The Homeys and FL's love to contradict themselves and each other by advancing equal and opposite arguments against LVT which cancel themselves out. They kick off by saying that the government would need to employ an "army of surveyors" to do all the assessments.
Firstly it wouldn't, it would need a few dozen people to process all the data routinely collected by HM Land Registry and collection would be carried out by the people who currently collect Council Tax (which has a 98% collection rate); and secondly, the government employs hundreds of thousands of people to collect all the other fiddly taxes tax and dish out all the means tested benefits anyway. In terms of civil servant/£ raised, land taxes win out every time.
So I say to them, OK, let's make a modest start by replacing [Council Tax, Stamp Duty, Inheritance Tax, Capital Gains Tax, TV licence fee in their entirety, current total revenues +/- £40 billion a year] and collecting £40 billion a year from residential land and building instead.
There are two ways of doing this: divide £40 billion by 2.1 million acres of residential land and charge everybody £3.48 per square yard per year (see Cell F388 in Google doc) which I refer to for these purposes as 'Land Tax' or to be a bit more sophisticated and graduate the tax according to rental values in each local authority area (taking the average price of a semi-detached as a proxy therefor), which I call 'Land Value Tax' (you can see the tax rates/sq yd/year in the right hand column):
In this example, the UK is the [relevant area]. So their next objections are basically that we aren't employing enough surveyors, the two main variants being:
1. "Within each local authority area, there are nicer areas and not-so-nice areas. Why should homeowners in the not-so-nice areas pay as much as homeowners in the nice ones?"*
a) Sure, within each area the national LVT will act like a local Land Tax, i.e. it ignores these differences. But under current rules, the houses in the nicer areas sell for more and the houses in the not-so-nice areas sell for less; replacing Council Tax etc. is hardly likely to exacerbate these differences, and of course, in Year Two, when we scrap VAT and double the required revenues to £80 billion, we will sub-divide each LA area into about ten postcode districts.
b) So each LA then becomes the [relevant area] and the year after that when we scrap National Insurance Contributions the [relevant area] will be a postcode district with different rates in each of five or six postcode sectors, and ultimately there might even be different rates in each LA ward or each street - it's a trade off between keeping collection costs down/'verifiability' and scientific precision.
c) At every stage, the H-FL wing will raise the same tired objection "But the houses on the other side of the street are nicer because they overlook the park and houses on my side back onto the railway line" and in the next breath they'll say "But if we make valuations more accurate then we'll need an even bigger army of surveyors" and the same counter-arguments apply.
d) Once you get down to a certain small geographical area, even the most ardent LVT-er can say: "Look, enough is enough. Whichever side of the street you live on, you have the same schools, the same police force, access to the same work or leisure opportunities; there are certain residual benefits which will always accrue to some land 'owners' and not to others. The teeny tiny distortions this causes cost less than the faff of calculating a value for each plot or each flat within a block of flats. Live with it!"
2. "Why should I pay twice as much as my neighbour just because I have a bigger garden?"
a) Sure, if you have a bungalow on a massive plot, you might be (in Year One) paying 25% of the rental value in tax**, but a row of town houses with small back gardens on a similar sized plot in the same area might only be paying 10% of the rental value in tax.***
b) So what? The people in the town houses are being rewarded for efficient use of land and the owner of the large plot is using up more land which has eaten into The Hallowed Green Belt.
c) There is such a thing as the 'free market' which is perfectly capable of smoothing out these imperfections in the tax system; i.e. the selling price of the town houses will go up and the selling price of the bungalow will go down; the people living in the bungalow are perfectly entitled to sell it (either to a family now in a town house which is desperate for a bigger garden, or to a developer who knocks down the bungalow and builds two semi's or a row of town houses or even a block of flats) and move into one of said town houses or flats.
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* Notice how the H-FL'ers are happy to flip flop between claiming that LVT is an 'attack on the wealthy' and then complaining that it is an 'attack on the poor'. It's neither of course, and certainly not both.
** I received a very polite email from exactly such a lady from anti-Council Tax campaigners Isitfair who had gone to the trouble of calculating her potential LVT bill, which came out at £5,572, rather more than her current Council Tax bill of £1,720. Rather unsurprisingly, she thought it was a terrible idea. But the people in the town houses would see their annual tax bill fall from [£1,720 + TV licence] to £1,393 all-in; it's horses for courses.
*** I'm glossing over the subtle difference between the rental value of land and the rental value of land and buildings, because any tax levied on land and buildings always falls on the land value element before it falls on the building.
Remember: the marginal tax rates on earned income are anywhere between 0% and over 100%, with a simple average of about 52%, and the economy manages to limp along vastly below its full potential - the only way that the free markets can adjust to this is either by businesses putting up their prices, reducing their output, offshoring, going out of business or engaging in wholesale tax evasion etc. Even with a low flat income tax, we would observe this happening (although to a lesser extent).
