Tuesday, 18 June 2019

Wealth tax musings

I've probably mentioned some of this before, but to summarise:

1. A traditional argument against Land Value Tax is that it is a "wealth tax". No it's not, it's a user charge for the value of services received/used, which leads to a better overall allocation/use of scarce resources, whatever you do with the proceeds (cutting damaging taxes on output and employment is top of my list). It's the same as fuel duty/road pricing; auctioning landing slots at airports, auctioning exclusive use of certain radio frequencies etc. These taxes are worth imposing even if the government just dishes out the proceeds as a Citizen's Dividend.

This ought to be implicit in the name, LVT is not a tax on paintings, Ferraris, pension funds or shares - it is a tax on land values.

2. The Homeys and hard lefties then make common cause, for opposite reasons, and say that if you have LVT, you might as well/should extend it to all 'wealth'.

The Homeys know that this takes the heat off them, because the revenue maximising rate of a general wealth tax would be very low, much lower than the revenue maximising LVT rate, so they'd be paying a smaller share of a smaller tax. The lefties just like the idea of wealth tax. Or just about any tax on anything, like 'carbon'. The left-wing Homeys point out that the second largest chunk of household wealth is pension funds and pension entitlements; and that this is concentrated in relatively few hands. This is true, but it is a fraction (a fifth or so) of the total value of housing and missing the point.

3. The UK only has one true 'wealth tax', which is Inheritance Tax (unlike most people, I have the dubious honour of having filled out actual wealth tax returns -  in Germany in the early 1990s - so I know more about this than most people), which raises a laughable £5 bn a year, a fraction of what would theoretically be collected if there were no loopholes and no planning. The loopholes and planning benefit the super-wealthy rather than the middle wealthy i.e. winners in the 21st century house price lottery, of course.

Human nature being what it is, there will always be ways round it; if you increase the rate, then there'll just be more planning. I am quite convinced, having seen this first hand, that the pin-striped ponces (lawyers etc) make more money from IHT planning than the government actually collects in IHT, which is probably the whole point. These tossers would all be out of business if the government just scrapped it.

4. Whatever the merits of a general 'wealth tax' are (and there are none), to my mind, the government should either tax something or subsidise something but not both (and preferably neither, with the exception of land values, fuel etc; or a general income tax if they need more money).

Rather than looking at the £5 billion a year collected in IHT/wealth tax (and £4 bn or so in Stamp Duty on shares, another dreadful tax), why not look at the subsidies going directly to the wealthy?

a) Pensions tax breaks, which 'cost' the government between £30 - £50 bn a year (depending how you argue it) in National Insurance and income tax breaks. These don't lead to people saving more and having higher incomes in retirement; half the tax breaks are soaked up by the pensions 'industry' (insurance companies, IFAs, accountants, trustees, fund managers, lawyers etc) and half just go into higher share prices. If you knocked all these tax breaks on the head and expected people just to buy shares off their own bat, we'd return to a proper shareholder culture and shares would be cheaper. So 'wealth' at the top end would fall and if people put aside the same amount of after-tax money every year, their pension income in retirement will end up the same.

b) Housing Benefit paid to private landlords, about £10 billion a year, meaning that about one-fifth of private landlords' gross rental income is pure subsidy. In a sane world, this would just be a government-run, pay-as-you-go insurance scheme, whereby private landlords pay in 20% of the rent they collect and this gets dished out as Housing Benefit where needed. To be fair, private landlords who are willing to self-insure can opt out of this insurance scheme (they would just have to allow tenants to skip rent for X months if they lose their jobs, so a tenant doesn't care whether he gets cash Housing Benefit or the rent-free period). The residual rate of insurance premiums for small investors who don't want to self-insure and slum lords who buy in low employment areas will thus go higher and higher until they either opt out or give in and hand their homes back to the council.

c) Legal Aid is another such scam, while I'm on the topic. While the general principle is sound, why not make the legal profession pay for it with a percentage contribution on their turnover?

d) Subsidies to owners of farm land, the more you own, the more you get, costs the taxpayer another £3 billion a year at least.

e) then there's minor stuff like SEIS, EIS and VCT tax breaks, which superficially benefit higher earners with spare cash, but actually just funnel money into the pockets of intermediaries and doomed businesses.

In summary, before we dream up ways of increasing revenues from IHT or imposing a general wealth tax, let's go for the quick wins and scrap IHT, stamp duty on shares and the subsidies mentioned at a) to e) above.

That would boost tax revenues/cut government spending (depending on your point of view) and slash bureaucracy (in government and private sector) with the minimum of administrative or legislative effort, as well as reducing wealth inequality.

What's not to like?


Physiocrat said...

Land is not wealth. This is discussed in depth at the beginning of Henry George's 'Progress and Poverty'. Wealth is man-made.

A land title is a claim on wealth. The title entitles its owner to the rental income stream of the land to which it pertains. The distinction may seem pedantic but it it critical to an understanding of the issue. Failure to understand this is why the left then extends the concept of a wealth tax to pictures on the wall and jewellery in drawer of the bedside table.

Lola said...

I am quite convinced, having seen this first hand, that the pin-striped ponces (lawyers etc) make more money from IHT planning than the government actually collects in IHT, which is probably the whole point. These tossers would all be out of business if the government just scrapped it. Tangentally my business does exactly this sort of work. I despise it. It's an utter waste of time and money and I can endorse MW point that collectively my peer group and the other 'rent seekers' up the line earn collectively far more that the tax collects. And what's more it is true that the middling wealthy are the only ones that pay it. Everyone else is either too poor or too rich (and can plan it away). IHT is an entirely selective tax for the 'rich'.

Mark Wadsworth said...

Phys, agreed. But the point is lost on the Homeys and Lefties.

L, thanks for back up.

Lola said...

MW and the fees on VCT, EIS etc demonstrate in spades the economic truth that 'all subsidies end up as rents'. Scrap the bloody things. When I'm Chancellor all this crap will go.

Physiocrat said...

And the value of all public goods ends up as rents eg Crossrail (when it starts running).

And all taxes come out of rent. Scrap the bloody things and just have a tax on rents.

Mark Wadsworth said...

L, HMRC are being increasingly arbitrary with EIS approvals. If investors have to choose between two ostensibly similar businesses, they will prefer to invest in the EIS approved one, even if objectively, the non-approved one is a better bet. It leads to malinvestment on a massive scale.

Mark Wadsworth said...

Phys, yes of course, but I am just trying to chip away at the 'tax wealth' meme in general; it's far easier and better to stop subsidising it.

Lola said...

MW. Yes. And that. Obviously. We, of course, encourage to exact opposite in our clients. Look at the quality of the investment first and the tax breaks (!) second. And sometimes they actually listen!!!