Some interesting charts over at FTAlphaville Link
(they might ask you to make one of those free accounts to read it and then mercilessly bombard you with pleas to buy the FT)
Particularly like this one.
From the FT:
Sir,
With reference to your editorial on the dysfunctional housing market, I would agree with the “Too much help for homeowners” but not with “too little for builders”.
With the abolition of the domestic rating system, owner-occupiers of more expensive homes have seen their property tax burden decrease by a significant amount... Some further relief was given to them when 2.5% was added to the VAT rate, to pay for a reduction in the equally regressive Council Tax.
All these savings in tax have fed into house prices, so that landlords, property speculators and mortgage lenders have scooped the income whilst those comfortably on the property ladder have seen their wealth and their ability to borrow massively increase. The rest are not so lucky.
The demise of the domestic rating system had a lot to do with the lack of regular revaluation, so perhaps the Council Tax is about due for replacement now.
So far as builders are concerned, as Shaun Spiers points out, there is plenty of land with planning permission that is not being developed. What builders need is sticks, not carrots.
Property tax reform is the necessary first step to fixing the housing crisis. Land Value Taxation would kill house price inflation permanently and it could be introduced gently by replacing Council Tax on main dwellings on a revenue neutral basis for each local authority.*
LVT on all other land, whether developed or not, (replacing Business Rates) would provide the incentive to build. The Community Infrastructure Levy and Section 106 Agreements do the opposite and should be abolished.
Carol Wilcox, Secretary, Labour Land Campaign
* I hotly disagree on the maths, any new tax should be at a flat national ad valorem rate, same as SDLT, or else it would continue to be inefficient and regressive, but hey.
From the FT:
Sir, David W Green (Letters, December 1) is right to point out that some money goes the way of spenders from savers through the low bank interest rates that so disadvantage savers.
But most of the low-rate bank lending goes on property, often producing bubbles, which Martin Wolf would cover by imposing a from hereon land value tax acting in a Pigouvian manner to disincentivise further over-investment in the inelastic supply of land.
DBC Reed, Northampton
Spotted by Carol W in the FT:
Sir, I cannot agree with Roger Fryatt’s suggestion of an even greater role for housing associations (Letters, November 9). Housing associations already benefit from cheap money and their role can be positively harmful. Like private landlords, housing associations exhibit mixed behaviours. Unlike elected local councils, which know their decisions will be considered by voters at regular intervals, the boards of housing associations have no accountability; they face no competition and have huge powers to decide who should, and who should not, receive a very selective benefit of cheaper rents.
The real problem is too few houses (or too many people). With a limited supply it’s especially important that what is built is what is needed. The housing market provides that. A decision by an unelected body does not. And with a limited supply, designating some housing as social simply increases the cost of free market housing. So the chosen few receive a very valuable benefit to the detriment of others, not chosen, but who are otherwise in almost the same position.
The answer is more houses, and one way to encourage that, as well as permitting more housing to be built, is a universal land tax – a tax on the value of all land, whatever it used for, based on the land value (reflecting planning consents and hope value but not buildings).
Jon Zigmond, Rosedale Abbey, North Yorks.
We'll have to mark him down for trotting out the misconception about "too few houses", that is a surprisingly small part of the solution, with a land value tax, we'd be using existing land and buildings much more efficiently/rationally, so the apparent supply shortages would largely melt away.
But well done for laying into the Housing Associations. I've long been saying this. They manage to combine the disadvantages of the private sector and the social sector.
From the FT:
Land is a significant omission from economic models
Sir, The debate about "the new economics" (editorial, November 13) fails to note the key omission from current models of the economy: the place of land as a separate factor of production.
Land, defined as all natural resources, should not be regarded as capital, since it is not a result of production and, unlike capital, creates rent, largely from location values.
Its omission from economic models has meant that land values have been ignored, even though these were the principal element in the house price rises that led to the creation of the subprime mortgages and other financial assets that caused the crisis of 2008.
A new analysis to include land, both in micro and macro models, would bring the whole subject into line with observable facts, including also the huge disparities of wealth in modern economies.
Brian J Hodgkinson, Oxford.
From the FT:
Queen Bess was the first Georgist (1)
Sir, In your report Taxpayers to lose out over 'Crossrail effect' on property (October 29) you quote transport expert Christian Wolmar as saying: "In the UK we've never developed a sophisticated way of capturing that added value."
