Killer Arguments Against LVT, Not (304)

Every now and then I stumble across a new KLN to add to the KLN blog. That IPPR nonsense I covered yesterday included another one (propounded by Socialists and Faux Libertarians alike) which I have slotted in here.

The KLN and the rebuttal are as follows:

"Why focus on one narrow asset class? Taxes should be broad-based!"

a) For LVT purposes, land is not an "asset" let alone an "asset class" or a "capital asset". The tax is levied on the annual rental value of land/locations", i.e. that flow of wealth which would otherwise go to landlords, landowners, bankers or property speculators ("rents", whether capitalised or not).

b) And those rents do not generate themselves, they are merely wealth which is siphoned off from a myriad different kinds of productive activity (or exploitation of natural resources or local advantages).

c) Clearly, it would be silly to try and raise a disproportionate amount of tax from any one "asset class" (cash, buildings, jewellery, works of art, plant and machinery or share prices); from any one particular kind of land use (residential, commercial or agricultural/extractive); or from any one particular kind of economic activity (manufacturing or services or any sub-division thereof).

The worst taxes are things like VAT, a flat percent of turnover of non-favoured productive industries which allow high-margin industries to thrive but condemn low-margin ones to oblivion, and the more "targeted" a tax is, the more distortions it causes (the same goes for "targeted" tax breaks and subsidies). So "broad based" is clearly good - it's just that the Homeys don't like it when they are included in that "broad base", despite the fact that owner-occupiers create two-thirds of the wealth, pay two-thirds of all the taxes and occupy two-thirds of all the land, measured by value.

d) But land rents are derived from all these uses and activities, and are that part of any industry's income which is not necessary to sustain that industry, they are pure surplus (or the price a retailer pays for having a monopoly position on the High Street). So the least-bad tax on farming is a tax on that extra income (revenue minus costs and the value of the farmer's own labour) which would otherwise go into rent or higher land prices (on average, about £20 per acre). And the least-bad tax on retail is that element of profits which would go into rents. Manufacturing businesses are happy do make do with marginal and out-of-town sites (they need more physical space but central locations are not so important - they need access to stuff like motorway junctions and railway sidings which make places a no-no for residential use) so the tax collected from manufacturing would be minimal. Etc etc.

e) And we all have to live somewhere. The least-bad tax on earned income is that a tax on that element of people's income which they pay as rent or mortgage repayments (which for an average household is the excess of income over the cost of the "basic minimum" standard of living and for higher earning households is "conspicuous consumption"), but unlike income tax (where you get nothing in return for paying it), the LVT is taken out of/included in the rent and when you pay LVT/rent, you get something in return (somewhere to live).

f) In urban areas (which is where 95% of land rents arise), these land uses are are all intermingled. It could be retail or services at pavement level with offices on the first floor and flats up above, with a car repair workshop in the alley behind. The rental value is fairly constant, it does not matter what that shop sells or what services are provided, it does not matter whether the offices are used by a financial adviser, physiotherapist or fortune teller. And it does not matter how the residents above earn their living or whether the car repair workshop specialises in second cars or tuning brand new Maseratis.

g) All of these uses compete. If people want to buy mobile phones instead of CDs, then the CD shop shuts down and is replaced with a mobile phone shop (or the canny CD retailer starts selling mobile phones on the side). The flats will be occupied by the people who work in the most profitable local industries, they might lose their job in the CD shop and be taken on by the mobile phone shop. Etcetera.

h) Occupiers who have to pay rent will always be the people who are best able to capitalise on the opportunities offered by that location or who can earn most by working within commuting distance of that location. So making people pay rent is not in itself a bad thing; where it goes wrong is allowing a privileged class to collect those rents rather than pooling them for the common good.

So as we see, land is not a narrow "asset class" and land rents themselves are a very broad-based and inherently stable stream of revenue/flow of wealth, which can be taxed with impunity.