Sunday 20 May 2012

Tax reform

Yesterday's post explained why it made sense to replace the overlapping systems of means-tested benefits, contributory benefits and subsidies to land ownership with a flat rate Citizen's Income. This of course raises the question of how this would be funded (the cost of the core functions of government - law and order, defence, refuse collection and road repairs is minimal - costing barely 5% of GDP).

1. Over the past century or two it has become majority opinion that taxes should be raised by taxing earned income and output:
2. The bulk of government revenues used to be raised from the rental value of land, to eliminate the inbuilt subsidies to land ownership. Nowadays, less than a tenth of government revenues are from the rental value of land, leaving land owners to collect the subsidies, i.e. the rent they can charge - or the benefits they can enjoy without paying for them - thanks to the efforts of everybody in the productive economy and the income tax revenues spent on improvements which then push up the rental value of land etc:
3. Somebody starting out in life therefore has to pay two layers of tax - direct tax on his income, which is used to pay for the core functions of the state and other things which push up rental values; and then the rent he has to pay privately in order to be able to live somewhere - if he moves to an area with higher wages to try and earn more, nearly all the extra wages are soaked up in income tax or the higher rents in high wage areas:
4. Taxes on earned income are not only morally questionable but have huge dead weight costs. The average rate of tax on incomes, taking income tax, VAT, National Insurance, corporation tax and Working Tax Credit withdrawal into account is about fifty per cent, and this depresses the size of the economy by something like ten or twenty per cent. Taxes on the rental value of land - to claw back the inbuilt subsidies - do not have dead weight costs, so replacing taxes on income with taxes on land would allow the economy to grow by ten or twenty per cent within a few years:
5. So instead of paying two layers of tax (one publicly collected, and one privately collected), workers and businesses would only pay one layer - being the rent (which would then be clawed back from the land owner as tax). For most owner-occupier households or businesses, the tax they would pay on the land they occupy would be much the same as the tax they currently pay on their earned income. After paying for the cost of the core functions of government, the rest of the tax revenues would be repaid to everybody as a flat rate Citizen's Income (or vouchers for merit goods such as education or health) and so the median household in a median home would be a net zero taxpayer: the Citizen's Income it receives would be equal and opposite to the land value tax it has to pay:
6. So who 'loses out'? Those people who currently derive the bulk of their income (whether in cash or non-cash) from the rental value of land. They will have to return to the productive economy or accept a more modest lifestyle. Further, the purchase price of land would be significantly reduced, and ultimately, there is no reason why the purchase price of any plot of land (after deducting the cost/value of improvements thereon for which the owner has paid) should be any more than its cost of production, which is of course more or less £nil:

23 comments:

Bayard said...

Mark, have you tried doing it the other way round: setting LVT so that Mr and Mrs Average pay the same in LVT as they currently pay in income tax, VAT etc, then funding the CI entirely from the savings made in the lack of deadweight costs to see what sort of CI would result?

Mark Wadsworth said...

B, no, because that's a highly circular calculation and leaves a big missing figure.

Bayard said...

Do explain.

Mark Wadsworth said...

B, because the calculations depend on each others' results, i.e.

- reducing taxes on incomes increases GDP and hence increases gross rents and hence increases potential LVT receipts; the LVT dished out as CI further pushes up rents, but these cannot push each other up to infinity, as there is a trade off between paying rent and buying other stuff.

- as LVT encourages more efficient use of land, this tends to push down rents (everything else being equal, which they are not), and there are unknown numbers of people who would want to trade down to pay less LVT and unknown numbers of people wishing to trade up (and hence pay more).

- According to the Faux Lib 'collapsing revenue' theory, people would be so appalled at paying LVT that everybody would try to trade down, it might happen (in theory - not in real life) that overall rents/LVT receipts would fall to a few per cent of GDP. Well so what, say I. In that case, those few per cent are still enough to pay for the core functions, and even though CI would be £nil, everybody else can afford to live wherever he likes, ground rents being £nil, so if you fancy a massive penthouse in Mayfair, the LVT would only be a couple of thousand pounds a year.

And so on. It's easiest to imagine a country where every single plot of land is identical, there are an unlimited number thereof and every household is very similar in composition. Clearly, the average LVT minus CI for each household would only be a couple of thousand pounds a year (to cover police, defence etc) so by default it would be like a Poll Tax.

ThomasBHall said...

Mark,
Do you every get to show your stuff to people in the Commons?
If I were dictator, I wouldn't hesitate to put you in charge of the Treasury...

Mark Wadsworth said...

TBH, thanks, but I - and plenty of other far more influential people - have been badgering MPs and the government for a century, to little avail so far. There is a tendency for people to abandon their principles once they become an MP (Vince Cable is about the only exception to this).

