Sunday, 13 May 2018

Many Killer Arguments against Citizen's Income are equal and opposite to Killer Arguments Against LVT.

Let's take two main Killer Arguments Against Citizen's Income first:

1. If you set the CI rate 'too high', far fewer people will want to work. Implicit in this is the acknowledgement that if you set the CI at the correct rate, it will have little impact on people's willingness to work, and it ignores the fact that in real life, paying out a CI tends to increase people's willingness to work, especially if it replaces the bulk of the existing UK welfare system, which discourages from taking low paid work and rather bizarrely, subsidies wealth (farmland subsidies, housing benefit for private landlords, higher rate tax breaks for pension savings).

2. Faux Libertarians, self-appointed hard core Georgists and many on the left (whether LVT sympathisers or not) argue that paying out a CI will just go into higher land rents.

The equal and opposite Killer Arguments against LVT are:

3. 'What about the semi-retired whose home has appreciated massively in value, due to circumstances outside their control? They will be 'forced' to move into a ghetto'. Implicit in this is the acknowledgement that the gain is entirely unearned. In many cases, these people 'want to leave their valuable home to their children', for whom the gain is an unearned windfall gain on two levels.

4. 'Landlords will just add LVT to the rent and/or housing costs will increase and/or LVT will not make housing more affordable'.

5. 'If you impose LVT, the wealthy will all flee the expensive areas, so revenues will collapse'. This is inherent nonsense, it's like saying if the government offers 'free' education for kids and a 'free' NHS, high earners (and mugs) won't send their children to private school or take out private health insurance. Be that as it may, if the rental value of the top couple of percent of homes flattens off at (say) £30,000 a year (instead of £100,000s for the swankiest streets in Westminster), this only reduces total LVT revenues by a few percent or so.
Stage one, under the Six Thinking Hats technique is to put your white hat on and write down everything you know.

As it happens, and as a matter of fact, the entire cost of cash welfare payments (state pension, Working Tax Credits, child benefit, disability benefits, housing subsidies), plus the cash value of the tax free personal allowance and tax breaks for pensions saving is approx. equal to the total site premium of all UK land (housing, commercial and farmland) i.e. about £250 billion a year.

So the obvious thing to two is keep welfare spending roughly constant, but with no, or much less, means-testing, and much flatter and simpler (such that most households are little better or worse off on a completely static basis) and pay for this out of LVT receipts.

This means that existing taxes on housing and 'wealth', plus the worst taxes on output and employment (VAT and NIC) which currently raise £250 bn (after deducting dead weight cists) a year or so can be scrapped. This would leave us with two flat taxes - LVT and flat income tax (I am indifferent between a) a low flat rate and no personal allowance vs. b) a higher flat  rate and a higher personal allowance).

Then for administrative simplicity and to reduce fraud, error, under- and overpayments, we net off each household's LVT bill and CI entitlement at source.

Simple maths tells us that the average household in the average home in an average area will have an LVT bill that equal to their CI entitlement and simply pays and receives nothing. The cost of buying or renting the average home, from their point of view falls dramatically.

We also know that the least desirable areas in any country have a site premium/land rental value of zero. This applies to housing and commercial premises in the poorest areas and, to be honest, most farmland.
To put some hard numbers on it, here's a chart of the site premium - measured at today's rent levels - of an average 3-bed semi (or large-ish terraced house or large flat) in the first 96 percentiles of English and Welsh postcodes. Rents go pretty vertically upwards after that, up to £100,000s a year!

If paid out in full as a reasonable Citizen's Income (children £40/wk, working age adults £80/week and pensioners £160/week), then the CI entitlement of an 'average' household (one and a quarter pensioners, or two adults and one child) would be £10,000:

Households in the cheapest ten percent of homes will gain a few thousand pounds more CI than they pay LVT, maybe enough for a bare subsistence level. The break-even point is three-quarters of the way up; households in the top ten per cent most expensive areas will have to pay LVT in excess of CI of £15,000 or so, a bit less than they would be paying in rent. There is no reason to expect any mass internal migration, it will all just settle down.

Pensioners who want to stay put can go for the roll-up option; young people who are much more mobile will make the usual trade-off between higher wages and higher rents etc.

