CityUnslicker gets himself in a muddle over the Mansion Tax:
You just can't tax wealth, only income. If you tax wealth then it will all disappear over time and then you have nothing left to tax (or its value drops below the threshold where the tax is set) - you literally erode away long-term value in return for taxes today. On income or spending people retain control over their spending and can try to save or keep their heads above water. Even capital gains is on income.Once you move to pure wealth taxes the game is up as it becomes so hard to store any value without the Government taking a chunk of already taxed income - it is a disastrous policy.
His opening assumption that earned incomes are fair game for taxation is the fundamental flaw, because his (valid) arguments against taxing private wealth apply in spades to the idea of taxing incomes, to which see footnote*, but hey...
The suggested Mansion Tax is a very crude form of LVT, but neither of them are a tax on "wealth" and certainly not on "private wealth", which can indeed disappear abroad or be eroded, and which has to be constantly replenished (it's just accumulated income, which shouldn't be taxed either). On a practical level, land (more correctly: locations) cannot be taken abroad because the location only has the value it has because it is where it is.
And neither can LVT erode real wealth (or private wealth) as it is not really a tax at all, it is a user charge for the rental value of land which you choose to occupy. It is the nation charging land owners for that share of national wealth which they choose to consume; it's like rent.
No matter how high the tax is, a flat overlooking St James Park in London will always have a higher rental value than a council flat overshadowed by the gas works in Redcar. This is why retailers are happy to pay millions of pounds in Business Rates to occupy shops in the best high streets.
Location rents are not generated by any individual, and certainly not the owner of any particular plot, location rents are created by the whole of society, they are "just there" because of transport infrastructure, a nice view, a quiet neighbourhood, job and leisure opportunities etc etc. That rental value cannot be eroded by a tax; if the nation (which created it in the first place) does not collect it, then the landlord will, or the owner-occupier will consume it for free.
Oil is something else which is "just there" (admittedly it wasn't created by anybody either, but it belongs to whichever country has the biggest army/navy, so without the agreement of that country, you can't extract the stuff). Most countries have a relatively Georgist approach to extraction rights, they basically charge people money for the amount of oil (or whatever else) which they extract, so drilling licences are a kind of LVT. Does the cost of a drilling licence destroy the real wealth, the oil? No of course not, it merely transfers the windfall gain from the oil company to the country which granted him the right to extract it.
And who says that LVT has to be paid out of "already taxed income"? The end game is to get rid of taxes on income, but seeing as the Lib Dems offered a straight swap, cut the 50p tax rate by 10p and introduce a Mansion Tax, most mansion owners will easily be able to pay it from the income tax savings (cue shouts of: "But what about Poor Widows In Mansions!?!").
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CityUnslicker continues:
Of course, this won't happen as people are not stupid. Instead they won't buy houses that face this wealth tax. They will rent from Special Purpose Vehicles or find some other way of getting around the taxes. Ultimately they will store their wealth offshore away from the wealth taxing state. The state will rapidly become poorer as capital flees. This is not sensible policy, its madness.
*ahem*
Business Rates. What are all those commercial buildings doing dotted round the country? Why are they building The Shard in London?
*/ahem*
The fact is, there is no way round annual taxes on land; collection rates for Council Tax and Business Rates are the highest for any taxes, between 95% and 98%. Don't forget that the government has the ultimate security against non-payment: the freehold. If the registered freeholder is a BVI company and it doesn't pay up, then the freehold is simply suspended and the Official Receiver collects market rents from the actual occupant pending full payment of back-tax with interest. I've worked in tax for twenty years and I know all about loopholes, take it from me, with annual taxes on land, there aren't any.
He also fails to explain how you can store the annual rental value of a flat overlooking St James' Park offshore... because of you can't. It is in full view and its ownership a matter of public record; more to the point, there will always be somebody prepared to pay extra to live there (quite how much more is up to the markets to decide).
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* The equal and opposite argument to all this it that it is madness to try and tax truly private wealth (as distinct from and opposite to user charges on national wealth); whether that's via income tax, VAT, capital gains tax, inheritance tax or anything else, the problem is that we have been brainwashed into believing that a) earned income is fair game for taxation, b) that land rent is a private asset just like anything else, so is not a particularly suitable subject for taxation, but also c) that land is somehow special so may not be taxed.
No wonder he's never around
57 minutes ago
18 comments:
What eludes me is why people continue to think that 'land' is 'wealth'. Like 'money' is 'wealth'. Neither are. It's what you do with them creates 'wealth'.
L, exactly. Money is just a unit of measurement in what is ultimately a barter economy. Feet and inches aren't "height" in themselves, they are units of measurement.
And land/location is not net wealth, it is a measure of the rental value, i.e. private wealth that flows from tenant/purchaser to landlord or vendor/bank.
Perhaps we should rename Land Value TAX 'UK land use user charge'?
L, the name isn't important, the Homeys will still be out in force to decry it as "an attack on wealth and aspiration" etc.
Does "the city" exist because of proximity to government, or is it more of a "network effect"? (like the shoemakers in Northamptonshire).
TS, I think neither. Usually, the government just plonks itself down in the biggest city.
There were attempts to site the government elsewhere (Bonn and Canberra spring to mind) but this doesn't seem to attract many people to the area.
Of course, the government attracts hangers on and lobbyists*, and those working for central government are incredibly highly paid, so after the event it is difficult to distinguish cause and effect.
* So banks are near where the government is, but not real wealth creators like car manufacturers.
"What eludes me is why people continue to think that 'land' is 'wealth'."
Possibly because it is? From the OED, under "wealth":
"Prosperity consisting in abundance of possessions; ‘worldly goods’, valuable possessions, esp. in great abundance: riches, affluence. In mod. use wealth tends to be felt as a stronger term than riches.
and
"Economics. A collective term for those things the abundant possession of which (by a person or a community) constitutes riches, or ‘wealth’ in the popular sense.
