Friday, 13 August 2010

Killer arguments against LVT, not (59)

Part 2/3 of responding to Adam Collyer's supposedly killer arguments against, the nub of which appears to be this:

The whole of your case (1) seems to rest on an assumption that people are willing to pay an absolutely fixed amount for their land (2). So if you levy the tax, then rents go down by the same amount (3). That is clearly untrue (4). If land (plus taxes on it) becomes more expensive, people may potentially be willing to devote more of their income to paying for it.(5)

So you could easily end up with the landlords going on merrily levying rent (6), and the people/tenants/mortgage payers simply paying the new tax on top and grumbling about it. (They wouldn’t grumble about the lower taxes elsewhere, obviously!)


1) There are nigh infinite arguments for restricting the revenue raising powers of the government (as proxy for society as a whole) to sources of income or wealth that arise solely because of privileges granted or protected by the government (as agent for society as a whole; and one man's privilege is another man's restriction). To a large extent, the arguments in favour of LVT are the equal and opposite of arguments against taxes on the free exchange of goods and services and the profits arising therefrom.

2) In the absence of property price bubbles, which are A Bad Thing in and of themselves and something which LVT would dampen or prevent, people are only prepared to pay a certain amount for their land. It is beyond dispute that the price of fixed income investments (such as government bonds) is in direct inverse proportion to their interest rate (higher interest rate = lower prices and vice versa). Land is a kind of fixed return 'investment' and as any fule kno, higher interest rates reduce the selling prices of land and buildings and vice versa, for the simple reason that the people have fixed budgets, and the more they have to pay in interest, the less they will pay for the purchase price.

3) Correct. All things being equal, and assuming no reductions in other taxes*, the total rents that somebody will pay are inclusive of the tax. If a tenant has to pay the Council Tax himself, the net rent that a landlord can charge in a high Council Tax area will be lower than in a low Council Tax area. I've covered this before a dozen times, see for example Part 48 of this series..

4) What I say is clearly true or I wouldn't say it. I observed this on many occasions in the eighteen years between starting a career in tax (and its even uglier sister, subsidies), accounting and finance and stumbling across LVT.

5) "may" and "potentially" are hardly arguments.

6) The whole 'landlord adding the tax to the rent' is a red herring, as less than ten per cent of UK households rent privately (without recourse to Housing Benefit) and seventy per cent of households are owner-occupiers, who cannot evade the tax or 'pass it on' in any sense (they can avoid it quite easily by trading down in absolute terms or allowing more housing to be built and hence trading down in relative terms).

Most people who can afford to rent privately also have the choice of buying (if it were significantly cheaper renting, nobody would ever buy), so seeing as LVT would depress capital purchase prices, even if LVT-inclusive rents went up, this would lead to a higher level of home ownership, which is usually seen as A Good Thing.

* To disentangle this, there are four effects which inter-act:

a) All things being equal, higher taxes on land values depress selling prices or rents, so that tax-inclusive rents or the total tax-plus-mortgage outlays of a new purchaser stay the same. And lower taxes increase selling prices and rents, in the same way that lower interest rates increases selling prices or increase profits for landlords with mortgages.

b) Lower income taxes (especially if accompanied by reductions in wasteful government spending) tend to increase rents and selling prices, which is why property prices and rents in a tax haven like Monaco are significantly higher than in surrounding French towns, but do not imagine that yer average waiter or shop assistant working in Monaco benefits from the lower taxes - either they live there and pay the tax saving back as rent; or they live in France and either pay more income tax in France or the wages they can earn in Monaco are no higher than in France in the first place.

c) When I'm in charge, once I've replaced existing property and wealth related taxes (Business Rates, Council Tax, Inheritance Tax etc) with LVT, any further increases in LVT will go in tandem with cuts in VAT, NICs, income tax, corporation tax. So to some extent, total occupation costs would increase, i.e. landlords would be no worse off (because they'd collect rent after one layer of tax, and not have to pay income tax on rents paid out of the tenant's post-tax income); homeowners and tenants would be no worse off on a static basis (because they pay more of one and less of the other) but the economy as a whole would benefit enormously.

d) Of course, the total that could possibly be collected in LVT is rather less than the amounts currently collected in tax (for a given GDP level). So that's good, but GDP would be growing much faster as well, once freed us from the burden of income tax and all the quangocracy and EU crap, so after five or ten years, the total tax collected in £-s-d might well be the same, but it sure as heck would be a much smaller share of GDP. What's not to like?

To sum up these four effects, with a simple non-scientific example, let's assume under current rules a household has headline income of £30,000 p.a., pays or bears taxes of £10,000 and pays mortgage or rent of £9,000 and Council Tax of £1,000. The bank or landlord collects the £9,000 and pays income or corporation tax on it of another £2,000. If we replaced all these taxes with Land Value Tax, it would level out at (say) £12,000; the household's income goes up (having shaken off dead weight cost of VAT, income tax etc) to £36,000 and pays mortgage or rent (inclusive of LVT) of £20,000. The bank or the landlord nets £8,000, which is of course tax free.

In other words, landlords would add the LVT to the rent, but only to the extent that income tax, VAT are cut, and nobody ends up particularly worse off.

2 comments:

TheFatBigot said...

"... people have fixed budgets, and the more they have to pay in interest, the less they will pay for the purchase price."

People do not have fixed budgets, although they might have fixed incomes. How they apportion their income between housing costs and other items is hugely variable. Some are prepared to allocate far more to housing than others.

adamcollyer said...

Thank you, FB!

And we've seen this in action over my lifetime. Average mortgages now are much higher than before, because people have generally decided to put more of their salaries into housing.