Killer Arguments Against LVT, Not (458)

Two KLNs which have been bugging me for a while:

1. The YIMBY argument, "It's all about supply, build more houses and prices will fall, no need to hit existing home-owners with LVT".

I admit I got bogged down in trying to explain that:

a) more supply - of the right type of buildings in the right places - will increase overall rents and prices. They can't respond to my simple observation that there are more homes and commercial premises within the M25 than in the whole of Scotland, despite Scotland having fifty times the surface area, yet prices and rents are much higher inside the M25. So logic says, build more inside the M25, prices and rents there will increase further.

b) given a sensible corresponding reduction in taxes on earnings and output, the median or average home-owner will end up a lot better off. They're being "hit" with a large overall tax reduction!

Clearly, I'm wasting my time on such arcane points, and the best strategy is to accept their assumption as correct.

The short rebuttal is:

i. Land Value Tax is not primarily about improving affordability, it is about making land owners pay for the value of government spending from which they benefit (fair and economically efficient) instead of making businesses and workers pay for the cost of that government spending through taxes on earnings and output (unfair and economically inefficient). The fact that LVT improves affordability and reduces inequality (by reducing the constant net transfer of wealth from the economy to land owners) is a big bonus, but not the main aim.

ii. Even if in the idealised YIMBY world, rents and prices were to fall, the question of who should pay for the spending which generates land values is unchanged.

iii. Also, LVT would tend to encourage more efficient use of existing buildings and more efficient/productive use of development land.

2. One of Richard Murphy's KLNs "Lower and middle income households tend to only have one valuable asset, their own home. Wealthier people have as much again in shares, pension rights, cars, paintings, jewellery etc. Therefore, a tax on land would hit lower and middle income households hardest and would be regressive. A wealth tax would be much more progressive."

No it wouldn't, that's basic maths.

The point is that land ownership is very concentrated in a few hands, so any tax thereon would be very progressive. The potential revenues from LVT (at least £250 bn a year in the UK) would dwarf potential receipts from a general wealth tax on shares, pensions rights etc (£25 bn a year, tops, even assuming it were morally justifiable and administratively enforceable, which it isn't, and not subject to massive avoidance and evasion, which it would be).

The £250 bn LVT revenues (or indeed £25 bn wealth tax revenues) could and should be used to reduce the most regressive and damaging taxes, so although lower and middle income households will be paying in to the pot under LVT (which they wouldn't be under a general wealth tax), they won't be paying in much and their net income gain/tax reduction will be much more than if they were merely given an equal share of that hypothetical £25 bn wealth tax revenue.

Jeremy Corbyn vs The Taxpayers' Alliance - what if they are both right?

In the Red Corner, Jeremy Corbyn, suitably fired up by Richard Murphy and his ilk, wants to reduce corporate subsidies, which they claim amount to £93 billion a year.

I have a nasty feeling that they started at the wrong end when they calculated this, see e.g. here. In other words, they are looking at the extra tax which they think businesses ought to be paying; and that £93 billion figure is plucked out of the air.

But I do have some sympathy with the general approach and, as we will see, their £93 billion number is - probably by luck rather than judgment - actually not far off.

In the Blue Corner, we have the Taxpayers' Alliance, who know bugger all about 'tax' and deny there is an implicit subsidy to landownership, but do absolutely sterling work when it comes to identifying public sector waste and overspend see e.g. The Bumper Book of Waste.

I have a lot of sympathy with their approach as well.*

How do we reconcile the two? Always start with the facts.

According to HM Treasury's Public Expenditure Statistical Analyses 2014, Table 5.3, govt spending on goods and services acquired from the 'private sector', plus grants and subsidies are £258 billion a year (38% of total govt spending); public sector pay and pensions are £174 billion (26%) and welfare and pensions are £242 billion (36%); and out of that 36%, two-thirds is old age welfare and one-third is working age. (The other bits and pieces net off to nothing, ignore those).

How much of that £258 billion paid to the 'private' sector is waste and/or overspend? What does the TPA say? Think about Ministry of Defence, NHS IT projects, PFI projects, all this nonsense. The cost of over-employment in the public sector is small change in comparison, despite all the revolving door quangocrats on six-figure salaries.

