Thursday, 3 April 2014

Killer Arguments Against LVT, Not (321)

The left wingers don't like LVT because, they argue, "the poor" would pay more. Tax higher earners, they scream.

The right wingers don't like LVT because, they argue, that "the wealthy" would pay more. Tax lower earners, they scream (not directly, but by implication: reduce benefits, have a poll tax or regressive taxes like NIC and VAT).

Clearly, they can't both be right as they have just contradicted each other and recommended opposing policies - they have both missed the point anyway - but they can maintain their delusions by picking diagonal comparisons and not comparing like-with-like, which is the only sensible basis to justify words such as "more".

The left wingers look at it this way: LVT would replace existing property taxes and income tax, let's say, and the LVT on each similar house in one street would be exactly the same. So the lowest earners on that street will have to pay more tax (unless they go and get themselves a job, duh) and the highest earners will pay less tax.

The right wingers look at it this way: LVT on homes in expensive areas would be more than LVT on homes in cheap areas, so rich people in expensive areas would pay more than people in cheap areas.

So they are using two definitions of "poor" and "wealthy". The left wingers look just at earnings (and ignore land values) and the right wingers look mainly at land values and have a slight disdain for people who actually work for a living.

And the left wingers are comparing current with future tax bills (the more sensible approach), and the right wingers are comparing expensive areas with cheap areas. It's two completely separate topics and different ways of looking at things.

The right wingers' approach is stupid because there is a very high correlation between average earnings in an area and average rental values (excepting possibly retirement areas like the South West or parts of Central London where nothing bears any relation to anything any more). So the government already collects more in income tax or just about any other tax from people who live in expensive areas, so by and large the tax paid by people in any particular area would stay pretty much the same under income tax or LVT.

On the whole, there would be far more winners than losers, whether among low earners or high earners, even in the short term, especially if you assume a roll-up and deferment option for pensioners*, and in the medium or long term, everybody will be better off (much larger cake shared slightly more equally).

*This whole "But I want to leave it to my children!" is a load of rubbish anyway. Every £1 more taken from the value of homes of deceased pensioners means £1 less taken out of earnings; and every £1 fall in house prices means that future homebuyers will save £2 in mortgage repayments.

So 99% of your children and grandchildren will end up much better off, especially those prepared to work hard. According to HMRC Table 12.4, the total (albeited inflated) value of residences inherited in the UK in 2010-11 was about £30 billion a year; which is 2% of GDP or 3% of total salaries, pensions and profits each year.

Even if the rolled up LVT payable on death wiped out every penny of that £30 billion a year (unlikely but possible); the saving to younger generations in income tax and other taxes and mortgage repayments each year would be much more than that. And don't people value things more if they've actually had to work and save to buy it, rather than having it fall into their laps later in life?


Lola said...

A tax that upsets both lefties and righties is probably the best type of tax.

Mark Wadsworth said...

L, yes, that's another argument in favour.

Physiocrat said...


Consider this sad story... (apologies if you have seen it before)

A 96 year old widow is in the same two-up two-down with an outside toilet that she moved into in 1946 when she was 30 years old. She had married at the start of the war and her husband fought in the Far East and was captured by the Japanese. He bought the house, badly dilapidated, for £250 with the help of his demob money. They patched it up in what little spare time they had, and a couple of children came along. Unfortunately whilst in the hands of the Japanese he had picked up a tropical disease from which he never recovered, and after a few years of ill-health died in the early 1950s. After that his widow worked for a meagre wage to supplement her army pension. By living frugally, she managed to bring up the children and build up a pot of money in a private pension scheme. But that collapsed due to Gordon Brown's pensions raid, and now she is left with barely enough to get by. Nevertheless, she still does a lot of work in the local Oxfam Shop. The house is now worth £2 million. Under an LVT system she is going to be living on the streets.

The sorry story would be compounded by the problems her grandchildren will face. They are currently priced out of the market and so she would like them to inherit the £2 million house to divide between them and use as deposits to help them onto the ladder and give them a good start in life. But under LVT, houses will become even more expensive, because the price of houses will have to go up to pay the LVT. Worse still, LVT will make her grandchildren homeless as well as they will not be able to afford the rent on their current homes because the landlord will add the LVT to the rent.