The system was developed and introduced hundreds of years ago by Queen Elizabeth I and was known as Poor Rates, an early or simplified form of land value tax and the direct precursor of Agricultural Rates, Domestic Rates (both phased out long ago) and Business Rates (still in existence).
It is worth noting that Poor Rates were used to finance a very basic welfare system, thus making her the first Georgist!
The beauty of land value tax is that there is no need to establish exactly why rental values go up or down or to correlate it to particular amenities, whether provided by the government, natural features or the general benefits of "location, location, location".
But in the case of Crossrail, it is worth noting that the resulting rental value uplift on the eastern end of Oxford Street alone, if captured by land value tax, would be sufficient to cover a half the costs of the entire Crossrail project.(2)
Mark Wadsworth, Treasurer, Young People's Party, Buckhurst Hill, Essex
1) They accompanied the letter with a picture of Henry George, with the caption "Henry George was an American writer, politician and political economist"
2) Workings here.
From the FT:
If one wanted to increase supply [of housing], the solution is evident, but politically unthinkable: make a large quantity of land available for development and impose a swingeing site value tax, to compel building.(1)
Back in the 1970s, the UK built an average of 300,000 houses a year. (2) But between 2001 and 2011, building averaged 188,000 a year, even though the population rose by some 3.5m.(3)
It is the supply, stupid! The reason this point is not made the focus of policy is that doing so would be too unpopular and too dangerous.(4)
1) Hooray. The tax costs the actual builder nothing - the tax pushes down the upfront cost of the land by an equal and opposite amount, so the interest saved is always enough to cover the tax.
2) Yup, that was the twilight of the pre-Home-Owner-Ist era - the aim of Home-Owner-Ism being of course to reduce the supply of housing; to push up rents and prices and ultimately reduce the number of owner-occupiers.
3) Maths time:
Ten years @ 188,000 = 1.88 million new homes.
3.5 million population increase ÷ 1.88 million new homes = 1.86.
In other words, as long as new households are on average two or more people (and they are), then that would be enough new housing (assuming it were allocated efficiently, which it isn't, separate topic).
4) Dangerous to what or whom?
--------------------------------------------
Fact of the matter is, house prices increase for the following reasons:
a) Credit fuelled speculation, pushing up prices as a multiple of rents.
And rents increase for the following reasons:
b)The tendency of rents to soak up a larger share of the economy as the economy grows.
c) Let's assume that new homes are built where people want to live; and most people want to live near urban centres (or within easy travel distance thereof).
Urbanisation (or specialisation or agglomeration or whatever you want to call it) itself boosts the size of the economy. For example, the population of Greater London is approximately equal to the population of Scotland and Wales combined - but because London is relatively densely populated, the total value of land and buildings in London is three or four times as much as the total value of land and buildings in Scotland and Wales.
d) Multiply up a), b) and c) and there is a massively exaggerated effect on selling prices.
From today's FT:
Sir, Can I suggest that Tony Travers ("It is time to set London free to tax and spend its own money", Comment, May 16) persuades one of Mayor of London Boris Johnson's fans in the Commons to re-present Herbert Morrison's 1939 site value rating for London bill.
An annual levy on some of the most valuable land in the world should sort out the capital's spending constraints nicely.
Carol Wilcox, Labour Land Campaign, Christchurch, Dorset, UK.
Howard Davies "a professor of practice at Sciences Po in Paris and former deputy governor of the Bank of England", not to mention Executive Chairman of the Financial Services Authority from 1997-2003, levies justified criticism at Clegg's idea of windfall taxes on "wealth" in today's FT, rounding off thusly:
So this kite does not look destined for a long flight. But there are others which could be more viable. The mansion tax remains a realistic option, as does a land value tax, which could be presented as a form of wealth tax, yet is far easier to collect and has fewer economic disadvantages. Indeed it should promote more active utilisation of land, which we sorely need.
If Mr Clegg's true game is to put these more focused imposts back on the table, his unusual speculation may turn out to have some virtue.