The one-third of 'young adults' who are currently 'forced' to stay at home and their long-suffering parents will be laughing and can split the gains.
Now, let's skip to the blue hat and think things through:

Even if KCN 1 and KLN 3 had substance, they cancel each other out. If the semi-retired couple want to stay living 'in the family home with all the treasured memories and pass it to their children', then all they have to do is go back into paid work; or ask their potential heirs to do a bit more overtime and pay it for them. LVT encourages work! So therefore LVT must be a good thing, from the point of view of the idiots who argue that a CI discourages it.

Even if KCN 2 and KLN 4 had substance, they cancel each other out, even though superficially they say the same. They must cancel out, or else rents would increase to £infinity which is clearly nonsense. There comes a stage at which people say, sod the extra bedroom; the bigger back garden; the shorter commute, we'd rather spend the money on a new car, nicer holidays etc. Even if the landlord can hike the rent all he likes, then LVT increases, the CI increases and an average household wonders what all the fuss is about as it still breaks even.

KLNs 4 and 5 clearly cancel out. It is impossible for rents to increase and collapse simultaneously.

Even if KCN 1 and KLN 5 had substance, they cancel out. Let's say all the foreign kleptocrats abandon their central London homes and all the semi-retired trade down, that means LVT revenues fall, so the CI falls in equal measure. The average family is barely affected (maybe a couple of hundred quid a year worse off). But people willing to work who were previously priced out of moving to somewhere nicer, or to somewhere where they can earn higher wages, now find it easier to trade up. So many 'average' families end up better off.

Those who thought they could game the system by moving to a low-rent zero-LVT area, banking the CI payments and living on a bare subsistence level (not bothering to work) now find that they have less 'free' money to live on, so are more likely to be willing to work. Hey presto, housing is, in aggregate, even more affordable for working people and more people want to work.
To cut a long story, there is an equilibrium to all this, and there are at least two fixed points.

i. Start in the middle, with an average income, average sized household in an average home in an average area, for whom the answer is always "zero". This is a fixed point. And then work outwards in any direction (smaller or larger household; better or worse area; bigger or smaller home; higher or lower earnings etc).

ii. Another fixed point is low-rent, zero-LVT areas. It is impossible for landlords in the worst areas to increase rents; the unemployed and unemployable; those wanting to game the system end will be getting a CI that is just enough to pay the bricks and mortar rent and to live on. There is no surplus to go into higher rents! That nails down rents/LVT at the bottom end. At the top end, the additional rental value/LVT bill cannot be any more than the extra wages that people can earn by living in a commutable radius of where the best paying jobs are (plus or minus a bit for subjective amenity value).

Here endeth.


Ben Jamin' said...

1. LVT and rent (and its capitalisation into selling prices) are economically the same, only difference is who collects and distribution. A Citizens Income is an equal share of LVT, thus rent.

Even if we assume CI does disincentivise work, then by broadening the base of who gets rent as an income, the deadweight losses incurred will be lower. This is why we broaden the tax base for taxes on output.

2. Rents arise from differences in locational productivity, thus differences in average incomes, the result being discretionary incomes across locations are flat.

A LVT is fully incident upon land because it levels out disposable incomes. Thus there is no difference left to be creamed off by rental incomes and therefore selling prices.

A CI is at the opposite end of the incidence scale. As everyone gets paid the same amount, it doesn't change the differences in disposable incomes between locations, thus rents and selling prices don't change either.

None of this is hard to understand. I'm a little puzzled why people in general, and Georgists in particular find it difficult to accept.

Mark Wadsworth said...

BJ, indeed. We both know all this :-) it's all a storm in a tea cup, I'd just rather be swimming around in a larger tea cup.

ontheotherhand said...

I think that the gig economy makes the argument weaker that people will stop work if CI give them shelter and food and basic living.

Historically, if the choice is between being tied to full-time mundane work only to keep a tiny bit more take home income net of withdrawn benefits, or being free to have all you own time, I can see why some people choose not to work. But if they get CI and want more income, they can choose to do some Uber or Deliveroo shifts as and when.

Bayard said...

"...UK welfare system, which discourages from taking low paid work and rather bizarrely, subsidies wealth"

Not so bizarre if you observe that welfare spending encompasses both types of government spending: both the money they have to spend to avoid riots and/or electoral disaster (welfare for the poor, schools'n'hospitals etc.) and the money they want to spend (welfare for the rich, cronyism, jobs for the boys etc).

Mark Wadsworth said...

OTOH, yes, sort of.

B, very good point.