Wealth tax musings

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What's not to like?

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.

Fun Online Polls: LVT vs Wealth Tax; the North South divide

The results to last week's Fun Online Poll were as follows:

3% of £80 is more than 0.5% of £100. So what would raise more revenue - Land Value Tax or a general Wealth Tax?

Land Value Tax - 94%
A general Wealth Tax - 6%

Thanks to all 33 who took part, a low turnout but an arcane topic.

I would have thought the maths was obvious, but I got some real grief from two acadamics/communists/Homeys (their stand point was not clear) on Twitter who demanded that I refer them to a 'study'. I asked them what they thought the figures were and they refused point blank to even give a hint as to what they thought the numbers might be. They just insisted I was wrong.

For sure, my numbers are rough and ready, but the principle stands.

1. Land and buildings are at least two-thirds of total household 'wealth'. The net cash is negligible (one man's mortgage is another man's deposit) and the rest is largely shares/pension funds.

2. We know from the French that there approx. 1% wealth tax rate was driving wealthy people abroad, which is why Macron wanted to exempt everything except land and buildings. By exempting non-land 'wealth', he reasonably expected to increase overall tax receipts (to howls of outrage from Homeys and Socialists alike).

3. Politically of course, you can only apply a wealth tax to the 'wealthy' so there is an arbitrary threshold of EUR 1 million or something, pushing potential receipts down much further. Imagine the outcry if they had abolished the threshold and made everybody pay on everything.

4. Applying a wealth tax to cash is madness anyway, there's already income tax on interest income from cash savings (ha!) and a stealth tax on cash savings called 'inflation'. Applying wealth tax to shares is also madness, as dividends are gains are usually taxed. The more cash and shares you have, the more tax (income tax, inflation tax and capital gains tax) you pay. That's quite enough tax.

5. Unlike the critics, I have at least prepared one wealth tax return, back in Germany in the 1990s. Their wealth tax was about 1% p.a. with a high threshold, at the last count it raised about EUR 5 billion a year whereas their very modest Domestic Rates (Grundsteuer) raises EUR 20 billion a year, which is a small fraction of one per cent of what houses are worth.

6. In the UK, the closest thing we have to Land Value Tax is Business Rates, which works out, coincidentally, to about 2% - 3% of what the land and buildings would sell for. Council Tax/the TV licence fee are a distant poor cousin of LVT (being very regressive) and those two between them raise £30 billion a year, less than 0.5% of what houses are worth.

7. The closest thing we have to 'wealth tax' is Inheritance Tax which raises a modest £4 billion a year, assuming a death/inheritance every 40 years that implies an annual rate of about 1% on the value of 'wealth' over a relatively low threshold (£325,000). Those above the threshold own a disportionate amount of 'wealth' (probably at least half of all of it) so an annual wealth tax of 1% on all 'wealth' would raise maybe £10 billion a year.

8. The real world also tells us that most countries have some sort of tax on land and buildings; very few have 'wealth taxes' in the narrow sense, which gives us more clues. Not that academics/communists/Homeys have ever put much thought into this.
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A recent article in The Daily Mail on the North-South divide said that it started when the Vikings invaded in the north east; they got as far as a line from London to Chester, with our greatest King ever (Alfred) holding the line to the south-west. The modern A5 road, which in turn runs along an old Roman road between their two major outposts (pushing the origin back even further) is the modern border. From south-east to north-west, in other words.

That's all news to me. As a born Northerner who's lived in London half his life, I always assumed that that the true north-south divide runs diagonally in the opposite direction, from Bristol to Norwich, from south-west to (slightly more) north-east.

(Watford Gap is pretty much where the two lines cross, giving it extra significance.)

In the south there are more Tory MPs, higher house prices, smug Home-Owner-Ists and rent seekers*, drier and sunnier weather, lovely country lanes for driving on, more arsehole drivers on the motorways, flat countryside with no lakes or mountains, containing London and a few little towns.

The north is the opposite; more Labour/SNP/Plaid Cymru MPs, cheaper houses*, more people with proper jobs, terrible weather, fewer good driving roads (A66 excepted), courteous drivers who stick to speed limits, dramatic valleys and mountains, rivers and lakes, dotted with medium sized towns.

* The BBC published some good stats on inflation-adjusted house prices since 2007 today, the line between 'winners' and 'losers' is pretty much Bristol to Norwich.

So that's this week's Fun Online Poll.

The UK's North-South divide runs from... Bristol to Norwich or London to Chester.

Vote here or use the widget in the sidebar.

Fun Online Polls: Brexit, Catalonia and the French wealth tax reforms

The results to last week's Fun Online Poll were as follows:

Which of the following applies to you...

Pro-Brexit; pro-Catalan independence - 78%
Anti-Brexit; pro-Catalan independence - 7%
Pro-Brexit, anti-Catalan independence - 11%
Anti-Brexit; anti-Catalan independence - 3%

Good, I'm with the intellectually coherent majority on this. Thanks to all 99 who took part.
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Re my post of yesterday, this week's Fun Online Poll is about maths and logic:

"3% of £80 is more than 0.5% of £100. So what would raise more revenue - Land Value Tax or a general Wealth Tax?"

Vote here or use the widget in the sidebar.

President Macron has vaguely good idea - shock

From The Daily Mail:

France needs it's [sic] new lower tax on wealth in order to stem its exodus of millionaires, the country's Prime Minister has warned.

