Oh the irony...

AFrom here: IEA launches Breakthrough Prize – £50,000 for your 2,000 word idea to solve UK’s housing crisis:

Richard Koch – the benefactor and supporter of the Prize – is a British author, speaker, investor, and a former management consultant and entrepreneur. He has written over twenty books on business and ideas, including The 80/20 Principle, about how to apply the Pareto principle in management and life.

The Pareto Principle is handy shorthand for many things, but let's not forget that it is based on the fact that "Essentially, Pareto showed that approximately 80% of the land in Italy was owned by 20% of the population."

Apart from that bit of irony, the whole thing is a travesty, it's like asking Houdini to get out of a strait jacket... without moving. Every premise is false, every statement a platitude and the questions are all (mis)leading questions:

Competitors will be asked to propose a single policy initiative which would:
• Increase the number of houses built so as to markedly reduce the housing shortage in this country (this can be reduced through increased rental or ownership).
• Increase the number and proportion of property owners in the UK.

i. There isn't a housing shortage in absolute terms, as a nation we've got 25 million spare bedrooms. Or as Blissex pointed out on an earlier thread: there's plenty of housing but the jobs are in the wrong places.

ii. Home builders have a profit maximising level of output, which is broadly speaking one new home for every two additional people in the UK. Unsurprisingly, and being fair to the construction industry, they have been building this many on average, even over the last ten or twenty years.

Why on earth do people who claim to understand free markets and capitalism think that "a single policy initiative" will encourage them to build more than this, thus depressing their own profits? (You aren't allowed to mention LVT, of course, but even that would not particularly increase overall construction rates).

iii. As to the second bullet point, private landlords acquired more homes over the last twenty years than were built. It requires government intervention, like restricting interest relief of charging landlords 3% extra SDLT to reverse this trend. (But you aren't allowed to recommend any sort of government action, oh no, that's not "market based").

Jacob Rees-Mogg said:

“Building more houses and supporting home ownership are the two great challenges for Conservatives. A property-owning democracy provides one of the most stable and prosperous forms of society. Its erosion denies people their reasonable life’s ambition."

Sure, until the 1970s, Conservative and Labour governments alike increased owner-occupation rates. They allowed lots of new homes to be built and discouraged landlords from snapping them up (rent controls and punitive taxation of rental income). Labour tended more towards building social housing, which kept a lid on private sector rents, but there was an overall consensus.

That social-democratic principle was gradually binned in in the 1980s and 1990s and now we have full-on Home-Owner-Ism - the aims of which are ever more expensive housing owned by fewer and fewer people. In other words, shifting back to the concentration/inequality which Pareto observed.

Mark Littlewood, Director General at the Institute of Economic Affairs said:

“Market-based policies have the power to dramatically change the economy and society for the greater good... it is time politicians looked beyond Brexit, to the pressing domestic issues of our time – arguably the most pressing of which is the cost of housing.”

T'was only government intervention and regulation which kept prices low until the late 1990s (s21 HA 1988 was changed in 1996-97 to allow no fault evictions, which threw the match on the bonfire which they had been building since abolition of Schedule A taxation of imputed rents on owner-occupied housing in 1963). "Market-based policies" had little to do with it.

Richard Koch said:

“In the twentieth century, home ownership went from one in ten Britons to seven in ten – a terrific achievement in extending a real property-owning democracy. And in the 1980s, Mrs Thatcher enabled millions of people whose families had never owned a home before to get on the property ladder. Today that’s just not possible.

Sure, home ownership increased rapidly, what these "free market" wankers never mention is the obvious corollary, that private landlords were nearly wiped out. That was the key to all this; eliminate the landlords and owner-occupation increases automatically.

And Thatcher could only "enable millions" to become owner-occupiers by flogging off the nicest third of social housing to higher earning tenants at big discounts. I fail to see how one government giving away assets accumulated by previous governments is a "market-based policy". This couldn't have happened if those previous governments had not adopted the distinctly "non-market based policy" of building all that social housing in the first place.

