Killer Arguments Against LVT, Not (479)

From the Evening Standard, the usual Homey bleatings re the mooted Mansion Tax:

Former Westminster council leader Nickie Aiken, now a London MP, summed up the mood in a tweet saying it would “hammer families and elderly people who’ve worked hard for years to pay their mortgages”.

The Vulcan, who somehow sees people who are sitting on massive, taxpayer-funded land price gains in the same light as proper risk-taking businessmen (and their long suffering employees), who generate the tax revenues to subsidise those Homeys, weighs in:

Former Cabinet minister John Redwood said that instead of tax rises the Government should be drawing up a list of targeted tax cuts, including stamp duty, to stimulate growth.

Why the emphasis on stamp duty? I've never heard a client moan about it affecting their business, because it quite simply doesn't, it's a minor irritant at worst.

He said: “You cannot tax people into prosperity.."

This is a tried and tested right wing mantra, and as a matter of fact, it is bollocks.

Governments, or organised societies, are there to provide "public goods", which I shall neatly restrict to the sub-set of "stuff that governments do where the benefits (to individual citizens, or the economy, or society as a whole) outweigh the cost".

So the police, education, the road network are public goods. Things like HS2 or Help To Buy Sell are just a massive slush fund for ailing corporates who donate to whichever party is in government, and these are not public goods. Don't get me started on Third World Aid payments or Tobacco Control Officers.

The spending comes first, that's what helps a nation to prosperity (up to a point and bearing in mind diminishing returns to scale). Those things have to be paid for out of taxes (unless you are happy to risk currency collapse).

Taxes don't help a nation to prosperity (to any great extent), none but the most hardened Marxist would argue that. It's the spending that helps the nation to prosperity. Taxes are just the flip side of spending. The key is to collect as much as possible from taxes which don't damage the economy (fuel duty; Land Value Tax; income tax on high incomes, which is a tax on "rent") and as little as possible from those taxes which damage the economy most (VAT; NIC; basic rate income tax; probably SDLT).

The UK, like most Western nations, collects most of its taxes in the worst possible way, so we are running to stand still. Spending on public goods, as defined, above boosts the economy, but it is financed with taxes which hold the economy back and create inequality.

Starting where we are now, with spending on public goods giving diminishing returns, increasing the bad taxes to pay for more of the same is a hiding to nowhere (agreed on that point).

But what if you keep spending constant and shift from bad taxes to good taxes; and the nation prospers as a result?

What if you start with a clean sheet? The government does just the bare bones (defence, law and order and protecting land titles)?

As Hong Kong or Singapore so ably illustrate, if you can collect the surplus that would otherwise go into higher land prices and rents and recycle that into public goods, the economy can boot strap itself from nothing to developed world status within a few decades.

It's a virtuous circle. Spending on/providing the right kind of public goods (that private landowners would never have paid for, having no incentive to do so), increases land values, meaning more tax revenues to spend on more public goods, increasing land values [etc].

Oops! Redwood lets slip flagship tory economic policy...

...over at his blog, the Rt Hon. John Redwood MP has been busy deflecting criticism on his post about UK productivity.

A few of his pesky readers have been pointing out that the UK runs a big trade deficit and questioning the sustainability of borrowing (public and privately) circa 10% of GDP to keep the party going.

When a fed up sounding JR snaps back to 'Ken Moore'

"[Running a trade deficit year on year] has proved to be sustainable as many people wish to invest in the UK or buy assets here. Germany sells rich people expensive cars they do not need, and the UK sells them expensive flats so they can have additional homes."

And that's it in a nutshell, the UK exports its land (and rents) so people like John Redwood can swan about in expensive motors.  This isn't just coincidence, it is actually an economic policy.

"to build council houses? are you quite mad?"

"Government has not been a great landlord, and is itself so hugely overborrowed that it is not in a good position to borrow to build Council houses on a big scale."  explains John Redwood, adding, "I have no problems with the government helping bridge the gap for people with too little savings to make the large deposit for a first home. Banking Regulators have lurched from allowing or encouraging banks to lend far too much against each home, to letting them lend too little. The government has decided to intervene directly whilst the banks and their regulators are being so cautious".

"intervene directly?" - what can he mean.   And we do of course know precisely what the "preferred mechanism" for funding social housing is.

"If we wish to see more homes built where people want them then we do need to ensure a sensible flow of finance to the home market. Recent years have seen all too few new homes built, making it more difficult for people to find the home they need in the parts of the country under pressure".

I think we can safely assume that John isn't talking about ensuring a sensible flow of finance to facilitate "social" or heaven forfend "council housing" in those areas where people find it difficult to find the home they need - "those people" probably aren't wanted in those areas unless and until they can afford to buy... 