If we conservatively assume a quarter of that £258 billion is pure waste/theft/overspend that's £65 billion straight off. Add to that most egregious tax break of all, tax relief for pension contributions of £30 - £40 billion, all of which is creamed off by 'the pensions industry' and none of which actually goes into higher pensions? Bung in third world aid and gross EU contributions (about £20 - 25 billion in total), which are largely recycled back to 'private' UK businesses, and £93 billion a year is not far off, and might well be an understatement.

That's how you plug deficits, not by twatting about persecuting welfare claimants to shave of a few billion a year at most.

* Where it gets tricky is because people draw an artificial distinction between cash spending, subsidies and overly generous tax breaks i.e. exemptions. The biggest single subsidy/tax exemption is the fact that the £200 billion a year implicit subsidy to residential land is not clawed back with a direct tax/user charges. Most households pay far more in taxes on income and spending than they get back in land freebies; it is only the top One Per Cent who cash in. But put that to one side for now.

Richard Murphy points out the futility of Article 123, Lisbon Treaty

From The Telegraph:

[Jeremy Corbyn] has proposed a “People’s Quantitative Easing” scheme in which the Bank of England would “be given a new mandate … to invest in large-scale housing, energy, transport and digital projects”...

Mr Corbyn’s proposals would clash with Article 123 of the Lisbon Treaty, which forbids central banks from printing money to finance government spending. Lawyers warned that a lengthy fight with the EU would be a certainty, and could mean that infrastructure projects end up incomplete.

Traditional QE was introduced by the Bank in 2009, since when it has intervened in the bond market to buy Government debt. Key to this is that the Bank buys bonds from the so-called secondary market - from private investors rather than directly from the Government.

Buying the instruments directly from the state is illegal under Article 123 of the Lisbon Treaty. Richard Murphy, who Mr Corbyn has named as the architect of People’s QE, has proposed “a ruse” in order that the Labourite’s plans not attract the ire of EU lawmakers.

“The bonds have to be sold into the financial markets first, but there is no reason at all why this could not be for an agreed fee akin to underwriting, after which the bonds are, indeed purchased by the Bank,” he has said.

Mr Murphy said that Article 123 was clearly a piece of legislation whose “sell-by date had passed”, and that some fiddle would be required to get around it. But the EU may not look kindly on attempts to bypass its rules.

Whatever the merits or otherwise of Corbyn's suggested projects are (housing is a great money spinner, you'd struggle to lose money on that), Murphy is bang on with that one.

The Bank of England was originally set up to borrow money from the general public and give it to the government to spend on enlarging the navy. It has somehow turned into a 'central bank' over the years, but that is a question of fact and degree.

HM Government, HM Treasury and the Bank of England are all different parts of the same thing. Why would it make any difference which one of them borrows or prints money to finance public expenditure? Who cares what the book debts between different parts of the government are, it all nets off to nothing.

To cut a long story short, if I need money to pay for my loft conversion, it doesn't make any difference whether I borrow the money in my own name; whether my wife and I borrow it jointly; or whether she borrows it and then lends it on to me. Our total household indebtedness and our total household assets are exactly the same. The only relevant question is this: "is it worth getting a loft conversion done?", that is all.

Tax-free... apart from all the tax he paid.

Emailed in by MBK, The Guardian at its self-righteous best:

Peter Mandelson received £400,000 tax-free in cash last year from a company he owns, accounts filed recently at Companies House reveal.

The company, of which he is the sole shareholder, gave the former secretary of state a loan for that amount in the financial year 2013/14 – a move described by a leading tax campaigner as likely to have been motivated by tax avoidance.

Salary payments or dividends from a small business are liable for tax under UK rules, but in the case of a loan to a director – provided a certain minimum rate of interest specified by HMRC is charged – the borrowing is not liable for tax. The official interest rate that applied at the time was 3.25%...

Richard Murphy, a chartered accountant and director of Tax Research UK, said Mandelson’s use of loans raised questions.