DD sets a new record for cramming Home-Owner-Ist lies into one paragraph:
It is said the Lib Dems (1) want a "mansion tax" instead [of the 50p tax rate]. Since cutting the top rate will generate revenue, (2) this is a political (3) and not an economic demand (4). It is a tax (5) on bricks and mortar (6) not on wealth, and as such makes about as much sense as a window tax.(7) It would probably hit elderly widows (8) harder than billionaire banker. If was precisely to avoid penalising people who are cash-poor (9) but for reasons of history, family or sentiment (10) still live in large houses that the whole council tax system was designed. (11)
1) It is not "said that", they quite clearly want it.
2) Not proven and irrelevant. The best guess is that it is revenue neutral, i.e. makes some people poorer without making other people richer. We can oppose the 50p rate in principle whether or not it is a net revenue raiser (the top of the Laffer Curve is not where we want to be).
3) Particularly ironic, given his later sentences, see 11).
4) There is every economic argument for taxes on the rental value of land, at which the Mansion Tax is a crude attempt, instead of taxes on income, profits or output. The only counter arguments are political.
5) The Mansion Tax is not a tax, it is a user charge on the community-generated rental value of land, continues in footnote*.
6) Woah! For £2 million, you could build a twelve-bedroom mansion with more ensuite bathrooms that you can count, with underground parking for six Porsches and a home cinema. That's not what we are talking about here. Ninety-nine per cent of homes worth £2m or more are worth that much because of the location value alone.
The fact that the Mansion Tax would not apply to physical houses in some locations but would apply to physically similar houses in other locations is the clue here - it's not a tax on the "bricks and mortar" it's a tax on the location (or the amount of the location they are consuming).
7) A Window Tax is a tax on improvements, it's vaguely land-related but (proveably) a bad tax for all that. Stamp Duty Land Tax is also vaguely land related but that's a bad tax because it discourages efficient use of land; it achieves the same as the Window Tax and the opposite of a Mansion Tax. but DD goes on to say that "we should close the offshore company house-purchase loophole", so he's the Window Tax supporter here.
8) Poor Widow Bogey. Just exempt them and make everybody else pay a bit more, see if I care. By his own admission, the "billionaire banker" can easily afford it (very few bankers are billionaires, there are only a few dozen billionaires in the whole world). Of course, the Poor Widow Bogey illustrate again that a Mansion Tax is not a tax on real wealth, as the truly wealthy can easily afford it.
9) Another Poor Widow Bogey.
10) Aha, that's priceless logic. The more that people want something, the less they should have to pay for it? Isn't one of the basic rules of free markets that people are prepared to pay more for things which are of value to them; and isn't there a behavioural rule that people value things more if they have to pay for them? A childless Poor Widow could be exempted anyway (her estate reverts to The Crown) and if she has, er, family, couldn't they step up the oche? Or is the idea that 'everybody else' chips in a bit more tax to keep these "families" in the style to which they have become accustomed?
11) That's historically a huge great lie, they introduced Council Tax in a hurry because their Poll Tax backfired on them so spectacularly; what he should have said is that they got rid of Domestic Rate to pander to the Home-Owner-Ists.
But isn't this waffling completely at odds with his principles at 3) and 4) that taxes should be based on economic not political logic? What on earth do "history, family or sentiment" have to do with a small-government, free-market, liberal economy? If people are willing to spend their own money on keeping their Poor Widowed Mother in a house that's far too big for her, then fine, each to his own, but don't go round spending other people's money on it.
* And it's not a tax (or a user charge) on private wealth either, as the rental value of land can never represent net private wealth, it only represents real wealth at national level. For example, a good local rail service boosts output, hooray, that's additional national wealth, and those people who can earn more by using the railway earn or create more private wealth. But the money that is transferred from those extra earnings to landlords (or vendors, or mortgage banks, same thing) is not net private wealth as the income and expense net off. It is merely a forced transfer payment, like taxpayer funded welfare and pensions, and I doubt that anybody would count pensions liabilities as wealth.
From today's FT in response to a fine article by Samuel Brittan:
Sir, Why do enthusiasts for a land tax concentrate on one particular one particular type of property? If the aim is to tax wealth, why not levy an annual charge [on all assets], rendering both inheritance tax and capital gains tax superfluous.
Gareth Howlett, Investment Management Director, Brooks Macdonald Asset Management.
This is a typical example of Homey/Faux Lib propaganda. By pretending that the rental value of land is "wealth"*, they can paint LVT as a tax on "wealth", and thus draw the entirely incorrect conclusion that LVTers want to tax "wealth" generally, or even worse, that LVTers are "anti-wealth".
