Killer arguments against LVT, not (20)

Alice Cook did a post about VAT, so I pointed out that Value Added Tax, which the politicians like to fob off as a 'tax on consumption', is (like any general sales or turnover tax) in fact a tax on gross margins (if you look at the economic rather than legal incidence of the tax) and hence the worst tax of all as it dampens economic activity, as against Land Value Tax (which is a tax on 'consumption' of land, but as land is not 'produced' it does not dampen production).

It appears that there are still too many people who can't be bothered to delve into economics and prefer to believe the politicians. One anonymous commenter came up with this:

"... scrapping VAT/introducing a Land Tax is punitive and unfair (1) and will discourage investment (2) and encourage wasteful consumption (3).... is that really a smart move? Think with your head, not your rent book."

(1) You can dismiss any tax as 'punitive'. I think VAT is highly punitive to the productive economy, i.e. it penalises the free exchange of goods and services for mutual benefit. As to 'unfair', I accept that rich people who earn the most money will drive the nicest cars, go on the nicest holidays and send their kids to the nicest schools. That is not, to my mind, 'unfair' as it is the whole point of being rich' 

Similarly, rich people will spend far more money on cars, holidays, schooling than other people. Is it 'unfair' that a new Mercedes cost ten times as much as a three-year old Ford? I don't think it is. So what's wrong with accepting that, with Land Value Tax, rich people would live in the nicest houses and pay the most tax for the privilege?

(2) How can a tax on land values discourage investment? As a general rule, if you tax something, you get less of it. If there is elastic demand and supply, you reduce the amount of it, so taxing turnover or employment is a bad idea. But you can tax land values to your heart's content because the amount of land is fixed. That's why we refer to it as Land Value Tax; what will happen is that land values would go down, not the amount of land.

(3) A conventional (and broadly correct) summary of the last ten or fifteen years of the UK economy is that credit was far too easily available and too cheap, and if interest rates had been kept higher, house prices would not have trebled, and therefore UK households would not have been able to borrow so much money (mainly from abroad) to consume so much stuff and run up such huge debts (household indebtedness as a fraction of household incomes went up from 100% in 1997 to 160% in 2008).

The phrase 'wasteful consumption' is just gibberish of course. People can spend their own money any way they like AFAIAC. But surely the worst kind of consumption is credit-fuelled consumption? Which is exactly what we have had for the past ten years, and which is exactly what Land Value Tax would have prevented, by keeping property values low and stable.

OK, we could have put up interest rates, which is like a 'tax' on mortgage indebtedness. In cash terms, it hits those with large mortgages hardest, as well as those who'd like to sell a house without replacing it (i.e. house builders and people who've inherited a house they don't need). Interest rate hikes don't have much effect on people who haven't bought yet (because prices will fall to match the interest rate hike) or people with small or no mortgages who intend to stay put for the foreseeable.

I just wonder, why is it:

a) acceptable to suggest a tax on mortgage indebtedness as a measure to dampen house price inflation, that does not raise money for the Treasury (thus enabling it to reduce the national debt or to reduce other taxes) and also hits the productive economy (who'd also have to pay higher interest rates) and that clobbers some home-owners but not others (more or less at random), but

b) unacceptable to suggest a tax on property values - if we want to dampen property price bubbles, surely we should be taxing the thing that we want to dampen, not something else entirely?

For example, let's assume that a 3% interest rate hike in 2002 would have choked off the house price/credit bubble. Seeing as this hike only hits a very few people (mainly those who have just bought a property and still have a large mortgage), who's to say that a 1% Land Value Tax (which affects all home-owners) would not have done the same trick, but without it affecting the interest rates that productive businesses have to pay?

Answers on a postcard.