Tuesday, 28 November 2017

Killer Arguments Against LVT, Not (427)

Via MBK, a fairly positive article about LVT at Bloomberg, which then goes into the political objections:

Why so unpopular? Here's Friedman's theory:

"It's not unpopular for good economic reasons. It's unpopular in my opinion for one simple reason: It's the only tax left on the books for which people have to write a big check."

Income taxes and Social Security contributions are withheld from paychecks before the recipients get their hands on the money. Sales taxes (and value-added taxes outside the U.S.) are remitted by merchants and other business. It's only with property taxes that a regular person gets a bill and has to pay it.

Seeing as Friedman himself helped design the US PAYE system back in the day, this is partly his fault.

As the author of the article himself explains in footnote 3, it is perfectly possible to deduct LVT monthly from paychecks via the PAYE system. That would be a good idea, even if we only have a low level property tax, like Council Tax. If LVT replaced taxes on earnings and output, for most working households, the total tax deducted would go down. For lower income pensioners (Poor Widows In Mansions, whose annual tax bills would inarguably increase), there would be the deferment option anyway.

If people are thinking of buying a home, the decision will be no different to now - they compare the rent they currently pay with the total of mortgage payments (and LVT) which they (as landowners) will have to pay. Experience shows that recent FTBs pay roughly as much on their mortgage as they did on rent, or would have been paying if they'd been renting the home they ended up buying. There's no reason to assume that this would change - the two would move in line. So the choice would be between paying £1,000 rent a month and paying £600 in mortgage repayments and £400 in LVT a month (or whatever), absolutely no disincentive to owner-occupation.

I can think of at least two other reasons for property taxes' unpopularity that are actually side effects of what economists like about them. To wit:

1. Property tax bills can rise without property owners doing anything, and
2. Rising tax bills can push property owners (homeowners in particular) to make economic decisions they might prefer to avoid.

People can adjust their spending, and often their income. But they can't help it if, say, house prices go up 80 percent in just three years -- as they did in California from 1975 to 1978. Well, actually, they could help it, by going to the polls in June 1978 and approving Proposition 13, a set of restrictions on property tax rates and assessments that have shaped the state's economy and government ever since.

Argument 1 is classic Homey DoubleThink: "I worked hard, invested wisely and deserve my land value increase; but as I contributed nothing towards the increase, I shouldn't be taxed on it".

Basing LVT on selling prices is a bad idea as they fluctuate wildly (unless you are doing a really low level LVT of 1% or less). Proper LVT would be based on rental values, which go up in line with local average earnings.

So let's assume a typical couple's wages are £4,000 a month and their LVT bill is £600, so their net wages are £3,400. If wages go up by £100 a month in that area, rents go up by a bit less £100 a month and their LVT goes up by a bit less than £100 a month, let's say from £600 to £680.

A 13% increase in their LVT bill sounds dramatic, but even if their wages don't go up, their net wages only fall by 2.4%, which they'd barely notice. Even if they think, sod this home-ownership lark, let's go back to renting, there's no incentive to do so, because their monthly housing costs would not go down as a result (if they stay in the same sort of home in the same area).
If we think all this through to its logical conclusion, LVT will then be attacked from the left by the Socialists, who say, "Ha! What you Georgists really want to do is price lower earners out of "nice" areas! You bastards!"

True dat, but so what?

Younger people and tenants of all ages are already priced out, even out of cheaper areas. It's only older low earners who bought decades ago who live in "nice" areas. Secondly, taxing land wealth (which is highly concentrated in a few hands) instead of earnings reduces inequality overall, it's redistribution from the few to the many, which is one of Mr J Corbyn's better slogans. Low earners who bought decades ago in "nice" areas are very much among "the few" and the priced-out under-40s; tenants of all ages; and low earning owner-occupiers who live in normal areas are "the many" for these purposes.


Graeme said...

How many people vote against PAYE or paying council tax in 12 installments? If we could do away work Vat and have a few percent deduction on the restaurant bill, what's not to like. Next up, who is going to bother going to Eire on a booze cruise?

L fairfax said...

"Low earners who bought decades ago in "nice" areas are very much among "the few" "
But for some reason they are very important to politicians and the press.

Lola said...

The whole taxpayers dont like writibg big cheque argument against lvt is specious. That price signal is a great benefit. The people who really don't like that transparency are governments and bureaucrats.

Mark Wadsworth said...

G, does anybody not pay council tax in instalments?

LF, they are just a human shield for the big landowners who are scared of LVT.

L, you're supposed to hate paying tax. That's the beauty of LVT, it's an in your face tax not a stealth tax.

Elizabeth Sumner said...

A modest proposal Mark. Have you considered condensing your numerous posts on LVT into a book? I'd buy it for my Kindle. Nick.

PS. This sent from my wife's A/V for obscure reasons.

Mark Wadsworth said...

N, thanks, I have of course vaguely thought about it, but this is a work in progress.

I summarised most of the main ones at kaalvtn.blogspot.co.uk, that is the closest I've got to "a book".

Plus I wouldn't have a clue how to go about putting it all into Kindle format.

Kj said...

Look here, the Irish has figured this out, and got loads of payment opportunities, and that's a smallish tax AFAIK.

To emulate the "success" of witholding income tax it would have to be mandatory though, but there's all sorts of incentives you could add before that; negative interest bonuses on installments through PAYE, credits for prepayment to go against increased assessments, etc. etc.

Mark Wadsworth said...

Kj, good link, ta.