Wednesday 28 January 2009

Fun Online Poll: Interim results

I have an uphill struggle whichever way I look. According to the FT's coverage of research published by the National Centre for Social Research... "for the first time since 1984, more people wanted taxes and spending ... to be left broadly where they were, rather than seeking an increase... it still showed little support for a big programme of retrenchment. Only 7 per cent favoured cutting taxes and reducing spending on these core areas of the welfare state [health, education and other public services]."

I am certainly among the 7 per cent who'd like to see taxes cut, but there is no need to reduce spending on genuine welfare or public services - we can just cut out the twenty per cent of tax revenues that the government wastes on an army of quangocrats, as Lola explains, but let's put that to one side for the moment.

Government spending has to be met, by and large, out of tax revenues. And the ultimate source of those revenues, or indeed all wealth, is the productive economy, which some try to sub-classify into "enterprise", "labour" or "investment", which is nonsense of course. How those three groups arrange their respective shares is best left to the markets and a tax system that tries to encourage one sub-category at the expense of another is on a hiding to nothing. Taking them as a whole, the tax burden thereon is far too high - even worse, the rates at which different sources of income are taxed range between "acceptable" and "punitive", which gives us yet more distortions.

But because of the British mentality, home-ownership is somehow seen as the ultimate goal, a one-way route to security and wealth, to be taxed as lightly as possible and subsidised wherever possible. This dream is being unveiled, yet again, as a massive Ponzi scheme fuelled by a giant debt bubble and dragging a Depression behind it - one of Fred Harrison's Forgotten Knowns. The mere suggestion that all existing property and wealth related taxes be replaced with a flat rate tax on property values, or even better, site-only location values has earned me a lot of grief, especially from the faux-libertarians (but I suppose I asked for it).

However, every now and then I see light at the end of the tunnel. The results of my Fun Online Poll so far are as follows:
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For a given level of taxation (the lower the better, obviously), would you prefer:

Low and stable house prices; lower taxes on incomes; and a steadily growing economy? - 87%

Wildly fluctuating house prices; higher taxes on incomes; and a boom-bubble-bust economy? - 13%

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Maybe it's an inter-generational thing? An average tenant would always prefer higher property taxes and lower taxes on income/production, because although this does not reduce his total rent (it might even increase it slightly), it sure as heck increases his net income. The same goes for a potential first time buyer. As we know, interest rate changes do not benefit or hurt the potential FTB, because he is competing with other FTB's with similar budget constraints. All gains/losses from interest rate cuts/increases accrue directly to existing mortgage borrowers and especially vendors.

Similarly, a replacement tax that averages out at 1.5% of total property values would act like a higher interest rate, that's all - the vendor loses out (unless he was going to buy himself a new house with the proceeds); the FTB benefits (lower mortgage costs and a reduction in other taxes) and existing home-owners are largely indifferent to the change (on a cash flow basis). By how many per cent are typical SVR's going to increase over the next decade? I have no idea, but an increase of 1.5% cannot be ruled out.

But once somebody is "on the ladder", that's it - they go over to The Dark Side. Their next instinct is to pull up the ladder - and all major political parties pander to this. The result is a shift in taxation from property back to incomes/production; this leads to a one-off increase in capital property values and the illusion of wealth, but without any real increase is the 'enjoyment value' that people get from their homes. More invidiously, the increase in taxes on the productive economy acts as a slight drag on the economy, which, as the Labour experiment showed, can be masked for a decade by the illusion of wealth that rising house prices bring.

Here endeth.

12 comments:

AntiCitizenOne said...

I believe a relatively simple LVT => CD payment scheme will encourage people to maximise the CD and thus look at state waste.

Mark Wadsworth said...

AC1, do you still go for a Property Value Tax or are you now going for Land Value Tax?

Lola said...

If only we all understood that even notional owners are tenants. The opportunity cost argument escapes nearly eevryone.

One of the other accidental (or maybe not so accidental) benefits of LVT might be the professionalisation of the landlord sector. By my observation amateur, profiteering (rent seeking) amatuer landlords intent on inflation in prices to justify their 'investment' bedevil the sustainablity of the rental sector. By definition they do not want tenant security as it reduces their ability to extract their capital. This of course affects the mentality of tenants who perhaps rightly feel themselves to be exploited. If it was clear that house price inflation was not going to automatically reward to rentier, tenants might be more ready to be tenants for the long term.

The flexibilty of the short hold tenancy contract rewards the property owner more than the tenant.

Mark Wadsworth said...

L, "The opportunity cost argument escapes nearly everyone."

I've been meaning to 'blog about opportunity costs and notional costs for a while. LVT is a way of turning opportunity costs into a real cash cost, thus leading to (hopefully) better decision making all round.

In behavioural terms, an LVT on the bubble value of house prices would deter 'capital gain happy' BTLers from entering the market, which would be win-win all round.

Anonymous said...

You just don't get it do you? LVT would be the most unpopular tax ever. The closest we have to it now is council tax, and thats not very popular is it?

