Thursday, 17 January 2013

V. Moralising

• I've already paid enough tax

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• I've paid for my pension with my National Insurance contributions (skip to article)
• I bought my home out of taxed income (skip to article)
• An Englishman's home is his castle; if they try and take my home I will be waiting with a shotgun (skip to article)
• LVT will lead to a break up of The Great Estates (skip to article)
• Even if the original appropriation was wrong, I paid for my land in good faith and it is now all water under the bridge (skip to article)
• It's nationalisation without compensation

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• Land ownership is widely spread and no longer a monopoly

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1. "I've already paid enough tax

"

This is usually from the pensioners' corner. What they merrily overlook is that they are net recipients of tax by a huge margin.

Fullfact.org put the numbers from MetLife Inc through the wringer and concluded that the quoted figure of £42 billion a year seemed reasonably accurate.

And what do pensioners get for that £42 billion? According to Fullfact.org (same link), the value of NHS treatment for pensioners was £40 billion a year. What else do they get? Ah, £94 billion a year in old age pensions, Pensions Credit etc (DWP Annual Report 2011-12, pages 124-125), add to that £25 billion a year in public sector pensions, maybe £10 billion for long term care. And don't they use libraries, 'phone the police and fire brigade, benefit from law and order, street lighting, defence and all that like everybody else? Let's allocate them a one-fifth share of the cost of that last lot, brings us up to £184 billion from the taxpayer, for which they pay £42 billion, they are up by £142 billion a year.

Under a flat 20% tax system, the amount of tax they have to pay would fall to about £15 billion (occupational + private pensions = £75 billion a year x 20% = £15 billion), and they wouldn't have to pay any LVT if they go for the deferment/roll-up option, it will be their heirs who bear the tax. So what's the problem?

2. "I've paid for my pension with my National Insurance contributions"

Not quite relevant to the LVT debate, but somebody always throws it in, the answer is, no you didn't.

The UK (like most countries) runs a pay-as-you-go system. This is probably the cheapest and least risky and hence best kind of system to run, but let's at least be honest about it. Today's pensioners paid for the old age pensions of people who were pensioners back then, in other words, they paid a lot less. People didn't live as long, so there were far fewer pensioners-per-taxpayer; the amount spent on the NHS treatment was a tiny fraction of what it is now, and the amount of NHS spending on pensioners was a smaller fraction of that than it is now etc. Broadly speaking, today's pensioners are massively up on the deal.

So pensioners, have a heart, you did not pay for your own pension, it's today's workers and taxpayers who are paying for it. In theory, everybody under the age of 65 could emigrate, and what are you going to live off then? The legal obligation to pay for you only applies to the extent that somebody lives in the UK and has to pay tax here.

3. "I bought my land out of taxed income"

This rolls so glibly off the tongue, but it is a big fat lie.

a) Whatever small deposit people paid donkeys' years ago was out of taxed income, but that was just prepayment of rent and usually far less than the cost/value of the bricks and mortar. LVT will never push the selling price of land and buildings to below the cost/value of the bricks and mortar, so you will still get more than your original money back if you decide to sell again.

b) The rest was a mortgage, and the mortgage payments over the nest few years were paid out of the money which was being saved in rent. Because the Home-Owner-Ists rigged things via inflation, the amount of mortgage payments was a progressively smaller proportion of the rent saved as time went on. And seeing as rent is just privately collected tax, any homeowner who bought more than ten years ago has paid a lot less tax than somebody who was renting. It's a simple fact that if all houses disappeared overnight and the insurance companies refused to pay up, people who bought more than fifteen years ago will still be far better off than they would have been had they stayed renting the whole time.

c) To cap it all, many countries give homebuyers subsidies, whether that is cash grants, subsidised mortgages or tax relief for mortgage interest.