Far from it, the whole point of a full-on LVT system is to scrap all taxes on private wealth (such as income tax, VAT, NIC, corporation tax - inheritance tax goes straight out of the window and capital gains tax is only there to prevent people turning taxable income into tax-free capital gains anyway). So individuals get to keep all the wealth that they create themselves, and society in general gets to keep what society in general creates/generates.
* Simple logic tells us that land values are merely a multiple of land rental values; and that land rental values are merely a measure of the flow of individually created wealth from society in general/the productive economy to landowners/mortgage banks. For every landlord there is a tenant; one man's income is another man's expense; this is not net wealth.
Consider: ten families/tribes are happily sharing their little island, and each family/tribe has exactly enough land to feed itself; nobody can charge anybody rent and on the face of it, the land has no realisable market value.
But if there's an earthquake and one-fifth of the island snaps off and falls into the sea, the two families/tribes who have lost their physical land now have to rent patches from the other eight; the unlucky two have to farm it more intensively and hand over some of the value of their work to the lucky eight. So now the land owned by the other eight has a rental value and a realisable market value.
Can anybody honestly say that these ten tribes are collectively wealthier for having lost one-fifth of the surface area of their island?
Five Six seven items worth a mention:
1. Samuel Brittan wrote one of his occasional articles in the FT:
... far from being an outrageous Bolshevik idea, the case for a land tax is one of the oldest and least disputed propositions in economic thought. The underlying theory was developed at the beginning of the 19th century by the highly respectable David Ricardo. Many chancellors have said that they would jump at a tax that had no disincentive effects on work or enterprise but had a strong redistributive element...
Doubtless some of the tabloids would present a land tax as a threat to the ordinary homeowner with a modest garden. We need to prepare for this in advance. Just as income tax is only levied above a threshold, there would have to be similar thresholds for a tax on land. If politicians really want to think about the unthinkable, as they sometimes claim, here is a place to start.
2. From the Tory Reform Group:
Properties of all shapes and sizes are already overtaxed by the likes of council tax, business rates, stamp duty land tax, planning charges, and landfill tax. If these taxes were to remain then LVT would be burdening people with further unwelcome costs. Instead, LVT should replace those property taxes - either entirely or at the very least mostly...
This would be simple to implement since land cannot be hidden in an offshore tax haven and calculating the tax bill would be made easier by the fact that land values are already measured by the market, therefore compliance costs could be reduced. The same bureaucratic processes for collecting business rates could readily be translated to the collection of LVT.
The LVT would not harm enterprise. It would boost productivity, discourage urban sprawl, could replace the plethora of punitive property taxes, and would be relatively simple to administer and collect.
The extra revenue raised would be enough to fund a radical package of tax cuts to “put fuel into the tank of the British economy”, as George Osborne promised last year, and would reconnect the link between effort and reward by making sure everyone pays their fair share. This is very much a policy that ought to be part of any modern, progressive Conservative agenda.
3. From yesterday's Evening Standard:
Today's proposal from Tim Montgomerie of the influential Conservative website, conservativehome, reflects rising Tory frustration over the lack of tax cuts. Mr Montgomerie proposes that we move towards taxing wealth rather than income, by introducing new council tax bands for homes worth over £500,000, £1 million and £2 million (in England, the highest band is currently H, for homes worth more than £320,000 in 1991).
He also wants a cut in tax relief on pension contributions. The money raised, he argues, could then be channelled into tax cuts, for example raising the income tax threshold and abolishing the 50p top rate. This could give new momentum to Lib-Dem calls for a similar "mansion tax".
Mr Montgomerie is right that the council tax system needs reform. The absurdity of a tax based on 1991 values - newer homes have to be assigned a nominal 1991 value - has been preserved only by the timidity of politicians on all sides in handling this hot potato. Yet however fair such higher bands might look in Exeter or Rotherham, they would amount to a tax on London, which is where the vast majority of such homes are.
Nor do London's £1 million-plus homes always indicate great wealth: they are just a sign of our inflated housing market. We do need to rethink local taxation. But piling more taxes on London to fund tax cuts for the rest of the nation is not the way to do it.
The ES is just the usual stupid Home-Owner-Ist nonsense - the 50p tax rate is of course a "tax on London" as well, so replacing it with a Mansion Tax is geographically neutral, I just wanted to give Tim M's article a favourable mention, but it was in The Times which is behind a pay wall.
