Thursday, 3 November 2016

Those Institute for Economic Affairs tax proposals.

Full report available here.

Most of the more detailed stuff slagging off existing taxes on pages 167 to 222 is actually quite good. They make the usual Faux Lib mistakes in thinking that VAT is a tax on 'consumption' and that corporation tax is a tax on 'capital', but hey.

Here's the fun part:

Location value tax

One exception [to their rule that 'wealth taxes' are bad], however, is tax that captures the location value of land. If properly constituted, a tax on location value may cause disproportionately little economic damage, because land cannot be hidden or taken overseas to avoid the tax and owners cannot respond to the tax by producing less value in its location – for the reason that they are not responsible for it in the first place.

A location value tax involves a tax on the value of land in a given location which is normally calculated on the assumption of the land being in its most valuable permitted use. However, it is a tax on the land value only and not on any associated buildings…

So far so excellent. Then come the KLNs...

A further objection arises from the fact that the burden of a location value tax falls on the owner of the land at the time when the tax is announced. The value of the land should fall immediately by the discounted present value of the expected future tax payments required under the tax. It is therefore a windfall tax on landowners and amounts to arbitrary and retrospective confiscation of the value of their assets.

That's not actually an argument against LVT, that is a huge advantage in favour. You can view it as a large one-off tax hit today, payable in instalments by whoever chooses to own/occupy the land in future; in exchange people will get a reduction in other taxes, leaving most people plenty of extra income to pay it. After the tax has been introduced, people will be largely unaffected; they are just paying in LVT what they otherwise would have paid in rent of mortgage payments (out of higher net incomes). So it's not retrospective at all, the tax (in cash terms) is due in future on the basis of where they decide to live in future.

And why does the word "confiscation" creep in? They don't describe income tax as "confiscation" of part of your income, even though that actually be true.

Over the next few pages there are the usual further KLNs, army of surveyors, poor widows etc, but still very favourable overall.

Being numpties, they estimate the site premium of all UK housing at £74 billion, which is only one-third of the true figure. But at least they propose a high tax rate of 75% (page 221), so their LVT (on housing, commercial and farmland!)would be enough to replace Council Tax, Business Rates and SDTL, so amen to that.

And even though they say that taxes should be simple, they also propose this:

To better adhere to the neutrality and transparency principles, almost all exemptions and all reduced rates for VAT should be abolished. But new dwelling construction, repairs and maintenance, and rents should not be subject to VAT. Instead, these items should be captured along with the consumption value of owner-occupied housing with a housing consumption tax which should be set at the same rate as the standard VAT rate and should aim to mimic VAT.

A system such as this this operated in the form of domestic rates until its abolition in 1990, when it was replaced by the community charge (‘poll tax’) and then council tax. The rates were intended to be reassessed frequently but, in practice, reviews were usually long delayed, which led to even stronger pressure to resist reviews as the changes in particular households’ tax rates that the review would lead to would be so great. This distorted spatial patterns of housing consumption and opened a gap in the level of taxation on housing versus other consumption.

To avoid repeating this problem, three design features should be implemented:
• Assessed rents should be automatically increased annually in line with a local rent index.
• Rent reassessments should be carried out at a fixed frequency, perhaps every four years...

In isolation that seems better than what we've got, but why bother with two taxes on essentially the same thing? Elsewhere they point out the stupidity and unfairness of levying two layers of income tax on employment income (income tax and national insurance), why have two similar, smallish taxes on housing instead of one bigger one? And why should the rate be the same as normal VAT? The normal VAT rate should be heading towards zero, for a start.


ThomasBHall said...

Maybe this is why they are looking for a new Economics head? ;)

Sean Vosper said...

Actually I think this is pretty big in fact - for respectable think-tank to endorse so starkly the LVT I think is pretty badass really.
Maybe, just maybe, there'll be one of those tipping point things when it surges. After all Lefties can get behind the whole impossible-to-evade thing. In fact in many ways its a far more "lefty" thing than a righty one. I've seen Dillow and Monbiot endorse it - and others i think.

Mark Wadsworth said...

TBH, explain?

SV, yes, that chapter cheered up a lot.

Funny thing is, the bloke who wrote it is from the "Taxpayers Alliance", a fairly right wing think tank who do excellent work pillorying government waste but are funded by the land owners and rent seekers lobby and always say that Council Tax (the UK's low level property tax) and Inheritance Tax are the worst taxes.

ThomasBHall said...

MW- I just remembering that the IEA was recruiting for a new chief economist recently. My joke was that this obvious call for LVT had upset some people and was why the old one had been let go. Not a great theory/joke I know...
The TPA connection is very interesting too...

Ben Jamin' said...


I think your theory might be true. Booths religious convictions may have lead him away from the hard line of the other Fauxs. He seems like a half decent thoughtful chap.

The fact the TPA, IEA, City AM and Telegraph regurgitate the same crap, by the same people, leads me to suspect someone is pulling the strings behind the scenes ;)

@ MW

If they really wanted to boost growth and radically simplify the tax system, they'd have cut and pasted your plan.

But they didn't, because they are hypocritical tossers, whose minds have been terminally infected by anti-State propaganda.

You are being conciliatory as usual, which I'm sure is the right approach and will wear them down. Eventually. Only you won't get any credit for it.

Mark Wadsworth said...

TBH thought so just checking

BJ of course I won't get credit, who cares? It cheers me up when people adopty ideas, credit or not.