Institute of Economic Affairs - gloriously wrong on corporation tax.

From page 204 of pdf here.

There's a lot of good stuff, but they relapse into Faux Libertarianism when it comes to the question of what's worse, VAT or corporation tax.

Corporate profits

The OECD found that corporate income taxes (such as the UK corporation tax) have the most negative impact on economic growth, among consumption taxes, property taxes and income taxes (Arnold 2008). Specifically, corporate income taxes have the following problems:

• They weaken the signal to reallocate resources from low-value activities to high-value activities between different companies and also within the same company by reducing after-tax profits.

No they don't "weaken signals" particularly. I know that the OECD said that but it's nonsense. A good pre-tax decision will nearly always be a good post-tax decision. When businesses are decided which projects to undertake, it is educated guesswork, for a given amount of £100,000 to be invested in a new project, if they expect an overall pre-tax profit of £50,000 from Project A and £30,000 from Project B, they will choose Project A. If the business compares post-tax profits, they will still choose Project A with a post-tax profit of £40,000 rather than Project B with a post-tax profit of £24,000.

That is quite different to VAT. Assuming we are looking at the same time frame/effort, compare:
- Project A involves producing/selling 100,000 small, high turnover items which can be made and sold within five weeks. They cost £1 each and can be sold for £1.05 gross = £50,000 profit over a year.
- Project B involves producing/selling 1 very large slow-moving item, which costs £100,000 and, takes a year to make/sell, and which can be sold for £130,000 gross = £30,000 profit.

If you knew nothing about VAT, you would say that Project A is better. But once you take VAT into account, Project A actually makes a loss of £160,000 and Project B makes a profit of £4,000. That strikes me as being hugely distortionary.

VAT similarly distorts activity in favour of VAT-exempt or zero-rated items and against fully VAT-able items. Corporation tax does no such thing.

• They bias ownership structures in favour of debt capital and against equity capital.

This is another of those myths that I have been railing against for decades to little avail. The UK tax system was heading towards a system (it is now heading away again thanks to George Osbrown's constant meddling) where the amount of tax (corporation tax plus income tax) would be exactly the same whether it is funded by share capital or loans. It would be quite easy to enforce the default rule that interest payments are liable to 20% withholding tax and get rid of Osbrown's stupid tweaks, so that by and large, it makes no difference.

• They distort spending patterns in favour of current expenditure, which is fully tax deductible, and against capital expenditure, which is not (capital allowances partially ameliorate this).

Not really. A good pre-tax decision is a good post-tax decision, see above. I've never heard a businessman yet decide to stop using 'capital' (i.e. labour saving devices) because they will not get 100% capital allowances in the first year. And if the IEA really thinks this is a problem, then they could suggest giving businesses 100% first year capital allowances on all the equipment they buy. Most small and medium sized businesses have been able to claim 100% first year capital allowances on all additions for the last few years anyway. I don't really see the harm in extending this to all businesses, it would result in a corporation tax shortfall in the first few years but slightly higher receipts once it has bedded in and an end to all this Faux Lib bickering.

• They discourage investment by reducing retained earnings, which would otherwise be spent on capital investment goods directly by the company or invested with financial intermediaries to the same effect by third parties.

Nope. By definition, corporation tax is not a tax on reinvested profits, which is what we care about, reinvested profits are paid out of earnings before corporation tax. 'Retained earnings' merely means all earnings not paid out as dividends. It's not even technically correct because corporation tax is paid on total earnings, including the part paid out as dividends, which are at directors' discretion. From the company's point of view, the government is just a quasi-shareholder with a right to a dividend of 20% of earnings. The directors can then decide how much pre-tax profit needs to be reinvested; and how much should be retained in cash and how much should be paid out as dividends. If they think the tax bill is too high, they reduce cash dividends accordingly.