Ideas for blog posts

Here are a few things which I've scribbled down on bits of paper over the past few days which I vaguely intended to 'blog about at the time but never really got round to it. So as an aide memoire for the future:

1. The normally prudish Sun newspaper showed a Page Three girl who was wearing invisible underwear as advertised by Bar Refaeli.

2. Porn shops in Westminster won a refund/reduction of hefty licensing fees from the council, because they contravened EU Directive 2006/123/EC, which seems like quite a sensible directive on the face of it. All of this raises a lot of interesting questions (economic, legal, sovereignty etc). How do we square Article 12 with licensing of taxi drivers, for example?

3. Supposed right-wing Tory John Redwood musing about how nice it would be if we could go back to the lower tax rates we had when the Chancellor was... Gordon Brown (top rate income tax 10% lower, National Insurance 2% lower, VAT was 2.5% lower etc).

4. The UK is not absolutely useless at everything: shock Britain exports more vehicles than it imports for first time since 1976

5. It appears that they are going to make people criminally liable for death and injuries caused by their dogs, something which I have long advocated.

6. Tory government is close to achieving its pre-election pledge of getting construction of new housing in England down to less than 100,000 a year for the second year running. With the rain stopping play during April and all the Olympic and Jubilee ructions, I'm sure they'll get it down to five figures for the next year. Hoorah! The Hallowed Green Belt is Preserved For Future Generations! But not to build homes on, obviously - just think, instead of having a house with a rental value of £10,000 a year, we could be growing £100's worth of potatoes or something.

7. Queues at Heathrow. FFS. When you think how much human effort and ingenuity it takes to run global air travel: the aeroplanes, the technology, the staffing rotas, coping with the weather, air traffic control, difficult passengers, getting people's luggage on the right aeroplane, killing as few passengers as possible, guarding against terrorist attacks etc, it is amazing how well it works, really. And the UK government can't even organise a few dozen people to sit in booths, open passports, check the face, hold it face down on a scanner and mutter "Enjoy your stay" while chewing gum.

8. I explained recently why the building society funding model, where a company's assets are matched £ for £ with customer/owner deposits instead of shares is a vastly superior way of running a business than having share capital. So instead of a shareholder being paid dividends at the whim of directors; investing in a company by buying shares from an existing shareholder and realising his investment by selling his shares to a third party; a depositor invests directly in the business and withdraws money from the business.

It occurred to me today that this model is also used by Unit Trusts: a UT's net assets are always funded £ for £ by unit holders' funds: you invest in a UT by paying in money, which is invested on your behalf (in shares in other companies, but that is not important), all the income and gains of the UT are credited pro rata to unit holders as they go along, and if you want your money back, you withdraw it from the UT itself, and to the extent that withdrawals are not matched with new subscriptions, the UT just sells some of the underlying assets. So the model does work in real life, it's nothing new or unusual.

9. While looking for something else, I stumbled across a couple of instances of Austin Mitchell MP saying sensible things about Council Tax, e.g. here and here. And about London.

10. UK banks not completely dishonourable: shock RBS repays £163bn emergency loans

11. BobE emailed me this fine piece of Home-Owner-Ist drivel from guess which paper:

Regardless of where you are on the income scale, nobody could ever call your decision to buy a house irresponsible – whatever happens, you need somewhere to live, and swingeing rents usually represent far worse value. For low-earning households to have avoided mortgage debts, they would have had to actively decide to stick with renting; that is, to pay the same, for a worse property that they'd never have any equity in, just on the off-chance that, as a result of a possible downturn, they might be dragged down by the debt. What a bizarre thing to expect of people, when you're preaching a can-do, pull-yourself-up-by-your-bootstraps, aspirational Tory attitude.

12. Jorge emailed to ask whether I thought Iceland should adopt the Candian dollar, I can't say I have a view on that one way or another.

13. Finally, is it just me or do Natalia Vodianova's legs look completely out of scale (in a bad way) in this photo from today's Evening Standard?

More Inflation & VAT Fun

My post of late yesterday, which was on the incidence of VAT rather than inflation, ended up far too lengthy, so to edit that down to the bare minimum...

1. The Consumer Price Index figures (Excel, Table 1) are given for separate classes of spending, some VAT-able (e.g. 'Alcoholic beverages and tobacco') and some not (e.g. 'Food and non-alcoholic beverages'). The main rate of VAT has changed quite significantly three times in the past four years, so if we compare the relative price changes of VAT-able and non-VAT-able items, this gives us a good indication of how much VAT is passed on to the consumer (in higher prices) and how much is borne by the producer (in lower margins).

2. Between November 2009 and November 2011, the average CPI for non-VAT-able supplies went up from 129.9 to 141.9, which means there was 9.3% 'monetary' inflation (as per Lola's definition below). That's our baseline.

