Thursday, 17 January 2013

W. I want to have my cake and eat it

• It's just my home - it doesn't place a burden on anybody (skip to article)
• All the new development will place a burden on me

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• My home is my/gives me security (skip to article)
• My home is my pension (skip to article)
• I want to leave my home to my children

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• Land is the only asset which has beaten inflation

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• With LVT, you would never properly own land

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1. "It's just my home - it doesn't place a burden on anybody"

This is actually an argument against taxes on output and employment: "It's just my job - I don't place a burden on anybody by going out to work or running a business, and in fact, society as a whole benefits from me doing so."

And yes, all landownership places a burden on others.

a) There's only so much land to go round and some bits are more desirable than other bits. And how desirable bits of land are is measured by their rental value - you can say that this is the price people are willing to pay to occupy it, or that the rental value is the burden which the occupier places on others by excluding them.

b) For example, lots of people would like to live in the catchment area of a good state school, but not everybody can (unless all state schools were equally brilliant, but they can't be because how good a school is depends largely on the children going there and their parents). So for every family who lives in that catchment area, there is another family who is excluded. That's why house prices (and rents) are higher in the catchment area of good schools.

c) So whoever lives in that area is excluding somebody else from a free place at a good state school despite the fact that all parents are paying for the cost of state education through their taxes. Under current rules, you pay the same income tax or council tax wherever you live, but if you want to be in the good catchment area, you have to pay extra to buy a rent a house there, and you pay that money to somebody who is not providing or paying for that school. Under LVT, if you want to live in the good catchment area, you'll pay more LVT; and if you are excluded from the area, you pay less LVT (in either case, you'll be paying less tax on your earnings).

d) The same applies to privately provided opportunities. The main driver for local average rents or house prices are average local wages. Who generates those wages? The employers and employees between them. But if you want to open a business or find a job in a high profit/high wage area, you will find yourself handing over a large chunk of your extra profits/wages to a landlord, just for the privilege of having premises in/living in a higher wage area.

e) This is at its most extreme in London, and the closer to the centre you are, the higher are the rents (Shelter). Paying more than half your net income in rent is quite normal. So the people who work and live in those areas are at best breaking even (extra profits/wages but extra rents). The winner every time is the landlord.

f) Of course, a lot of people in high wage areas own their own premises or homes, so they are getting the benefits without paying for them - and they are excluding other businesses or workers from moving to those areas.

g) Under LVT, the extra rental value generated by the businesses and workers in high proft/wage areas is shared between those working in the area and those excluded from it, instead of everything extra accruing to landowners (whether landlords or owner-occupiers).

2. "All the new development will place a burden on me"

This is a NIMBY argument rather than one against LVT, but it just illustrates how Home-Owner-Ists (which includes NIMBYs) are happy to completely contradict themselves.

Yes, if you currently own a house right at the edge of the village and have a beautiful unspoilt view, you don't want more houses being built obstructing the view. But by the same token, your house is blocking the view for the houses behind it.

So they'll wail on about preserving the Hallowed Green Belt and food security and so on, before coming up with this:

"Ah... but if more people move to this area, it will increase pressure on local services!" which again is nonsense (except in the very short term). 'Local services' are provided pro-rata to the number of people living in an area and not pro-rata to the surface area. That's why there are more coppers, teachers and nurses in London (pop. 8 million on 600 square miles) than in the whole of Scotland (pop. 5 million on 30,000 square miles).

And it won't just be users of services moving to the area, some of the people who move into the new houses will be coppers, teachers, nurses, dustbin men, who don't get paid particularly high wages and are most in need of affordable housing; to the extent that building more housing keeps prices and rents down, 'local services' will be better if there's more housing because it will make it easier to attract coppers, teachers, nurses and dustbinmen to the area.

3. "My home is my/gives me security"

No it isn't and doesn't.

A house is a building and it keeps you and your belongings physically protected, that's all. All the other benefits you get from owning a house are provided by other people and are beyond your control.

Without some sort of law enorcement in your area, the house isn't much good to you if you daren't step out of the door. Without local schools, families won't want to live there. Without NHS and so on, pensioners won't survive there. Without local jobs, or a welfare and pensions system if you cannot find work or are too old to work, you wouldn't have an income and you would starve. As people in the Pathfinder areas found to their cost, if the majority of other people in the area move away, all of a sudden, your house is nigh worthless.

4. "My home is my pension"

Fully agreed, a home is like any other asset to see you through your old age.

a) When you retire, you need to consume food, heating, water and electricity every day, new clothes occasionally and a TV to watch. And that's what the old age pension covers, those basics.

b) If you want more than that, you save up a separate fund. You can either save up cash and spend it as you go and gamble on not running out before you die, or you can buy an annuity with your pension fund, which gives you a fixed amount of cash every year, however long you live, and when you die, the payments stop. It's entirely your choice how much to save up and what you'll end up spending it on.

c) Your home will be the asset you use to pay for the value of living in a nicer area (i.e. the LVT), as there would be a deferment/roll-up option. If you live long enough in retirement, the accrued and unpaid tax will be more than the value of your home when you die, so actually you've come out ahead on the deal. That's exactly the same as if you saved up an annuity which is sufficient to pay rent/tax for the rest of your life.