Once a business has shown itself to be viable, it will grow organically. The first outlet/machine/project has to be funded by share capital (assuming banks won't lend to start-ups); if there is sufficient demand and it is profitable, it will grow. If the business decides to just roll up profits in cash instead of expanding, then yes it will pay full corporation tax on them.

I spend all day completing tax returns, and it is only tax return in twenty where the capital expenditure in a year is greater than the profits, so if the business can claim 100% capital allowances on all its expenditure, it has a loss for tax purposes. The other nineteen returns show that capital allowance expenditure was a lot less than the profits for the year, ergo full corporation tax relief and/or the expansion is funded out of pre-tax profits, whichever way you want to look at it.

Admittedly, there is a timing issue here but this can all be fed into IRR calculations, or the loss carry back period could be extended from one year to three years again, to give the one business in twenty a better chance of reclaiming all the corporation tax it paid on the earlier years' profits which it has now genuinely reinvested.

One of the few sensible measures in the UK corporation tax system is that there is no tax relief for buying land, and rightly so, as people selling land to each other does not increase our productive capacity one jot, land is not capital. Annoyingly, there is precious little tax relief for the cost of new buildings, even though buildings are capital in the true sense of the word. Again, that can easily be fixed by reintroducing Industrial Buildings Allowances and extending them to all new buildings.

Economic Myths: Corporation tax is a tax on capital.

The Faux Liberatarians say little about the worst taxes of all (VAT and NIC) and usually refuse to countenance the least bad tax (LVT). Which leaves us with Milton Friedman's second least bad tax, a flat tax on income.

The Faux Libs, for reasons unknown to me, are putting the superficial legal form of a tax above substance and by some convoluted process of logic decide that corporate income is somehow special compared to employment or self-employment income, or indeed interest or dividend income.

Enter stage right The Institute of Economic Affairs…

Bringing capital taxation into the 21st century

Woah! Corporation tax is not and never was a tax on capital! Imagine Joe, our self-employed van diver who owns his own van, he drives around picking up and delivering parcels. Are his takings earned income? Yes of course. You could if you wished split it into a small part for return on capital and the rest as true labour income, but why? He claims the depreciation and running costs as an expense and only pays tax on the value of his labour. The small part that relates to depreciation and running costs is in turn earned income of the car factory and the repair workshop etc. You could then split the income of the factory and the workshop into 'return on capital' and 'labour', but ultimately it is all labour (until you get all the way back to raw materials in the ground).

If Joe decides to form Joe Limited and trade through that, does the nature of the income magically change from labour income to capital income? Of course not.

As a matter of fact, corporation tax is a tax on income, full stop. There is no particular reason why this should be taxed at higher rates or lower rates than any other kind of income. It is not a tax on 'capital'. A business with capital worth £1 million that makes £50,000 profit pays the same tax as a business with very little capital and a £50,000 profit. A bit of a clue. I would have thought?

Summary:

* Corporation tax is an inefficient way to raise government revenue. It has a negative impact on growth, investment and entrepreneurship. A 2014 review of the literature found that 57.6 per cent of the amount raised by corporation tax is borne by workers.

Corporation tax, like any tax on income, is an inefficient way to raise tax (but not as bad as VAT/NIC), as is anything but LVT. That's an argument against taxing earned income, not against corporation tax per se. That 57.6% is questionable indeed, but even if true, so what? Do they really believe that if employers get a tax cut, then they would pay their workers higher wages? And if you are a worker, would you rather have PAYE which you bear 100% or corporation tax which you only bear 57.6%?

And in a large, faceless corporation, managers are supposed to try and maximise profits and dividends for their shareholders as a vague collective body, and managers are paid according to results. Does it make any difference to the manager that in economic terms, the government is large but silent shareholder who automatically receives a certain % of profits?

* Since 1981, the average corporate tax rate in key OECD countries has dropped from 47 per cent to 29 per cent. However, corporate tax revenues as a share of all taxation have remained stable during this time. They have increased as a share of GDP, in line with growth in the tax burden.