4. Also in the FT (spotted by Derek), a fine article on barriers to entry and rent-seeking:
Ghaleb Ibrahim, a grizzled Jordanian immigrant with a mane of wavy grey hair, holds to a modest vision of the American dream. He wants to own and drive a taxicab in Milwaukee, Wisconsin, the city in which the television show Happy Days was set.
The trouble is that he does not have $150,000. That he says is what it would cost, over and above the price of the vehicle itself, to buy from its existing owner one of only 321 cab licences in issue by the city...
The creation of an economic rent – often by persuading the political system to grant some kind of a monopoly or privilege – means a one-off chance for someone to get rich and then a permanent barrier to newcomers entering a market. The Milwaukee cab licences are together worth $48m – and since 1991 more than half of them have migrated to companies owned by one family: the Sanfelippos. Even at their own more modest price estimate of $80,000 their permits are worth as much as $13m.
Is that $48 million real wealth? Is it capital, or an asset (as the incumbents argue in the article), or is it merely a measure of the burden placed on passengers (in terms of higher prices, worse service) or would-be taxi drivers who are prevented from earning a living - in other words a zero-sum game. Exactly the same zero-sum rule applies to land wealth as well, of course.
5. Finally, also from yesterday's Evening Standard, the sort of fight that would be far less common if we had LVT:
A seven-year row between neighbours over a narrow strip of courtyard in Peckham could reach the Supreme Court.
The dispute, which has cost up to £50,000 in legal fees so far, began in 2005 when Angela Boggiano, 45, and Craig Robertson, 43, put up a white picket fence. It ran along what they say is the boundary between the back of their terrace home and the front of Devon Cameron's mews house.
In 2007, they replaced the fence with a wall, and plant pots were put along a gravel strip measuring 10ft by 2ft which Mr Cameron, 48, contends is his...
You want the land? You get the LVT as well.
6. Late addition. Lib Dems ALTER member David Cooper appeals to the NIMBYs over at The Daily Mail:
This development is driven by a simple business proposition. Locally, an acre of productive farmland can be purchased for about £7000. Working a farm in West Berkshire turns a decent profit, and is a perfectly good business proposition. But land speculators bank on far richer rewards. If they can get planning permission to turn this acre into residential land, its value will shoot up to over £700,000...
The value of fields (called greenfield sites in the trade) close to towns rises by a factor of a hundred or more when planning permission is given to build on it. This value uplift happens once. An already built up (“brownfield”) industrial estate may be entirely suitable for new housing, but the owners have far weaker reason to push for the planning changes that would be needed to achieve this.
Taking Newbury as an example, there is a large, old and underused industrial estate near the town centre, which could go a long way to accommodating the needed houses. There has been far less push from its owners to make the necessary planning changes, and it is not included in the current housing strategy.
So he's got the NIMBYs onside, but he shies away from explaining which simple tax would take away the planning gain uplift (thus taking away the motive to build out in the green belt) as well as encouraging/forcing the owners of the industrial estate to bring it back into use.
7. Late, late addition. Spotted by Mombers in today's Evening Standard:
Councillor Stephen Greenhalgh, leader of Hammersmith & Fulham Council, hit out at Liberal Democrat plans for higher levies on more expensive homes... Alarmingly for many Londoners, influential Tories are also now backing proposals for higher council tax bands on homes worth more than £500,000, £1 million and £2 million. (a)
These levies would all disproportionately hit the capital. (b) Mr Greenhalgh told BBC radio: "We have the fourth highest property prices in the country. A lot of the houses that would fall into the £1 million or £2 million plus bracket are owned by ordinary people still. This is not a way to catch the wealthy. It's a way to clobber people often on relatively modest incomes that may have assets that are incredibly high but not necessarily incomes that match."
