now, it’s too difficult to implement"
Why is it too late? There are plenty of people who don't own land who will easily adjust to an LVT system. Why saddle them with this crap just because older generations were saddled with it? Is it some sort of vicious revenge?
I accept that politically LVT is difficult to implement, that's because the majority of UK politicians are land speculators if not downright corrupt and in the pocket of bankers and large landowners, it's exactly these people who have been pumping out Home-Owner-Ist propaganda for decades if not centuries. But in practical terms it is dead easy: you tell people what the LVT on each plot of land is, cut taxes on output and employment and watch things blossom.
Yes, house prices will fall, but we'll adjust to that, some better than others. We adjusted to house prices rising, didn't we? some people (older Baby Boomers) will have to down-size. So what? People move home all the time, it's only a couple of months hassle and then they settle in.People change jobs or get pay rises or pay cuts all the time, most of them soon adjust. Poor Widows can stay put and defer the tax until death. That'll wipe out inheritances for some people, but so what? People who thought they'd rely on inheriting rather than working to get through life will be in a for a rude shock, that's all. Why is that worse than people losing their jobs during a financial recession? Lots of buy to let landlords (without whom we managed perfectly well until five or ten years ago) will go bankrupt and have to sell off their "investments" to their sitting tenants, so what? That's a risk of being in business, there'll be plenty of new business opportunities for the truly business-minded. And there's a limit on the speed with which existing businesses can expand and new business start up, but it's quicker than you think.
Once we've settled in to the new system, well that will be it, done and dusted.
3. "LVT won't prevent the boom-bust cycle
I'm not really sure what level of reality these people are operating on. First they wail that LVT will bring house prices down (see here), and hopefully it will, even though that is not guaranteed, and then they wail that LVT won't bring house prices down and keep them down? Those are two equal and opposite arguments and the truth lies somewhere in the middle.
As it happens, it is provably the case that LVT dampens land price bubbles. Again, we refer to the next-best tax, Business Rates which is a flat tax payable on the rental value of commercial land and buildings, more or less regardless of who owns it or uses it (income tax or corporation tax is on top of that). And we observe that there was a price bubble in commercial land and buildings but it was far smaller than the one in house prices, and it was over quicker:
Chart from the Bank of England's Feb 2010 Inflation Report (click to download Powerpoint slides, via the ever reliable Tutor2U
I have seen it argued that house prices are not in a bubble, that they were chronically undervalued and are now fair price; or that banks' losses on residential mortgages are small compared to losses on commercial mortgages, which proves that commercial was a bubble and residential wasn't.
That does not make sense. We know that Council Tax is much lower than Business Rates, and developers can make windfall gains by getting commercial premises re-zoned for residential use. That difference in selling prices is tax-fuelled bubble value. Whether the house price bubble ever bursts or not, it must be pretty clear that house prices would not have risen to where they are if we had Domestic Rates on them at the same level as Business Rates on commercial.
4. "Hong Kong has LVT and it still has property boom-busts"
The connoisseur then throws lobs this one into the game, but it doesn't really prove very much either way.
The fact is that Hong Kong does not have full-on annual LVT, what the government does is raise a lot of money from selling leases of land, usually for about thirty years, which is the lifespan of a typical skyscraper, and it gets a lot of other land-related taxes, which make up 45% of government revenues. For historical reasons, it can't spend the income from lease auctions on general stuff, it has to spend it on things which further improve the value of land such as transport and similar infrastructure. So rents keep going up, so the price which people are prepared to bid for thirty year leases keeps going up.
It is a simple matter of financial maths, that a thirty year lease behaves pretty much like a freehold, so if people underestimate interest rates a bit and overestimate rental growth a bit, and throw a bit of property developer machismo into the mix, yes, sometimes they overpay and come a cropper.
However, what it does prove is that people are happy to invest in buildings even if they are only going to own the land for thirty years and pay for the privilege. It's not too difficult to make your money back in that timescale, and after that, the land and buildings reverts to the government.
Alongside that, the top rate of income/corporation tax is very low (17% I believe), and Hong Kong has very little economic regulations on anything at all, there's very little in the way of a welfare system. But it all seems to work.
5. "LVT still takes money out of the economy as it has to be paid out of earned income"
The short answer is: paying rent out of untaxed income must be far better taxing the income itself and then expecting people to pay rent out of taxed income. If you work for a living, then everything is paid out of earned income, that does not mean that money you spend on clothes or eggs or guitar strings is 'money taken out of the economy'.