The first bit is probably true, the last bit isn't - tax as a share of GDP of western economies has been surprisingly stable for decades (35% - 40% of GDP). Laffer effects ensure that it is nigh impossible to get over that 40% threshold.

And the reason why corp tax revenues have remained stable despite the (welcome) fall in rates is partly Laffer effects and more likely because corporate profits have increased as a share of GDP, which in itself is a bad sign because that extra corporate profit is largely monopoly income (patents, land income, monopolies, government contracts etc).

* Economic developments such as globalisation and the growing importance of intangible assets underscore the need for reform of the way in which capital income is taxed.

It's not capital income, see above. Intangible assets are a government protected monopoly right/source of income and so the government is perfectly entitled to collect more tax from those who benefit from the system. Which means that registering IP (which stifles the economy) would no longer be a one-way bet; people would have to choose between giving it a go in the free market at a lower tax rate or relying on government protection but paying the appropriate price.

* The OECD’s BEPS proposals are likely to entail new costs and uncertainty for multinational firms. Furthermore, their volume and complexity means that effective implementation will be difficult, especially for developing countries.

If multinationals played ball, it would not impose 'new costs'. Somehow the global profits of such businesses have to be allocated between the various countries in which they operate and each country taxes its own share at whatever rate it chooses. So each multi-national just submits one worldwide tax return and whatever info is needed to enable total profits to be apportioned between all the countries in which it operates. The various countries taking part in the scheme then chuck all these returns on a pile and agree on how to apportion profits.

* Radical proposals for reform include a tax on turnover, a sales-based corporation tax, and formulary apportionment of multination profits. While these reforms might curb opportunities for tax avoidance, they would have damaging side-effects of their own.

Boo to turnover and sales taxes, the worst taxes of all. All tax on income is arbitrary and so the formula will be arbitrary, so what? In theory at least, reducing avoidance means that a lower tax rate can be applied overall to a larger amount of taxable income (which must be a good thing).

* The only radical reform that would improve on the status quo without introducing new distortions would be to replace corporation tax with a tax on the income distributed to shareholders. Such a system would overcome the weaknesses of the current system, while also reducing incentives for avoidance, and raising revenue in a growth-friendly way.

Here we go again. These people do not live in the real world. That is exactly the position that Apple is in - it siphons off most of its surplus/rental income into tax havens and parks the money in government bonds. For psychological reasons, it does not want to use that to pay dividends, because transferring the money back to the USA triggers a high tax bill. So Apple shareholders never get their dividends and no government ever gets the tax (they have to borrow money from Apple's offshore companies instead!)

Or to use an analogy: wild animals are free gift of nature but a bit scarce. People like catching and eating them, so the government decides to levy a tax. Surely it makes sense to levy the tax on actually catching the animals to minimise the number of animals being caught. With a reduced number of animals being caught, we can be pretty sure all those caught will be eaten. What the Faux Libs propose is zero tax on catching animals, but then imposing a tax when they are eaten. The result if this will be that many more animals will be caught a lot of them will be wasted. Plus being even more difficult to police.

* This reform could be implemented in stages to ensure the UK’s international tax treaties are updated. Once fully implemented, the new system would see UK shareholders taxed on their worldwide capital income, while foreign shareholders in UK firms would be exempt.

That's a terrible idea. We can safely assume that people in rich countries own more shares in companies in poor countries than vice versa. So governments in poor countries would be getting less tax and governments in rich countries would be getting more tax.

The only way to do it would be to make companies pay tax when they pay dividends, which means that companies will end up sitting on vast piles of untaxed cash, like the Apple situation.

* It is important to recognise that this discussion is about tax structure, and not necessarily the overall level of taxation. Those who wish to maintain existing levels of taxation would be better served by the proposed reform than by the status quo.

