Killer Arguments Against LVT, Not (94)

The Home-Owner-Ist Coalition insist that LVT is a 'tax on wealth' or even an 'attack on wealth' itself, e.g. Allister Heath in the CityAM:

There was time when aspiration was rewarded in Britain; this is no longer true. Individuals are being double or even triple-taxed on the same income. At least the stamp duty hike is not as damaging as Vince Cable’s mansion tax, a purer and more devastating form of wealth tax.

Remembering that the existing tax system (mainly income tax, VAT, National Insurance) is itself a massive attack on wealth creation, it takes away around half the value of all the goods and services produced and exchanged, how can a tax system based on LVT in any way be considered as an attack on wealth?

There are three main reasons why your house would go up in value:

1. Home improvements

If you go out and do some overtime and scrape together £10,000 and spend it on replacing a tatty old kitchen with a nice new one, with a bit of luck, the value of your house goes up accordingly. Under current rules, you have to earn about £20,000 to leave you with enough money after tax to pay for the kitchen; with a full-on LVT system, you'd only have to earn £10,000 more to pay for your kitchen, so if anything people would be able to spend more on improving their houses, and the amount of your LVT bill would not go up as a result of your new kitchen (and there'd be no VAT on the cost of the kitchen either).

2. House price and credit bubbles

As we saw, between the mid-1990s and 2007, house prices doubled or trebled without homeowners having to lift a finger. Was this an increase in real wealth? No, not at all. If you remained in your house without selling or adding to your mortgage, you were neither better nor worse off; it was only if you cashed in and sold to rent/downsized that you personally could have realised a gain.

But if you added to your mortgage, or if you or your children bought houses at the end of the bubble period, you are worse off as you are in the same houses but with bigger debts (and the banks are correspondingly better off). LVT would have the effect of dampening these house price bubbles, so it would at least protect us from becoming worse off; or you could argue that as land prices = debt, LVT is the opposite of a tax on wealth; it's more like a tax on negative wealth (if there is such a thing).

3. Job opportunities and transport infrastructure

The other reason why house prices or rental values go up in a particular area is because of better job opportunities and/or better transport infrastructure (the two seem to go hand in hand). Now, having more job opportunities and better transport infrastructure is clearly 'wealth', but who created it? It's difficult to say, but it certainly wasn't any individual person who happens to own a house in the affected area (let's take the extreme case of a landlord who lives overseas or a house which has been derelict/vacant for years); and so if they didn't create it, they can't seriously claim to 'own' it unless they pay for it, so LVT in this instance is a tax (or 'user charge') on the land 'owner' proportional to the benefits that accrue to him because of the efforts of other people (whoever they may be).

People who have to pay the tax can grumble and moan as much as they like, but replacing taxes on output, incomes and profits with LVT will encourage/motivate people to set up businesses, go out to work etc, and (with a bit of luck) the government would be motivated to focus public spending on things like transport infrastucture where the increase in future LVT receipts more than covers the cash cost*.

So there we have it.

The current tax system is a massive attack on wealth; conversely, LVT encourages wealth creation (or at the very least, doesn't discourage it). The only difference is that under current rules, the people who create the wealth and the people to whom it accrues are two quite different categories of people (many will be members of both categories, but that is a secondary issue); under LVT you keep every penny of what you earn and only pay for 'what you take'.

* The calculation is the same as that faced by a rational landlord - he does not pay for repairs and improvements out of the goodness of his own heart, he does it because it makes commercial sense; the fact that his tenants end up with somewhere nicer to live is a bonus.