“How to extract cash from small companies whilst paying as little tax as possible on the way is a massive part of the UK tax avoidance industry,” he said, “Directors taking loans from companies they own is one way in which this is done, which has been widely condemned in the past when done by footballers and others.

Stuff and nonsense, and the Murphmeister really should know better.

Taking Mandy and his personal company together, he has to pay about £225,000 tax in total to end up with that magic "tax free" figure of £400,000.

It is because of a crude but effective anti-avoidance rule that says if a company 'lends' a shareholder £1, it must pay 25p quasi-advance corporation tax (known as Section 455 tax) just as if it had paid a dividend in the good old days when we had advance corporation tax i.e. withholding tax on dividends.

(This rule does not apply to loans to employees who are not shareholders, i.e. from a football club to a player, there are different anti-avoidance provisions for that).

The company can only make the loan and pay the Section 455 tax out of post-corporation tax profits, so it collects £625,000 in bribes and bungs fees for services rendered, pays 20% corporation tax, leaving £500,000. £100,000 goes towards the Section 455 tax and £400,000 is lent to our hero.

Now, the overall rate Mandy pays is 'only' 36%, compared to normal employment income (basic rate overall 40.2%, going up to 53.4% for additional rate taxpayers, which is what Mandy would be), but hey.

Richard Murphy nearly gets it

Although Mr M was one of the people putting about the myth that There is $21 trillion hidden in tax havens, common sense appears to have prevailed. What he now says ties in with my post of yesterday evening.

From today's City AM Forum:

I disagree with Sir Martin Sorrell’s claim [that corporation tax payments are a "question of judgement"]*, which is based on the perception that capital can locate where it wishes and can move at will.

Three things perpetuate this myth.
* The first is that tax havens (and low-tax jurisdictions), whose opacity allows much of the supposed mobility of capital, obscure the reality that often nothing moves bar the ink on a contract.
* The second is a financial sector that promotes and services this myth.
* The third is that tax authorities are unwilling – as the Public Accounts Committee has suggested – to tackle tax avoidance.

Multinational companies cannot make money without engaging customers, staff, and by employing assets. Paying tax in the right place at the right time is not a moral obligation. The right place is where the customers, staff and assets are.** The right time is when the law of the land dictates. It is not "a matter of judgment"; it is a legal obligation.

* On the facts and under current rules, Martin Sorrell is quite correct. The relevant question is the "mobility" or otherwise of "capital".

** Change that sentence to "The right place is the locations at which their customers, staff and assets are" and that's your cluebat as to what the ideal tax base is.

Killer Arguments Against LVT, Not (214)

Richard Murphy launched a debate about the incidence of corporation tax and denied that there was such a thing as objectivity in economics/admitted that he used evidence selectively*.

Henry Law commented thusly:

The French physiocrats argued that the economic incidence of all taxes was ultimately on the economic rent of land**. The same conclusion follows from Ricardo’s Law of Rent. The latter law appears to hold objectively i.e. it can be observed in operation. There are a few other laws of economics that appear to be confirmable by observation.

The Murphmeister hit back with a novel counter-argument:

The physiocrats were wrong. And so are you.

* Delete according to prejudice.

** Strictly speaking, taxes are borne by the least elastic factor of production, which is by definition always land/location but also any other monopoly or near-monopoly right. Take personalised number plates for example. Some people are prepared to pay £lots extra for the right to have a certain combination of letters and digits, and that right only has value because the government will prevent anybody else from using that number. We can observe a crude relationship between how short a number is and how much it costs on the grey/free market.

Now, let's assume that DVLR imposes a tax on shorter numbers; for example two characters costs £500 extra a year, three characters is £400 extra and so on. what now happens to the resale value of a three character number plate on the grey/free market? Does it go up, stay the same or go down?

Killer Arguments Against LVT, Not (179)

Physiocrat invited me to join the fray over at The Guardian yesterday (the actual article is by landowner and Socialist Richard Murphy who is obsessed with collect more and more taxes from people's earned income, so can be cheerfully ignored) after he donated the LVT bomb yet again.

