Sunday 30 June 2013

Killer Arguments Against LVT, Not (305)

From The Economist, having explained the merits of LVT quite thoroughly first...

Economists are more divided about the “fairness” of property taxes than they are about their efficiency. For a long time the prevailing consensus was that property taxes were regressive because the burden would be passed on to tenants and workers.(1) Today another school of thought is more popular. It argues that in an efficient capital market the burden of property taxes is borne by owners of capital across the economy; and since capital owners tend to be richer, the tax is likely to be progressive.(2)

Nuanced judgments about progressivity are not what drive political opposition to these taxes. Voters hate property taxes because they are what economists call “salient”: the burden is obvious, easy to calculate and hard to avoid.

An intriguing new paper by Marika Cabral and Caroline Hoxby at Stanford University shows what a difference this makes. Most American homeowners pay their property taxes in one or two lump sums during the year. Around a third (mainly those with mortgages) have their tax payments bundled in with monthly mortgage payments. The economists find that how people pay their property taxes affects their tolerance for them.

The more people pay in lump sums, the lower property taxes are likely to be. For property taxes to become a much bigger source of revenue, governments must apparently ensure people don’t realise how much they are paying.(3)


1) Was it? I thought that proper economists had always agreed that such a tax was paid out of the rental income which the landowner would collect in cash from tenants or be enjoyed by an owner-occupier? Nothing gets "passed on". To whom can the owner-occupier "pass on" the tax? Nobody. To whom does a landlord "pass on" the tax if his premises are vacant? Nobody.

2) Firstly, land is not "capital", it is "land".

Secondly, of the total income of productive businesses, there is a Pareto distribution equilibrium that the employers/owners/shareholders (who own the "capital") gets about 20% - 25% and employees (who provide "labour") get 75% - 80%. Thirdly, most of that "capital" is just accumulated 'labour" so if a business owns a machine which cost £1 million, that means that the business has paid £800,000 for"labour" and 20% to the man who owns the business which makes machines etc.

Thirdly, it is quite simply the case that the distribution of land ownership by value is very, very skewed, far more skewed than "capital" which is in turn far more skewed that "earned income". Therefore a tax on the rental value of land is inherently more "progressive" than a tax on earned income, Poor Widows In Mansions notwithstanding.

Finally, we know that LVT would be highly progressive, or else the rich and powerful landowners and bankers would devote their propaganda efforts to supporting LVT, rather than attacking it mercilessly.

3) True, I suppose. But there is no reason why LVT cannot be deducted monthly from salaries, like existing payroll taxes, or withheld welfare payments, or rolled up until death in the case of pensioners.

Another sneaky idea of mine was "Georgism without LVT".

You simply have a fairly high flat rate of income/corporation tax, say 60%, collected via PAYE or via Self-Assessment, but for each household or business, it is capped at the amount of LVT they would be paying under an LVT-only system, so actually only low earners who own a home with a high rental value (or marginal businesses who own premises with a high rental value) would be paying the 60% marginal rate; everybody else would have a marginal zero per cent income tax rate, and the overall average rate would be a lot less than 60%.

On a very local level, that looks regressive, i.e. if all the houses on one street have the same LVT bill after deducting personal allowances - say £5,000 - then the household which earns £6,000 a year is paying £3,000 tax (50%), the normal household which earns £25,000 will be paying £5,000 tax (20%) and the high earner household on £50,000 will only be paying 10% tax, but so what?

On a national level, it is still progressive as the rental value of land in high wage areas is higher as a proportion of earnings, so in an area where the average household earns £50,000, the tax will be £15,000 a year or something.

And on a meta-level, clearly the tax is still "progressive" because in the absence of the tax there is an eternal feudal trickle upwards of wealth - anything which reverses this flow must be "progressive".

7 comments:

Lola said...

I think that the point that tax payers don't like LVT is not a criticism of taxpayers at all. it appears to be the classic argument made by taxers for stealth taxes. the very in yer faceness of lvt would do for high tax / high spend gummint

Mark Wadsworth said...

L, yes, the "salience" of LVT is actually a plus point, but fair enough, that's no reason not to collect in monthly instalments via PAYE etc.

Some people won't care or notice, and the people who do care have got a choice - trade down or earn more.

Patrick said...

A mitigating factor for LVT's salience is that it'd only fall directly on owner occupiers and and landlords. So a good portion of the Country wouldn't be getting an unwelcome letter from the taxman every month.

One thing I've not been able to get my head round is the "it won't be passed on to tenants" As the Rent would fall on all landlords and owner occupiers at the same time aren't they going to "pass it on" at the same time? The Country's tenant population won't be able to pack their bags en mass.

Mark Wadsworth said...

L, of course tenants won't leave the country en masse - that is entirely unnecessary.

We know perfectly well that in high rent areas, tenants will share houses, flats or even bedrooms.

So although rents in London are twice as high as in Birmingham, tenants in London do not pay on average twice as much because they'll live or three or four to a home instead of one or two to a home etc.

If Birmingham landlords all tried to double their rents to cover the LVT, then they'd find that tenants all downsize or room share etc, so Birmingham landlords then end up with a third of their homes empty - and they still have to pay the tax.

So then the owners of those vac ants will have to drop their rents again until they can find tenants.

It's basic observable economics and universally accepted as true - tax is always borne by whichever is least price sensitive. Land is totally price insensitive, tenants and purchasers are price sensitive.

Patrick said...

Thanks for the explanation. ;-)

Mark Wadsworth said...

L, another way of looking at this is as follows:

Instead of levying LVT at approx. (say) 3% of the current selling price of houses, the government just makes a one-off levy equivalent to 60% of the value of each home and then allows that to be repaid on an interest-only basis at 5% interest.

Now, what if a landlord loses at a high stakes casino, and gambles away 60% of the value of all his homes, and the casino tells him he doesn't need to do a fire sale, he can just repay the amount with interest at 5%. Can that landlord then go to his tenants and bump up the rents?

Of course not. And why is it any different if all landlords lost 60% of the value of their homes at the casino?

The only way to rid yourself of this 3% a year payment is to sell the house (because the charge is on each home itself and not personal to the landlord), and then the next purchaser has to pay it - but when the selling price is being negotiated, the purchaser will deduct the liability from the selling price.

Lola said...

Another good thing could be that ( if LVT was combined with bank reform) it'd likely do for house price inflation.