Sobers, in the comments to the previous post:
This sums up my gut opposition to LVT. The taxation of a notional capital gain 'seems' unfair (1), however much you can justify it by rational economic analysis using terms such as 'Ricardian' and 'notional rents'. Something only has value when it is sold (2). Everything before that is conjecture. When a buyer parts with hard cash, then a value has been set, and its fair to tax capital gains, if any. Valuation of property is very subjective - it comes down to the opinion of the valuer. I don't want to be taxed on someone's opinion (3).
If LVT were based on the last actual sale of a property, then I would have more sympathy (4, 5, 6). It would still exert downward pressure on prices as people would be loath to bid more for a house knowing the LVT would be higher too. If you stay put in one place, you would only be taxed on the capital you have put into the house, not any notional gains made since. There would also not need to be a complex bureaucracy of valuation, just the existing Land Registry of sales, which would define the value for LVT purposes (7).
(1) All taxation 'seems' unfair to whomever has to pay it, that's not the point, it's a question of finding the tax with the lowest deadweight costs and the most consequential benefits (dampening property price bubbles etc), and even more than that, moving away from stealth taxes (VAT, Employer's National Insurance) and towards "in-your-face" taxes (to ensure that people are aware of how much they are actually paying).
(2) Wot? Are you saying that your house and farmland has no value because you do not intend to sell it? BTW, remember that farmland wouldn't be liable to LVT for reasons explained by Adam Smith way back when.
(3) Nope. Most housing in the UK is fairly standardised, and all we need to know is relative values. If you bought a standard 20th century 3-bed semi on an estate thirty years ago for £20,000 and other very similar houses on the estate have sold for £200,000 in the last year, it's pretty safe to say that your house is worth closer to £200,000 than £20,000., yes? And even if your property is unusual, then it's also fairly safe to say that its value will move in line with other properties in the area, which is what HM Land Registry already do with their monthly house price indices (it's called 'repeat sales regression'). Is it better to be roughly right or precisely wrong?
(4) OK, as I said at the end of the previous post "Y'see, it's helpful to look at both sides of the equation."
As we know, wages and house prices grow roughly in line with economic growth, i.e. about 2 or 3% faster than inflation. In my last post I was focussing on the typical pensioner, so let's keep going with that example. Now, as we know, pensioners like to see their taxpayer-funded state pension indexed up with earnings (which seems perfectly fair to me), so the ratio of LVT-to-pension would, in the long run stay stable.
If your argument is correct, then the corollary must be that your state pension entitlement is frozen at the date of retirement as well, seeing as that is the point at which you stop 'contributing' (i.e. paying for the pensions of the previous generation). So somebody who retired fifteen years ago in an average house worth (then) £60,000 would only pay £600 LVT (or whatever average council tax was back then) rather than £1,500 LVT being 1% of the property's current market value, but obviously his or her basic state pension would also be frozen at £2,995 a year, rather than £4,953 as it is now (I don't have the figures for SERPS/S2P to hand).
Times that extra £1,998 by two for a married couple, and that's an extra £3,996 per annum they're getting, all paid by today's generation of workers/taxpayers, including the under-forties who are struggling to pay ridiculously high mortgages. So by all means, save yourself a few hundred quid LVT and forego a few thousand quid state pension.
Or have I missed something?
(5) The system you suggest is what they have in California. The knock on effect of this is that people who have lived in a property for a long time are paying a subsidised rate compared to their new neighbours, and they have every incentive to stay where they are, rather than trade down and free up capital in retirement or move somewhere closer to their adult children, which in many cases might be the rational thing to do.
(6) Closer to home, what if Mr A bought a new-build flat three years ago for £246,995 and signed up to LVT of £2,470 a year, but other flats in the block are now selling for only £120,000. Does it not seem 'fair' to reduce his LVT bill to £1,200 as well, or should he really go through the rigmarole of selling up, realising the loss and then buying it back again?
(7) What "complex bureaucracy of valuation"? All we need is "the existing Land Registry of sales, which would define the value for LVT purposes". Give or take ten per cent they can easily say what each house is worth (and if you're not happy with that margin of error, let's just round all their values down by 10% and apply a 1.1% tax rate instead of 1%), and what about the "complex bureaucracies" that we'd no longer need, who currently administer and collect council tax, council tax benefit, Stamp Duty Land Tax, inheritance tax, capital gains tax, the TV licence fee, VAT on domestic fuel, insurance premium tax and all the other crap that LVT could and should replace?