They don''t understand the maths of it. Corporation tax in the UK is a nice low 20% and roughly half of profits are paid out as dividends. To remain fiscally neutral, the tax on dividends would have to be about 40%. This is such a high rate that companies will either not pay dividends (meaning cash is just parked in government bonds and not put to its best use) or they will find devious ways of dressing up dividends as capital payments (like share buy backs and so on) which are usually taxed at much lower rates. As a tax advisor, I say bring it on, but I don't see why anybody else would be in favour.

He is starting to get it.

Philip Booth of the IEA has been fairly Home-Owner-Ist in the past, so I am heartened that even he can see the flaw in the idea of exempting main residences from Inheritance Tax.

From today's City AM:

Some Conservatives are currently pushing plans to increase the amount of an estate which will be exempt from Inheritance Tax by the value of a family’s primary residence up to £350,000. This will save many families up to £140,000.

Tax rates should be low and flat. Tax exemptions lead to discrimination and distort economic behaviour.

If this tax change goes through, two families with identical total assets could find themselves paying vastly different amounts of Inheritance Tax if one of the families invested in shares and the other invested in their home. Such discrimination against business investment is wholly unjustified. It adds to the already heavy tax discrimination in favour of owner-occupation.

The proposal will encourage investment in housing rather than in other forms of investment. Given the fixed supply of housing due to planning constraints, the result will be higher house prices. It will also encourage older people to remain in larger properties rather than downsizing, moving into more appropriate sheltered accommodation, or moving back in with their family.

The incentives will not be trivial. A 90-year-old woman, for example, living in a four bedroomed house in Leicester might pay an extra £100,000 in Inheritance Tax by choosing to move into sheltered accommodation, or an extra £140,000 by choosing to be cared for in her son’s or daughter’s house.

So far so good.

He then goes off on a tangent with some wild suggestions about reforming/simplifying IHT which are
a) administratively unworkable, and
b) miss the point. IHT raises barely more than the TV licence fee and they could get that money in much more easily in other ways (like a council tax rebanding, or just sticking 15% on Council Tax).

But hey, it's a start.

Sour grapes

Health groups dismayed by news 'big tobacco' funded rightwing thinktanks:

"At the current time, with a centre-right government, thinktanks which represent the libertarian right wing like the IEA and ASI are crucial players in the development of public policy," said Deborah Arnott, chief executive of smoking-related health charity Ash.

"The government needs to take note that tobacco industry funding of such organisations completely undermines the credibility of their opposition to standard packaging," she added. "For the government to allow its policies to be influenced by tobacco-funded think-tanks would be a breach of its legal obligations under the WHO tobacco treaty."

Whereas the fact that over recent years "the centre-right government" has directly or indirectly handed up to 20 times as much each year and more to its unacknowledged "agencies" such as ASH [£220,000 in 2010/2011 and £150,000 in 2011/2012] and in the process paid Deborah's salary is not something we should question or discuss.

Killer Arguments Against LVT, Not (233)

Paul Perrin, over at the IEA blog:

Mark, what if you are happily living in your home, then the council decideds to grant planning permission for a shopping centre on your plot? Your tax bill makes your whole plot is valueless to anyone other than a major property developer... how do you get out of you £1,000,000 monthly LVT? Surrender the land (with your home on it) to the council?

There's no basis for his assumptions that:

a) I will ever own a garden big enough to build a shopping centre on, or
b) The annual rental value of land used for shopping centre is a hundred times higher than for residential, or
c) Councils go round granting planning willy-nilly before anybody has applied for it (except to the extent they do 'zoning').

i. In real life, if you look at any smaller area there's surprisingly little difference in the rental value earned on neighbouring plots of land - be that residential, commercial, shops with flats above or car park - for the simple reason that, by and large and in the very long run, most land is put to something approaching its best use, despite the best efforts of NIMBYs and planners.

