Killer arguments against LVT, not (60)

In part 3/3, I'll take a quick look at all of Adam's other killer arguments:

"LVT... would reduce land values, as you often point out. That would in turn have an economic effect, by encouraging the use of land rather than other factors of production like capital and labour."

Full-on LVT would of course reduce the selling prices of land, but how on earth does he work out the last bit?

For example: Business Rates are levied on the total rental value of commercial premises, so the tax is the same whether a supermarket has a five-acre car park, or a three-storey car park covering two acres (assuming they both have space for the same number of cars). If we switched to LVT, the tax on three-story car park would be two-fifths of that on the larger, flat car park. So supermarkets are more likely to build multi-storey car parks with a smaller footprint. So it's exactly the opposite of what he says - LVT encourages use of capital and labour rather than land.

"Presumably there’s nothing inherently impossible in having 200% LVT for instance. (In this case you would levy a tax of £20,000 per year on land worth £10,000.)"

That is a non-argument, I might as well argue against income tax on the basis that the rate could go to 200% (there are marginal cases where people pay more than 100% income tax). Nobody has ever argued for LVT in excess of 100% of land rental values (and even if it slid up to 110% or something, that's no worse than Schedule A taxation as it would merely eat into the rent from the buildings element). As it happens, the tax burden on businesses/commercial premises is vastly in excess of site-only rental values, so however it was calculated, the tax payable by businesses/commercial premises would go down by two-thirds (or whatever).

"I’m not sure how you can calculate what the proceeds would be, because you don’t really know what the effect would be on land values."

We can guesstimate them as being a proportion of the total annual rental value of land – if other taxes were cut then the rental value of UK land would increase (e.g. rents in tax havens like Monaco are much higher than rents in a French town a few miles away). So ball park total LVT revenues (assuming full-on LVT and nothing else) would be a quarter to a third of GDP.

But, for the time being and just to get the ball rolling, I have never seriously proposed anything more than replacing all existing property and wealth related taxes (Business Rates, Council Tax, Stamp Duty, Inheritance tax etc) with a fiscally neutral flat tax on property values (about 1% on capital values per annum, like Domestic Rates in Northern Ireland), which by definition would have no overall impact on land values.

"Politicians can be quite willing to increase in your face taxes if there’s no alternative – the current lot are increasing VAT to 20% for example. With LVT, anyway, I’m sure they would find a way to change the rules so that calculated land values were higher, for example, to increase the LVT take by stealth."

Ha!

George Osborne announced that they were going to increase every politician's favourite stealth tax, VAT, to 20% (being fair to our provincial government, the EU aim to harmonise VAT at 20% in all Member States so he probably had little say in the matter) and claimed that this would raise an extra £13 billion. A few people mumbled a bit, which might flare up again for a week or two next January when the changes kicks in and apart from that - nothing.

Now, let's imagine they'd decided to raise £13 billion from an in-your-face tax like Council Tax, which would have meant scrapping Council Tax benefit and increasing the rate by about half...

Of course, how LVT would be calculated will always be a bit arbitrary, that's why it's called tax. But so what? People pay different interest rates on their mortgages depending on what kind of deal they signed up to; neighbours in identical houses might currently pay vastly different amounts in income tax (because one is a high earner and the other a low earner). Nobody seems too bothered about this, do they?

But in a nation obsessed by house prices, people would soon notice if most houses in the area were selling for a lot less than their rebuild costs* (which is what would happen if the rate were over 100%), and any sensible assessment system would reduce the level of the tax in areas in which this happened.

* In any event, the NIMBYs would surely quite like this - if the selling prices of houses are less than their construction costs, there would be no new construction.