Thursday 19 August 2010

@ John Redwood

He's launched another full on counter-attack on LVT. I typed a lengthy comment which wouldn't register, so I'll post it here for future reference:

"The third proposal is to go over to a system of LVT. Proponents of this see it as an easy answer to all our problems. Others see it as land nationalisation."

LVT is not an answer to "all" our economic problems - some are simply insoluble and we have to learn to live with them.

And it is not 'nationalisation', it is a straight user charge for the benefits you receive from the state in your capacity as 'landowner' - in any event, isn't income tax 'nationalisation'?

"The full scheme replaces some taxes with a rental charge on all property payable to the state. It is therefore a more penal tax on all those who have already bought freehold interests in property, and may still be paying off the bank loan or mortgage, as their freehold effectively is taken away from them as the state becomes their landlord."

Sure, so let's have discounts or reductions for recent purchasers whose house falls to a lower value than what they paid. Even with a full-on LVT to replace all other taxes (income tax, VAT, National Insurance, corporation tax), people who bought ten or more years ago would still be sitting on a capital gain.

And if this tax is 'penal', then is not income tax even more so?

"I have never seen a satisfactory explanation of how the transition would be handled fairly, given the huge numbers of property claims that underpin the banking system and the current pattern of widely spread property ownership. "

Others have already made their own suggestions for the transition (all of which we can incorporate), to which I would add:

1. HMLR already holds enough info on selling prices, locations and plot sizes to be able to determine land values within a tolerable margin of error.

2. For a start, let's replace all existing land or wealth related taxes with a flat tax on site only land values. On a fiscally neutral basis, replacing Council Tax, Business Rates, Stamp Duty, Inheritance Tax, Capital Gains Tax, Insurance Premium Tax and the TV licence fee in their entirety would require a 1% flat tax on total buildings values (like Domestic Rates in Northern Ireland) or even better, a 2% tax on site-only land values (i.e. value of bricks and mortar is deducted for valuation purposes). Preferably averaged out over postcode sectors or whatever.

3. From there on in, you just increase the rate every year and use the revenues in a just and equitable manner...
If it hits recent purchasers - give them discounts.
If it hits high earners in big houses - get rid of higher rate tax.
If it hits lower earners - double the personal allowance or cap their bill at a certain percentage of their income (this overlaps with AVI's suggestion above)
If it hits pensioners - then double the basic state pension or give them discounts or deferment option.
If it hits landlords - get rid of Capital Gains Tax to give them an easy exit (oh, we already did that, see above!)

Provided the averaged out buying/selling prices of buildings in any postcode sector does not dip below their depreciated rebuild cost, then the tax is not 'too high' by definition.

4. One group would be clear winners from this, and that is businesses - instead of businesses and their employees having to hand over about half the wealth they generate (in VAT*, National Insurance, income tax, corporation tax and Business Rates) the total tax generated from businesses and commercially used land and buildings would go down by about two-thirds, and the UK would be a veritable magnet for inwards investment. Hurray! What's not to like?

5. As to 'property values underpinning banking system', aren't wildly inflated land values and a heavy tax burden on businesses how we got into this current mess? Isn't that something worth avoiding in future?

* Obviously, we'd have to leave the EU first, but that would be A Good Thing in an of itself.

14 comments:

James Dowden said...

Mark, do you have a figure for the total value of taxable land in Britain? Clearly this is needed to assess whether your figure of 2% is realistic.

I do nevertheless agree that LVT is much fairer than the six nasties of Income Tax, Corporation Tax, National Insurance, Capital Gains Tax, Inheritance Tax, and VAT.

And I am thinking that a particularly nice way to leave the EU would be for Great Britain to declare independence from Northern Ireland. The only downside is that Northern Ireland would end up with the permanent seat on the UN Security Council and some overseas bases.

Scott Wright said...

In my opinion (disregarding economics for a moment) TV tax is the nastiest tax because the BBC is crap yet i'm forced to pay about £36 a quarter on top of what I pay Virgin Media in order to be legally allowed to own a television!!

Even mandatory car insurance is less draconian than this, you only need that to DRIVE a vehicle not simply to OWN one.

Scrapping TV licence would be a welcome move to a switch to LVT and is happily included in Mark's list of 1st taxes to be replaced.

Personally I'd let em advertise (between programs only not mid) and cut their budget by 50% aswell.

DBC Reed said...

The idea that the banks are vulnerable to falling property prices was incorporated ,(or so they said) into the recent stress-testing of the banks e.g how they would cope with various percentages of house price falls.They should know how much of an average fall the banks collectively can cope with.The Guv should therefore aim at this figure with LVT.Once there it is a matter of allowing banks a breathing space then aiming to get house prices down a bit more.And so on.Although the Sentinel Tax is
looks all sweetness and light,it operates on a downward ratchet,so when prices fall,the new lower values become the new line in the sand , upward movement or HPI being squeezed out.

Derek said...

People concentrate on the point that introducing LVT will lower house prices and that it is therefore a Bad Thing. And its difficult to argue against them because it would reduce house prices.

However that's not the whole story. The same people will happily ignore the fact that abolishing income tax, VAT, etc. will raise house prices (which must be a Good Thing if lowering prices is a Bad Thing, mustn't it?).

So the question should be: would the combined effects of LVT and lower (or non-existent) other taxes raise or lower the price of housing?

This is not nearly so cut-and-dried. My personal opinion is that the combined effect would be to raise the price of housing because the general income level would rise as a result of the disappearing deadweight leading to a lower overall tax burden on the economy. However it's difficult to say for sure without doing a full economic simulation.

