Killer Arguments Against LVT, Not (292)

Over at Lib Dem voice, Joe Bourke is broadly in favour of LVT as opposed to other forms of taxation, but he advances this KLN:

3. LVT [can not] pay for all Government expenditure, with a surplus, and only capture unearned incomes/economic rents.

Maybe, maybe not, but I fail to see the relevance:

1. The government currently spends about £665 billion a year and hopes to raise £569 billion in tax (and £32 billion in rental and other income) this year (from the public sector finances databank). So clearly, not even the current tax system can raise enough; there's going to be a deficit of about £120 billion (yes, I know those figures don't add up, don't blame me).

2. Even the biggest of the big taxes, income tax (average rate about 25%), will raises £150 billion this year, which is only a quarter of all taxes raised, and only a fifth of all spending. That's not really an argument for or against income tax, so why is it an argument against LVT?

3. If we had kept public spending down to pre-crisis levels, say 2005-06 levels and added 3% inflation each year, public spending would be £595 billion and there would be no deficit. If we had kept public spending down to 1999-00 levels and added 3% inflation each year, we would 'only' be spending £477 billion a year.

4. To keep this discussion simple, let's assume that spending had been frozen at 2005-06 levels plus inflation, in which case spending and total receipts would be about £590 billion a year. The relevant question is, how much of that could be raised in LVT, even if it is not all of it?

5. There is a lot of circularity involved. You need to actually know how much current taxes raise and that there are two quite separate Laffer effects. The better known one is that once income tax rates are past a certain level, total receipts start to fall. I suspect that we are at or close to that level.

6. The lesser known Laffer effect, but more important one is the measure of deadweight costs of an economy, which appears to be the overall tax rate cubed, i.e. if overall tax rates on income are 50%, the size of the economy is depressed by 0.5 x 0.5 x 0.5 = 12.5%. Overall average rates of taxes on earned income (income tax + NIC + VAT) are slightly more than 50%, so it is a reasonable to assume that our economy is only 87.5% of its potential.

7. Whether the current rental value of all UK land (excl. buildings) is £150 billion a year (Joe's low estimate) or £250 billion a year (my higher and more scientific estimate), it is a huge flow of wealth, value or potential tax. Let's split the difference and call it £200 billion.

8. Let's assume we introduce LVT as an additional tax, in theory we could put an end the deficit straight away.

6. Or, my preferred option, we get spending down to a sensible level and could use LVT as a replacement tax. An LVT rate of about 25% on the site-only annual rental value of residential land would be enough to replace the usual list (Council Tax, CGT, SD, SDLT, IHT, TV licence, Insurance Premium Tax, total £49 billion). And Business Rates could also be replaced with LVT of about 50%.

7. If LVT were at 100% of current rental values, it would raise (say) £200 billion a year. With that extra £150 billion revenue, we could reduce or replace the worst taxes (VAT £102 billion, NIC £106 billion and higher rate income tax £50 billion-ish).

8. So with VAT halved (from 20% to 10%), NIC halved (from 25.8% to 12%) and no higher rate income tax, average tax rates will be 40%, so the economy will grow from 87.5% of its potential to 93.6% of its potential, that's an extra £100 billion money being earned, most of which will flow through into higher rents (observable fact, I can't be bothered explaining it again).

9. So now we have potential LVT receipts of £300 billion, so with the extra £100 billion, we can rinse and repeat; get rid of VAT and NIC entirely. This means that the marginal rate of tax on earned income is only 20%, at which stage the deadweight cost is 0.2 x 0.2 x 0.2, less than 1% and can be more or less ignored.

10. That's another £100 billion extra rental values, so we could then reduce income tax from 20% to 12% or 15% (or whatever). There'd be no further secondary Laffer effects from this, apart from the economy would grow slightly faster from a higher base, but let's ignore this for uncertainty.

11. Now, under current rules, the 'average' household is paying or bearing about £21,000 a year in tax (directly or indirectly). About £2,000 of that is Council Tax or Business Rates, so the split it 10/90. With only two major taxes, LVT and flat income tax, the average household would be paying or bearing (say) £10,500 LVT and £10,500 income tax (however directly or indirectly). Why do we assume that £21,000 is 'affordable' if collected 10/90 between [Council Tax, Business Rates] and [income tax, VAT, NIC etc], but not if it collected 50/50 with LVT and a low flat income tax?

12. And if 50/50 is 'affordable', then why not 60/40 or 80/20 or even 100/0? From here on in, it would be just a question of nudging up the LVT rate and reducing the income tax rate a bit each year, after five years at most, we could have a full-on LVT only system.

13. Yes, the chances are that once the LVT system is bedded in, most households are paying much the same in tax as they do now, but so what? Their gross earnings will be higher, and, if they are willing and able to pay more in LVT, then in return they get to live in a nice house with a low or no mortgage. Surely that is better (in free market terms) than people who are willing and able to earn more being forced to pay loads of income tax and getting nothing in return?