There has been much controversy among economists as to the precise extent of meaning in which the term should be used. The definition that has been most widely accepted is that of Mill (quot. 18481 below).
J. S. Mill Princ. Polit. Econ. I. Prel. Rem. 8 Money, being the instrument of an important public and private purpose, is rightly regarded as wealth; but everything else which serves any human purpose, and which nature does not afford gratuitously, is wealth also.
1848 J. S. Mill Princ. Polit. Econ. I. Prel. Rem. 9 To an individual, anything is wealth, which, though useless in itself, enables him to claim from others a part of their stock of things useful or pleasant. Take for instance, a mortgage of a thousand pounds on a landed estate. This is wealth to the person to whom it brings in a revenue.‥ But it is not wealth to the country; if the engagement were annulled, the country would be neither poorer nor richer.
1848 J. S. Mill Princ. Polit. Econ. I. Prel. Rem. 10 Wealth, then, may be defined, all useful or agreeable things which possess exchangeable value; or in other words, all useful or agreeable things except those which can be obtained, in the quantity desired, without labour or sacrifice.
"....and those working for central government are incredibly overpaid
L, amendment accepted.
B, firstly J S Mill was a land value taxer, secondly, as he says:
Take for instance, a mortgage of a thousand pounds on a landed estate. This is wealth to the person to whom it brings in a revenue... But it is not wealth to the country; if the engagement were annulled, the country would be neither poorer nor richer.
We can apply the same crystal-clear logic to "land wealth", it is only an asset to the owner if it is a burden on those excluded.
Bayard
Don't quite get it do you?
Land, say a piece of barren rock in the middle of the ocean, clearly has no economic value. You can't grow stuff on it. You can't mine it. No-ones going to deliver the post. There's no street lights, and there are no neighbours to do business (i.e. create wealth) with.
Now look at England. See what I mean?
Bayard - The OED entry illustrates one of the fundamental problems with economics these days - namely loose and useless definitions.
"We can apply the same crystal-clear logic to "land wealth", it is only an asset to the owner if it is a burden on those excluded."
If I give you £100, I am undeniably £100 poorer and you are undeniably £100 richer. The fact that our aggregate wealth has not changed doesn't alter those facts. Yes, land does not contribute to the nation's wealth, but it sure as hell does to that of a few select individuals.
"Now look at England. See what I mean?"
No, I don't. OK, sheer physical land isn't intrinsically valuable, but then nor are banknotes. I agree it's where that land is that makes it worth money. However, if I have the right to collect money from others who wish to use that land, it makes it valuable to me. I am prepared to store up my physical effort in the form of "money" and exchange it for that right.
I think this whole "land is not wealth" argument is missing the point. The point is that LVT isn't a tax on wealth, not because land isn't wealth, but because LVT isn't taxing the land, it's taxing the income the land generates. As Mark has pointed out ad nauseam, just because the majority of people are simultaneously landlord and tenant and therefore no money changes hands doesn't make it any the less a source of income, a point which was recognised in Schedule A taxation. So really, LVT is a form of income tax, not a wealth tax at all.
Let's say I have a house worth £2M. Under the Mansion Tax, I would be paying tax on that £2M. I then sell the house and put the money in a non-interest-bearing account. Now I pay no tax on that £2M, but am I any the less wealthy? No, in fact I am more wealthy by the amount of tax I have avoided. Therefore the Mansion Tax isn't a wealth tax.
Bayard wrote:
The point is that LVT isn't a tax on wealth, not because land isn't wealth, but because LVT isn't taxing the land, it's taxing the income the land generates. As Mark has pointed out ad nauseam, just because the majority of people are simultaneously landlord and tenant and therefore no money changes hands doesn't make it any the less a source of income, a point which was recognised in Schedule A taxation. So really, LVT is a form of income tax, not a wealth tax at all.
Hear, hear, Bayard. You have hit the nail on the head. That is exactly how I see it.
L, that was a bit harsh.
F, yup, the taxes they don't like they call "taxes on wealth", the taxes on wealth which they do like get called "income tax" or "VAT".
B, yes fair points, let's not split hairs. Of course land CAN be [a source of] private wealth for a select few (and it clearly is), but it is not NET private wealth; it is only net NATIONAL wealth. We can call it tax on income (but then they wail that it's on non-cash income) so it's best described as a user charge (but then they wail they wail that they are being charged rent for their own houses etc).
(but then they wail they wail that they are being charged rent for their own houses etc).
Which is why ultimately, it's a moral issue. As long as it's considered morally sound to own the earth outright, no amount of economics will persuade. (Keep up the economics, though MW! It is necessary, it just isn't sufficient)
D, yeah but see F's comment.
F, there's nothing wrong with people owning the physical land and what's on it, the problems arise when they refuse to pay for the location rent* and want to tax people's earned income instead.
* Which I insist is something quite different to "the land". See for example these tales about landlords in East London being able to charge much higher rents during the Olympics (and assuming them to be true).
Even if we accept that the land and buildings "belong" to them, and that the normal rental income "belongs" to them, it must be pretty obvious that the extra few thousand quid they can get during the Olympics does not as we know exactly how that arises and who paid for it. That rental income "belongs" to them about as much as a flame belongs to a piece of wood in a fire, it is entirely transient, and take that wood out of the fire, it will probably stop burning, the flame does not go with it.
MW. Yep. It was a bit harsh - apologies all - bit stretched today...
F, there's nothing wrong with people owning the physical land and what's on it, the problems arise when they refuse to pay for the location rent* and want to tax people's earned income instead.
Hence the word 'outright'.
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