Sunday, 20 September 2015

Killer Arguments Against LVT, Not (370)

There is a troll who wastes our time over at the LVT Facebook group, Kj and I went into battle, and so far the best he could come up with is this:

Your LVT proposal doesn't have efficiency or effectiveness or fairness built into it…

"Fair" is a much overused word. Clearly LVT is far more "efficient" because people would have to pay for what they consume. The economy runs more efficiently when businesses and households have to pay market value for their inputs, whether that is food, electricity, labour or ground rent. Anybody who says that LVT is inefficient because landowners would have to pay the same as tenants might as well say that the economy would run more efficiently if a select group were provided with free or below market price food, electricity or labour etc.

… you could get much more out of a Google by taxing company profits than a low level LVT.

I'm not aware that anybody ever argued for LVT with the justification that Google would pay more tax. For a start, nearly all businesses would pay a lot less tax than now if we did a tax shift. Two-thirds of businesses rent their premises and the tax on that rental value would be payable by the landlord, not the business.

Under current rules, Google and other large corporations take the piss and pay a lower overall tax rate than smaller companies, and it is quite possibly the case that Google would pay even less tax with LVT, but so what? I don't see what harm they are doing, they are not causing pollution or anything and provide wonderful 'free' stuff like Google Maps. And in relative terms, smaller businesses would see a much larger saving as they are currently paying a much higher effective rate than Google.

On the facts, most of Google's profits spill over into the higher rents payable by their employees, who tend to be young and hence renting or looking to buy, so any 'shortfall' in what the government gets from Google (the company) would be compensated for by collected more tax from Google's employees' landlords.

You now have a tax shortfall to make up.

??? LVT can be set at any rate between 1% and 100% of the location premium/rent. However much or little it raises, this means that other damaging or regressive taxes can be reduced accordingly. There is no 'shortfall'.

Note there is already an LVT in place via tax on rental profits - so all you've done is rob yourself of company profit tax.

Yes, any system which just taxes income also taxes land values to a greater or lesser extent, because landlords/owner-occupier businesses pay tax on their rental/business income and tenant businesses pay lower rents. And by and large, higher earners pay more tax and buy or rent more expensive homes for a lower price out of their net incomes.

And, in the pantheon of taxes, a low-rate income tax or corporation tax (up to 20% let's say) is not the worst tax in the world. LVT receipts ought to be used first to cut any tax in excess of that (higher rate income tax, payroll and sales taxes). A flat-rate income/corporation tax would be the last to be phased out.

Earlier in the troll was of course bewailing that some businesses would pay more in LVT than they currently do in corporation tax. Clearly, those owner-occupier businesses who are not making optimum use of their sites would pay more - the result would be that they either pull their socks up or are replaced by more productive or profitable business.


Bayard said...

"Two-thirds of businesses rent their premises and the tax on that rental value would be payable by the landlord, not the business."

Don't we already have LVT for businesses, called "business rates"? So to the extent that the business rates come out of the rent, any increase in Business rates when they change to LVT will come out of the rent, too.

"Clearly, those owner-occupier businesses who are not making optimum use of their sites would pay more - the result would be that they either pull their socks up or are replaced by more productive or profitable business."

Another way to look at this is to split the business in two, with one part, the "landlord", owning the premises and renting it to the other part, the "tenant". If the landlord bit is charging a market rent and making a profit, whilst the tenant bit is amking a loss, then the business isn't really, say, a widget maker, it's a landowning business playing at widget making. Some companies already do this split into a property holding company and a manufacturing company.

Mark Wadsworth said...

B, yes, BR = crude form of LVT, I have always said that.

As to your second point, my mum explained this to me when I was twelve and it struck me as blindingly obvious even then.

Henry Law of the LVTC once explained this concept to a young chap he met on the train who had taken over a 'struggling' family business. The next time they bumped into each other, the young chap told HL that he had taken heed, had shut the business and was renting out the old shop for twice as much as he used to make in 'profits' for about 1% of the effort. The young chap had lived handsomely ever since (having become a full time/semi-amatuer musician).

Shiney said...


So if TPTB abolished VAT and introduced full on LVT, including for commercial property, what would be the effect on a landlord who had opted to charge VAT on his rental income? (as my landlord does).

And could said LVT totally replace government receipts from VAT?

Just wonderin' thass all.

Ben Jamin' said...


There's no doubt that the majority of landlords would be worse off under a LVT, because on average 2/3 of their income comes from location values.

To what extent this happens depends on if LVT is shifted onto other taxes only once, or under a fullon LVT 100% of it is always collected.

And as all taxes are "land taxes" insofar as they lower rental incomes/selling prices, it is highly likely IMO, that given the current ratios of wages/rents/interest that we could simply miss out the middle man (producer) and tax land directly (landowner).

Mark has calculated we've got around £250bn per year of land rents we can cut taxes on production with. Enough to scrap all bad taxes and leave only a flat 20% on all income.

A good start, and then we'll see how rental values respond and cut that 20% as and when possible.

Mark Wadsworth said...

S, Business Rates is pretty close to LVT, the overall average rate expressed as % of site premium must be around 50% (higher in some areas, lower in London). And some landlords charge VAT on their rent. And plenty of landlords actually pay income tax or corporation tax. And there's SDLT on new leases. So the true rate is probably between 50% and 100% of site premiums.

So using our medium term tax plan (see BJ's comment), the total tax payable on commercial premises probably would not change much in aggregate. Honest landlords who pay those four layers of tax (see above), especially those in declining areas would pay a lot less; pension fund landlords who own bank buildings in London would pay more.

BJ, thanks for back up.

Random said...

"You now have a tax shortfall to make up."
Not if they spend the money.
Idiot. Anything this guy says you can ignore from now on.
This is linear thinking that does not see the Circular Flow of money, due to use of words and not diagrams.
Anyone with money can do three things:
1. Pay taxes with it
2. Spend it
3. Save it
If they choose option 2 spending = income and repeat.
The "tax shortfall" is due to people saving.
Spending from anyone (incl govt) creates an amount of real activity and unsurprisingly tax.
The TL;DR version is the money is spent and further down the line generates tax.

Shiney said...

@BJ and @MW

Thanks... so somebody like my Landlord (a small Ltd Company) would probably be neutral or maybe even better off.

So its really only the BTL Landlords who rent residential property who'll be stuffed by LVT.

Mark Wadsworth said...

Sh, "yes" and "yes" respectively.