And if we're basing arguments on 'fairness', how fair are all the other taxes in that list? It's a bizarre mixture of Poll Taxes and jealousy surcharges, if you ask me. Wouldn't a flat tax on [a reasonable estimate] of property values be a tad 'fairer'?
Tuesday, 14 July 2009
Killer arguments against LVT, not (17)
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13 comments:
The reference to California might prompt a look at the Wikipedia entry for Proposition 13.This arose from the "little old lady in a big house" or " Churchill's Poor widow" scenario.Property prices were rising in California and retired people were struggling to meet the assessments for property tax.The obvious answer was the standard Land taxer solution (which is actually in operation in some places in the USA): defer payment of property tax until the property turns up in the Inheritance Tax settlement,when it is a charge against the estate.
But the Californians chose to make newcomers pay a higher rate of tax.Places full of retirees could not raise enough revenue for infrastructure and public services.In this fix newcomers had to pay over the odds to make up for the retirees' restricted contributions.
And now California has gone bust.And a lot of people blame Proposition 13.
Mind you with the patent Reed tax none of this arises.
A wise woman I once spent some time with (she was a Taoist) taught me that humans have 3 decision making processes, the head, the heart and the gut. The decisions made with the head are rational, theoretically perfect and make absolute sense. The decisions made with the heart are emotional, can be counter factual and can equally result in tears or a happy ending. The decisions made from the gut are not based on facts at all, just a feeling of 'rightness' about them. They are our 'hunches' if you like.
I am arguing against LVT from my gut, you are arguing for it from your head. Neither is 'wrong', we are merely approaching the same issue but on different roads.
DBC, Prop 13 is actually far worse than either of us could imagine. Apparently the low assessment can be inherited and retained even if you start letting out the property.
Sobers, simple observation tells me that a) house price bubbles, whether permanent or temporary are A Bad Thing, b) high taxes on incomes and production are A Bad Thing, and c) forced redistribution from the general public to property owners (in the instant case, from savers to borrowers) is A Bad Thing.
It's the politicians who have conditioned people to think otherwise. Just remind me, whose side are they on?
Sir Garfield's comment, on which you comment, was in response to an observation of mine.
I asserted, as I believe to be the case, that increases in market value of real property are merely notional profits. They might be enormous during someone's ownership of a particular property and lead to very substantial LVT bills yet the owner sees not a penny piece of that profit until he sells (or dies) at which time the value could have fallen back and the profit he actually received will not necessarily bear any relation to the notional profit on which he has been taxed.
Your answer at the time, Mr Wadsworth, was that these are real profits rather than notional profits. I cannot see how that can be so, and you do not repeat it when addressing Sir Garfield's point.
My difficulty in taxing notional / unrealised profits is that the person chargeable hasn't actually received any dosh from which to pay the tax. It is no answer to say that it can be rolled-up and paid on sale or death because that does not undo the unfairness of taxing someone on a profit he has not actually received in pounds and pennies. Maybe you don't consider that to be an unfairness, so be it, it's a matter of opinion not of fact.
As for your observation that the valuation exercise will be simple, I'll believe that when I see it. If LVT is to be responsive to changes in notional sale values, as it has to be on the case you advance, it is hard to see how a large permanent army of Re-valuation Executives can be avoided. All of them, no doubt, keen to pounce on any opportunity to increase bills.
TFB, all right then, have it your way, let's leave the capital gains tax free if you so wish and charge the value of the enjoyment that the land owner receives simply by owning that land.
The value is of course broadly proportional to the current market value of the property, as evidenced by what others are paying for similar properties in the area ...
This deals nicely with your second objection: "at which time the value could have fallen back profit he actually received will not necessarily bear any relation to the notional profit on which he has been taxed." as the tax still bears a direct relation to the enjoyment somebody has had.
You dabble in one-sided economics as ever, maybe property A rises in value and falls again and is sold for no gain; whereas Property B falls in value and then rises again and is also sold for no gain. The total tax on property A would be more, because for the bulk of the period it would have been nicer to live in.
And why do you keep perpetrating the myth there would be "very substantial LVT bills"?
By definition, they would be easily affordable to a First Time Buyer (who has to pay x% in interest and 7% in LVT), so if he can afford it then of course somebody who has paid off most or all of the mortgage can afford it as well. And if you are wealthy enough to move upmarket, well that's your decision.
The "large permanent army of revaluation executives" is another complete myth, as you and I both know for a fact that HMLR already hold all the info they need to do this, most of which is already computerised (historical and current selling prices, addresses, plot sizes etc) to be able to to 'reasonably accurate' valuations.
