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".