• 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).
"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..."
ReplyDeleteOn what "general stuff" could the HK government, or any government, spend the money generated by LVT in a way which would not "further improve the value of land"? Isn't there a danger in any LVT system that rents keep rising even for people who don't want to keep increasing their productivity, maybe they want to do more noncommercial things? In a small country like HK, or England to a lesser extent, it would be impossible to escape from ever more development and the rising rents that this generates, so impossible to do anything other than work full time in some not particularly desirable job. Is LVT a policy for a post-productivist society, would it be compatible with a no-growth 'steady state' economic policy?
Anon, that is a most interesting question, and the answer is either:
ReplyDeletea) Nobody really knows
b) Apply commonsense:
LVT is just like national ownership of land. So let's assume we all lived in council houses and all businesses were tenants of Crown Estates or the local council or whatever (so there is no need to distringuish between site rental value and bricks and mortar rental value) AND there were no taxes on income etc whatsoever.
There would be an upper limit to rents which the government can charge (even if it were minded to do so) - the demand for housing is price elastic and beyond a certain level, people would rather spend their money on other goods and services.
c) The bulk of LVT would be dished out as personal allowances or Citizen's Income, so the median household in the median home always breaks even. Why would that household care particularly whether they nominally "pay" £5,000 LVT and "receive" £5,000 CI, or whether they nominall "pay" £20,000 LVT and "receive" £20,000 in CI? Either way, they break even and get on with their lives.
PS, England is not a "small country", only a tenth of it is developed, and the other nine-tenths (farmland, forests, deprived areas) has no site rental value whatsoever, we are talking pennies.
Another perspective to anonymous' question is: whatever level of growth we envision, LVT will always be more sustainable. Privatized collection of land rents cause speculation, more debts, and set the bar for what future growth is needed for things not to end it tatters every 18 years or so.
ReplyDeleteTo elaborate on the point MW makes, having a CI that is connected to the size of rents, gives everyone a chance to choose how productive they want to/need to be, now it's either keep up or fit into a program.
On the whole I agree. I just worry that the more developed a country becomes, the higher rents become and the harder it will be to choose to live less 'productively'. If you think sufficiently long-term, ie hundreds of years, this could be a problem, which might be alleviated if LVT is supplemented by a low tax on production, like a low flat rate income tax. I'm thinking about these issues because I recently heard lvt criticized as being akin to a tax on endowments and therefore illiberal, and dangerous from an ecologial perspective, and I'm trying to work out whether there's anything to be said for these arguments.
ReplyDeleteIs the idea that 'the bulk of lvt would be dished out as personal allowances or citizens income' really that plausible?
Kj, thanks for back up.
ReplyDeleteAnon, why would anybody want to be rewarded for living "less productively"?
Thankfully, there is plenty of space for such people to roam freely, i.e. where land values are negligible. And the Green Party is pretty supportive of LVT from an ecological perspective, they are the experts and I have no worries on that front. You can easily supplement LVT with taxes on pollution, which is just another form of using natural resources.
And how would having income tax discourage people from living "less productively"?
And yes, of course it is plausible. In the UK at the moment, a third of government spending is dished out as welfare payments and pension to the population in general in cash. A third is dished out as universal non-cash benefits (health, education), and a third is dished out as "bungs to insiders and mates of the government" (corporate subsidies).
Clearly, we can and should get rid of the last third. Health and education spending is OK, as long as it is universal. Ultimately, paying a personal allowance to somebody and collecting LVT from him is a netting off exercise.
All it means it that the bottom third or bottom half of households have no net LVT bill to pay. I covered that here
http://kaalvtn.blogspot.co.uk/p/personal-allowancescitizens-income.html
It's not a question of people being rewarded for living less productively, just letting them get on with doing it, which is fine if, as you say, there's plenty of space for such people to roam freely. But there might not be enough space in years to come, particularly if LVT plus a few taxes on pollution are the only means of generating public revenue. Income tax wont 'discourage people from living less productively', it will make it easier for them to do so, since they will only pay income tax if they are living productively, unlike LVT which has to be paid whatever.
ReplyDeleteAnon, you've lost me now.
ReplyDeleteBefore we even start debating this, just remind yourself how much of the country is actually built on (five per cent) and how many people are consuming without working - children, pensioners and unemployed (plus a few million people in non-jobs), that means that less than half of us are productive anyway.
I'm not eve sure if you see giving people the opportunity of being unproductive as a good thing or a bad thing, or whether you think that LVT or income tax leads to there being more unproductive people.
And yes of course LVT has to be paid whatever, but there will always be marginal areas where the LVT is more or less nothing. You can be as unproductive as you like in such an area and it is no burden on society at all.