3. In November 2009, the main VAT rate was 15% and by November 2010 it had been increased to 20%, so if it were true that producers can pass on all VAT to the consumer by increasing prices, then VAT-able supplies would be subject to additional 4.3% 'government-made' inflation (i.e. old price £1.15, new price £1.20, £1.20/£1.15 = 1.043) on top of 'monetary' price inflation of 9.3%.

4. So predicted CPI inflation for VAT-able supplies over the period would be 14% (1.093 * 1.20/1.15 = 1.14).

5. As it happens, the average CPI for VAT-able supplies went up from 103.1 to 113.2 over the same period, which is total inflation of 9.8%. So by subtracting our baseline 'monetary' inflation of 9.3%, we see that the consumer lost 0.5 (higher prices) and the producer lost 3.2 (old net selling price = 100.0/1.15 = 87.0, and the new net selling price = 100.5/1.20 = 83.8).

6. Thus the consumer only suffered one-seventh (=0.5/0.5+3.2) of the extra 5% VAT in terms of higher prices, and the producer suffered six-sevenths of the VAT (=3.2/0.5+3.2).

7. So the next time people try to tell you that VAT is a 'good tax' because it is borne by the consumer not the producer, or that this year's CPI inflation figures will be lower because the last VAT increase drops out of the equation, feel free to laugh in their faces.
-----------------------------------------
As background, Lola tried to put John Redwood straight on the topic of inflation, this seems like a good way of looking at it, so I'll repost the whole comment here:

There is a big problem with Mr R’s analysis and that is a confusion between ‘inflation’ and the ‘rise in the cost of living’. The problem is that the Bank of England shares this confusion which is explains why their predictions (impossible anyway) have been/will continue to be, dire.

Firstly, inflation is a function of money. Money is a commodity with, for all intents and purposes, a zero cost of production. If too much is produced its price falls, and hence the goods and services priced in that commodity we exchange for it will rise.

Secondly, the cost of living can be affected by a range of factors that prevent the prices of the goods and services we buy achieving equilibrium, or trending lower, as capitalism does more for less every day. Mostly these are government inspired taxes, subsidies (the reverse of taxes), sclerotic regulation and similar interventions in the spontaneous order of the free market. These price rises are not inflation. They are simply price rises caused by government. This is what confused Brown (easily done with such a numpty). He thought that the lack of price rises meant that his loose money/high debt policies weren’t inflationary. What he failed to factor in were the price reductions coming on stream from the economic liberation of China and similar. His legacy is real inflation.

The situation now is that the government in trying to put right both Brown’s inflation – an unwarranted expansion in money and credit, and his price rises – excessive taxation/subsidies and regulation, by increasing prices by increasing taxes, rather than by properly cutting goverment spending. Which Mr R has already said many times that they are not doing at all.

What now has to happen and will happen, despite whatever the Coalition or the Bank of England do, is deflation and de-gearing. The deflation is already under way as the money supply (i.e. the [fraudulent?] creation of credit) contracts. At the same time assets purchased at inflated prices and bad investment made under the false price signals under Brown’s lunacy will have be liquidated, and they are being. In fact most of these were in real estate, and house prices will fall a lot more.

But because the Government and the Bank of England mis-define inflation, they will make this process unnecessarily painful, and so prevent us from benefiting from this process. Government-made price rises from taxes and the like will make us even poorer and worst of all utterly constrain real wealth creation and the maximising of production, which in its turn would create real jobs.

All pretty sensible, you might think. And John Redwood's reply?

Reply: The Bank’s task is to control measured inflation, which is measured by a basket of goods where relative prices may shift, and where there are arguments about how you adjust the index for changing quality and styles of product purchased. Measured inflation may be your monetary inflation or movements in prices caused by other factors.

John Redwood doesn't do logic

Joseph Takagi does a compare and contrast exercise.

Complete and utter moron

As background, John Redwood is a lifelong politician, and an MP for the pro-EU party known as the Conservatives (aka Tories).

If truth be told, he likes the current voting system ('First past the post') because it makes it easier for him to get re-elected and easier for his party (one of the two large parties) to obtain an absolute majority in Parliament; and he doesn't like the 'Alternative Voting' system (whereby each voter can rank candidates in order) because he knows that a lot of Conservative voters would give their first vote to a smaller anti-EU party known as UKIP (even though it is broadly accepted that most of these voters would still give their second vote to the Conservatives, so it is unlike to affect the outcome of the election very much).

