Tuesday 25 May 2010

Killer arguments against LVT, not (38, 39)

Just to set the scene, people like Henry George realised that not all 'taxes' are collected by the government. My view is that "All money that changes hands purely because of existing laws (as distinct from free exchange) counts as 'tax'. " (and eighty per cent of respondents to an earlier Fun Online Poll agreed).

As a simple example of the similarity between publicly and privately collected taxes, consider this: it makes little difference to the outside world whether:

a) The rate of VAT on taxi journeys is increased (prices will go up; quantity demanded will go down; and some taxi drivers will be put out of work), or

b) Whether the local council restricts the number of taxi driver permits (quantity supplied goes down; people who would otherwise have become taxi drivers can't find work; and taxi drivers with a permit can charge higher prices). The permit system doesn't even benefit future taxi divers; before they embark on their taxi-driving career, they have to buy a permit on the grey market, so they have to hand over a large part of their future super-profits on Day One and then spend the next few years earning it back.

The former, VAT, is a publicly collected tax; the latter (restriction on the number of permits) is a privately collected tax, aka 'super-profits' aka 'rent'. Full post with pretty supply-demand curves here.

While I oppose publicly collected taxes on incomes and production, I have to break ranks with the Home-Owner-Ists and Faux Libertarians because I also oppose privately collected taxes - the most significant privately collected tax being the returns to land ownership. So, even more left field, I simultaneously support the view that 'Private land ownership is theft'* and the view that 'Taxation of incomes is state-sanctioned theft'. I square the circle quite easily by suggesting we make the punishment fit the crime - scrap income tax (and VAT etc); tax land values instead; and dish out the proceeds as a Citizen's Dividend (so by definition, the average household in an average house would be neither a net taxpayer nor a net claimant).

So to every argument against LVT there are two opposite counter-arguments. To illustrate this, let's look at two comments which stalwart LVT-opponent IanB left on a recent post:

You are forcing them to pay a rent to the State, assessed by the State, under threat of being dispossessed. What the state assigned tenant thinks the land is worth doesn't come into it. You (as the State) set the rent arbitrarily, and if they can't afford it they get kicked out.

Notwithstanding that he overlooks the Citizen's Dividend bit, which would cover the rent on most houses (i.e. you are indifferent if LVT goes up because your CD will go up in line), I batted this back as follows:

Let's look at land 'ownership' first: "You are forcing [tenants or mortgagees] to pay [rent of mortgage repayments] to the [landlord or the bank], assessed by [the landlord or the bank], under threat of being dispossessed. What the [tenant or mortgagee] thinks the land is worth doesn't come into it [but at least he can move out]. You [as the landlord or bank] set [the rent or mortgage repayments] rent arbitrarily, and if they can't afford it they get kicked out."

Now let's look at income tax: "You are forcing [wealth creators] to pay [a large proportion of the wealth they create] to the State, assessed by the State, under threat of being dispossessed. What the [wealth creator mutually agrees with his customers or employer] doesn't come into it. You (as the State) set the [income tax rate] arbitrarily, and if they can't afford it they get [put out of business or made unemployed]."


IanB followed up with this:

The issue is why you demand that the State extract a rent from every square foot of land in the nation, in perpetuity.

To which I would have responded (had I been able to summon the energy):

Let's look at land 'ownership' first: "The issue is why you demand that [private landowners] extract a rent from every square foot of land in the nation, in perpetuity [without compensating society in general]"

Now let's look at income tax: "The issue is why you demand that the State extract a [tax] from every [penny of earned income] in the nation, in perpetuity."


So that's two more supposedly 'killer arguments against LVT' dealt with, no doubt the next one will be along soon (perhaps you can be lucky number 40! Maybe play the Old Widow Bogey again, or something?).

I tell you, four years ago, I stumbled across LVT and considered it more an intellectual curiosity than anything else (a tax which had positive knock-on effects), and I wasn't really too fussed; what has really steeled my resolve is that none of the hundreds of arguments I have heard against it stack up in the slightest - especially if you compare those arguments with arguments against private land ownership and/or arguments against taxation of incomes and production.

* For clarity: I have nothing against people having state-protected exclusive possession of land; society would break down without it (I do happen to live in the real world, y'know). But those who benefit from the state-imposed restrictions on others ought to compensate those others. The bitter irony is that the main reason we have private landownership in this country is because of the profligacy of the state in centuries gone by, different topic.

14 comments:

Bucko said...

I'll start this comment with an admission. I've followed these posts and comments about taxation and not fully understood any of it. None at all.

It seems to me that one camp is in favour of taxing earnings and the other is in favour of taxing land / property values.

(Im sure we can all agree that tax in all its forms is way to high. However, I suppose that is not relevant in this context.)

I have always been a firm believer in income tax rather than land / property tax. And income tax as a set percentage of gross pay, regardless of earnings. The reason is this -

If I earn a certain amount in a week, I then get taxed at a certain percentage. I have to first earn the money before tax is taken. If I earn nothing, I pay no tax. If I earn extra, I pay more tax, but what ever tax I pay I have to first earn the sum of money from which it comes.

When I pay council tax and car tax it is not based on earnings. Council tax is based on property value, car tax is based on engine size. My house and car does not earn me a fixed sum every year.
My house may appreciate in value by a small annual sum but is does not generate cash in pocket from which I can pay my tax money. My car depreciates in value each year and again, does not generate cash from which I can pay my tax. I can buy a bigger engine car for the same amount but have to pay more tax on it.

If I pay VAT, or tax on cigs and booze, I first have to earn money and have it in my pocket and readily available to spend before I pay the tax. If I earn no money I can not buy any taxable products and therefore, dont pay the tax. If I earn more money I can choose to buy more taxable products and therefore pay more tax.