I fail to see why the 'free market' response to a national LVT or a local Land Tax (where 'local' might mean a single street) where the effective rates vary between 50% and 90% is not vastly preferable to the 'free market' response to taxes on incomes and output.
Friday 8 April 2011
Killer Arguments Against LVT, Not (107)
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31 comments:
Presume you're one day going to list Nos 1-107 in a post, in point form.
JH, indeed, that is on my 'To do' list but it's nowhere near the top.
I added a tag 'KLN' for cross referencing, or click the shortcut in 'Quick links'.
You really need to replace VAT on day 1.
L, that's a non-starter.
VAT raises £90 billion or so a year, we need to give people twelve months to adjust themselves to the fact that this is how taxes will be raised in future, and then scrap VAT in Year Two.
And a lot of the calculations are circular - we don't know by how much income tax/corporation tax receipts will increase when VAT is scrapped; or by how much welfare costs will go down.
Neither do we know quite how much VAT is 'passed on the consumer' (I guess about a third) and how much is borne in lower wages or profits.
I haven't a clue what you're talking about, Mark. But I'm sure it's all very clever.
I'm afraid I agree with E-K, still, maybe I'll grasp argument 108.
Surely from a practical point of view though Homey's would accept that scrapping council tax, stamp duty, the T.V licence etc etc and replacing it with a land tax is an eminently sensible reform. Particularly because they'll be able to shift some of the cost onto idle landowners that currently pay very little tax.
What's not to like?
EK, I am a simplification campaigner - it's just that the complification campaigners keep coming up with reasons why complicated is better, so to rebut them, I have to use even more complicated counter arguments to show why simple is good (if that makes sense).
CD, you or I might think this a sensible reform, but the little Homeys are trained to act on behalf of the big Homeys - so they always argue that any tax even vaguely related to land values is a bad tax.
If they are low income Homeys, they want more income tax; if they are high income Homeys, they want a Poll Tax. I wish they could agree to settle on one or the other.
MW, it's frustrating because a few minor changes could make so much difference to the overall efficiency of the economy.
Who would lose from rolling up all these petty taxes into one based upon market rental values? Major landowners like Prince Charles and possibly a handful of accountants, the majority of people would benefit enormously yet the knee jerk reaction is always to oppose such measures.
chefdave,
The other problem is that government isn't generally about tax simplification. They're about creating the most opaque tax system imaginable so that they can produce low headline tax rates, while maintaining a high tax burden. And large sections of the media are too stupid to work this out.
I suspect that the "mansion tax" will soon find moving downwards. It won't be £2m houses, but will come down to £1m houses, and eventually to a point where moderately well-off families will be paying it.
Good post. Nice plan. Might work.
Property taxes are a good one to start on. If most of it taken is land value then most of the change will not harm production and needs no balancing day one. Good start!
The anti's actually concede LVT's advantages when they moan about LVT on selling price accidentally taxing the capital and labour elements. ALL taxes today tax nearly ALL of the capital and labour in EVERYTHING. Their point is?
CD, our knees have been conditioned to jerk in that fashion for a thousand years.
JT, I don't mind if the Mansion Tax threshold is reduced, especially if they abolish other taxes at the same time.
RS, of course it would 'work', none of this harms production, the positive effects will vastly outweigh any negatives* the Day One changes are of course revenue neutral.
* Which negatives, actually? If somebody is 'forced' to trade down and a willing buyer trades up, then the value of trading down clearly exceeds the cost of doing so to the down-trader, so they're better off, and the value of trading up exceeds the cost of doing so to the up-trader and both parties end up better off.
Sorry mate I dont know what you mean by negatives. Never mentioned any.
The plan will only work once people have decided they want to do it. Then is doesnt really matter how it is done. Like slavery it will be an overnight activity, no compensation, no exceptions.
Er... so dont hold your breath.
RS, don't you mean "Like ABOLISHING slavery it will be an overnight activity..."?
"which I refer to for these purposes as 'Land Tax' or to be a bit more sophisticated and graduate the tax according to rental values in each local authority area (taking the average price of a semi-detached as a proxy therefor), which I call 'Land Value Tax' (you can see the tax rates/sq yd/year in the right hand column)"
Well, actually, they are both "Land Tax". Land Value Tax would take into account that with a bungalow in a large garden the value of the plot is less per square metre than a six-bedroom house in a small garden. Unless, of course, you assume that all planning controls have been abolished, which you appear to be from your point 2 (c), in which case residential land in the middle of the country should be worth precisely the same as agricultural land and the Land Value Tax on my property would be very small indeed.
MW Yes. Like abolishing it. Granted we now have quasi slavery that still needs abolishing. LVT will do that largely.