But being a politician, he can't admit this and has to pretend he is doing this out of principle. He even tries using "logic" and falls flat on his arse:

Let us suppose that in a marginal the Conservatives last won with 37% of the vote. Labour had 31%, Lib Dems 22%, UKIP 3%, others 7%. If the UKIP theory is right and numerous Conservatives switch to UKIP on first preference, the AV first round result might be Conservatives 27% (10% switch to UKIP), Labour 39%, (they are currently well up on their 2010 result) Lib Dems 12% (as they are well down in the polls currently), UKIP 13%, others 9%.

Second preferences would easily give this seat to Labour, with the UKIP voters’ second preferences not coming into play.

Before we even discuss whether his final sentence is logically correct (it's not, it's complete and utter bollocks), is it not the case that Labour would have won this vote under First Past The Post anyway, having got more of the vote (39%) than the Conservatives would have obtained (27% + 10% = 37%)?

Mr Redwood confesses that he thinks he can 'run the economy'

This is JR's post recent post to which I am referring.

http://www.johnredwoodsdiary.com/2011/01/21/the-game-of-managing-the-economy/

This is the first paragraph...

A government trying to manage an economy is rather like a child trying to play that game of placing a number of small ball bearings into a series of slots on an enclosed board. The game proceeds by nudging or shaking the board in different directions to try to tempt each ball into one of the slots. If you nudge too hard or in the wrong direction you dislodge some of the balls you have already placed in the right holes. Success depends on administering the right series of shocks in the right directions to complete the task. Too much force will wreck it. Too little will not achieve it. There may be some way of calculating the right forces, but in the real world it comes down to experience and judgement, to trial and error.


Now, there is nothing more terrifying in my world than a politician stating that the government 'manages the economy'. It is the confession of a latent leaning to 'central planning', which all us Austrians know is doomed to failure.

Generally I like Mr R (H-O-ism excepted) and anyone who cannot sing in Welsh cannot possibly be all bad. He runs an outfit called Evercore which does some of what I do in a similar way, so that's good. But this post somewhat riled me, and I was rather caustic in my comments.

A better anaology to my mind than JR's 'nudging the pinballs' is the motor racing 'tank slapper'. This is what happens when you get into a bit of skid and in trying to correct it you over compensate and swerve off in the opposite direction. Then you overcompensate again and again you swerve off, and so on until you spin right round and, bang!, you're in the barriers.

JR's, or any politicians attempts to 'nudge' the economy, always ends in tank slappers, and more often than not, in the crash-barriers too.

VAT tomfoolery over at John Redwood's

The patron saint of Home-Owner-Ism trotted out the old propaganda yet again:

Some tax rises can be self defeating. VAT is probably the least bad tax option. Hiking the rates of CGT, Income Tax and profits tax might result in less revenue being collected. It is all too easy to put people off enterprise.

You can drive them or their profits and earnings abroad very quickly. Higher rates of Income Tax and CGT are more damaging to tax revenues and the rate of business investment and growth than higher VAT.

Nope. I left a comment as follows (ever so slightly tidied up):

Wrong. VAT is by far and away the most damaging tax.

1. It distorts massively between VAT-able and non VAT-able businesses (which are mainly those related to banking and finance, or land, i.e. food and housing, i.e. those things that got us into this recession).

2. Corp tax is a tax on the return on capital, but if you are making losses you pay nothing, so it does not eat into the capital itself. VAT has to be paid whether a business is profitable or not, so it eats into capital.

3. VAT acts as a barrier to entry/barrier to growth for new and smaller businesses, because the £70,000 threshold means that a business with a turnover of £69,000 has to leap straight to a turnover of about £90,000 before it even catches up. Further, new businesses tend to make losses in the first couple of years, so it benefits incumbents, see point 2.

4. As a simple matter of observation, VAT is largely borne by the producer, not by the consumer. Consumers cannot magic money out of thin air to pay 2.5% more than they were doing before.

5. One sign of competitive (i.e. efficient, i.e. successful) industries is where net profit margins on sales are very low (5% to 10% is about normal, across all businesses). So very profitable businesses earning more than 5% will become less profitable, marginal businesses with profit margins of 5% or less will be in the danger zone; and businesses in the danger zone, say 1% or 2% net profits will go bankrupt.

6. If you grind the figures, the knock on effect of trying to raise an extra £13 billion from VAT will be that corp tax receipts go down, PAYE receipts go down, unemployment and welfare costs go up. It is quite possible that incremental extra tax revenues minus additional welfare payments is so close to zero as to make this a very dangerous experiment indeed.

7. VAT is imposed by the EU, and as a Tory MP, you might be aware that the EU wants all Member States to harmonise VAT at 20% – to pretend that this is to try and reduce the deficit (which is not going down under the Tories, I might add) is a bit feeble.

8. If we are to try and tax ‘consumption’ rather than ‘production’, taxing the output of enterprise, labour and capital is NOT the way to do it. You have to try and identify something that has value, which people are prepared to pay for but which is not actually ‘produced’ in any meaningful way (and certainly not by individuals who can change their behaviour).