If I earn no money, I still have to pay council tax and car tax. If I earn more money I still have to pay council tax and car tax at the same rate.

If you are taxed on income and purchasing power, you first earn the money, then pay some of it back in tax.

If you are taxed on land / property values, you pay an arbitry fixed fee, regardless of what you income at any given time is.

Tax should be taken as a percentage of generated wealth. Property does not generate wealth.

Mark Wadsworth said...

Bucko, I've heard that argument a thousand times.

Tell me please, if you stop earning money, you may well 'save' a bit of income tax, but how on earth are you going to pay your rent or mortgage? How are you going to feed yourself? Wouldn't you end up homeless and starving anyway?

"Property does not generate wealth."

I find that most puzzling. Firstly because it is quite patently not true (at the very least, land enables us to generate wealth); and secondly, why do you think that people are prepared to spend a third of their incomes of rent or mortgages on housing?

Is it really of no value?

Are people not prepared to pay much higher rents or mortgages to live in an area with better paying jobs?

AntiCitizenOne said...

Bucko,

So you are going to tax an postive externality (working is good) rather than a negative externality (land exclusion rights)?

I hope you like the unemployment, credit bubbles and rent-seeking scramble that they cause.

Bucko said...

Mark

You seem to misunderstand the direction from which I am making the arguement.
I say "Property does not generate wealth" because at the end of every year, my house does not give me a lump sum of cash from which I can pay my council tax. I did not say that property has no value. If you use the "value" to make cash, then that would involve a property trade and you would still be taxed on the profit. If I simply live in my property, it does not matter to me what happens to the value, yet if that value is perceived to go up, I am expected to pay more tax from the same income.

Also I said that if I dont earn, I pay no tax. I did not mean that earning less is better because you save on tax; of course I would be homeless if I tried to avoid tax by quitting work. What I meant was, the tax you pay is based on the actual figure you earn, so if you find yourself earning less, you also pay less tax as a result.

My house does not give me a lump sum at the end of each year from which I can pay my tax, however my job does.

AntiCitizenOne - Im sorry, I have no idea what you mean.

formertory said...

Bucko, are you conflating "cash" with "wealth"?

You aren't alone in that.

Old BE said...

I am confused. You say that private land ownership is theft but you can tolerate it because you are a pragmatist. Would you prefer in an ideal world that nobody owned the land? In which case how would the world work? For example, where would I sleep? Where would I work? Where would the food be grown?

Would you mind explaining to a simpleton like me what you would actually like to see?

Paul Lockett said...

Bucko: My house does not give me a lump sum at the end of each year from which I can pay my tax, however my job does.

That argument assumes that any income you have is 100% disposable, which is very rarely the case. Most people have bills to pay and if one of those is a mortgage or rent, then an increase in interest rates or rental costs might increase the demand on an individual's income such that they can't afford to pay their income tax and cover those costs, which puts the individual in much the same position that you were seeking to avoid.

Bucko said...

formertory - I dunno

Paul Lockett said...

Blue Eyes,

Think of it in the same terms as North Sea oil fields. They aren't privately owned, but it doesn't prevent them being used. The exclusive rights to use them for limited terms are simply auctioned.

Bucko said...

Paul - I am not assuming income is 100% disposable. I am assuming income needs to exist before tax is taken. If interest rates increase ect or there is some other extra demand on my income, the disposeable portion will decrease or even cease to exist.

A tax on property value exists before income and is taken regardless of the gross amount of said income or the desposeable portion of it.

If the disposeable portion of my income decreases substantially I will still be requiered to pay my council tax, however my income tax will decrease in line with my wage. And vice versa.

Paul Lockett said...

Bucko: If the disposeable portion of my income decreases substantially I will still be requiered to pay my council tax, however my income tax will decrease in line with my wage. And vice versa.

But you could equally say that if the disposable portion of you income decreases substantially, you will still be required to pay the same amount of income tax, which is the point I was making.

Old BE said...

So we would rent our homes/farmland/factories/offices from the state?

Paul Lockett said...

Blue Eyes: So we would rent our homes/farmland/factories/offices from the state?

What you would be paying to use would be the location, not what is on it, in much the same way that an oil company will pay to rent an oil field, but will use its own rig, or a mobile phone company pays to use a specific part of the spectrum, but owns its own infrastructure.

Also, I wouldn't view it as renting it from the state, as the state has no more right to claim it than anybody else. The state would be no more than a middleman. Each individual would be compensating everybody else for the state granted privilege they enjoy.

The Alaska Permanent Fund is probably the closest functioning example I can think of.

Mark Wadsworth said...

Bucko, see my next post.

BE, first comment, of course people (including me and my family) need state-protected exclusive possession, whether that is houses, offices, factories, radio spectrum or airport landing slots. I have explained what I would 'like to see' in this and the next post in the series.

BE, second comment: "So we would rent our homes/farmland/factories/offices from the state?"

For every argument against LVT there are two equal and opposite counter-arguments:

1. If LVT is like 'rent', then is income tax not like having to pay rent for your own skills and initiative? In fact LVT is not rent, it is payment for the benefits that you derive from having state-protected exclusive possession etc.

2. The gains to land-ownership have to accrue to somebody. Rather than taxing and distributing earned income and profits (with the massive dampening effect on the economy), would it not be better to tax and redistribute unearned income?

See also what Paul L. says.

Bucko: "A tax on property value exists before income and is taken regardless of the gross amount of said income or the desposeable portion of it."

Similarly, you'd receive a Citizen's Dividend regardless of the gross amount of your income, which in most cases would cover the LVT bill. But you'd keep ALL your earned income.