Sunday, 25 September 2011

The Poor Widow Bogey

There's a thread over on a lawyers' discussion forum concerning an article in this week's Economist, the main thrusts of which are that a lower flat tax on all incomes is better than having very high rates on some incomes to subsidise other people's tax breaks (agreed) and that "one option would be to shift more of the burden from income to property, which would collect more from the rich but have less impact on their willingness to take risks. The “mansion tax” proposed by Britain’s Liberal Democrats would thus do less damage than the 50% rate."

It's not clear to me why The Economist refers to land values as "property" (it is but one form of "property" and it is more of a "legal entitlement" rather than "property" in the narrow sense), and overlooks the fact that most of the people who would be paying it (in the short term) are only "rich" because of this legal entitlement and not because they are "rich" or actually wealth creators in any real sense (i.e. if you are a bus driver, a brick layer or a brain surgeon, you create wealth by doing what you're paid for, driving buses, laying bricks or operating on people's brains respectively; nobody creates wealth by merely owning land which goes up in value), details, details.

Inevitably, people on the thread confuse LVT with a tax on "wealth" (it's not, it's a sophisticated form of Poll Tax) and play the Poor Widow Bogey, at which The Sumo King hits back with this:

As regards your poor widow neighbour;

It is her fault that house prices went up - it's exactly these people who voted to get rid of Schedule A tax and Domestic Rates, it's exactly these people who constantly voted to restrict new construction to a trickle. It certainly is her fault if she has "little cash", it's called "not saving up while you are working". And if she wanted, she could be sitting on a huge great pile of cash, so this sort of poverty is entirely self-inflicted.

What such a tax would do is encourage Poor Widows In Mansions to do the economically rational thing and down size a bit to somewhere costing "only" a few hundred thousand, freeing up huge great piles of cash for them to really enjoy their last few years!

And, if we are that worried presumably we could have an old lady exemption that might be slowly phased out? The older generation cannot go on holding the younger generation hostage and demanding that the younger generation pay for them because it was not cool to save in the 60s!


An LVT makes sense, you are taxing the value and the value is not generated by you, the value is how much society wants to live where you do, nice roads, quick police, good hospital, high amenity...

It would not be an extra tax, it would be instead of income tax and pretend income tax (which we still call NI), probably IHT and if at all possible VAT (or a chunk of VAT), then the more you work the more you earn and if you don't want to pay tax you go and live somewhere awful and pay 20p tax


dearieme said...

Is this by a disciple of yours?

Mark Wadsworth said...

D, nope, there are just thousands of people who've sat down and though about it and who have arrived at the same conclusion.

What is bizarre is the level of expertise which yer average Land Value Taxer is supposed to have, whereas numpties left right and centre can muddle along happily with the old lies that 'income tax relates to ability to pay', 'VAT is a tax on spending', 'my Council Tax pays for local services' and 'National Insurance funds my pension'.

chefdave said...

The truth get's out eventually, I worked quite hard over at HPC for a year or two (with a lot of help from another poster from the website Priced Out) countering useless monetarism with Georgist arguments, and since then there's definitely been a consensus shift.

It might just be a coincidence of course, but where mansion taxes and the like wouldn't have been given the time of day a while back now they're roundly defended for being the soultion, and better still faux libs get savaged for wheeling out the Poor Widow Bogey!

The foundations of Georgist theory just work, and you don't need to be "an Einstein" (as fred Harrison says) to realise it.

Derek said...

Of course if you are an Einstein, you still think it's a good idea!

Mark Wadsworth said...

CD, we've just got to keep chipping away, I guess. I don't worry about the Faux Libs, that's only a small minority. It's the 90% of the population who are Homeys who worry me.

D, Thanks. But along with Adam Smith and RIchardo and Friedman, Einstein was of course a closet Marxist who didn't know a thing about economics. The same applies to Queen Elizabeth I, of course.

Anonymous said...

As someone who agrees with you I am not sure that this is a such a good arguement
"Inevitably, people on the thread confuse LVT with a tax on "wealth" (it's not, it's a sophisticated form of Poll Tax) "
A) The poll tax is not a way to convince people LVT is a good idea
B) Isn't a sophisticated poll tax a contradiction in terms?

Mark Wadsworth said...

Anon, Poll Tax has a bad press because:

a) It bore no relation to value of benefits received and was levied on human beings (hard to track down).
b) By definition a Poll Tax cannot raise anything more than a token amount, and certainly not enough to pay for welfare, pensions etc (it's the direct opposite of Citizen's Income).

The good news was, it's not a tax on incomes and it is, in theory, nice and simple.