9. So how about a tax on the ‘consumption’ of land? This cannot be created, destroyed or taken abroad, so all you’d be doing is replacing privately collected taxes (ground rents) with publicly collected taxes (Land Value Tax) and reducing publicly collected taxes on output, income and profits accordingly.

The New Feudalism

I am not Mark Wadsworth.

MW's comment on the Redwood housing post with a flattering comment on my comment made me think I 'should' share with you a central bit of my 'financial planning' advice for clients - 'The New Feudalism'.

Some background. I am what is branded an IFA - but that's not what I do, it's just what is bureaucratically convenient for the reg-yew-lay-ter to label me. We did 'financial planning' before I'd even heard of the idea. I have long thought that essentially we are in the freedom business, in the sense that we make calculations and do things that get our clients financially independent as soon as possible at the lowest cost possible. Behind this is the core philosophy that what we now live under is a 'New Feudalism'.

Look at it this way. You're born. You do education. You go to work. It's just you. If you don't like work you can tell your employer to stuff it and go anywhere. Then you fall in love. Your family think this is great. They rub their hands and tell you that now 'you'll be able to get on the property ladder'. So you do. You buy a house. You get into a huge debt to buy a wasting asset on a piece of land whose price is being inflated like mad by the very people enslaving you - the State, the central bank and the retail banking cartel.

Now they've got you. The Bank's got you, since if you don't service the mortgage debt they'll take your house off you and blight your life for ever. You have keep your job to pay your debt, so your employer's got you and can pay you not quite enough. As you have to have a job the taxman can steal from you through the scandal of PAYE. In other words the State has got you.

This triumvirate of Bank, Employer and State owns your arse. These three weird sisters now control your life. You're on the treadmill.

The trick is to work out as soon as possible that this is the case and then set about getting them out of your life. And for that you need income that is not dependent on an employer and no debts.

If you set about it early enough (and before you ask, I didn't - I made too many mistakes and, to be fair, got trapped by circumstances beyond my control) you'll be free by 50 at the very latest.

Hence Redwood's bit about housing was, well, bollocks.

Here endeth the lesson.

Killer arguments against LVT, not (67)

John Redwood, who has described Land Value Tax, possibly accurately, as "a dagger to the heart of property values" on Housing Lobbies:

"The aim of housing policy should be to offer more people the choice and security which ownership brings. For all those approaching retirement it is especially important to lift the need to pay rent for the rest of their lives. The poorest of our society end up paying the most for their housing at the end of their lives when they can least afford it."

Lola steamed in with the financially literate counter-argument:

"False. Owning a house outright has an opportunity cost. The money tied up in the house is money an owner could invest into income producing assets to pay an income. Very roughly a properly set up fund will produce about 4% per annum in your hand for ever. Hence someone owning a 150,000 property (roughly national average house price) is foregoing £6,000 pa by owning. That's £500 per month. Round here you can rent a decent house in a reasonable area for that."

Lola's argument stacks up even better if we assume that the income from these investments were not subject to tax, at corporate or individual level, of course, which would be the case under a full-on LVT system. My take is as follows:

1) You automatically get a mark deducted for using "should" as an argument to support anything.

2) JR was talking about "the need to pay rent for the rest of their lives" as a long-winded excuse to flog off social housing at undervalue to people as a short-term and very expensive way of winning votes and signing more people up to Home-Owner-Ism.

3) Here's an idea - just exempt pensioners in social housing from having to pay rent at all! That way there is neither a need for them to saddle themselves with large debts nor a need for taxpayer-owned assets to be flogged off at undervalue. The loss of rental income is far less than the cash discount that would have to be offered to entice people to buy, so that's a win-win, and I think that "the poorest in our society" wouldn't have much to complain about, especially as there are plenty of other poor people in the queue for social housing - if you flog it off to one group, you deny it to the other.

4) We can apply the same logic to Land Value Tax. It is, in economic terms like paying rent for where you live or your business premises, so we'd all be tenants. But - assuming this were the main source of tax revenues - your old age pension would be paid out of rents collected from others, so in a way we'd all landlords as well - the two cancel out.

5) But if it is a good idea to exempt pensioners in social housing from paying social rent, we might as well just exempt pensioners from Land Value Tax as well (or give them massive discounts/exemptions combined with a higher state-pension, or interest-free deferment or some such fudge.)

6) I'd have caveats to this - it would only apply to pensioner households who only own one home and who use that home as their only or main residence etc, so it would only apply to about one-sixth of UK land values. It would be quite simple to do administratively and the unintended consequences would be fairly minimal.

7) This would be politically motivated rather than good economics, but hey, it deals with the Poor Widow Bogey once and for all.