He stressed there were many "long-standing family homes" in areas such as the Peterborough Estate in Fulham, which were bought under the right-to-buy scheme and then shot up in price. (c) He also warned that new council tax bands or a "mansion tax" would be "hugely expensive" to introduce as it would require a property revaluation estimated to cost £200 million.(d)
a) See item 3 above.
b) Yes, because that's where land values are the highest. You could just as well say that the 50p tax 'disproportionately hits London' because that's where most high earners live.
c) Wot? These people were allowed to snap up council owned housing for rather less than £100,000 and have made a windfall gain of a million quid and they're whining about a few thousand quid additional Council Tax? They can always sell up, then they won't be 'ordinary people... relative modest incomes' any more, will they?
d) That was The Morbidly Obese One's estimate of the cost of a full revaluation of all homes in the UK for council tax purposes, that's less than £10 per home. As a matter of fact, HM Land Registry have enough info on their databases to do full and accurate land valuations for a tiny fraction of that, but even if it did cost £10 per home for updating valuations which are 21 years out of date, it's money well spent, its still only 1% of annual Council Tax receipts.
It's ages since I've had one in the FT:
Sir, Andrew Harvey-Smith (Letters, 23 February) recommends a tiered rate of corporation tax to help small and growing businesses.
The UK already has slightly lower rates of corporation tax for businesses with smaller profits, but corporation tax in itself is not really a barrier to growth. By definition, it cannot push a marginal business into making losses, or increase the losses of a start-up.
The real barrier to growth is value added tax. It is not just that crossing the registration threshold can leave a growing business worse off than before: the real issue is that VAT is payable whether a company is making profits or not, so in relative terms it is a lighter burden on large, established businesses than it is on marginal or growing ones. By acting as a barrier to entry, it could even be argued that taxing turnover rather than net profits is a subsidy to large businesses.
So a far simpler and better alternative to tiered corporation tax rates would be to reduce the standard rate of VAT and increase corporation tax rates accordingly.
Mark Wadsworth, etc
From a splendid article which appeared in the FT in late 2009
There are three types of bankers: those that can count, and those that can’t...
Observers of financial services saw unbelievable prosperity and apparently immense value added [in the years leading up to the crash]. Yet two years later the whole industry was bankrupt. A simple reason underlies this: any industry that pays out in cash colossal accounting profits that are largely imaginary will go bust quickly. Not only has the industry – and by extension societies that depend on it – been spending money that is no longer there, it has been giving away money that it only imagined it had in the first place. Worse, it seems to want to do it all again.
What were the sources of this imaginary wealth? First, spreads on credit that took no account of default probabilities (bankers have been doing this for centuries, but not on this scale). Second, unrealised mark-to-market profits on the trading book, especially in illiquid instruments. Third, profits conjured up by taking the net present value of streams of income stretching into the future, on derivative issuance for example.
In the last two of these the bank was not receiving any income, merely “booking revenues”. How could they pay this non-existent wealth out in cash to their employees? Because they had no measure of cash flow to tell them they were idiots, and because everyone else was doing it. Paying out 50 per cent of revenues to staff had become the rule, even when the “revenues” did not actually consist of money.
Via HPC, who got it from a link from a link this article, which went back to this article, which in turn links to the one in the FT.
Surprisingly, nobody rose to the bait in my post of this morning and we ended up discussing spending on old age care rather than funding, so I'll try again. This evening's lesson is taken from today's FT:
High Frequency Trading] has made it harder for the traditional floor trader and affected the ability of the point-and-click crowd to make money.
I am one of its victims. When I began as a trader in the pork belly pit, I was as high a high frequency trader as possible. My computer was in my head and it responded as fast as it could. There were others in the pit who were slower. But there were also traders who were much faster. It never occurred to me to pass a law to cut them down to my speed... I readily understood a trader’s request to gain a trading booth closer to the pit.
James Angel, associate professor of finance at Georgetown University, recently said it made him shudder when he heard regulators asking: "Is it fair that people spend extra money to sit their computer right next to the stock exchange computer?" He said it showed an almost shocking ignorance of financial history.
It's the same old pattern; open outcry traders wanted to be nearest the pit; these HFT people will pay a lot extra to site their computers tens rather than hundreds of yards away from the exchange's central computer because the cabling costs money and in their line of work every millisecond they can be faster than the competition (signals do not travel instantaneously down computer cables!) means money.
It's the same as the hot dog vendor wanting the pitch nearest the tube station or people being prepared to pay more for a seat in the front rows of the theatre.
It's the same as every extra minute's walk from the tube station reducing house prices by £x,000 or every extra minute's commute time to/from central London reducing house prices by £y,000.
It's basic geometry.
From today's FT:
Sir, A flotilla of admirals advocates increased spending on the navy to protect our seaborne trade (Letters, December 5). If such trade needs billions of pounds’ worth of such protection, it is traders who should fund the protection, not taxpayers.