In the UK, like most countries, most people who pay for the bulk of the purchase price by taking out a mortgage, usually 20 to 25 years at the onset with a twenty per cent deposit. MIRAS was phased out in stages before disappearing in 2000 or thereabouts. So nearly everybody who bought before the mid-1970s, paying an average interest rate of 8% paid more in interest than the original purchase price of the house, and the value of the tax break/subsidy was broadly equivalent to the amount of tax paid on the income earned to buy the house.

d) There are of course plenty of people who are part way through paying off their mortgage (out of earned income). If they have only just started paying it off, then the income tax etc they save in future will be more than any extra tax they have to pay on their home. There will of course be some people stuck in the middle, who received little benefit from MIRAS and have largely paid off their mortgage, but you can't make an omelette without breaking eggs.

4. "An Englishman's home is his castle; if they try and take my home I will be waiting with a shotgun"

a) The original meaning of this phrase (which dates back to at least 1628) had nothing to do with land "ownership", it was a general rule of common law that you can do what you like in your own home. It does not matter whether you rent or own that home. And if the police want to search your home (rented or owned), they usually need a warrant.

All very sensible. And in return for that privilege and protection, you pay rent, or mortgage or LVT. Or you might as well argue "I paid for my car, so I shouldn't have to contribute towards cost of maintaining public roads and the pollution I cause through fuel duty."

b) For some reason, the Faux Libs get all trigger happy when you mention LVT. I do wonder where all this aggression comes from? If they are so averse to paying taxes, they can start right now, they can walk into a shop with a shotgun and demand a 1/6 discount on the basis that they refuse to pay VAT. They can threaten the payroll lady with a shotgun and demand that their salary be paid out gross without deduction of PAYE. They can do the same in the bank when they receive interest net of 20% income tax. And so on. So, please get on with it lads, then you'll all be safely locked up in jail and no threat to me when we finally introduce LVT.

When you point out to them that if they have to stand guard over "their" land 24/7, they'll never have time to earn any money. Aha, they say, we will organise standing patrols with our neighbours and we will take it in turns, an hour or two a day each. OK, if they actually get away with it and form a breakaway republic, have they not now become "the state"? The very thing they claim to despise? If I want to live in their wonderful libertarian republic, would they not expect me to do my share of standing guard with a shotgun? How is that not a kind of tribute or a tax? What if all the residents decide they have better things to do, and all chip in a bit of money and pay for a few mercenaries to protect their borders? How is that not a tax? So we are back where we started.

5. "LVT will lead to a break up of The Great Estates"

I've even seen this one once or twice. Why on earth does anybody think it's a good idea for a few people to own far more land than they can possibly use themselves and to have a lot of tenants on it? What about the tenants' right to own land, they are the ones doing all the work, aren't they? Further, owning land will still be profitable, there will still be net rental income, unless a landowner is heavily mortgaged.

Another phrase which hacks me off is this boast that "The land has been in the family for ... generations" as if that makes people special. The flip side of this is the derogatory term "nouveau riche", so some Victorian industrialist who has bought a stately home off some landed aristocrat who has wasted all his unearned income gets looked down on. And what's so special about having lived off the land which your distant ancestors the Normans stole? Does anybody think that the land could care less which human beings claim to own it? The land can manage quite happily without them, it's like two fleas arguing over who owns the dog.

6. "Even if the original appropriation was wrong, I paid for my land in good faith and it is now all water under the bridge"

Aha, but it's not the original appropriation which matters, what matters is what happens now and in the future. Bare land is not worth much, what matters is the flow of wealth or benefits which the landowner receives by virtue of owning the land (the rental value) today, tomorrow, this year and next year, all of which are generated by the whole of society.

It's like the difference between
- me stealing your car (you'd claim on the insurance, get a new one, and you'd get over it) and
- me stealing your car and expecting you to pay for the petrol, insurance, road tax and repairs as long as it's on the road. And then expecting you to buy me a new one when it goes on the scrap heap. And another one when that one wears out. For ever.

More specifically, there are the legal concepts of (a) "privity of contract" and (b) the distinction between the parties to a contract and the subject matter of the contract.

a) "Privity of contract" means that Mr A and Mr B can make a contract between themselves, with mutual obligations. So Mr A can agree to work for Mr B for a wage; or Mr A can sell something to Mr B. Mr A gives his labour or a car to Mr B, and Mr B gives cash to Mr A.