Next.

They didn't read the memo

John Redwood, in The Daily Mail:

Senior Tory MP John Redwood last night... said: ‘Lib Dem activists can do what they like but I do not think the Coalition Government is interested in finding more ways of taxing people.’

Apart from that VAT hike, eh? Which the Lib Cons claim will increase the tax burden by £11.4 billion in tax per annum...

Henderson’s chief economist Simon Ward in City AM:

“This [increase in food price inflation] could warrant postponing or cancelling the coming VAT hike,” Ward cautioned. He said the better-than-expected public sector borrowing numbers could justify cancelling the VAT rise, thereby cutting one percentage point off headline inflation.

However, a Treasury spokesman insisted the VAT hike is here to stay, arguing that controlling inflation is a matter for the Bank of England and its monetary policy tools.

Unlike the Treasury spokesman, Mr Henderson obviously didn't read the EU memo saying that Member States have to harm-onise their main VAT rate at 20% (to be fair, countries with hitherto very high main rates have reduced them slightly).

Headline Of The Day

Over at Man Widdecombe.

@ John Redwood

He's launched another full on counter-attack on LVT. I typed a lengthy comment which wouldn't register, so I'll post it here for future reference:

"The third proposal is to go over to a system of LVT. Proponents of this see it as an easy answer to all our problems. Others see it as land nationalisation."

LVT is not an answer to "all" our economic problems - some are simply insoluble and we have to learn to live with them.

And it is not 'nationalisation', it is a straight user charge for the benefits you receive from the state in your capacity as 'landowner' - in any event, isn't income tax 'nationalisation'?

"The full scheme replaces some taxes with a rental charge on all property payable to the state. It is therefore a more penal tax on all those who have already bought freehold interests in property, and may still be paying off the bank loan or mortgage, as their freehold effectively is taken away from them as the state becomes their landlord."

Sure, so let's have discounts or reductions for recent purchasers whose house falls to a lower value than what they paid. Even with a full-on LVT to replace all other taxes (income tax, VAT, National Insurance, corporation tax), people who bought ten or more years ago would still be sitting on a capital gain.

And if this tax is 'penal', then is not income tax even more so?

"I have never seen a satisfactory explanation of how the transition would be handled fairly, given the huge numbers of property claims that underpin the banking system and the current pattern of widely spread property ownership. "

Others have already made their own suggestions for the transition (all of which we can incorporate), to which I would add:

1. HMLR already holds enough info on selling prices, locations and plot sizes to be able to determine land values within a tolerable margin of error.

2. For a start, let's replace all existing land or wealth related taxes with a flat tax on site only land values. On a fiscally neutral basis, replacing Council Tax, Business Rates, Stamp Duty, Inheritance Tax, Capital Gains Tax, Insurance Premium Tax and the TV licence fee in their entirety would require a 1% flat tax on total buildings values (like Domestic Rates in Northern Ireland) or even better, a 2% tax on site-only land values (i.e. value of bricks and mortar is deducted for valuation purposes). Preferably averaged out over postcode sectors or whatever.

3. From there on in, you just increase the rate every year and use the revenues in a just and equitable manner...
If it hits recent purchasers - give them discounts.
If it hits high earners in big houses - get rid of higher rate tax.
If it hits lower earners - double the personal allowance or cap their bill at a certain percentage of their income (this overlaps with AVI's suggestion above)
If it hits pensioners - then double the basic state pension or give them discounts or deferment option.
If it hits landlords - get rid of Capital Gains Tax to give them an easy exit (oh, we already did that, see above!)

Provided the averaged out buying/selling prices of buildings in any postcode sector does not dip below their depreciated rebuild cost, then the tax is not 'too high' by definition.

4. One group would be clear winners from this, and that is businesses - instead of businesses and their employees having to hand over about half the wealth they generate (in VAT*, National Insurance, income tax, corporation tax and Business Rates) the total tax generated from businesses and commercially used land and buildings would go down by about two-thirds, and the UK would be a veritable magnet for inwards investment. Hurray! What's not to like?

5. As to 'property values underpinning banking system', aren't wildly inflated land values and a heavy tax burden on businesses how we got into this current mess? Isn't that something worth avoiding in future?

* Obviously, we'd have to leave the EU first, but that would be A Good Thing in an of itself.

Killer arguments against LVT, not (61)

The Home-Owner-Ists have been busy churning out propaganda to protect their own vested interests for years*, which the Land Value Taxers do their best to counter-act with logic and examples, so far to little avail.

What worries me is that the Home-Owner-Ists don't just churn out propaganda, they appear to have a counter-insurgency element which knows perfectly well all the arguments in favour of taxing land values rather than incomes; of liberalising planning laws; of building more council housing or indeed ending the bank bail outs. This element does not usually mention 'Land Value Tax' by name, but it certainly gets its retaliation in first.