On second thoughts, so many admirals signed the letter that I should have said a "fleet of admirals".
Ralph Musgrave, Durham, UK
Quite right. According to the shipping industry's own figures, they pay £3.1 billion a year in the usual mish-mash of taxes. We can roll the whole lot into the tonnage tax (which was introduced in 2000) and use that to fund as much Royal Navy as the shipping industry is prepared to pay for.
As a rough guide, total UK imports of goods from non-EU countries are worth £180 billion a year and exports are £120 billion, so that's a tax base of £300 billion. The MoD's total budget is around £30 billion a year, of which maybe a third is Royal Navy (of which an unknown amount is spent on stuff of no interest to the shipping industry, it's not like an aircraft carrier is much use against pirates), so we could fund the Navy with a (say) 2% levy on the value goods imported and exported.
Or it might be cheaper for ship owners/charterers to dispense with paying such a levy/user charge at all (like LVT, it's not really a tax), in the UK or in anywhere else, in which case they don't get protection from Royal Navy and take the higher insurance premiums on the chin; or maybe other countries' navies offer a better value service etc.
How much does insurance cost as a % of the value of goods being transported by ship, how much [more] would it cost for a ship which could not claim protection of any navy? I've no idea and the internet won't tell me.
A letter writer in the FT adopts a typical Home-Owner-Ist tactic of being an insufferable know-it-all who deliberately misrepresents what LVT is all about (or is possibly so stupid that they don't understand the difference between "annual rental value" on the one hand and "construction operations" or "transactions" on the other), thus forcing people like me to waste time debunking their crap:
Sir, I refer to the article by Nicholas Boles proposing a land tax (It sounds bonkers but we should embrace a land tax, September 30) and Geoff Copeland’s letter (October 6) giving further support.
They are too late! There are already six such taxes. They are as follows: business rates (when occupying or even not occupying a property) (1), stamp duty land tax (when purchasing) (2), Section 106 payments (when building on the land) (3), the community infrastructure levy (also when building) (4), corporation tax or income tax (on rental income)(5) and capital gains tax (when selling the land).(6)
How many more taxes are they proposing?
Clifford Lawrence, London SW1, UK
(2) and (6) are taxes on transactions, they are bad taxes as they discourage efficient use of land and are easily avoided (by simply not buying or selling), they are a random percentage of the price paid, and the price paid in turn relates to the purchaser's estimate of the NPV of the future rental value of any buildings or improvements on the site (minus any development costs). They are a million miles from LVT.
(3) and (4) are even worse, as these taxes are only incurred when a site is being developed, they discourage development (and when it's finished, it's usually sold, triggering Stamp Duty Land Tax, bleurgh). And he missed off the obligation for residential developers to sell off 'affordable housing' which is another kind of tax. For sure, the amount that the local council can cream off is vaguely related to the capitalised rental value, but apart from that they are about two million miles from LVT.
Nick Boles did not go into infinite detail in his original article, but it is quite clear that these four taxes would be among those to be replaced: "... [land value] tax would deter speculative land banks and would encourage property owners to develop brownfield sites and put rundown areas of inner cities back to good use."
(5) Income tax and corporation tax are general taxes on all income, and are only paid if land and buildings are being rented out (but a business tenant claims equal and opposite tax relief); there is no charge for owner-occupation and nothing if they are empty. For sure, imputed rents of owner-occupier businesses are included in taxable profits as well, but income and corporation tax are at least three million miles from LVT.
(1) Business Rates is the tax that comes closest to LVT, as it is an annual tax based on the annual rental value of commercial land and buildings (payable whether occupied or not, by and large), but
a) it does not differentiate between the buildings and the site itself instead of just taxing the site rental value and
b) is NOT applied to derelict or undeveloped sites, so that in itself discourages development (although when Labour reduced exemptions for empty premises in 2008 or thereabouts. occupancy rates of existing buildings went up, as we would expect).
(7) Mr Boles had this to say on Business Rates: "If we were to implement [LVT] in the UK, it would need to be deductible from business rates so that struggling retailers and other firms were not faced with a devastating double whammy – and it might in time replace business rates altogether" which seems very sensible to me. Mr Boles is a proper Tory MP, for Heaven's sake, his whole article explains that his version of LVT would be a replacement tax, and he also names Employer's National Insurance as a Bad Tax which LVT receipts could be used to reduce.
