Killer Arguments Against LVT, Not (219)

From The Evening Standard:

Millions of Londoners in family homes would be unfairly penalised if George Osborne brings in a mansion tax in this month’s Budget, a report claimed.

In a hard-hitting report, the Centre for Policy Studies (CPS), Margaret Thatcher’s favourite think tank, said widows, savers and people with large families would be losers under the policy. It said some three in 10 family homes in London had been in the same hands for a decade or more*, opening up the owners to the threat of an annual "wealth tax" based more on rising property prices than how well off they are...

Warning that the very wealthy could leave the capital while breadwinners on relatively modest incomes have to pay**, he added: "A mansion tax based on property values is therefore a discouragement to aspiration. The probable result: brain drain and capital flight."

Let's focus on the "brain drain and capital flight", and for the benefit of the Home-Owner-Ists who refuse to apply logic, just look at a few real-life examples:

1. Hong Kong is the country which comes closest to having LVT, has a very low rate of income tax and no sales tax. Has this jurisdiction suffered "brain drain and capital flight" since Cowperthwaite took over? Methinks not.

2. Who is more likely to sell up and move from London? People who quite possibly can't afford to pay the tax [poor widows, people with large families, "breadwinners on relatively modest incomes"*] or [high earners, millionaires, oligarchs]? The former. So who will end up paying? The latter. And to whom will the former be selling their "mansions"? They'll be selling them to yet more of the latter (the price will adjust down to take account of the tax, to the extent that any income tax cuts don't wipe out the extra LVT), so in net terms, a Mansion Tax would attract brains and capital to the, er, capital.

3. WTF are "savers" bracketed in with Poor Widows and Large Families? Why are they affected particularly? They'd be entirely unaffected. And why does he bracket in Poor Widows with Large Families? The interests of these two groups are diametrically opposed when it comes to land use: the latter would love to live in larger houses; the former are, apparently, keen on hogging them for themselves. Shifting from income tax to LVT would be bloody great for Large Families and Breadwinners and a bit of a bummer for those hoping to inherit from a Poor Widow In A Mansion.

4. In the UK, the tax system is completely schizophrenic. There are three types of land uses:
a) Agricultural, which is heavily subsidised in cash (and farming income is relatively lightly taxed).
b) Residential, which receives huge non-cash subsidies and is very lightly taxed.
c) Commercial, which is quite heavily taxed via Business Rates (pretty close to LVT).

So we have plenty of real-life evidence for examining the impact of LVT.

Yes, there are frictions, and at the margins, there is a tendency for e.g. people to want commercial to be treated as or re-classified as residential; and maybe Business Rates ever so slightly discourages farmers from putting up giant cow sheds, and so on, but things still work: we have some sort of mix of agricultural, residential and commercial, which is probably not absoutely optimal but it's not that far off.

But by and large, we see no "brain drain and capital flight" into agriculture, do we? And we also observe that the very highest Business Rates bills (millions of pounds per acre of land) are in town centres and shopping districts, but these are still magnets for investment. Conversely, Business Rates are much, much lower on out-of-town industrial sites: have we seen "brain drain and capital flight" from banking, retail towards manufacturing? Nope. If the level of land tax were a deciding factor, then the UK's financial sector would have moved to Germany decades ago. But mysteriously, it hasn't - despite the EU's best efforts.

* So by their own admission, seven in ten are owned by recent purchasers, who can easily afford to pay.

** By the standard of people living in Westminster, I am indeed a "breadwinner on a modest income". I work there, but there is no earthly way I could afford to live in there, with or without Mansion Tax, so I work in Westminster and live a few miles out on the Tube where I can afford the rent. What's the impact on the economy of this arrangement? Precisely none.