LVT is a tax on the concept of ownership. Why not tax everything that people own? Why should someone have several cars, when they can drive only one? It would be much more economically efficient to tax cars so that each one is used to its maximum productive capacity. If you're not prepared to go out doing taxi service in the evenings to be able to pay the tax, sell your car and get a bike. (But that would have bike tax on it too). And so on an so forth.

The whole concept of individual property rights - the idea that 'this is mine, no one can take it away from me, and I can do what I want with it' is undermined by LVT. Suddenly some faceless bureaucrat will decide that you COULD make much more money doing x or y with your land/property so we are going to tax you on that basis whether or not you are doing that, and whether or not you have the money.

Communism is also about the most efficient use of assets. They thought the capitalist system most inefficient. Why have several competing supermarkets when you can have one? Much better use of resources. And we all know how that ended up.

Even if LVT was introduced as you suggest (abolishing swathes of other taxes) it would end up as the most hated tax of all. That's before you realise that no govt will EVER abolish such a large range of profitable taxes anyway. You'd just end up with LVT on top of all the others. Great. Just what we need. Another tax.

Give up the idea of LVT. You're only giving the politicians ideas of ways to tax us even more.

Mark Wadsworth said...

Sobers, unless the experience of Harrisburg is anything to go by, it might be "wildly unpopular". I see that as another bonus. It is the very opposite of a stealth tax, so there will always be pressure to keep it down.

"LVT is a tax on the concept of ownership."

Nope. You pay to society a share of the value of that which you get from society. The fact that each property owner has a little local monopoly over whatever combination of external factors that gives his land any value in the first place DOES NOT mean that each landowner 'owns' those external factors.

"Why not tax everything that people own? Why should someone have several cars, when they can drive only one?"

Because there is a free market in cars. By buying a car you are not depriving anybody else of a car because they can always build some more. The value of that car is created by the manufacturer and paid for by the customer. But think about fuel duties - they are a form of mobile LVT - so many pence per litre goes towards building and maintaining roads, so the more road you 'use', the more you pay. That seems perfectly fair to me.

"some faceless bureaucrat"

Nope. At its simplest, the tax would be 1.5% of total property values. Tenants pay 6% of the total property value to a "faceless landlord" as rent. First time buyers are prepared to pay 6% of that value to a "faceless bank" in mortgage instalments. Is it so terrible if home-owners paid 1.5% as a flat tax? If an FTB can afford to pay 6% PLUS 1.5%, why can't people with a smaller or no mortgage afford to pay 1.5%? That's a fifth of what an FTB has to pay in total.

Anyway, I am in economics not politics.

John B said...

LVT is a tax on the concept of ownership.

...which is worse than taxing the value of my labour how, exactly/

John B said...

or ?, even.

AntiCitizenOne said...

I'm still a PVT fan, as I cannot see how you can separate the LV from the property on it (discount demolition cost? is the only one I've come up with).

I'll be updating my blog soon, but I'm trying to think through the comments made and come up with options or a decision.

Mark Wadsworth said...

AC1, to be honest there's not that much of a difference. Proper LVT is better but more difficult to explain.

Anonymous said...

So let me get this straight.

I built my house, at considerable (taxed) expense, and spent a number of years paying off the mortgage out of (taxed) income.

I am now approaching the end of my productive career, but that's OK, because I own the house outright, nobody can turn me out of it, and I can look forward - if that's the right phrase - to ending my days living here in peace. My modest pension will do OK for living expenses.

And now you want me to hand over to the state every year an arbitrary, unpredictable, but probably increasing percentage of an arbitrary "value" (which can only be some official's guess, since the house is unique and I'm not selling - until I'm forced to, to pay the tax)? A value over which I have no control and which will probably increase in numerical terms as the state debauches the currency. My modest pension, of course, will not rise in line with that debauchment, since I didn't used to work for said State. I'm screwed, aren't I?

Are you mad or what?

Mark Wadsworth said...

Anon, as I was saying, this is an intergenerational thing. Older people, home-owners, landlords and second-homers want less property tax and more income tax (where does your pension come from?) and then to be able to sell their homes for as much as possible to the next generation who've been paying all the income tax to fund local services and state pensions.

Young people and tenants are much better off with more property tax and less income tax for the equal and opposite reasons.

LVT would, by definition always be affordable - if the rate were 'too high' then prices in that area would go down to compensate, and as an ideal LVT is based on actual selling prices, the LVT in that area would go down again.

Ultimately, prices are determined by first time buyers - most of their housing budget goes on mortgage repayments and a fraction of that (maybe a fifth?) goes on the tax. And if FTB with lower incomes can afford it, so can everybody else with low or no mortgage.

If you still think the tax is too high, then encourage your council to be more generous with planning permission - extra supply = lower prices = benefits everybody.

Finally, as to pensioners, as I have said countless times before, they would be allowed to roll up unpaid LVT to be paid out of sales proceeds after they die, which is why Inheritance Tax, SDLT and CGT would be scrapped and rolled into the tax as well.