A more sophisticated Poll Tax would be
a) set in proportion to benefits received by owner/occupier(s) of any particular house
b) be able to raise huge amounts of revenue to replace lots of other taxes and pay for a Citizen's Income (which acts like a personal allowance against your tax bill)

The good news is, LVT retains the two big advantages of Poll Tax - it's not directly related to incomes (any more than the value of your car is related to your income) and it's nice and simple to assess and collect, plus there's no avoidance.

Robin Smith said...

I like the comment 'willingness to take risk'. Very amusing.

It should read willingness to CREATE risk.

Deniro said...

Mark , You often say that the current tax system distorts the Economy. But those miriad tax laws are deliberate interventions onto the economy voted for by polititions who support such things. Its how the social democracy/democratic socialism system is implemented. Like it or not. I know it is stating the obvious , but I have not seen a comment on it by yourself.
Also have you thought that there may be political consequences of millions of people paying no tax whatsoever and all government spending being funded from people who own property.

Mark Wadsworth said...

RS, that bit baffled me as well.

Den: "Also have you thought that there may be political consequences of millions of people paying no tax whatsoever and all government spending being funded from people who own property."

We've covered that. 70% of the population are owner-occupiers and 30% are tenants; for every tenant there is a landlord. Tenants already pay LVT it is included in the rent they pay to their landlord, and he is welcome to add it to the nominal rent by private agreement (the incidence of the tax remains the same). And nobody is forced to be a landlord, is he?

Further, as we well know, having LVT would increase the number of owner-occupiers so the problem largely solves itself.

In any event, try this for size:

"... have you thought that there may be political consequences of millions of people paying no income tax whatsoever and all government spending being funded from people who go out to earn a living?"

Deniro said...

It was the possible political consequences of government being funded soley by property owners that I was meaning to direct your thoughts and comments to.

Mark Wadsworth said...

Den, I know, you're applying mechanical Blue Socialist economics at its worst which completely ignores 'free markets' or 'real life' or 'the distinction between economic and legal incidence of a tax'.

In practice, the government would be funded by occupiers of land and buildings, whether they are freeholders, mortgage slaves or rent slaves.

By definition, a tenant pays for the value of the location, it's included in his rent (part of which would go towards paying the LVT, and which currently goes straight into landlord's pocket, albeit subject to income tax); and owner-occupiers would pay for the value of the location directly via LVT.

As I said, there is nothing to stop landlords adding the LVT to the nominal rent by private agreement, that does not change the economic incidence of the tax.

Deniro said...

Under LVT renters would pay no income tax, no duties , no VAT. My question is what would those who do fund Government say about that. And what would be the political power of the renters and the owner occupiers. Would the owners say no taxation without representation and no representation without taxation. Don't you think the political consequnnes of taxation are different from the economic distinction. Maybe a political process is that enlightened , I don't know though. You have allready said that owner occupiers have to much power, but your LVT implementation would give them more power by the same reasoning that you apply to the current situation

Mark Wadsworth said...

Den, "LVT renters would pay no income tax, no duties , no VAT."

Neither would owner-occupiers, who would only pay as much as LVT as they were willing and able to pay, it's entirely voluntary, like petrol, booze or tobacco duty.

For sure, there is such a thing as "tenants" who are a minority anyway, who will - and I repeat - pay LVT directly or indirectly through their rent bill.

Now, if landlords baulk at this, they are free to stop being landlords, and we know from real life that with LVT there will be far more owner-occupiers, therefore in the final analysis, the problem which you have dreamed up simply does not exist.

And if residual tenants/landlords can arrive at a free-market way of splitting the LVT between them, what business is that of owner-occupiers? That's like somebody complaining that his neighbours still have an adult child living with them, possibly paying a few quid in rent, isn't it?

In any event, how can you justify a tax/land/subsidy system whereby the interests of Poor Widows In Mansions are paramount, i.e. the interests of those who are welfare recipients, pay little or nothing in tax and are sitting on the largest unearned gains?

Mark Wadsworth said...

Den similarly, if you are happy with the size and location of the house you own-occupy, but are unhappy with the level of the tax, are you likely to want to sell up and rent it back? Surely the selling price would adjust down to cancel any advantage to you of doing so?

Why would a landlord buy the property unless he could make a decent annual return (rent net of LVT divided by purchase price)? You'll find it's cheaper and better all round remaining an owner-occupier and effectively renting to yourself.

SumoKing said...

my retorts are largely hurried searches of your blog and even hastier cut and paste... if you churned out "101 arguments against lvt NOT!" in paperback I could just pull the thing out and shoot down the madness

a glossary with descriptions of 'wealth' and 'value' and such would be helpful in it too

Mark Wadsworth said...

Sk, thanks, I have been tempted. But your summary plus application of dollop of commonsense was just as good :-)