Killer Arguments Against LVT, Not (407)

I saw this one on Richard Murphy's blog a couple of months ago but forgot to save the link.

It goes something like this:

1. If you look at the total assets of the poorer half of the population (or possibly the bottom three-quarters), as like as not it is nearly all land. If people possibly can, they prefer to own that rent (it being cheaper in the long run and just nicer all round) and will devote most of their spare income to paying off the mortgage.

2. If you look at the total assets of the richer half of the population (or possible the top quarter), while they own a lot of land by value, they own a disproportionate share of other forms of wealth, primarily pensions, shares and cash (there isn't much else).

It would appear that these two facts are broadly correct. Maybe the bottom three-quarters own half of all land/housing by value, but only a quarter of all pensions, shares and cash.

3. His conclusion was therefore, if you impose LVT it will 'hurt' poorer households more than wealthier ones in relative terms. Therefore it is better to have a general wealth tax which catches pensions, shares and cash as well as land/housing.

The fundamental mistake here is confusing cause and effect. Wealthy people don't own lots of land because they are wealthy; they are (in most cases) wealthy because they own land, whether they had the good fortune to buy more than 15 years ago when housing was still sensibly priced, or inherited it or whatever. The picture is even clearer if you deduct mortgage debts; there are lots of higher earners who 'own' an expensive house but their net equity is relatively low.

To give a simple example: a landowner collects rent from all his tenants and lives in a magnificent castle full of paintings and golden artefacts, his tenants own no land whatsoever and precious little else. He owns the castle etc because he owned land to start with. If we were to redistribute his paintings and golden artefacts (via a wealth tax and citizen's dividend), he would simply bump up the rent to what his tenants can now afford to pay and the status quo ante is quickly re-established.

Conversely, if we predistribute the land (via a land value tax and a citizen's dividend), this leads to much greater equality and economic efficiency much more quickly. The landowner no longer has the surplus to spend on maintaining his castle and acquiring more paintings and golden artefacts. If he bumps up the rent to try and claw back the citizen's dividend then by definition, the rental value and hence his LVT bill increases and cancels it out.

Similarly, it is unfair to simply look at how much a household has in pensions, shares and cash, you have to look at how they acquired them. The largest chunk of these are accumulated out of the surplus income of higher earners, and a lot of higher earners have earned their money fair and square. There are also a lot of higher earners who have rigged the system (senior bureaucrats, quangocrats, executives at quoted companies and various rent seekers), but the problem here is allowing them to gouge that extra income in the first place, not what they do with it afterwards. So sort out the gouging first and if you are still worried about income disparity after that (which I am not) regardless of whether it is earned fair and square or gouged, you can fix that through income tax.

Finally, I ought to point out that land/housing/commercial premises - total about £7.5 trillion - dwarfs the value of other assets such as the entire market capitalisation of the FTSE100 and FTSE250; the total value of UK government bonds; or cash in UK banks, each of which is about £1.5 trillion.