ii. If you realise your neighbour's plot is earning £30,000 a year as a car park and you're only getting £20,000 a year rent from a shop, you'll knock down the shop and lay some tarmac. This pushes down the amount that you or your neighbour can charge for daily parking, and now there are two cheaper car parks (each owner gets £25,000, down from £30,000), so the rental value of a shop goes up a bit to £25,000 and the equilibrium is restored.

iii. We know that of developed urban land, the vast majority (80%?) is used for residential. Retail and offices tend to be concentrated in the middle of town (industrial is usually out-of-town nowadays, let's ignore that for the purposes of this debate).

iv. By definition, the retail/office area only spreads out as far as it needs to; at the edge of the 'middle of town', you'll find a mix of residential and commercial; houses next to shops; flats above shops; little workshops between houses; petrol stations on main roads; corner shops in housing estates etc. Nobody in his right mind would demolish all the housing in the entire town to build just shops and offices because they'd lose all their potential customers and workers; it is sufficient for the shops and offices bit in the 'middle of town' to cover a tenth or so of the total urban area.

v. If the developer wants to build a shopping centre in the middle of town in place of existing shops and offices, then Paul's scenario does not arise. Neither does it arise if the developer wants to build out-of-town, something which we are constantly told is a very bad thing indeed (the ideal shopping centre would be an out-of-town shopping centre in the middle of town).

vi. If the town has grown outwards, then there may be enough people there to justify building a new shopping centre in the middle of town. If land in the middle of town is already being fully utilised (multi-storey buildings), then best place to build it is at the edge of the existing 'middle of town', which would indeed involve buying up and knocking down houses.

vii. But we know that the rental value of commercial land and residential land at the edge of the middle of town is pretty much the same (or else those flats over shops would be offices over shops etc - see iv.), so the uplift when it is re-zoned from residential to commercial will probably not be very much if anything. The homeowners are unaffected and the developer still has to make them offers they can't refuse.

viii. But how much would the uplift need to be to justify the council granting planning to the developer in the first place? Let's assume he needs to buy up five acres, that's about a hundred homes, each currently paying £12,000 in full-on LVT (assuming no taxes on income or personal wealth) and so the council is getting £1.2 million a year in tax. If the developer offers £1.3 million a year, the council will tell him to get stuffed, it's not worth losing hundreds or thousands of votes for such a small amount. He'd have to offer to pay at least (say) £2 million in LVT a year.

ix. So that's £800,000 extra LVT a year, in perpetuity (plus an unknown amount from any new housing, see x.). The council would also negotiate with the developer that he has to pay a reasonable whack for the bricks and mortar value of those one hundred houses, and to make things politically palatable, the council would earmark the first few years' worth (let's say three years) of that extra LVT income as compensation to those one hundred home-owners.

x. So the home-owners get paid in full for the bricks and mortar; plus £24,000 each for grief and hassle. The council can easily zone another bit of land in the vicinity for new housing and/or stipulate that part of the shopping centre land will be used to provide flats (with the hundred home owners being offered first dibs), so those one hundred households can take their bricks and mortar money plus the £24,000 compensation and either buy a house that comes up for sale nearby; move into one of the new flats or have a new house built on the new estate.

It's all very simple if you look at the real world and then apply common sense. Nothing terrible happens. None of it scares me, there's a one-in-a-hundred chance that it would ever happen to me, and if it does, I'll haggle for as much money as i can get and then move home.

Rabid right-wing free-market think-tank recommends, er...

Spotted by Derek at the IEA blog:

Relaxing planning restrictions would lead to a rebalancing of land designations towards their most profitable use, namely residential housing and business. This would lead to a fall in house and business property prices as supply increased, and windfall gains to land owners.

A concurrent LVT would capture some of those gains. As the tax base is observable and fixed, neither avoidance nor evasion is possible, making collection cheaper.

Substituted for other distortionary and inequitable taxes such as council tax and business rates, Land Value Tax could also increase efficiency. Paired with an overhaul of the antiquated system of land-use planning, it would boost growth and ease budgetary woes.