5. "I want to leave my home to my children"

Hang about here, didn't we just agree that your home is your pension?

a) A pension is a personal asset, you cannot take it with you and you cannot pass it on. If you want to pass on more to your children, then you will have to live a more modest lifestyle, whether that's during your working life or your retirement.

So the question is: do you want to make your children and grandchildren better off?

b) For a given total tax take, we can shift between taxing the rental value of land or taxing earned income. If we stick with the present system of taxing earned income, then people have lower incomes from working (bad for incentives) and some of them will make a windfall gain when they inherit a house and usually later in life; a minority indeed will be making very big windfall gains indeed. But those windfall gains are ultimately funded out of the income tax which everybody has to pay, whether they inherit or not.

c) Although a cuddly liberal at heart, I'm always a bit nervous about downwards redistribution (because of the damaging impact on work incentives), but at least that only disincentivises work at the very bottom, those people whose output is of little value.

d) But taxing earnings instead of the rental value of land is clearly upwards redistribution with an even worse impact on work incentives because it disintentivises work all the way up the income/value scale; the people who stand to inherit nothing get clobbered with taxes on their earnings, and the people who stand to inherit valuable land don't even need to bother working in the first place.

e) Basic maths, and the spreadsheets I have embedded (e.g. here)show that the average working family would pay £100,000s less in tax over their working lives; maybe £500,000 less for higher earners. How many people hope to inherit land and buildings worth £100,000s or even £500,000? A few per cent maybe? So very few of your children and grandchildren will get their money back. It's the One Per Cent, who stand to inherit millions or tens of millions of pounds worth of land and buildings who really benefit, all paid for out of the taxes on earnings which you force your children and grandchildren to pay.

Now try that question again: do you want your children and grandchildren to be better off?

6. "Land is the only asset which has beaten inflation"

Yes of course, but so what?

a) That's partly because of the natural tendency for rents and house prices to rise ever so slightly faster than wages in the longer term, but also because landownership is ever more subsidised and ever more lightly taxed.

b) And the most hideous subsidy to landownership is monetary inflation, primarily fuelled by low interest rates, which push up house prices and push up inflation at the same time. So savers are losing wealth and landowners - especially highly leveraged ones, are gaining wealth at their expense.

c) Under LVT, house prices will still keep pace with inflation, it's just that all other asset classes, i.e. productive investment whether directly in shares in businesses or cash in the bank will do correspondingly better.

d) The Homey logic here appears to be: land prices beat inflation, so they should be lightly taxed (despite the main reason why they have beaten inflation being because they are already heavily subsidised and lightly taxed).

Clearly, cash savings are being beaten by inflation, and shares haven't been doing too well for the past fifteen years either (income from these sources is very heavily taxed), so if we apply their logic to cash and shares, then cash and shares should be even more heavily taxed.

7. "With LVT, you would never properly own land"

That's a philosophical point and it depends what you mean by "ownership".

a) Do you own your own body? Yes, but you still need to spend money on food and so on or you will die. Do you own your own car? Yes, but you still need to spend money on fuel and repairs and so on, or it will be of no use to you. Even if you own your house, you still need to pay for repairs, heating, utilities, insurance and so on, or else that won't be much good to you either.

b) Do you own the right to vote? Yes, because society says so, but that is an inalienable right, you cannot sell it or buy it or pass it to your children when you die. The right to vote is of benefit to you, but the fact that fifty million other people have the right to vote differently is a burden on you.

c) The land itself is not so important, it is the rental value, that part generated by 'everybody else' (whether by private individuals or 'the state') which is important. Instead of paying a large lump sum in advance for the land and keeping your fingers crossed that the area goes uphill rather than downhill, under LVT, people will effectively get land for free and just pay the rental value every year, if it goes up you pay more, if it goes down you pay less; so there's far less risk (negative equity will be nigh impossible).

d) So what you will properly own is the building themselves (unaffected by LVT) and the inalienable right to a personal allowance or Citizen's Income, which will cover the LVT on homes in the bottom half anyway. It's only if you want to live in the top half that you would actually pay anything.

e) The personal allowance or the Citizen's Income is like the right to vote. If we all agree that it is a good thing, then everybody gets it and everybody gets it equally. And a household's total personal allowances/Citizen's Income will always be enough to pay the LVT on the bottom half of homes suitable for that size household, that's basic maths. So if you define "ownership" as meaning "for no annual cash outlay", then everybody already owns a lower-value plot of land as of right; if you want something nicer, then pay for it.

f) And however you twist it, surely it is better to pay LVT to the government and to keep more (or all) the value of your own labour and enterprise than it is to pay large sums to private individuals to acquire land in the first place (the capitalised value of the LVT you aren't paying) and then to have to hand over half your earned income in income tax, NIC, VAT and so on?

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