Xmas blogging break is over, so it's back to the grindstone. I've probably done this one before, but just for completeness:
Comment 4 here by Right To Leech: "Mark, loss of a job or forced retirement and the land tax becomes an unsupportable burden. 'Move to a cheaper area' will be your reply... all good for lawyers, stamp duty receipts etc, but such dramatic u turns would wreck plans for so many."
In general terms...
1. The point about Stamp Duty is a non-starter, because like all other taxes - including of course taxes on incomes, output and profits and existing taxes on land 'ownership' like Council Tax or Inheritance Tax - it would of course be scrapped.
2. LVT is not an end in itself, the idea is to use the proceeds to pay for core functions of the state and to dish out the rest as a Citizen's Income/Citizen's Pension* and health or education vouchers. So for a median household in a median house, the LVT payable would more or less net off with the Citizen's Income etc that it receives, it would neither be a net taxpayer nor a net welfare recipient. It is the closest we can get to a tax-free world, remembering that land rents are an irreducible minimum of taxes - they cannot be competed away or even imagined away, it is just a question of whether they are collected publicly or privately.
3. The advantage of LVT over all other taxes is to discourage people from trying to grab the largest share of land 'ownership' and thus to increase their share of privately collected taxes. The total value of location rents would be continuously returned to 'the nation' which created them.
As a more specific reply...
4. Paying LVT is akin to paying rent for the value of the location where your home (or place of business is). Is it possible to imagine a society where there's no income tax, where everybody has a 'private' income of a few thousand pounds a year and everybody rents? Yes of course it is.
5. The value of location rents are set entirely by the markets. As the cost of production of the location (to the owner) is precisely zero, there is no minimum price that has to be charged, so the price is set by how much people are willing to pay in rent, purchase price or mortgage repayments.
6. When people take out a mortgage it is usually for twenty-five years, so existing first time buyers ('FTBs') are all making some sort of estimate as to what their net income and housing needs will be for the next twenty-five years. Assuming people act rationally (and ultimately, most do), FTBs only take out mortgages which they will be able to afford to repay. Sure, some of them will lose their jobs for whatever reason, but that can be covered by insurance or by saving up a bit of money to tide them over.
7. Under LVT, the FTB will have a much larger disposable income (once income tax, VAT etc are scrapped and the Citizen's Income is added on it will double, let's say) and the rational FTB will, as now, allocate a fixed amount of future income towards housing costs, being mortgage repayments, utilities, repairs, LVT etc.
8. So people will be perfectly capable of taking out insurance or putting aside an extra amount each month to cover housing costs during periods of unemployment to smoothe out such fluctuations - this is a splendid way of encouraging people to save, is it not?
9. Finally, another advantage of LVT is that it has no dead weight costs; it does not create unemployment and it encourages saving while discouraging speculative land price and credit bubbles, which are what causes recessions in the first place (as any Austrian will tell you). So the chances of losing your job, and the chances of not being able to find another one, are both greatly reduced.
Here endeth.
* We could either make the Citizen's Pension far more generous so that most pensioners can afford to stay living where they had been living before retirement - even if they haven't bothered saving up for this eventuality - OR we could give pensioners exemptions, discounts or a deferment option, OR any combination of the above, depending on whether you prefer economic logic or political necessity.
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7 comments:
Good post...
5) There is a minimum price of land. It is zero in theory. This is not pedantry. All other prices are set by the marginal price. Same applies to labour. And capital(if you have decided what that is yet) Xxx. Also some land is worth less than zero where a liability exists such as in sub prime America or near nuclear waste dumps etc *.
6) I had not noticed that people in general were rational when it came to economic decisions of the household. They keep voting for an unsustainable system that will ALWAYS crash. How can that ever be rational?
n) You could also discuss how some monopolies are natural and by that nature must become a function of the state because they will be less corruptible that way. And as the economy grows, so too must the state grow in these areas unless we want to see more problems. We can see this with land, money, utilites,rail today very clearly if infinite evidence is required.
Merry Christmas and a Happy New Year!
* I'm not anti nuclear. Its just a fact.
RS, ta for input.
5) The cost of production of the value of the location is more or less nil as far as the owner from time to time is concerned. Even if the cost of cleaning up the nuclear waste is huge, this does not change the value of the location.
6) People are rational - problem is they are lied to. If you were told that tomatoes were poisonous, then the rational thing to do is not to eat them.
n) Fair point on monopolies, but that is quite in tune with what I have always been saying.
I've fixed the quote for you:
"Mark, loss of a job or forced retirement and the rent/mortgage becomes an unsupportable burden. 'Move to a cheaper area' will be your reply... all good for lawyers, stamp duty receipts etc, but such dramatic u turns would wreck plans for so many."
It's just another case of not understanding that they are already paying it.
F, thanks. That's usually a good riposte, to just insert "rent/mortgage" instead.
@ fraggle
On the other hand ,it is not that attractive to be told that if you are being charged too much for the land under your house ,you won't be any better off under LVT (only not worse off).
There are LVT variants that allow the unemployed to stop paying ,roll up the charge and pay it off when the property is sold ; same goes for the poor widows from hell that annoyed Churchill.Other very libertarian types suggest making the LV tax voluntary so you have the option of either paying it monthly or waiting till you sell the house to pay the deferred tax out of the proceeds.
As the biggest push-over in town I favour the sentinel version of LVT that hovers in the backgound and is only triggered when property prices go up through land value increases.If land values stay the same or go down you don't pay anything .This,of course ,lacks the rigour and comprehensiveness of Mark's scheme which is a fully costed ,integrated reform of the tax system which would provide an adequate amount of tax revenue to run everything.My version aims to stop property/land prices going up
and not much else.
"Under LVT, the FTB will have a much larger disposable income"
Well, everyone who doesn't own land will have a larger disposable income, so under Ricardo's Law, will this not push up rents, allowing the landlords to simply add the LVT onto the the existing rent? How do the figures stack up?
@ DBC, I am personally quite happy with just having a sentinel tax, but when i suggested it here, I got exactly the same arguments against as against full-on LVT, so I thought "May as well be hung for a sheep as a lamb".
B, the calculations are rather circular, so it is best to make a guess of what the answer might be and test it against known experience - landlords can and will 'add LVT to the rent' to the extent that income taxes are reduced and GDP goes up. But if they hike the rents, then LVT can be hiked in turn until you reach some sort of equilibrium.
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