Exhibit One

From John Redwood's blog yesterday:

The third [idea for dealing with windfall planning gains] is that the wider nation should pocket the gain, through moving to a system of land nationalisation, where everyone just rents their property from the state and the state collects all the rents and therefore benefits from new construction. Effectively land values are abolished as no-one is allowed to be a freeholder apart from the state.

It was nice to see the usual suspects, Lola, Steven_L, DCB Reed, Derek, and Steven W pile in over there. To debunk Redwood's twisted logic and lies, let's apply it to taxation of normal incomes and output:

The third [idea for dealing with employment income and business profits] is that the wider nation should pocket the gain, through moving to a system of taxation of incomes and output, where everyone just rents their own time and effort from the state and the state collects all the rents and therefore benefits from new business activity. Effectively, effort and enterprise are nationalised as no-one is allowed to be a free man apart from the state.

No serious Land Value Taxer has ever said land would be 'nationalised' or that people would 'rent their properties from the state'. They would merely pay tax or ground rent for the value of the state protecting their exclusive right to occupy whatever bit of land they wish to occupy - what that person or his predecessors have chosen to build on that site or what they do in that building is entirely up to him.

It's no different to owning a caravan or tent and paying the farmer a daily charge for the pitch when you're there on holiday - you own the caravan, and you pay him for the right to exclusive occupation of that pitch while you are there.

Or does somebody think it is better if, for the few days or weeks that you are on holiday with your caravan or tent, that you pay the farmer up to 50% of your income, time-apportioned to that time period? Wouldn't that mean that lower income people pay less than higher income people? What motivation does the farmer have to improve the facilities if the rents he can collect are decided by somebody else? Isn't price rationing the best form of rationing?

No doubt somebody will whine and say "But it's my land". Fine. The physical land is fairly irrelevant - what is relevant is the value of all the local amenities.

To continue the analogy, what if the farmer sold off little caravan sized 'freehold' patches to campers? Who'd pay for the facilities to be maintained in future? What do you do if the owner of the plot next door decides to dump a load of rubbish on his pitch? Who'd chuck him off? Within weeks or months the place would be in chaos.

Anyway, all Land Value Taxers agree that some or all other taxes should be replaced (we differ hotly on which ones and in which order, of course). I've never met one yet who said otherwise. Even the Labour Land Campaign has a list of other taxes which they'd like to reduce or phase out.

* Stuff like "House prices can only go up"; "Your house is your main asset", "Rising house prices make us wealthier", "An ever expanding banking sector is the driver of the UK economy", "We can't build any more houses because of food security", "We have to protect vulnerable homeowners from the spectre of repossession", "We have to keep house prices high or else the banks will go bust" and "We have to bail out the banks to keep house prices up", "We have to keep house prices up to protect hard working homeowners from the spectre of negative equity", "Council Tax is unfair because it does not relate to ability to pay" and so on, which is all lies and half-truths.

Supply and demand

Our Housing Minister looked at the demand side of the equation yesterday:

In his first speech since being elected Shapps told a gathering of housing sector experts that "the age of aspiration is back.. I don't agree with my predecessors that reducing homeownership might be a good thing," he said. "Most people still want to own their own homes and I want people to know that this government will support them in that."

And further:

Shapps says that 1.4 million people want to buy their own home: "The age of aspiration is back. Another quarter of a million people can afford a mortgage of at least 80% loan-to-valuation, but can't find a lender. The banks and building societies will be asked to come and see me to explain why that is and what they plan on doing about it."

Our Communities Secretary ruled out one possible source of new supply last week:

"The previous Government gave a green light for the destruction of the Green Belt across the country and we are determined to stop it," Mr Pickles said, "We've promised to use legislation to scrap top-down building targets that are eating up the Green Belt, but I'm not going to make communities wait any longer to start making decisions for themselves."

Our Decentralisation Minister* ruled out another possible source of new supply today:

New measures will be announced today to stop the practice of "garden grabbing". Decentralisation minister Greg Clark is giving local councils immediate powers to prevent the building of new homes in back gardens... Local councils have struggled to stop the trend as gardens have been classified as "previously residential land", meaning they are brownfield sites.

The third and final option would be to somehow encourage/force** landlords and second home-owners to sell their properties to 'aspiring buyers', of course, but I think certain Tory back-benchers will have a thing or two to say about that.

* A job title which somehow reminds me of when the previous government set a target for the reduction of targets.

** Delete according to whether you think that market forces are A Good Thing or A Bad Thing.

All our taxpayer-funded windfall gains are belong to us!

