Thursday, 6 July 2017

Things which cancel each other out.

I'm sure there are loads of non-tax related examples of matching pairs of reasonably popular government policies which cancel each other out. If I was aware of all of them I would probably go mad. What is worse is when both policies or policy aims are fundamentally wrong, IMHO it would be better to do neither.

Here are two real life examples:

1. The lefties, many centrists and some more moderate Conservatives think that taxing wealth rather than income is a good idea because it does not damage work incentives and leads to less inequality. The proposal is often used as a smoke-screen argument against LVT as people can't distinguish between privately created wealth and land values arising from the actions of the whole of the country and it's a bad idea anyway, but hey.

On the other hand, people like the idea of being 'encouraged' to save for their pensions with tax breaks. As higher earners have more spare income and get relief at higher rates, inevitably they get a disproportionate share of the tax reliefs and wealth inequality increases. It's a stupid idea because it discourages people from paying off debts they have now, which is always the first thing you should do if you have spare cash and the value of the tax break is largely siphoned off by the pension providers and what's left just goes into inflating share prices. So that's a bad idea as well.

But do the two ideas not cancel out?  Before we even think about 'wealth taxes' (apart from proper LVT) why not make a start by phasing out pensions tax reliefs and giving everybody a modest tax (or giving low earners progressive tax cuts/increasing in work welfare, if reducing inequality is your thing)

2. Inheritance Tax also has a lot of support from lefties because they think it reduces inequality, does it heck as like. Total revenues are about £4 billion a year, barely more than the TV licence fee. To raise significant amounts, a lot more people would have to pay a lot more Inheritance Tax and then it really would be unpopular. It's a bad idea all round. As it happens, the bulk of assets on which Inheritance tax is paid is land and buildings, so clearly, raising the same amount in annual LVT would be a much better way of doing things.

On the other hand, owners of farm land have been collecting farm land subsidies (negative LVT) for so long that we think it's normal somehow, and the nonsense propaganda that it keeps food prices down is trotted out again and again. That can't possibly be true because it is possible to separate the land from the subsidy entitlement and sell them separately*; if the propaganda were true, a farmer who buys the land without subsidy entitlement would not be able to sell his produce as it would be above market price.

The government pays out about £4 billion a year to owners of farm land. Farm land is also exempt from Inheritance Tax, that makes it a handy place to park your cash.

Don't these two cancel out? I know taxes aren't hypothecated, but the government is taking £4 billion a year from the top million or so families who own valuable urban land (and buildings) and giving it to the top few thousand really wealthy landowners. If we're going to have redistribution, let it be universal or downwards but not upwards, for Heaven's sake.

*From The Land Magazine:

Of course, if you own land on which you hold entitlements you are also able to sell them off or lease them to the highest bidder. Remarkably, although SPS entitlements were awarded to individuals free of charge back in 2005, they were not tied to specific plots of land.

As a result they have since become a tradeable commodity in their own right, willingly facilitated by land agents up and down the country. Indeed you do not have to manage any land, or even take an interest in farming, in order to take a gamble on the entitlement market.

3. Even when it comes to a tax which doesn't exist (yet), Land Value Tax, I've heard people argue in favour of:

a) a 'Sentinel Tax' which means that no tax is payable on the value of any plot of land when the tax is introduced, the tax is only payable if the value increases. This is the concession to the school of thought which says "I've paid for my land out of taxed income". It's administrative and economic nonsense, but has political appeal.

b) Something like California's Proposition 13, whereby LVT on a plot it assessed at the time it is acquired and any increase after that is ignored. Your bill will never increase. Administratively this is nice and simple and clearly, it has political appeal, even though it is economic nonsense (even worse than the Sentinel Tax idea) and pretty much defeats the object of LVT (although propbably not as bad as VAT or NIC).

But don't these two ideas cancel out? LVT can be split into a tax on the original value (taxed under Prop 13, exempt under Sentinel Tax) and tax on any increase since then (exempt under Prop 13, taxed under Sentinel Tax). If one is a better kind of LVT, then the other must be worse. They can't both be better than proper LVT.

Just sayin'.


Graeme said...

Don't the EU CAP payments not to grow crops also enter the equation? At some point, owners of agricultural land are getting paid more to sit on their bottoms than to grow crops

Bayard said...

"because it is possible to separate the land from the subsidy entitlement and sell them separately;"

That is something so bizarre that it would be rejected as too unlikely if it occurred in fiction. Can anyone think of a good reason for this state of affairs except as a boon to speculators? I suppose at least you can't claim the subsidy without owning the land, even though the reverse is true. The same is true, AFAIK, of milk quotas.

"At some point, owners of agricultural land are getting paid more to sit on their bottoms than to grow crops"

Set-aside payments were abolished in 2008, according to Wikipedia. However, while they lasted, the landowners didn't sit on their bottoms, they grew "set-aside allowable" crops on their land, like flax.

Lola said...

I suspect that this all driven by the classic political / bureaucratic technique of concentrating benefits and distributing costs. So buying ones constituency. It does not pay bureaucrats to simplify rules. The complexity of rules is what gives them power and wealth.

DBC Reed said...

As the coiner of the phrase "Sentinel Tax" I should explain that it derives from the original LVT proposed by John Stuart Mill in the programme of the Land Tenure Reform Association in 1871. This the Association makes "clear" ( as far as their late nineteenth century language allows) is dependant on the premise that"whatever value the land may have acquired at the time when the principle they contend for shall obtain the assent of Parliament, they do not propose to interfere with".So they leave the present land values as found and intercept the "Future Unearned Increase" or unearned increment.
This would make it easier to get popular support now: people demanding the right to unearned capital gains from the country's land will be shown up for what they are; with the Georgist Tax they can claim to have been deprived of what they own.
( JS Mill's papa had lain down the law fifty years earlier "Where land has, however, been converted into private property without making rent in a peculiar manner answerable for the public expenses, where it has been bought and sold upon such terms and the expectations of individuals have been adjusted to that order of things, rent could not be taken to supply exclusively the wants of government without injustice". James Mill "Elements of Political Economy 1821).This kind of attitude is still deeply ingrained, probably irremovably.
In 2008 I tried to get Land Taxers to consider the Sentinel Tax because it would obviously be best to introduce it when land values were down to stop them going up again.The usual shower of abuse ensued.
My supposition was that the tax would be re-rated every tax year.Once the guarantee of unearned untaxed capital gains in land value was removed, it was likely that people would regain a natural caution (the way people thought twice about homeownership in the time of Schedule A pre 1963).They would not declare on their tax forms that house had gone up in value because of the certainty of tax. Values would drift down and, once decline had set in, there might be a disinflationary spiral.
The Sentinel Tax deserves consideration.
In the hands of insensate right wingers, George's tax would serve to rescue demand from the exactions of the land market but only so they could seize on any augmented demand to flog stuff without doing anything to improve productivity.
I commend a return to a natural Macmillanite mixed economy with a Sentinel LVT replacing Schedule A on houses.
As I used to say when teaching: originality is discouraged, all of this stuff has been thought out before.

Mark Wadsworth said...

DBC, of the two, I prefer Sentinel Tax to prop 13.