It causes smoking,obesity,binge,drug taking etc. All comfort blankets for not having a free life. (:
Posted on Tim Worstall's blog post "In which Ritchie proves the Laffer Curve;"
JP -- Someone tell Mark Wadsworth about Winston Churchill’s definintion of a fanatic.
"A fanatic is one who can't change his mind and won't change the subject." -- Winston Churchill
So Mark comments on a post about tax changes and its effect on tax revenues and growth with a comment on the effect that LVT will have on tax revenues and growth, and this is somehow off-subject? And when have you shown a willingness to change your mind, Jonathan, about LVT? Or is it only fanaticism if someone consistently disagrees with your unchanging desire for what I can gather is a low-rate flat tax and zero taxes on land?
"It has also struck me as counter-intuitive to say that a way to promote growth is to tax something more than otherwise."
It is also counter-intuitive to some people that the creative destruction of the market is good for society and also (apropos to the post) that lowering marginal tax rates can boost tax revenue (at certain levels of tax rates). The problem with intuition is that it acts in place of reason to obtain knowledge. Here are some people who saw past the counter-intuitive nature of LVT and endorsed it:
The property tax is one of the least bad taxes, because it's levied on something that cannot be produced — that part that is levied on the land.
— Milton Friedman, Nobel laureate in Economics (1976)
The landowner who withdraws land from productive use to a purely private use should be required to pay higher, not lower, taxes.
— James Buchanan, Professor of economics and winner of the 1986 Nobel Prize; from a lecture at St. Johns University, New York City
Both ground rents, and the ordinary rent of land, are a species of revenue, which the owner in many cases enjoys, without any care or attention of his own. Though a part of this revenue should be taken from him, in order to defray the expenses of the State, no discouragement will thereby be given to any sort of industry. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground rents, and the ordinary rent of land are, therefore, perhaps, the species of revenue, which can best bear to have a peculiar tax imposed upon them.
-- Adam Smith, writing in the Wealth of Nations
And, of course, any standard Econ 101 textbook will tell you that a tax imposed on something with a perfectly inelastic supply will incur no deadweight loss. But since you have supplanted reason for intuition, you are at odds with what others can plainly see once they actually use reason to arrive at a solution.
I am rather a fan of LVT (as much as you can be a fan of any tax) -- I even have it as a search term in Google News, which is how I ran across the article here in the United States.
There are two arguments against LVT that opponents always raise that irritate me no end: the myth that poor farmers will somehow be forced from their land (even though Manhattan has half the people and twice the land value of all of Iowa -- apparently, complaining that stock brokers will be forced out of their penthouses doesn't have quite the same impact), and the myth that poor old grannies will be forced from their childhood homes because they happen to have a big yard. I would be surprised if someone hasn't combined the two, and bemoaned the fate of poor old granny farmers.
I am unfamiliar with the tax structure in the UK, but here in the United States, property tax is a significant source of revenue for local governments. Of course, it is unpopular, but I have to believe that some of that is from combining a "good" tax with a terrible one (the tax on improvements), which tars both with the same brush in the eyes of the public. I have often thought that merely shifting the burden from improvements (houses, driveways, landscaping, and the like) to site value in a revenue-neutral way would be a good first step to showing the benefits of land value taxation. They already do the work necessary for such a shift here in Oregon -- my tax bill shows the value of my land, and the value of the house, it just charges both the same rate. Appraising just the land should be easier than appraising land and everything on or under it.
As a side note, one of my personal heroes, William Simon U'Ren -- the most influential Oregonian no one has ever heard of -- was strongly in favor of Henry George's "Single Tax." So much so, in fact, that he pushed through things like the secret ballot, citizen's initiative, referendum, recall of elected officials, presidential primaries, and direct election of senators, all in an (unfortunately unsuccessful) attempt to push the state into adopting land value taxation. If only we had another politician that was even half as unsuccessful! :)
B "Unless, of course, you assume that all planning controls have been abolished.."
That's the general idea. But LVT works just as well with strict planning restrictions as it does with none whatsoever.
RS, you mean if we had LVT then I wouldn't drink or smoke? Sounds a bit dull.
Snarf:
1. We can exempt farmers anyway. It's the same in the UK, the total rental value of all UK farmland (85% of the surface area) is only 3% or 4% of the rental value of all the urban land (10% of the surface area), so barely worth collecting.
2. We can exempt little old ladies as well as far as I am concerned, that just means that everybody else pays a slightly higher rate. Little old ladies owns maybe ten per cent of all houses, so we can exempt them and increase everybody's tax rate by a ninth.
Logan, ta for support.
To be fair, I have become a bit of a fanatic over the past three years or so, but it's people like JP (or indeed Sobers or TFB) arguing against LVT on the most spurious grounds who make me realise that they're wrong and we're right.
But I'm delighted to see that I annoy JP as much as he annoys me with his Faux Libertarianism.