Edouard Philippe defended President Emmanuel Macrons' economic reforms, which have seen thousands take to the street this week, saying they are needed to make France attractive [to] the wealthy again... The annual millionaire's migration report by New World Wealth found that around 10,000 millionaires left France for other countries in 2015...

France's wealth tax currently applies to personal assets of more than 1.3 million euros, but as of Macron's new budget, it will only apply to real estate. Any other forms of wealth, such as shareholdings, will be exempt as of 2018, the government announced this week.

Bravo! An annual recurring 'wealth tax' which only applies to land and buildings is pretty damn' close to Land Value Tax. And a general 'wealth tax' is a stupid idea for various reasons, not least the practicalities of it.

Caveat: it ought to apply to all land and buildings in France, however much or little it is worth, whoever own it and wherever they are tax resident. They can make this look more like a 'wealth tax' by introducing a personal annual exempt allowance for French residents. Admittedly, that is probably against EU law, so residents of other EU member states would also have to get the personal allowance as well. I once did this for real, and the higher charge for a UK resident was waived in the end.

Thomas Piketty's "global wealth tax" nonsense.

Whatever the merits or otherwise of a general "wealth tax", it fails for practicalities, Tim W outlines some of them here.

Unlike most people who waffle on about this, I have actually prepared wealth tax returns for people, back in the early 1990s when I worked in Germany and they still had Vermögensteuer. I've still got the Beck-Texte handbook, 1991 edition, it's over 400 pages, just as long as the Corporation Tax handbook and nearly as long as the Income Tax handbook.

There were so many exemptions and exceptions that what it boiled down to was a surcharge on income tax, it raised as little money as you would expect (about DM 9 billion in its last year of operation in 1996 = approx. £3 billion), so they then got rid of it.

There's a favourable write-up of Mr Picketty's book in the FT; putting practicalities to one side, the author is stumbling along the right lines BUT he (and the reviewer, and indeed Tim W):

- assume that increasing inequality is inherently A Bad Thing. It is not, whether it is A Bad Thing or not depends entirely on why it is happening. If some people or businesses work harder or smarter than others, they get richer than those who don't. Fair enough, that's capitalism and benefits everybody overall. But if the government introduces a taxpayer-backed Help To Buy scheme to pump up land prices and mortgages, this increases inequality and is clearly A Bad Thing.

- fall into the trap which the Neo Classical Economists (early Faux Lib's) set a century ago, which is to confuse the difference between a) real personal wealth or capital on the one hand (which is a very good thing) and b) monopoly privileges (primarily freehold land titles, with a few bits and pieces like patents, barriers to entry etc).

If you make these two cardinal errors and decide that an annual wealth tax would help, you would then set the tax at a flat percentage on both kinds of wealth (real wealth and monopoly wealth). Let's say 1% to get the ball rolling, the same as the German Vermögensteuer.

The effect of that 1% tax on real wealth, which perhaps has no annual return (like a painting or jewellery) would be that people just don't declare it or spend years arguing about the value; the effect of that 1% tax on shares or cash in the bank (not directly wealth, but claims on underlying wealth) in an age where dividend yield is only 4% or so and bank interest is maybe 2% would be like increasing income tax on dividends from 25% to 50%, and increasing the income tax rate on bank interest from 20% to 60%.

The effect of that 1% tax on business capital (cars, lorries, machinery, buildings) on which the annual return is (say) 10% would be like increasing corporation tax from 20% to 30%.

The effect of a 1% tax on monopoly wealth might help a bit, but as the total return to monopolies is far, far higher than the return to anything else, at least 10% per annum compound, this would merely slow the rise of inequality at the expense of damaging the real economy to everybody's detriment, including those who live off their wages alone and own little or no wealth of either type.

And we'd still get all the bleating about Poor Widows In Mansions.

The total yield would be small (going by the German example), administratively it would be a nightmare, there would be mass evasion/arguments and it would harm the economy in much the same way as higher income tax and corporation tax rates.

However, a tax on monopoly wealth alone, primarily the rental value of land, would raise significant amounts of revenue because it can levied at up to 100% of the income/benefit arising. There would be no need to define all the stuff that wouldn't be taxed and think up all sorts of exemptions for them. There would be no scope for evasion and no damaging economic effects (as well as a lot of positive economic effects). It's the very opposite of Help To Buy.

In the UK, for example, such a tax would/could approximate to a flat 3% charge on the current selling price of land and buildings and would be enough to get rid of council tax, business rates, stamp duty, inheritance tax and capital gains tax just for starters; the remaining bulk of it would be enough to get VAT down to the EU-dictated minimum of 15% and eliminate National Insurance (super-tax on employment) and higher rate/additional rate income tax entirely.

So it wouldn't be downwards redistribution of cash, it would be a sideways redistribution of the cost of government from rent generators to rent collectors. Workers and businesses (and shareholders) would end up better off, not because they are being given money that the government took away from somebody else, but because less money is being taken away from them.

This also deals with the KLN that "Land Value Tax is a step towards a Wealth Tax". Clearly it's not, as you can raise more money from LVT alone than from a general wealth tax. If you started with full-on LVT and tried to extend it to all wealth (however defined, and that's impossible), the annual % rate would have to fall so steeply that total revenues would be lower (even ignoring the damaging economic impact).

Sorted.

UPDATE: Tim W refers us to an article by Matt Yglesias at vox.com who comes to much the same conclusion as I did. It's a longer article but nice and clear and step by step.