Sunday, 19 April 2015

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.

32 comments:

Lola said...

Nicely argued.
For various serendipitous reasons I browsed to this http://en.wikipedia.org/wiki/Monopoly_%28game%29 today. I was reading a Buzzfeed piece that was saying that Monopoly as a game was boring. But the real life game of rent seeking is far from boring, is it not.

Lola said...

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).. Go on do me a favour. Set out the sum for me.
Also, where does that rule come from?

Lola said...

I have also come to the vague conclusion that LVT is a very 'civilised' and 'civilising' tax. That is, taxing monopoly rents of all types is 'civilised'. The corollary being I cannot for the life of me see any (social?) justice in income taxes or transaction taxes.

Taxing one's labour, that is time, and ones accumulated saved labour, that is savings, and the transactions which are fundamental to the exchange economy are self-evidently 'wrong', or even immoral.

Ben Jamin' said...

How does MMT fit in to a Anarcho-Capitalist Utopia?


Where there is no Government, only a thriving community that shares land rent equality, all services are provided privately, and there is no taxing authority?

Bayard said...

"but more importantly, the really rich people get most of their wealth or income from land"

In the C18th and the early C19th, almost all the rich people, (the landed gentry and the aristocracy) got all their income from land, even more so than most other European countries, as the UK had no peasantry left. This is the period that everyone aspires to turn the clock back to, provided, of course, they are the landed gentry and not the toiling masses.

The Stigler said...

Lola,

Monopoly is a terrible game and one that I now refuse to play. Either you spend hours and hours in a war of minor attrition with a couple of players left owning properties and flat refusing to give another player Mayfair and Park Lane (which massively destroy the opponent) or someone gets Mayfair and Park Lane and it's all over rather quickly.

And kids just get bored with it. At least with Game of Life, it's all done in half an hour (although GoL has probably as much to indoctrinate kids about going to university as schools have ;) ).

Ben Jamin' said...

@ Lola

These days I tend to think of it about aligning incentives.

Taxing income/capital is a coercive transfer of wealth/welfare from producers to non-producers.

This obviously distorts incentives to produce.

Likewise, capitalised land rent merely transfers wealth from producers to non-producers.

Again this distorts incentives to allocate/use Land optimally which reduces output.

If this loss of output isn't bad enough if the amount people pay in tax isn't the same proportion (relative to other people) as land they own by value, we get a net transfer of wealth/welfare.

So, in the UK, because the top 1% of households own a disproportionate amount of land by value than they pay in tax(about three times more), the economic system is nothing less than a giant Ponzi scheme.

It is set up to trickle about £100bn pa of wealth/welfare upto the top 1% of households each and every year.

When we align incentives, good things happen.

Prosperity and equality take care of themselves, without the need for State interference.

Quite simply, incentives are only aligned we we have a fair distribution of the three factors of production.

That means produced factors(income/capital) remain private and the non-produced factor(land) is equally owned (value shared).

Not so difficult. Odd how economists/politicians fail to see it though isn't it?

Lola said...

BJ. It doesn't. Personally I reckon mmt falls form on mis defining inflation and by assuming that the state has a monopoly of money by right, as it were.

Lola said...
This comment has been removed by the author.
Ben Jamin' said...

@ Lola

Then at best it is treating a symptom rather than a problem.

Once you hear people recommending banning the import of luxury goods (define that) then you know it's probably all garbage.

Lola said...

BJ. As far as I understand MMT, then yes, I think it seeks to explain the status quo and the symptoms that flow from that and propose a fix. It's all very statist.
FWIW I think that the state and money are market developments. The development of the state grows out of 'markets', even including monarchies. Money ditto. It's just a system of breaking down value into manageable gobbits to enable the exchange economy. MMT seems t think that money is 'law'.
Look, this is only a short comment and I know that there is a lot more too it than that.

Bayard said...

"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."

That does strike me a bit like someone, having unbolted the legs and lifted the top off a table, concluding that the purpose of the top was to stop the legs falling over.

If the UK elected a radical hard left government, like in the film "A Very British Coup" and the governemt revoked all freehold titles and replaced them by leaseholds, with ground rents at market rent prices, thus funding all government services, then government revenue would be rent, not tax. Would this be inflationary? I doubt it.

Even if you class all domestic government revenue as tax, you could have a state, let's call it Brunei, which funds all its government spending from selling the oil that it (the state) owns. There would be no taxation, but would this be inflationary? It doesn't seem so.

Random said...

"Where there is no Government, only a thriving community that shares land rent equality, all services are provided privately, and there is no taxing authority?"
A "community" getting together is government. You can do this via volunteers but it generally does not work well.
You have to understand what taxes are a way of transferring resources from the private sector to public sector. As rents/mortgage interest transfer to renters.
Unemployment is a type of excess capacity and that is always called by a monopolist restricting supply.
There is (usually) no unemployment in a barter economy.
If I impose a tax of 1 card on everyone in a room, and to leave it you have to pay, you are all unemployed in terms of my cards. If there are 30 people and only 29 cards are handed out, we have a problem.
And LVT/rents is dependent on money supply and is an auto stabiliser.
So currency monopoly needs to be managed correctly, just like land monopoly.
If land is "shared equally" you need to hand out LVT as CI. If you just burn the money people won't have any to use.

