Response to Sobers' objections to LVT

Sobers posted a long comment here, which deserves a proper response:

1. I'm anti LVT on the basis I don't like being taxed on income I don't have! Which is what LVT taxes ...

People are prepared to pay huge sums of money for houses to live in. That house does not produce income, but it is of value to the owner (even if we ignore the notional income, i.e. the cost saving from not having to rent). LVT would reduce the cost of land (as it acts like a higher interest rate) so a purchaser would pay more in tax but less in mortgage repayments. And if he pays more in tax, then other more damaging or more unfair taxes can be reduced.

Exactly the same argument applies to businesses. If you're renting, then part of the rent is paying purely for the location (rents on Oxford are ten times as much as on an average High Street), but think about it, Primark on Oxford Street charges the same prices as Primark on Leytonstone High Road, so the rent is not passed on the customer in the form of higher prices.

The extra rent that Primark's Oxford Street store is paying is for the privilege of being able to work harder and sell ten times as many clothes in a prime retail location. That extra rent acts like a tax on Primark's retail operations, but the site owner collects that tax, not the State. So why not collect more tax from the site-owner, and less VAT/Employer's NIC from Primark? The site-owner cannot pass on the LVT, as Primark is already paying full market value rent.*

2... I'm a farmer, and no farmer in the land could afford to pay a LVT of even 2% without going bust. You would close down the entire industry...

As it happens, I would exempt agricultural land from LVT and have said so (its value, net of subsidies, is so low as to be not worth taxing, plus farmers' incomes fluctuate wildly from year to year). The first challenge it to get rid of CAP subsidies which set a floor for a minimum rents that landowners have to charge tenant farmers (if they can't get at least £70/acre rent, then they might as well leave the fields fallow and collect the subsidies). As it happens, one of the prime LVT-supporters in UKIP is Dr Duncan Pickard, a sheep farmer and land-owner in Scotland, who wrote this fine book.

3. Also LVT would have a massive downward pressure on land prices (not a bad thing in itself), but would leave anyone who had borrowed money to buy in a negative equity situation overnight.

Agreed. Which is why I have always said (e.g. point 5 here), LVT should be introduced at the bottom of the market - when people are already in negative equity anyway - to replace Council Tax, Business Rates, Stamp Duty Land Tax, Inheritance Tax etc**. So the static impact of the shift would be minimised - some properties would go up in value a bit, others would go down a bit. But thereafter, land values would be low and stable, exactly because of the "massive downward pressure"

4. Equally I'm not sure the figures add up - I suspect the 5% I think you've quoted before would have to rise once land prices fell because of the introduction of LVT in order to get the revenues back up, thereby creating further land price falls etc etc.

I do not know what total UK site-only land values (net of buildings thereon), excl. agricultural land, public parks & roads etc. will be in a few years' time at the bottom of the market. Maybe a third of what they were at the 2007 peak, £1,000 billion or so? If the total revenues from the taxes to be replaced are £60 billion, then the rate is 6%, and that's the end of that.

5. LVT is probably a superior taxation system if you were designing a tax system from scratch, but we already have a system in place upon which people have made long term decisions.

Agreed.

6. The government is not entitled in my view to suddenly turn the applecart over and change everything so drastically overnight.

Agreed. But now the property price/credit bubbles have burst, The Markets are busily destroying land values as we speak - total residential property values are falling 1.5% a month = £2 billion per day! So the clock is resetting itself back to normality anyway, i.e. typical house price three or four times income etc.

7. The only other tax similar to LVT that taxes value of assets and has to be paid year on year is council tax, and we know how unpopular that is, and how regressive it is too.

Agreed. Council Tax was designed as a mixture of property tax (fair enough, actually) and Poll Tax (regressive = bad), but the Labour government has skewed the central funding so that LibDem & Tory Councils have to charge far more for the same band than Labour councils, so there's a Jealousy Surcharge element as well (bad).

It always puzzles me that VAT (the worst tax of all) raises four times as much as Council Tax but nobody bats an eyelid. The point is, LVT will go to the local council to cover local spending. Council Tax only covers a quarter or so of local spending, don't forget! If you don't think the council is getting value for money or spending it on the right things, then go and protest! Further, if the council is wasting LVT on the wrong things (5-a-day advisors rather than bobbies on the beat; climate change officers rather than street sweeping) property values and hence land values go down again, so their source of income gets choked off by simple market forces.

LVT would not be regressive relative to property value. Somebody in an ex-Council flat up North would be paying £100 or £200 per year; somebody in a villa in Hampstead or a penthouse in Westminster would be paying £10,000 or £20,000 per year. If they can afford a mortgage repayments of £100,000s a year, then they can afford LVT of £10,000s a year. If they can afford to buy cash, they can afford easily afford it.

I agree that LVT, if demanded on an annual basis, would be unaffordable for retirees in larger houses. So they would be allowed to roll up unpaid tax to be repaid on death. Which is why it is important to scrap Inheritance and Stamp Duty Land Tax as a quid pro quo.

8. As for CI, you have more knowledge and insight into it than I will ever have

Thanks.

9. As I said, I like the idea, and wish it could be introduced, at whatever level was feasible. I just can't see it ever happening due to the basic flaw of that if it makes anyone at the bottom of the pile worse off, while making wealthier people better off, politically it's a dead duck.

Don't worry about the wealthy - the CIT booklet did not say they'd get rid of higher rate tax, that's just my own view (getting rid of higher rate income tax is the flipside of making the wealthy pay more in LVT than they did in Council Tax to smoothe the shift from taxing productive activity to taxing land values etc).

The CIT system leaves relatively few people better or worse off (and if so, only by marginal amounts, which can easily be recouped by working part time, which is an intended, not an unintended consequence). Where it does shift money is from lone parents to couples, that is part of the point. The reason we have so many children in single parent families is because of the extra £10,000 per annum that parents can claim by pretending to live apart, or indeed split up.

* I assume that Primark are renting. Perhaps they bought the site on Oxford Street, in which case they are paying a mortgage instead of rent, which in economic terms is much the same as renting.

** ... and Capital Gains Tax on property gains, TV licence fee, VAT on domestic fuel, Insurance Premium Tax, s106 Agreements for new builds, minus Council Tax Benefit, CAP subsidies, VAT zero-rating for residential new build, Housing Benefit for private tenants, in other words LVT could and should replace all taxes and subsidies that relate in any way to land, property ownership/occupation, wealth generally or construction costs.