The long answers are the same, just a bit more roundabout:
a) All income or benefits which people receive of derive from land (or more correctly, "locational advantage") are "unearned". Any household is not actually doing anything to measurably increase the benefits they receive from living where they live. So while an owner-occupier is not getting a cash income to pay the tax; he is getting benefits from the location equal to (or greater than) the tax. From the point of view of the household, LVT is just a user charge, or a tax on consumption (without being a tax on production).
b) As I explained here with real life supporting evidence, if average wages are higher in some areas than others, the extra wages in high wage areas merely go into higher rents; those higher wages do not benefit the person earning them. So if an average private sector worker can increase his or her (net) wages by £5,000 by moving to London and doing the same job there (and living in similar quality accommodation), his or her rent will by £5,000 higher as well. If that rent goes to a landlord, it is unearned and can be taxed at no detriment to the economy. So we could equally argue that the extra £5,000 was unearned in the first place, as it is extra income for doing exactly the same job, merely from a different location, and so an owner-occupier in a high wage area receives, in cash, an element of unearned income.
c) If LVT takes money out of the economy, then rents and interest payments take money out of the economy as well. It's the same stream of money, just going in a different direction. So that's a break-even. But taxing earned income clearly takes money out of the economy as well, so more LVT and less income tax means overall, that less money is taken out of the economy.
d) Taxes on earned income have deadweight costs (GDP is 12% smaller than it would be, hence all the unemployed) and LVT does not. So that's 12% which the current tax system takes out of the economy which LVT wouldn't. That's extra money on the table, out of nowhere.
e) However wasteful a government is, and however it collects tax, it still spends a good proportion on things which benefit people in general and it keeps the rest for itself and its cronies, which I would consider "waste". If the UK government had kept spending level in real terms for the past ten years, it would be spending £500 billion a year instead of £700 billion (Public Sector Finances Databank), and it's not as if there was no "waste" ten years ago. So over £200 billion a year (a third of government spending) is disappearing into the pockets of the government and its cronies, that much is true, but that still means that two-thirds is benefitting people in general.
f) If we allow private individuals to collect the ground rent instead of the government, then none of that ground rent is spent on things which benefit people in general. A landlord or landowner or banker spends all the money on himself, he spends nothing on welfare or education or health or roads, why would he? He is under no democratic pressure to do so, and there is little benefit to an individual landlord, landowner or banker in doing so.
g) So why have a dual system, where the government takes money out of the economy via income tax (and spends a third on itself), and a small group of private individuals take as much again out of the economy via ground rents (and spends it all on itself)? If you want to minimise the amount of money 'taken out of the economy' then let the government collect ground rents instead of taxes on earned income, that's basic maths and logic.
h) That landlords and landowners and bankers take money out of the economy must be blindingly obvious. Imagine that all bankers cheerfully waived all debts and all landlords gave their homes to the sitting tenants for free. Would the rest of the productive end up worse off or better off? And imagine that the bankers and landlords (along with a load of quangocrats) went out at got themselves proper jobs. Would GDP fall or rise?
i) The same goes for taxes on earned income. If they were abolished overnight, then we'd all be better off as well.
j) So what happens if the government announces that it will scrap all taxes on earned income and collect the rent and interest instead (via LVT), and it spends the vast bulk of that LVT on things which benefit people in general and dishes out the rest of the income on straight forward cash rebates? Would we not all be better off?
6. "If some people downsize, then other people will upsize. So if you keep the total tax take constant, everybody will still end up paying the same amount of tax as before. So what's the big difference?"
There is a huge difference.
a) Yes, it is true that on a short term basis, most people's tax bills will go down, but for others it will go up, and incomes of bankers and landlords will go down quite a lot. Let's ignore them, that is a straight win for the economy.
b) Let's focus on a younger/higher income household (H1) in a smaller home trading up and an older/lower income household (H2) in a larger home trading down; they swap places. Under current rules, H1 pays £15,000 tax and H2 pays £5,000 tax. Afterwards, H1 ends up in the larger home paying £15,000 tax and H2 ends up in the smaller home, still paying £5,000 tax.
