Modern Monetary Theory and Land Value Tax

Random left the following lengthy comment on Lola's post on why LVT is inevitable, tidied up as follows:

Every pound of govt spending comes back as taxation.

To realize this you have to think harder about what taxation really is for. It certainly is not to 'fund' spending. It is to stop spending become inflationary. Once you realise this you see people voluntary tax themselves - it is called 'saving.' In MMT it is referred to 'voluntary taxation.'

So we get the equation Govt spending = local saving + net imports (foreigners saving) + tax.

Now we can argue over who gets compulsory taxation and who gets voluntary taxation. But it has nothing to do with public services.

The main power of billionaires (even if they don't know it yet, and if rich people are reading this, then yep) is the ability to spend their billions on real resources and cause inflation. Then govt has to cut spending/raise taxes to stop it.

Once you see things from the MMT point of view it is very clear. For example in developing countries capital controls won't be all that is needed. The govt needs to ban imports of luxury goods as rich people spend money on foreign goods and the exchange rate declines. There is tons of material on this - Neil Wilson's site on economics displays things very clearly to accountants and he hammers these types of points home. Bill Mitchell's blog is good as well.
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There is a lot of truth in that, but all roads lead to Rome, and the kind of tax which dovetails most neatly with that is a tax on rents and monopolies (mainly land) i.e. LVT.

Why is LVT therefore vastly preferably to taxes on income, assuming its main aim is to address inequality, lack of private saving and current account deficits?

1. Equality is A Good Thing in an of itself, provided the 'costs' of achieving equality do not outweigh the benefits - there is no point levelling people down, the idea is to level people up.

The prime driver of inequality is land ownership, that is between Baby Boomers and younger generations; but more importantly, the really rich people get most of their wealth or income from land, banking (80% of bank loans are secured on land) and other monopoly rights (landing slots, broadcasting rights etc). As others have pointed out, in the UK there are more estate agents/letting agents than school teachers.

2. Private saving is generally regarded as A Good Thing and there is plenty of evidence to show the negative correlation between land prices and the savings ratio. So keep land prices low and stable and you get more private saving; keep taxes on profits low and you get more investing. Win-win.

3. Constant current account deficits are A Bad Thing, they are a sign that the domestic economy is running below potential. The UK's current account deficit is running at about 6 per cent of GDP. How would LVT help..?

i. Removing taxes on economic activity helps the economy grow; reducing the average overall rate from about 50% to 20% would mean that the economy expands by about 12% (the deadweight cost of taxes are the tax rate cubed). So people are more likely to spend their money in the UK because there is more to spend it on. So that's the trade deficit sorted (see Denmark in the 1960s).

ii. More private saving = less importing.

iii. The bulk of monetary inflation is down to land prices; with LVT in place, this kind of inflation would not be an issue. The natural tendency of free markets and dynamic capitalism is for prices to fall gradually over time (relative to wages i.e. people are more productive).

As to the last paragraph:

4. With LVT, you don't need 'capital controls', which are a recipe for inflation and all sorts of other skulduggery. When foreigners 'invest' in the UK, they seem to love investing in land and other monopolies, as their current profits would largely be collected as tax, there would be less leakage that way. Money which foreigners have earned here fair and square will be taxed lightly and they should be free to take their profits abroad.

5. LVT follows the principle of territorial taxation. Income should be taxed where it arises and not where it is spent. Simple observation tells us that really wealthy people are heartily indifferent to lump sum taxes on housing, what they are very sensitive about is the tax rate on income, especially on remitted income. Leaving remitted income untaxed would therefore encourage them to spend more money in the UK (until the countries they are plundering wise up and impose their own LVT).

6. Banning imports of luxury goods is a nonsense and barely enforceable in practice, in any event, what's wrong with it?

7. LVT is voluntary taxation; nobody is forced to live exactly where they do (and nobody is forced to be a landlord!), it is a tax on consumption of land. If you don't want to pay tobacco duty, don't smoke (or smuggle); if you don't want to pay so much LVT, then trade down, there will always be somebody prepared to trade up (you can't smuggle land into the UK). Everybody therefore has a choice between spending their money on other people's output or on land.