So a private contract is never binding on third parties. So Mr A cannot agree to sell Mr C's labour or Mr C's car to Mr B (that would be slavery or sale of stolen goods) without Mr C agreeing to enter into the contract and receiving some consideration. If Mr A runs an employment agency or sells used cars on commission, then Mr B pays, Mr A takes his cut for bringing the two parties (Mr B and Mr C) together and Mr C receives, hopefully, a better wage or a better price than if he had looked for a job or tried to sell his car himself.

b) If Mr A sells his land to Mr B, then Mr A's part of the contract is to vacate the premises, sign some bits of paper or hand over the titles deeds and hand over the keys. Mr B hands over cash and/or takes on a mortgage. The private element of the contract is thereby concluded.

But what is the "subject matter" of a contract for sale of land? It is the land itself, and that "land" only has value because Mr B now has a privileged position as against everybody else in the whole of society in perpetuity. It is the whole of society which provides that value (by respecting Mr B's exclusive right to possession; by paying for the police to protect Mr B's right to exclusive possession; by paying for the roads and schools etc out of their taxes; by running all the private businesses in the vicinity, where Mr B or his tenants can earn money or spend their money).

Mr A plays no greater part in all this than anybody else, so why does he receive all the money?

c) We can put the two concepts together and illustrate the point using an extreme example.

Under the EU's farm subsidy scheme, people who own farmland are entitled to a cash subsidy of around £80 per acre on average (in the UK - other Member States pay smaller or higher amounts). So when you buy farmland, you are paying for two things, the "land" itself and the future subsidy stream paid for by taxpayers generally.

It is perfectly legal for a landowner to split this into two and to sell the land and the subsidy stream as two separate items (or retain one and sell the other). So Mr A might keep his farmland and sell the subsidy stream to Mr B. Let's say that the subsidies are £10,000 a year and Mr B pays £500,000 for them (his gamble being that the UK government will continue to pay for ever more).

Now, what if a future UK government realises the error of its ways and reduces or scrap the subsidy payments. Would it be reasonable for Mr B to attempt to force the UK government to divert £10,000 of taxpayers' money into his pockets every year for nothing in return, on the simple basis that "he has paid for them"? Why would a private contract between Mr A and Mr B be binding on all third parties - i.e. UK taxpayers - in perpetuity?

Surely not, in which case, why would it be any different if Mr A retains the subsidies and sells the "land" to Mr B? How on earth can that private contract be binding on all other UK citizens (who are then forced to maintain the value of that land as described above) in perpetuity? Why shouldn't all other UK citizens be entitled to that value, which inevitably would have to be collected by a central national body ("the government") and either spent on stuff which benefits everybody or dished out as a Citizen's Income/personal allowance?

7. "It's nationalisation without compensation

"

Firstly, it's not "nationalisation" because that would imply taking away something private or personal. Land rents are not private or personal, they belong to the location and are generated by the whole of society, or the nation-state (or whatever abstract term you wish to use). Even if LVT is nationalisation (which it isn't), it is only nationalisation of land rents and not the land itself. And even if it is nationalisation, then surely it is not as bad as nationalising half of the wealth generated by productive businesses and their employees (I don't see any big dividing line between the two).

I've done a longer post on compensation, it's a whole topic in itself, but here are the bullet points:

a) If the government had to compensate people for the amount of tax they pay, then it would never raise a penny.

b) All occupiers of land are getting compensation because they are receiving/consuming rental value of land worth at least as much as the tax.

c) LVT is in itself the compensation that a land owner has to pay "everybody else" for the state-protected right to exclude them and hence place a burden on them. A bit like the "polluter pays" principle.

d) Similarly, every individual, including every individual land owner, is also being excluded from all the bits of land he doesn't own, so is entitled to his share of the tax paid by all the other land owners (Citizen's Income or personal allowance). That's your compensation.