"as the tax still bears a direct relation to the enjoyment somebody has had. "
you are however assuming that everything that increases the value of the house, also increases the owners enjoyment of it.
no.
@MW 21.43 14th July
You're right: I can't believe Prop 13 allows for the long-term Californian resident's low assessment to be passed onto the heirs even when the property is being rented out!
So much for the political influence of the Prophet of San Francisco.
@ Anon, what you say just does not compute.
We can safely assume that new arrivals are paying market value for similar houses in the area, so what on earth are they paying for if not "enjoyment" of whatever benefits accrue to them from owning a home in that particular location?
Sure there are frictions, if the local council has a bit of land left over, it could sell it off for development; use it for a skatepark for the youngsters, or a little park with trees and benches for the old folk, each of which would have benefits or disbenefits for different groups of current and future residents.
But is there any reason to assume that all the different people who buy and sell in an area in any time period place wildly different values on these benefits or disbenefits?
Surely not, as they will all be buying and selling at similar prices?
Wot? Are you saying that your house and farmland has no value because you do not intend to sell it?
Mark, nothing has value except when it is traded. You are confusing an estimated value with actual value. An estimated value is the value that somebody thinks something would have if it were traded.
This is an absolutely crucial point in understanding market economics. Values are subjective and instantaneous and only exist during trade, when the parties to the trade have agreed a value and make the exchange. An item which is not up for trade does not have any value.
What it does have is some utility to its owner, which is why they keep it rather than trade it. What you are trying to tax is utility. You are basically trying to tax- and thus penalise- people for keeping something which is useful to them. That is not the same thing as taxing market value.
Ian B, so what you're trying to say is that if I buy a house today for £200,000, it's worth £200,000, but as I intend to stay living in it, by tomorrow it's worthless?
Even more crucial in understanding market economics is that monopoly owners reap unearned gains; and that the state protects certain monopolies - either by restricting supply/raising barriers to entry; direct subsidies and/or relatively light taxation; or in the case of land, in the very real sense of guaranteeing title and ownership via land registration and legal system.
Which is why (for the zillionth time) I am against taxing incomes and production (because these are largely a result of an individual's or an organisation's efforts and have relatively little to do with the existence of 'the state' - you can always move abroad - and secondly because if you tax them you get less of them). Income tax etc penalises people who create wealth, that much is clear.
Conversely, land or property values are very much a function of the protection that the state provides (as well as stuff like police and road maintenance etc), and however much you tax land, you don't get any less of it, do you?
As a small government free market liberal I don't like monopolies, especially where the government creates and protects them (rather than those that arising through cunning corporate manoeuvring and which usually get competed away again). Land, as you can imagine, cannot be 'competed away'.
And I am not intending to 'penalise' anybody for 'keeping something useful', LVT is a straight user charge in return for the legal protection and other benefits that accrue to property owners, which only the state can provide. If anything, planning controls and light taxation of property and zero taxation of property gains penalises people who don't happen to own property.
Or would you say that the bank 'penalises' a home owner by charging him mortgage interest, bearing in mind that under your analysis, by the time the buyer has moved in, his house is valueless?
Ian B, furthermore you are perpetrating 'one-sided economics':
"Mark, nothing has value except when it is traded. You are confusing an estimated value with actual value. An estimated value is the value that somebody thinks something would have if it were traded."
OK. How many people are planning to sell all their worldly possessions: car, books, furniture, CDs etc? I'd guess very, very few. How many people have car or contents insurance? A vast majority, I'd guess.
People ascribe an 'estimated value' to what they own and then pay for the 'protection' that the insurance company provides. There are market values for insurance premiums, despite being based on imperfect estimates of replacement cost/intrinsic value and estimates of the likelihood of stuff being destroyed or stolen.
I see no fundamental difference between that and people paying LVT for the guarantee that the state will protect their property (whose market value can be ascertained to within a tolerable margin of error, that's a simple fact whether you like it or not) and exclude others therefrom (and not just squatters and trespassers, but also protection via planning regulations to maintain the scarcity value).
And if you don't like paying it, well then become a tenant, in which case you'll pay an amount equivalent to the land value tax anyway because it's included in your rent (you wouldn't pay for exclusive possession unless your landlord also had exclusive possession).
Never forget that tenants already pay 'land value tax' as part of their rent; but because the land value is privatised, the tax goes to the registered land owner as 'rent' and not to the state as 'tax', in economic terms it is exactly the same thing, it's calculated the same way, it's the same amount in £-s-d.