Know-it-all's just can't resist digging

More tax hilarity over at John Redwood's:

JimF:

Mark,

I think you are confusing cashflow and profit. The point is that VAT will never affect the level of retained profit or loss in your business. VAT is not a part of your P/L, and never belongs to your business. Your customers are paying the VAT which you then have to pass on...

Mark Wadsworth:

JimF

1. I am the world’s second best accountant and know perfectly well the difference between cashflow and profit, in the long run they are the same thing anyway.

2. But I also know the difference between the legal and economic incidence of a tax …

3. VAT is only not part of your P&L because accounting standards say so. Let’s take a simple example and you are a one-man limited company with very low costs and are making VAT-able to end-consumers. For every extra £1 you earn from a customer, you have to hand over 15p in VAT within three months and then out of the remaining 85p hand over 19p within nine months.

4. Business Rates is part of the rent, the Tories experimented with BR-free zones in the 1980s and all that happened was that landlords put up the rent. It did not stimulate or encourage business activity in the slightest.

5. Therefore your two statements “If you can’t pay the VAT you aren’t making a profit in the first place and frankly shouldn’t be in business” and “Business Rates are equally as insidious as Corp Tax as you feel you get nothing for it and pay it regardless of your P/L” are not only incorrect but self-contradictory…

6. A business gets a heck of a lot for its total rent (rent plus BR), it gets the base, access to public transport, employees, customers etc etc. So the real truth of the matter is that a business that can’t afford the total rent (which by definition other businesses would be happy to pay to trade from that location) shouldn’t be in business.

7. Conversely, if and when we get out of the EU and VAT is phased out, businesses that might otherwise not have been profitable will become profitable, prices go down, more employment etc etc. Hurray!

Know-it-all twats over at John Redwood's

JR did a very sensible article saying that it'd be a good idea if the government removed some of the barriers to setting up and growing small businesses. I commented thusly:

John, I’d broadly agree, especially on the de-regulation point, but you are wrong on which taxes to reduce.

The biggest barrier to entry is VAT, because a new business probably won’t be making much profit anyway, so wouldn’t pay much corporation tax – but it does have to hand over 15% of its turnover as VAT (yes I know that if it is supplying to VAT-registered businesses it flows through, but not if it is supplying to exempt businesses or the general public), even if it is not making profits, i.e. the new start-up has to pay the VAT out of its own funds that it should be investing in the business.

The same applies to Employer’s NIC (and yes I know that in economic terms, a lot of the tax is passed on to the employee as a cut in salary). Taking on your first employee is a total administrative nightmare and then you have to pay for the privilege as well (which is why the cunning cove runs his small business as a partnership!).

Corporation tax ain’t so bad – no business ever went out of business because it was profitable and hence had to pay corporation tax. And don’t forget that total corporation tax in the UK is only half as much as VAT collected, even though half of businesses are VAT-exempt or zero-rate, i.e. VAT registered businesses pay four times as much in VAT as they do in corporation tax.

And while in principle I am totally against capital gains tax as well, that is a long way down the line, it might be ten or twenty years before today’s new start up is sold on to a competitor etc. Many people set up a business without any particular intention to sell it.

Of course, two twats took the opportunity to show how decades of brainwashing had affected them:

JimF: I disagree. Corporation Tax hits just when you start getting into profit and need to re-invest to grow the business. It is a barrier to growth.

If you can’t pay the VAT you aren’t making a profit in the first place and frankly shouldn’t be in business.

Business Rates are equally as insidious as Corp Tax as you feel you get nothing for it and pay it regardless of your P/L.

alan jutson: Jim, Agree with you.

Being Vat registered actually gives you a positive cash flow as the Vat you charge is more than the VAT you pay, until you have to pay Inland revenue the difference every 3 months. Being Vat exempt (below threshold turnover) gives negative cash flow, as you have to pay VAT before you can invoice customer for work completed.

Mark Wadsworth: Wow! That is the most amazing non-logic I have ever seen.

Are you really trying to say that if a business has to hand over £400,000 VAT, that is all fine and dandy, and even better if it drives you out of business, but if it has to hand over £100,000 that is “a barrier to growth”???

As to the cash flow argument, that is even dafter – I might as well point out that corporation tax is “cash flow positive” because small businesses do not have to pay it until nine months after the year end!!

I couldn't be bothered to explain that Business Rates are the least bad tax we have and why.

John Redwood breaks his own rules. With a vengeance.

At the recent ASI bash, JR insisted that he used his 'blog for information and campaigning, and tried to avoid humour or tabloid stuff. Here's today's post:

Another easy spending cut

We learn today the government wants to give some taxpayers money to charities for political campaigning*. Surely the government could hold some meetings with charities to find out what they want, without giving them money to run ads to tell them?

* He's not making this up BTW, see for example here.