Random said...

let's call it Brunei, which funds all its government spending from selling the oil that it (the state) owns.
The govt can nationalise (seize) things and charge for them, this is another way of transferring resources from private to public sector. In which case the "tax" is on use of oil use. It is all about real resources.
Money is a distraction. If the govt taxes oil at 50% profits and then prints some money and buys ice cream from everyone, the "wealth" came from oil.
"Would this be inflationary? I doubt it."
You'd have to ask MW. A shift from income tax, etc to land will likely be neither.
Getting rid of income tax is inflationary, LVT is deflationary.

Random said...

"assuming that the state has a monopoly of money by right, as it were."
MMT explains how things are at the moment and how to improve them within the system. It doesn't suggest other ways of doing things.

Lola said...

R.@17.45. Yes, that's the point I was making. As a general principal it's bets not to waste time trying to fix a badly designed system. Better to scrap it and start over.

Bayard said...

"The govt can nationalise (seize) things and charge for them, this is another way of transferring resources from private to public sector."

But in Brunei, AFAIK, the oil never belonged to the private sector, nor did any minerals in the UK until some king, I think it was Charles II, started allowing landowners to own the minerals under their land. Also, in Brunei, the money from oil is from outside; its domestic use of oil is negligible, so the money the state gets from oil is not a tax.

Random said...

"Also, in Brunei, the money from oil is from outside; its domestic use of oil is negligible, so the money the state gets from oil is not a tax."
I was saying if there was a tax on oil hypothetically, the govt is getting its wealth from demand for oil. If.you have a strong external sector a la Norway, you can get money from outside but by definition not every country can be a large net exporter.

Random said...

In Brunei you have negative foreign saving (net imports.)
The point the govt has to gain real resources somehow either by levying a tax or controlling resources to ensure demand for currency.
Bitcoin for example works as a currency despite no taxation. But tax ensures the currency is stable and in demands.

Lola said...

R But tax ensures the currency is stable and in demands. only with legal tender laws, surely?

Random said...

http://www.theguardian.com/politics/2015/apr/19/what-would-happen-if-britain-left-the-eu-consequences-of-exit
What a steaming pile of nonsense.

Lola said...

R The EU don't really get this Liberty and self determination thing do they?

Random said...

L, the EU sucks.

Lola said...

R...the life and wealth out of all of us.

Bayard said...

"But tax ensures the currency is stable and in demand"

Interestingly the archaeological record shows that money was invented as a means for the citizenry to pay tax and the state to pay its army.

Random said...

"Interestingly the archaeological record shows that money was invented as a means for the citizenry to pay tax and the state to pay its army."
Right, money always works by coercion and force. So all this "markets invented money" is nonsense.
Markets created credit though. If I build Lola a house, Lola then buys some sugar at Bayard's convientience store, then if all know and trust each other we can work well. Credits/debits are ancient.
When we don't know each other, that's money comes in and facilitates those transactions.
And we still have credit now, through the banking system, except the banks are pegged to the govt money.

Random said...

"only with legal tender laws, surely?"
If you have to pay tax to the govt and don't pay, then you go to jail or get fined more taxes. You can't pay taxes in Bitcoin or Gold.
With LVT on the other hand, the govt stops enforcing your title deeds and just sells your house. Because here the govt is providing you with a service.
This is particularly the case for full on 100% LVT, where the govt effectively acts as a giant landlord. I agree with MW that this "dovetails" neatly with MMT. It is impossible to avoid as everyone has to live somewhere. The govt don't even have to know who lives there to sell the house.

Dinero said...

Taxes aren't paid in reserves they are paid in Deposits.

Consider if the Government taxed £1B in one day and Spent £1B in the same day its possible that no reserves would change hands at all.

Random said...

Some links for Din :)
https://www.gov.uk/government/publications/debt-management-offices-exchequer-cash-management-remit-2012-13

http://www.parliament.the-stationery-office.co.uk/pa/cm200102/cmselect/cmpubacc/349/349ap02.htm

http://www.bankofengland.co.uk/markets/Documents/sterlingoperations/summaryops130502.pdf

Dinero said...

Thanks

good links.

And they do demonstrate that taxes are paid, and the government spends, in Bank credit money - deposits.

Random said...

The govt spends by crediting bank accounts and debiting bank accounts.
Because of course there is a peg between the commercial and central bank. Which is what allows a bank to function property. Why the UK could nationalise Northern Rock at the drop of a hat.

Random said...

Dinero, combing back to this, let's suppose you pay some tax. You have £100 in your bank account. The government debits the bank reserves (or vault cash) and the bank debits your account. Taxes function like forced money destruction.