Here's some of the rubbish we find in the rubble:
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Bricktopguy The problem is Tax havens. While even one exists, it is impossible to stop tax evasion.

Physiocrat: Not true. Tax due from the Business Rate is not evaded through the use of tax havens. The solution is to collect more money from property taxes, preferably on land value. The tax havens would never get a look in.
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Existenzangst: If our friend [Sir Philip] Green [owner of lots of high street clothes shops] owned no land in the UK and earned £6 million in the UK, he would pay no tax. Both sorts of taxes are needed.

Green is infamous for having paid a large dividend out of post-tax profits to his wife, who is not UK domiciled for tax purposes and hence had to pay no higher rate income tax, which allegedly saved him/her £285 million in tax. That's tax law as it stands, and good luck to them, say I.

But his businesses need to occupy land on UK high streets in order to earn money in the UK, whether as tenants or as owners. From today's Soaraway Sun: And then there is business rates. These are expected to rise by another five per cent in April next year. Sir Philip said: "On Oxford Street I pay £6million a year in rates — yes, £6million! — and now they want to charge people to park on weekends!"

The chances are that the total VAT, PAYE and corporation tax that his companies/employees pay are ten or twenty times as much as the Business Rates he pays. Business Rates (similar to LVT) is the one tax that he has to pay and cannot avoid; in the absence of those other taxes, his companies could be charged, and would be willing to pay, ten or twenty times as much in Business Rates (or LVT) as they do now and it wouldn't matter whether or not he owned land in the UK or whether or not he or his wife live in the UK.
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UncleHarrie: I don't know what this LVT is, but if it effects ordinary little landlords like me then forget it, there is enough of us to make a big difference to the amount of seats any government can win. if it affects us we won't vote for it.

Jolly good. He doesn't know what it is but argues against it anyway. Fair enough, shifting from income tax to LVT would, by and large, benefit tenants at the expense of landlords. But his electoral maths is shit. By definition there are three or four times as many tenants as there are 'ordinary little landlords'. I suppose this is why the hardcore Home-Owner-Ists would like to see a return to the old days when only landowners had the vote.
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Brouillard: Oh, and I half agree with Physiocrat on taxes... I don't agree with LVT though. It over taxes useful activities and makes knowledge economies far more lucrative than they should be. It penalises industry over services.

*Sigh*.

Land ownership is not an activity, useful nor otherwise. There are a lot of politicians who say (rightly or wrongly) that we should encourage 'knowledge economies' so how come that's A Bad Thing all of a sudden? As per usual, he fails to see that there will always be a balance between different types of industry. For sure, we need cutting edge computer programmers but they are merely a means to an end - better stock control, better telecoms, more accurate medical diagnoses, online banking, whatever. But there is a natural upper limit on the number of programmers we need, all the stock control in the world is no good if there's nobody on a farm or in a factory making stuff, for example.

Neither does LVT penalise 'industry' (I assume he means manufacturing), it's the tax system and all this carbon pricing that does that. Modern factories need a lot of space, but these can be, and usually are sited at the edges of towns and cities where land is plentiful and hence cheap. 'Services' on the other hand are usually provided from much smaller units in the middle of towns and cities, but where land values are much higher. It all evens out in the end; Honda would not wish to use retail units in the middle of Swindon to make cars, and hairdresser in the middle of Swindon would not shut up his shop and rent a cheap industrial unit on the edge of town instead.

*/sigh*
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Nick Greeny: So where does the [LVT] come from? Many people who currently pay tax would not, and you cannot assume that the value of land in Regent Street would remain as it is. If the tax paid was more than now, then the owner would go bust or move to a field in Norfolk. Where are your tax revenues then?

Oh dear oh dear. If you think that Apple or Hamlyns or Austin Reed are all going to shut up shop in a prime shopping area and open up in a field in Norfolk with only a few tractors and sheep passing by every day, you are very much mistaken.

Further, as a matter of fact, most of Regent St actually belongs to Crown Estates and most shops on there are rented. So whether a tenant pays rent to Crown Estates (part of the government, nothing to do with the Queen), pays Business Rates to Westminster Council (part of the government), and pays a shed load of VAT, PAYE, corporation tax to HM Revenue & Customs (part of the government) or just pays a single tax LVT (i.e. ground rent) to the government makes ABSOLUTELY NO DIFFERENCE.