"L, that's a non-starter.
VAT raises £90 billion or so a year, we need to give people twelve months to adjust themselves to the fact that this is how taxes will be raised in future, and then scrap VAT in Year Two.
And a lot of the calculations are circular - we don't know by how much income tax/corporation tax receipts will increase when VAT is scrapped; or by how much welfare costs will go down.
Neither do we know quite how much VAT is 'passed on the consumer' (I guess about a third) and how much is borne in lower wages or profits."
Potentially (with access to the full info the treasury has) you could up the registration threshold to £100k or so and then cost that into year 1 figures. It's the 11,000% marginal rate that stifles economic growth.
SW, that's the problem though - the £70,000 threshold stifles growth at £70,000 and a £100,000 threshold stifles growth at £100,000.
If I am to do some crude tinkering with VAT, then I'd suggest:
1. Replace £70,000 threshold with a £50,000 exempt amount, so you only pay VAT on the excess over £50,000. Hey presto, no barrier to growth.
2. Scrap all the zero-ratings and gimmicks; either you are VAT-able in full or exempt and no mucking about.
3. Reduce the main rate a bit for a year until it is canned in Year Two.
M,
1. It really is that simple, isn't it. I suppose we have the stupid system that we have because HMRC doesn't want to be bothered with VAT returns of tuppence ha'penny, but at the same time doesn't want to miss out on all the VAT they collect from the VAT-registered firms on the first £70,000 of turnover.
But it's still stupid, like SDLT.
2. You can't get rid of the zero ratings! That's what VAT is all about - a tax that the rich and powerful don't have to pay. It's the modern form of patronage.
B, as to item 2, once we are in charge we will just ignore EU laws (like VAT) that we don't like and are no good for us.
If the EU chucks us out, then great - that'll save us the faff of working out how to leave.
In 2001 the Land Registry's Quinquennial Review http://www.landreg.gov.uk/assets/library/documents/qqr2k1.pdf
made the point that it would be relatively simple for it to create figures for freeholds but virtually impossible for leaseholds without putting considerable groundwork in place.
The Registry is a fine organisation which has put considerable improvements in place since but sufferred from its own success when swingeing redundancies were imposed as a result of the efficiencies created.
Had its resources been put to creating facilities such as NEARS (search the review for the term) instead, much of what MW proposes would now be feasible.
Mark, you may have already seen this, but the Green Party of Canada had an interesting platform proposal that included an LVT. It's a bit too long to quote, but the link is here:
http://greenparty.ca/node/14928
Also, Frank de Jong (a Green Party of Canada member) had a bit more in-depth version, including some numbers:
http://frankdejong.blogspot.com/2010/03/green-budget-for-canada.html
(It doesn't look like I can make html links.)
John, exactly. HMLR could do reasonably accurate freehold valuations (certainly down to postcode sector level) at the press of a few buttons.
Or we can do them ourselves by using houseprices.co.uk (which will give you results by postcode sector - you just enter the relevant bit, i.e. "E11 4" instead of full postcode "E11 4ZZ" - a postcode sector is 2,000 to 3,000 addresses on average).
You then copy and paste the last 100 results into a spreadsheet and deleting everything except sold prices for semi-detached houses, because they are fairly standardised all over the UK.
As to the leasehold/freehold issue, I deal with that in Part 75 of this series, that's easy to sort out.
I can't find anything under 'NEARS'.
Snarf, I was vaguely aware of that, but ta for links anyway.
I would base LVT on the same valuation system as the current one for Council Tax, except that revaluations would be done yearly. If you are unhappy with your valuation, you can appeal, as now, which would sort out the anomalies. Take off the rebuild cost for the bricks and mortar element and you have your land value tax base. There is no "army of surveyors" argument, that army exists already, they are all busy selling houses and could easily be redeployed briefly for a one-off valuation exercise. After that, it's down to the householder to employ a surveyor themselves if they don't like the state's valuation, after all they could stand to save far more than the surveyor's fee.
B, if people think their house/garden is being overvalued, then they can self-assess; they declare a price at which they are willing to sell and the LVT is capped at a certain % of that (let's say 1.5% in Year One), seeing as it is supposed to average out at about 1% in Year One.
"B, if people think their house/garden is being overvalued, then they can self-assess; they declare a price at which they are willing to sell and the LVT is capped at a certain % of that"
And you could have a clawback rule so that if you sell your house for more than your self-assessed value, you pay the difference in tax out of the sale proceeds, and you pay the percentage by which it exceeds your valuation extra as well. Like rebuild costs for insurances purposes, only the other way round.
B, it's simpler than that.
The local council just snaps it up for the self-assessed price and sells it for market value, subject to the full LVT. That way the council gets 100% of the shortfall.
My way is less draconian (and raises more money).
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