I see giving people the opportunity of working (being productive) part time and being unproductive (eg choosing to do things like looking after/educating their children, looking after their parents, pursuing hobbies, etc) the rest of the time, instead of working full or overtime and commuting and getting ill from stress, as a good thing. Marginal/near marginal areas will in time become less marginal and more valuable as development occurs, and it is not necessarily ok to say 'just move to a marginal area' to these people if they happen to have spent decades investing time, energy, and capital in making their place (house, land, community) nice and suitable for their lifestyle. And I'm saying that having some tax on production, like a flat rate income tax with high personal allowance, rather than relying just on lvt, will give these people the opportunity to do their thing. LVT on its own will in the long run end up forcing such people to move away from their established homes as development occurs and the economy grows, which will happen faster under lvt. Which is fine if you think such people don't matter, but not if you're a liberal who thinks that people should generally be allowed to do their thing.
ReplyDeleteAnon, fair enough, you are happy to tax other people's income to support non-workers. This whole blog proposes a half-way-house tax system with 20% flat income tax and as much again in LVT (and similar taxes like fuel duty).
ReplyDeleteBut you seem to overlook that people live in families. There only really needs to be, on average, one working person in each household for us to have our current living standard. I don't see why this would change under LVT (in fact, you'd need fewer working adults because land would be cheaper).
I'm not on about supporting non-workers, I'm talking about allowing people to work part time, and do other non-commercial or non-market activities the rest of the time, which might be 'work' or might be some other, perfectly reasonable, non-work activity. Which is perfectly fine and no problem if they choose or happen to live on marginal land, but perhaps more of a problem if the land that they live on and develop becomes more valuable and subject to higher tax over a longer period of time. But now I see that your blog proposes a 'half-way-house' tax system anyway, so that's great. But it's important to point out that this is quite different from the pure Georgist 'single tax' system, which might (or might not) be more difficult to defend.
ReplyDeleteAnon: Income taxes on top of LVT wouldn't necessarily be any better. Yes, rents would be reduced somewhat, but so would the income you were to earn by working part time, and you're at square one again.
ReplyDeleteIf your point is to reduce economic growth as a whole, why? As MW says, there's nothing in the way of having resource-consumption/pollution taxes on top, or conservation measures. Economic growth isn't a negative on it's own, it's primarily increases in efficiency, for which winnings is either taken out in less labour or more goods and services.
If the point is about reducing stress/commuting, then LVT actually improves this, because it increases development where people want to live (near their work). Currently, without LVT, people's preference for sitting on valuable land, either for speculation or for ignoring the alternate cost of their landholding, pushes people out of cities.
Also, while you could argue that planning should somewhat regulate where people should and should not build, there should definetly be more scope for letting landowners increase construction on already built land, making more/smaller units per land, which would reduce rents per unit, and allow those who want to live centrally, but work less, do that with a tradeoff in living space.
I just used "should" 4 times in a sentence, sorry.
ReplyDeleteKj, agreed. LVT usually beats income tax, but let's do a halfway house tax system first and then stop and decide what to do next.
ReplyDeleteI forgive you for using "should" too often. Remember - the ideal number of "should" in any sentence is zero.
Kj: The point about having income tax on top of lvt is not to reduce rents, although it might have this effect (not a huge effect though if it's a flat rate 20% income tax with a high personal allowance), but rather to allow for a lower rate of lvt (say, 60-70% as opposed to 90-100%), which would make it easier for people to choose to produce less and do more of other things. A lower level of lvt is compensation for the fact that development and constantly rising rents are not going to be to everyone's taste.
ReplyDeleteAnon, the problem with that is that a lower LVT rate and higher income tax rate mainly benefits existing owner-occupiers. And remember the rule of thumb - with the system proposed here, half of households will have no net LVT bill because their Citizen's Income/personal allowances reduce it to £nil anyway. If they are happy to muddle along on low earned income, then good luck to them, that's fine by me.
ReplyDeleteAnon: all I can get out of that is that you feel that people with paid down mortgages/inheritances in high-rent areas, deserves a bit of a break. A little middle-class welfare to be able to concentrate on massage therapy and allotments, or spending more time with the kids, without moving away from accustomed settings, or trading down in space/sharing accomodation instead.
ReplyDeleteWhy not extend the favour to everyone? So fair enough that income tax reduce the gains from "productiveness" slightly, and recycling it into a CI benefits all non-productive. But what's ultimately the point? "Development and constantly rising rents are not going to be to everyone's taste"? It's not to everyone's taste without LVT, and most likely rents will be more stable in the equillibrium state than what we've got now.