Bayard said...

"There is a tendency for people to abandon their principles once they become an MP"

I incline more to the theory that they have their principles forcibly removed using a genteel form of coercion or blackmail.

Bayard said...

Mark, I was thinking more along the lines of:
1. the gov't can afford to give everyone the tax on their personal allowance,
2. although there will be more winners than losers under a switch to LVT, the tax take from LVT should be greater as the losers will lose more than the winners win because of the unequal distribution of ownership of valuable land and
3. there will be savings in not employing the army of civil servants, quangocrats, fakecharities and fakeprivatecompanies that are supported by the current system.
Adding all these together wouldn't give a very munificent CI, but I'd be interested to know how much you think it might be.

Sarton Bander said...

Best to stick to a single citizens Dividend for all real citizens (all those able to vote and work).

Then use dividend deferral schemes to sort the rest so parents can borrow from CD to fund their children's education, and others can take out > 100% of CD. You defer 100% of one years CD means you can take out 110% of CD in the future.

Everyone wins.

Mark Wadsworth said...

B: "Adding all these together wouldn't give a very munificent CI, but I'd be interested to know how much you think it might be."

Whatever the figure is, it would always be enough to cover the median LVT bill of a median household. It might be £5,000 each way, it might be £20,000, that doesn't really matter. The relevant figure is the net transfer from those who over-occupy to those who under-occupy, which would, mathematically, only be about a fifth or a sixth of theoretical total LVT receipts.

i.e. it would not be the case that Rich Chap pays in £200 LVT, median chap £100 and poor chap £60 to make total LVT receipts £360 and then each gets £120 CI; it's rather the case that rich chap pays in £80 net, median chap collects £20 net and poor chap collects £60 net.

SB, why would anybody defer and trust the government to pay out a random amount in future? Far better to take the cash and invest it yourself (or piss it up the wall, thus transferring it to landlords and barmaids).

Sarton Bander said...

TPA goes for partial disguised LVT (increased Local Government tax)

http://www.guardian.co.uk/politics/2012/may/20/chancellor-spending-cuts-income-tax

Sarton Bander said...

> why would anybody defer and trust the government to pay out a random amount in future?

Why would anyone trust the state to pay out an CD/CI then?

Sarton Bander said...

Vince Cable never had any principles to begin with. He's a brainless windbag.

ThomasBHall said...

I must say, maybe it is just the negative media spin, but Vince always appeared as Sarton suggests above- do you have particular reason to believe he has principles?

Mark Wadsworth said...

SB, no, those shysters are recommend local income tax and local sales tax.

TBH, Vince is battling his way out a maze of brainwashing, he believes in taxing land values even though he's not really sure why. He's the best we've got, I'm afraid.

Lola said...

Question on Citizens Dividend. At present we agree to make extra transfer payments to the somehow specially disabled, the blind say. Do you envisage the continuation of such additional transfer payments for particular groups with 'special' problems / issues? And if so, how the bloody Hell can we stop politicians from engaging in 'benefit creep.?

Lola said...

Wince whats to implement LVT as an additional tax - 'this is not LVT as we know it, Jim.'

mombers said...

The TPA/IOD plan sounds like a disaster. 30% flat rate + local tax of anything more than 2% is just the same as the present system for lower earners (20% + 12% 'NI'). Although I'm assuming that they will get rid of employer's NI. Even with that though, a local tax of 10% would wipe it out.
Why do these folks not read economics and tax things that are of fixed supply? Probably because they're homeownerists

Mark Wadsworth said...

L: "Do you envisage the continuation of such additional transfer payments for particular groups with [severe disability]?"

Yes of course, it's £10 billion-odd and would continue.

"And if so, how the bloody Hell can we stop politicians from engaging in 'benefit creep?"

Dunno.

M, exactly. On Planet IoD/TPA, VAT is not a tax on earned income, go figure. And yes, Heath is the hardcorest of Home-Owner-Ists.

Lola said...

"Heath is the hardcorest of Home-Owner-Ists I take it you mean Allister H not Ted H?

mombers said...

Allister Heath made a pathetic endorsement of planning reform a while back as an attempt to introduce market principles to the housing market, but not in his back yard of course.

Mark Wadsworth said...

L, yes.

M, yup, he described replacing higher rate income tax with Mansion Tax as a "crippling attack on wealth" or something.

Bayard said...

"Why do these folks not read economics and tax things that are of fixed supply?"

It's a well-known effect in management circle, called the "Not Invented Here Syndrome" - basically, "if we didn't think of it, it can't be any good".