Ralph Musgrave in today's FT:
Sir, I was interested to learn from Brian Garcia (Letters, September 30) how the ancient Greeks solved their debt problems in 173BC. In the mid-5th century BC, Pericles advocated the use of public works as a means of providing work for the unemployed. And the ancient Romans had a property price crash/credit crunch, which they dealt with in short order.
Has our understanding of economics improved or deteriorated over the past two and a half millennia?
Ralph Musgrave, Durham, UK.
From The FT:
Sir, With reference to your report Council bond issuing plans spurred by subsidy cut and rise in borrowing costs (September 1): am I missing something?
The government used to lend to local authorities at 0.17 per cent over its own borrowing costs. With negligible transaction costs, the 0.17 per cent turn was almost pure profit to central government.
The Treasury has now increased the turn to 1.0 per cent, which is so high that councils are seeking to issue bonds in the open market at 0.8 per cent over gilts, notwithstanding the significant transaction costs. Because municipal borrowing is part of the national debt, the net effect is that the total interest payable on consolidated public borrowing increases.
At the same time, the government’s profit from the margin on lending to local authorities drops to zero, because none of the latter will borrow on the exchequer’s terms. This is a lose-lose situation. Would the chancellor not do better to lend at a more modest uplift?
Adrian Jack, London WC2, UK.
It's PFI all over again, why do something cheaply in the public sector, if you can do it more expensively in the private sector?
If the true interest rate for local councils is 0.8% more than central government debt, then surely the ideal mark-up for central government is +0.79%; while the councils pay more than now, it's close to the market rate (good) but the extra bit which councils pay is extra income for central government, so there's no extra cost on the taxpayer (also good).
From today's FT:
“If we do get rid of the 50p [income tax] rate we need to make sure there is something else levied on higher rate payers. Lib Dems think there should be a new way of taxing wealth,” one senior Lib Dem aide said. Talk of lowering the top rate of tax has triggered a dispute within the coalition, with Danny Alexander, the chief secretary to the Treasury, saying advocates of the move were “living in cloud cuckoo land”. (1)
But the Lib Dems expect it will happen, and are concentrating on coming up with replacement taxes that would raise extra revenue and win the support of voters, among whom the 50p rate is popular.(2) Mr Cable has long favoured the option of a “mansion tax”, levied on the sale of high-value homes, although others inside and outside the party have called it overly-complicated and unworkable...(3)
David Laws, the former chief secretary to the Treasury, and one of Mr Clegg’s closest political allies, is opposed to all these forms of wealth tax (4), saying they amount to double taxation after income tax has already been raised. (5)
1) Why? We managed perfectly well with a top income tax rate of 40p until a year ago, and according to HMRC estimates, it only raises about £1 billion. According to others, the top rate of 50p is past the top of the Laffer Curve and reduces overall revenues.
2) Have we really sunk this low? The 50p top tax rate on wealth creation is 'popular' but such is our reverence for 'people in big houses' that a tax on rent seeking and unearned wealth wouldn't be?
3) No it wouldn't be, not compared to the hyper-complexity of the current tax system, or the complexity of the 50p top tax rate alone (which requires a whole raft of anti-avoidance provisions to make it anywhere near enforceable), if anything it would be as simple as, or simpler than Business Rates in the UK or Domestic Rates in Northern Ireland. And given that any tax on residential land and buildings could and should replace other taxes, it would lead to a massive reduction in the overall complexity and unworkability of the tax system - the more taxes you replace, the easier it gets (including politically easier, as there'll be a minimum of people who'd lose out on Day One).
I sketched out a possible system for taxing residential land and buildings which ended up being published on Labour Left (of all places). If you want to get rid of the 50p top tax rate as well, or even the £30,000 non-dom levy, you just have to increase the target receipts from £42.5 billion per annum to £43.5 billion, hooray, yet more fiddly little taxes and jealousy surcharges out of the window.
4) A tax on the rental value of land is not a tax on wealth, it's a user charge. In the same way as a tax on petrol is not a tax on the wealth tied up in your car (VAT is), it's a tax on road use.
5) So if you pay 50% income tax, that's OK, but if you were to pay 40% income tax and approx. 5% of your income in LVT, that's double taxation, is it? Since when does "paying less tax" amount to double taxation?