One interesting piece of evidence on the matter is that when Denmark started to replace other taxes with LVT in the late 1950s, house-prices did in fact rise as a result of the improvements to the Danish economy. Ironically this led to a backlash from many of the people who had supported the Land Taxers (aka the Justice Party) on the basis that LVT would lead to cheaper property. As a result they lost their MPs, the land tax measures were withdrawn within a few years and the economy started doing badly again.

Paul Lockett said...

I have never seen a satisfactory explanation of how the transition would be handled fairly

This from the man who was the local government minister at the time the poll tax was abolished and we transitioned from no tax on domestic property to council tax.

Surely the one person with direct experience of handling that kind of transition should be the one person who doesn't need an explanation.

Mark Wadsworth said...

JD, total value of privately owned non-agricultural residential land is about £2,000 bn at current prices, total receipts from Council Tax etc = £40 billion per annum = 2%. The rate would be a bit higher on commercial non-ag land to replace Business Rates (5%?). Ag land is exempt of course, let's phase out CAP subsidies first.

SW, ta, agreed.

DBC, sure, but the Home-Owner-Ists see rising prices as A Good Thing, so best of luck with the Sentinel Tax.

D, the Danish Justice Party probably made the mistake of having LVT too low to kick off with - so they should have just hiked it sharpish. I agree that the whole thing is circular, but it is quite clear that land subject to Business Rates (pretty close to LVT) costs much less than land subject to Council Tax.

PL, I didn't know that. The land value taxers often point out that Council Tax was cooked up and properties valued within a few months and that was the end of that. HMLR collect more info now than they did then, and computers are much quicker, so valuing this time round will be a doddle.

Robin Smith said...

That would be cos I forwarded him a link on HOI from your blog 2 weeks back. I copied the council leader and other cllrs and residents associations who all want to hoisterbate over him for claiming credit for the right for local people to decide on planning numbers.

Good news. He's bitten. Must be worried.

Tim Almond said...

Derek,

This is not nearly so cut-and-dried. My personal opinion is that the combined effect would be to raise the price of housing because the general income level would rise as a result of the disappearing deadweight leading to a lower overall tax burden on the economy. However it's difficult to say for sure without doing a full economic simulation.

But you also have to consider what effect homeownerism has on planning, too, and on economic development in general.

In my town, some homeownerists appealed against 1800 homes and a university campus being built. That would be around 2% of all the housing in the town. When houses cost around £120,000-200,000, what impact does that lost 2% of housing have on house prices in the town?

Derek said...

Understood, Joseph. I realise that there are a lot of indirect undesirable effect caused by lack of LVT and general "homeownerism". And that one is certainly nasty.

I just wanted to make the point that we don't know for sure whether prices would go up or down after the implementation of LVT was started because it's dependent on a lot of other tax changes besides the LVT itself. I think that, too often, proponents and opponents just assume that prices will drop as soon as LVT is implemented whereas price behaviour would be highly dependent on the actual level of LVT used, and upon how revenue-neutral the switchover from other taxes to LVT is during the transitional period. I don't look on it as an argument against LVT. The overall benefits of an LandValueTax/CitizensBasicIncome system are just too big for that. However I do think that it should be borne in mind when discussing LVT with the general public so that we don't end up promising low land prices that won't be delivered unless or until LVT is set at very high levels.

Mark Wadsworth said...

RS, we have spoken. First they ignore you, then they ridicule you... At least JR has got to the ridiculing stage :-)

JT, D...

NIMBY-ism is something that LVT would hopefully counteract to some extent, but I'm pretty agnostic on what effect more construction would have on land prices - for the simple reason that overall land rents would go up (by reverse logic, if we demolished all buildings in the UK, the total rental value of UK land would be minimal). But that's a separate topic.

The more interesting question (to which I do not know the answer either) is the impact of shifting from taxation of incomes to taxation of land values on capital land values (it would clearly have a positive effect on land rental values).

A simple approach would be to say "We will keep hiking LVT and reducing other taxes until capital land values are close to zero" and if the public believed it, they will always underbid for buildings on the assumption that prices will fall (so it would be a self-fulfilling prophecy).

It's a bit like buying a house near a crumbling cliff edge. If all purchasers assume that it will fall onto the beach in ten years' time, they will only offer a maximum of ten years' rental value.

And in the short term, there is no need to use LVT to cut other taxes - it makes just as much sense to pay off the national debt, which has a much slower impact on improving the economy (a lot of the money goes abroad).

Lola said...

Just a thought. But if JR thinks that LVT is 'land nationalisation', surely income tax is 'labour nationalisation'?

Mark Wadsworth said...

L, exactly. But the Home-Owner-Ists never respond to that riposte, and the Faux Libertarians say they're opposed to income tax anyway (but they seem to be quite relaxed about VAT or import duties).

Steven_L said...

I'm not sure it was Robin's link - he was just offended when I told him I wouldn't vote for him if I lived over his parts the other day.

Just like the clamping ban is because of MY post on Cleggies 'your freedom' thingy.

Hang on...I see how this works, we've been had again!

Scott Wright said...

"RS, we have spoken. First they ignore you, then they ridicule you... At least JR has got to the ridiculing stage :-)"

That "the debate" is happening in the blogosphere with an elected MP is a promising sign, I think he fears its growing popularity.

I know of about seven groups/parties in favour of LVT, the majority of those also favour citizen's basic income.