And in fact people with mortgages pay LVT as well but it's hidden in their mortgage repayments.
Ian B, so what you're trying to say is that if I buy a house today for £200,000, it's worth £200,000, but as I intend to stay living in it, by tomorrow it's worthless?
No, I'm saying its value is undefined. If we define an investment as some good which one buys with the intention of later sale, then we recognise that any investment is a form of gambling. You hope the good will achieve a higher value when you sell it, but you have no way of knowing whether it will. Nothing "holds" value. Nothing has a defined value between trades. We just hope things do. This is the fallacy that homeowners fall into of believing that their property must hold and accrue value. But it's a gamble, in reality.
For instance, you may buy some shares, and note that other people selling equivalent shares are gaining value. So, you decide to sell... but just before you do, somebody dumps many shares onto the market and suddenly you can't trade at the value that those shares were trading yesterday. Your shares never had that value. The value is hypothetical and undefined. YOu haven't lost anything because you never had it.
Ergo, you cannot tax that which people do not have. You could tax land sales, if you like. But in between trades, there is no value for you to tax. It is just a plot of land and nothing else.
You are confusing three things; value (which is instantaneous), utility (which is purely personal) and "the going rate" which is simply an average of similar goods, and which can change arbitrarily at any moment.
LVT is a straight user charge in return for the legal protection and other benefits that accrue to property owners, which only the state can provide.
And which every citien receives, and which you intend to give non-landowners for free, which means they are getting something for nothing.
There is a (questionable) case for a one-off land confiscation and redistribution to level the playing field- that is carving up the historical legacy estates and handing them to tenants, or selling them and redistributing the proceeds as a (lol) stimulus cheque to eradicate the inequities and privelege inherited from the past. But I see no compelling case for a land value tax. Like all taxes, it is arbitrary and cannot be justified deontologically (from liberal axioms). Probably the only "fair" tax is a national flat rate subscription paid to the state for services rendered. Considering the wide disparities in ability to pay, and the very high rate of tax a flat rate would be at present, it is probably most just to make that progressive.
And then you're back to an income tax and soaking the rich.
Ian B, your example with shares, i.e. ownership of businesses is a red herring; shares and businesses are largely private affairs which are open to the pressures of the market and which CAN be competed away.
You say:
"This is the fallacy that homeowners fall into of believing that their property must hold and accrue value. But it's a gamble, in reality."
In the long run it's not a gamble, but in the short term it is. LVT would prevent there being long-term gains and would discourage people from expecting short term gains as well.
I said:
"LVT is a straight user charge in return for the legal protection and other benefits that accrue to property owners, which only the state can provide."
To which you countered:
"And which every citizen receives, and which you intend to give non-landowners for free, which means they are getting something for nothing."
Wot? When did I ever advocate rent controls? They neither work in theory nor in practice. Think about it - a tenant pays not only for the VALUE of what the state does (legal protection, police, refuse collection, noise abatement, whatever) because the VALUE is included in his rent, but he also pays for the COST thereof in income tax, VAT and the like. The corrolary of allowing the landlord to charge full market rent is that he also pays to the ultimate landowner, The Crown, market value for the services that The Crown provides to him.
You say:
"Probably the only "fair" tax is a national flat rate subscription paid to the state for services rendered. Considering the wide disparities in ability to pay, and the very high rate of tax a flat rate would be at present, it is probably most just to make that progressive. And then you're back to an income tax and soaking the rich."
We can rule out Poll Taxes. As to this 'ability to pay' nonsense, let me restate, in case you'd overlooked it, I am a small government free market liberal. Yes, there are wide disparities in incomes, that is neither A Good Thing nor A Bad Thing, it is just an immutable fact of life.
And what's the point of having loads-a-money? It's to have the nicest car, the nicest holidays, send your kids to the best schools etc. So what's wrong if we simply add "the biggest and nicest houses" to that list? Worst case, low income people trade down and high income people trade up - we end up with the happy situation where the richest people pay the most tax (if the tax is 'too high', then property values would fall to compensate), even though it is not a tax on 'incomes' as such, it is a tax on ... er ... the VALUE of services that the state renders them.
And if the state is to act economically rationally, is it not better to charge for the VALUE of the services it provides rather than the COST? That way at least the state concentrates its spending on things where the VALUE to society exceeds the COST (and e.g. stops spending money on five-a-day advisors)?
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