Does it not seem equitable that the family expected to pay more tax into the pot for the benefit of society gets more back from society, i.e. gets to live in the larger/nicer home? H2 will still be getting their Citizen's Income etc, funded out of the tax paid by H1And does it not seem sensible to reduce taxes on earnings - why punish people for going out to work, adding to the pot of total wealth etc?
c) Or imagine a load of people who've run up a tab drinking in the pub all evening who now have to split the bill:
If they split the bill equally, with the same amount per drinker, that's like a Poll Tax.
If everybody puts in a certain percentage of his last week's wages, that's like income tax.
If everybody just pays for his own drinks, that's like Land Value Tax.
So under LVT the total amount of land rent which people will consume is the same, and the total amount of tax which people will pay is the same, it just gets split up more sensibly.
7. "There will be more losers than winners"
This is quite simply not true.
Even in the shortest of short terms, any fiscally neutral shift from taxing earned income to taxing the rental value of land will create far more winners than losers, for the simple reason that earnings capacity is quite evenly distributed and land ownership is concentrated in relatively few hands, especially if you deduct mortgage debts.
Only about ten or twenty per cent of working age adults are unemployed at any one time, so eighty or ninety per cent have positive earned income, but nearly fifty per cent of working age adults own no land whatsoever, i.e. the thirty per cent who are social or private tenants and all the recent purchasers whose mortgage is as much as the value of their home. Even worse, those people don't just own no land, they actually own negative amounts of land because they have to pay rent and mortgage interest (land ownership is at best a zero sum game).
I have included spreadsheets on the separate page covering the transition and you can check for yourself how different households would be affected, around two-thirds of households would be noticeably better off from Day One.
Who would lose out in the short term? A few small groups such as landlords, large landowners, senior bankers etc (a few per cent of the population at most), I don't see why anybody should be too bothered about them, and their favourite human shield, the "asset rich, cash poor" (see The Poor Widow Bogey).
In the medium and long term, nobody will lose out, people will just have to find better things to do.
8. "You underestimate people's atavistic desire to "own" their own home because it makes them feel independent/like a fully-paid member of society"
This shows how warped people's consciousness is.
The feeling of "independence" is entirely illusory. Without society providing law and order, without a functioning economy, without all these things you own nothing. "No man is an island". A fifth of all adults live off state pensions, which do no appear magically out of thin air, they depend on other people paying taxes and other people providing benefits in kind (like "free" healthcare) and producing all the goods and services for pensioners to spend their pensions on.
The very real price of this illusion to the would be home-owner is to have to pay two layers of tax - publicly collected taxes on his income for the whole of his life, which he can only avoid by ceasing working or not having any savings (in which case, what is he going to live off? Fresh air?) and the privately collected taxes represented by all the extra mortgage payments on the land element which he has to make to be able to clamber up to the hallowed status of "freeholder".
What people have to realise is that the rental value of land is the result of the individual efforts of everybody in the whole country, and indeed other countries who export subsidised goods to us and live in mutually beneficial peace with us. That rental value does not belong to any individual or any group of individuals, it belongs to the whole community.
LVT recognises this, so the revenues are spent on things which benefit everybody and the surplus is dished out as welfare payments or pensions. So that means that everybody is effectively a "landowner" as of right, everybody is a fully paid up member of society and every household receive enough Citizen's Income/personal allowance to be able to pay the tax on an average home for a household of that size, and a whole layer of privately collected taxes (location rent, the cost of land, mortgage interest on the land element) is stripped away.
Instead of some people owning a disproportionate amount of land (by value) and nearly half of households owning none (while still having to pay rent), which causes massive wealth disparity and hence social frictions, everybody will be able to walk past any plot of land, and however humble or grand the building on it is, he will know that "I own an equal share in that, a sixty-two-millionth part of that belongs to me."
Would that not be a much more reassuring feeling?
9. "Over sixty per cent of voters are home owners and turkeys don't vote for Xmas"
This is a non-argument.
Even if were a valid objection, you might as well point out that considerably more than 60% of people have income on which they have to pay income tax and/or employment income on which they have to pay National Insurance; that nearly everybody buys goods and services subject to VAT etc.
If it were an important factor in designing a tax system, then we would find that the only taxes levied would be those only ever borne by a minority (for example alcohol, tobacco and gambling duty, possibly corporation tax and Business Rates).
And as a matter of fact, for most households (certainly for most working age households) their earnings as a share of total national earnings is much higher than the value of their home as share of total land wealth, so shifting taxes from the former to the latter will reduce the tax bills for most households (quite dramatically, as it happens).