e) Proper LVT'ers are as united in their loathing of taxes on output, earnings and profits as they are united in favour of taxes on land (and other government protected monopolies or cartels). So another way in which people will be compensated is that for every £1 LVT they pay, their other taxes go down by £1.

f) For sure, older homeowners will see the unearned windfall paper capital gains they have accumulated over the years disappear, but was that a real gain anyway? What is morally wrong with a windfall tax on a windfall gain?

h) In practical terms, all these old people who wail about having "bought their houses out of taxed income" effectively got their houses for free; they paid a tuppence ha'penny deposit and the mortgage payments were a lot less than what they would have paid in rent. They have lived rent free for decades and have already had their money back several times over.

i) The only people deserving in any way of compensation are recent first time buyers who were tricked into taking out large mortgages in the last few years and who might end up in negative equity. They'll get automatic compensation because by and large they will have the biggest tax cuts, but I'm not averse to writing off the underwater element of their debts. The banks will cope somehow.

j) There are some freebies as well: with taxes on productive activity reduced or phased out, the economy can grow by at least ten or fifteen percent.

8. "Land ownership is widely spread and no longer a monopoly"

A moral argument for LVT is that as land is a state-protected monopoly right (without a state, there is no landownership; once you have enough landowners co-operating for mutual benefit, you have a state), land rents are fair game for taxation. The pragmatic argument is that taxing monopoly income (cash or in kind) does not disincentives wealth creating economic activity, it has no deadweight costs.

"Ah yes," cry the Homeys, "But it's not like under the Normans when a few people owned all the land. That was a monopoly. Nowadays, millions of people - in fact a majority of households - own some land, and when it comes to selling it or renting it, they are all competing with each other and the potential buyer or tenant can pick and choose."

Even if were true that land isn't inherently a monopoly (and it isn't true), so what? The Homeys are happy with taxing non-monopoly earned income so even in their terms that is not an argument against LVT.

And clearly it is true that land ownership is always a cartel or a monopoly. The prices and rents charged are much the same whether each individual plot is owned by a different individual or whether one powerful landowner owns them all. Imagine that all the land and all the buildings in a town or even in the whole of the country belonged to one corporation or one family. Would they charge higher or lower rents for an individual building than a small owner? They'd charge much the same because the price is set by the willingness and ability of the purchaser or tenant to pay and the relative advantages of each site. If they get too greedy, then people will rent less land and the monopolist's total income will fall.

This is quite different to e.g. radio spectrum. If four telco's own a quarter of the available frequencies each, they are an oligopoly, but the customer couldn't care less which particular frequency he's on so those four telco's are still competing.

Our other clue is that it is quite easy to envisage a tax system with 100% LVT and no taxes on income. People would still go to work and spend money, businesses would still thrive, buildings would still be built and maintained. Contrast that with a tax system with 100% income and no taxes on land. Everything would grind to a halt within a few hours.

3 comments:

  1. 7j) Mark, where do you get
    "economy can grow by at least ten or fifteen percent?"

    I cannot see why growth should be limited to this figure. The limiting factor on growth in a globalized economy is comparative advantage; even if the size of the world economy remains static, which it does not, the UK economy would grow until there is no advantage to work happening in the UK. If productive activity in the UK becomes more competitive than other countries, total growth could be larger than this.

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  2. DEC, "ten or fifteen per cent" is HM Treasury's own estimate of the deadweight costs of the tax system, which seems about right to me as a bare minimum for the one-off additional economic growth in the short term (two or three years).

    In the longer run, lower taxes on earned income and fewer and milder recessions will mean that growth is (say) 1% higher than otherwise (although it will appear to be less when the rest of the world is in a credit-fuelled boom phase). See also "Hong Kong".

    But I don't want to over-egg the pudding. Better to claim credit for "ten or fifteen per cent" which is accepted as correct and known, and ignore future gains (which are certain but difficult to quantify).

    ReplyDelete
    Replies
    1. Could LVT be used for "expansionary austerity" then, say if the coalition govt had implemented a LVT and cut other taxes we would have strong growth.

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