If, as Physicocrat and I keep suggesting, we got rid of VAT, income tax, corp tax, NIC etc, then the rental value of shops on Regent Street would increase by an amount similar to the tax cut, so overall revenues would not change much.

I suppose it is possible that every single shop in London and every person living in London would move to the same fields in Norfolk, build a new Tube network etc, in which case, the rental value of that field would rise to whatever the rental value of central London is now and the rental value of London would fall. But this is a) unlikely to happen and b) irrelevant and c) illustrates that land rents will always arise, they merely shift from area to area.
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Nick Greeny couldn't think of a come back to that, so he hit back with something completely left field, incorrect and irrelevant:

So after 10 years our 'free' green and haphazardly pleasant land would look like Azerbaijan with strip mining, fracking plants and land fill up and down the country. Hurrah for LVT!

FFS.

We were trying to discuss reforming the tax system, and did not in any way suggest abandoning all planning laws or environmental protection laws. As we well know, the amount of land needed for landfill is amazingly small, but if LVT applied to landfill sites, they would be used more efficiently and more waste would be recycled or used as fuel.
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... and then this:

And on a bad year when the farmer or other business makes no money? Instant bankruptcy. Well done... Also, what if you're a hedge or investment fund operating from a 800sqft office. You're making millions and paying the same tax as the pound shop across the road.

Severe lack of imagination, let alone any knowledge of the real world.

Can you envisage a country in which farmers and farm workers are exempt from income tax and NIC? Yes. Would there be farmland? Yes. Would some farmers wish to buy land, possibly with a mortgage? Yes. So such a farmer has committed himself to regular monthly payments for the foreseeable future. If he knows that the bank will foreclose for a single missed payment, the farmer would put a bit of money aside in the good years to the extent it can't be invested in improving his capital and machinery, and so in the bad years he has something to fall back on. Are there idiot farmers who would over-mortgage themselves and have the farm foreclosed? Yes. Can you legislate against stupidity? No. What happens to the foreclosed land? The bank sells it or rents it to another farmer, so what is the impact on agricultural output? None. If most farmers can cope with a future regular stream of interest payments, why would they not be able to cope with a regular stream of future LVT payments instead, knowing that if there is a long term depression in food prices, that their LVT payments will be reduced or even waived? No reason.

As to the hedge fund and the pound shop, we know that most hedge funds in the UK rent swanky offices in the most expensive part of London and pound shops run from yer average high street. If the hedge funds wanted to reduce their rental expense, they could easily do so, but they don't, presumably for status reasons. Neither can we assume that pound shops would rent incredibly expensive office space in central London.

So there's no reason to assume that a pound shop and a hedge fund would ever be competing for the same retail space, and even if they did, so what? There are rich people who like giving their spare cash to hedge funds and there are poor people who like spending their money in pound shops and so we will always have some mix of the two, there will always be demand for stuff that costs a pound and there will always be people who would rather run a pound shop than run a hedge fund.

These Home-Owner-Ists just don't know anything about real life, let alone economics.

Richard Murphy is sometimes right

Richard Murphy sparked an interesting debate over at Tim W a year ago; he claimed that if banks etc had issued bonds that had fallen in value (because the bank's credit rating had fallen), they were allowed to reduce the value of that debt on their balance sheets, and hence book the difference as a profit, which I immediately dismissed as twaddle.

My bad!

It turns out that UK banks are now actually doing this, as evidenced by the two negative expense items of £584 million and £224 million buried away in Note 2 on page 49 of The Royal Bank of Scotland's 2008 interim results.

Altho' it seems bizarre to book this as a profit, and thoroughly underhand to bury it away like this, that is just the way that double-entry booking works, and, to be fair, at least it flags up the issue to the discerning reader.

Economic illiterate of the day (4)

There'll be fairly stiff competition at this seminar.

Also ideal for people who enjoy stabbing themselves with forks etc.