Killer Arguments Against LVT, Not (482)

One from the left this time. Richard Murphy is a big fan of wealth taxes.

In an earlier exchange, I pointed out that Land Value Tax was the best kind of wealth tax (land excl, buildings thereon being about half of marketable wealth in the UK, easy to assess, easy to enforce etc). The effective LVT rate could be much higher than the effective rate of Wealth Tax (even if Wealth Tax, had any merits, which it doesn't). A four percent tax on half of all wealth would raise more revenue than a half-a-percent tax on all wealth.

Countries that have dabbled with Wealth Tax have never managed to get the rate much higher than half-a-percent, any higher than that and you get 'tax planning', lots of special pleading and exemptions and you see falling revenues.

Which is why for example Germany phased it out their Wealth tax in 1997. Total revenues were €5 billion, i.e. naff all. I once had to prepare one of these returns, all the adjustments and exemptions were bonkers, mathematically it was like an extra 1% income tax or something, so why not just do that? Murphy appears to have realised this by now, but back to the topic.

He did a diagonal comparison to explain why he preferred Wealth Tax to Land Value Tax. His example was Mr B, who owns a house worth £100,000 and nothing else and Mr C, who owns a house worth £500,000 and has £500,000 in his pension fund. Statistics back up this general picture, no arguments there. His logic was that Mr C would pay ten times as much Wealth Tax as Mr B, but only five times as much Land Value Tax. Therefore, Wealth Tax would be more progressive. Mathematically correct but meaningless and irrelevant in the bigger picture.

The five glaring errors here are, five KLN's for the price of one, each of which can be knocked down:

1. He missed of Mr A, Ms A and Mrs A, who have no assets whatsoever, and are nearly half the population, all the younger people and tenants. And he missed off Lord D, 0.1% of the population who owns dozens of homes and thousands of acres of farmland (and has no need to invest in anything else) and is banking negative LVT, i.e. farm subsidies and Housing Benefit.

If you now consider the whole population from the A's up to Lord D, LVT is clearly more progressive than Wealth Tax. The A's pay nothing either way and Lord D pays a lot more LVT than he would pay under Wealth Tax. Mr B and Mr C just fall into place somewhere along that continuum.

2. If LVT were done properly and based on site premiums, not selling prices, the chances are that Mr B would pay very little and Mr C would probably pay ten times as much as Mr B (thus knocking his basic objection out of the park).

3. Should you count pension funds as 'wealth' or is it deferred employment income? It's a bit of both, really, but before we worry about taxing the value of pension funds, wouldn't it be easier to simply reduce the generosity of the tax breaks (of which I am now a beneficiary, that's for a separate post, the maths of this is insane). Taxes are bad; subsidies are bad; worst of both worlds is taxing and subsidising the same thing (I could give you countless examples). Net the two off and either tax that thing at a lower rate (and scrap the subsidies) or subsidise that thing at a lower rate (and make them tax free).

4. The end game is not just taxing land (or wealth) for the sake of it; the end game is reducing taxes on output and employment, which are very regressive. LVT can raise *a lot more* revenue than a Wealth Tax, so would enable us to reduce these regressive taxes significantly. So the A's are all hugely better off; Mr B is a lot better off; Mr C would probably end up better off as well (but so what?); and Lord D would just be paying a shedload of LVT (he would not benefit from VAT or NIC reductions as he doesn't pay any).

5. As mentioned, Murphy has twigged that increasing income tax rates on investment income is mathematically similar to a Wealth Tax (at least, a Wealth Tax on income-generating assets). I'm a big fan of flat taxes, of course (and Murphy isn't, of course). If you taxed employment income and investment income at the same rate, employees would pay less tax and investor would pay more, that's all fine as far as it goes.

But his modified wealth tax would allow the value of owner-occupied housing (which is most of UK land by value) to completely slip through the net (no cash income to tax), and the effective rate on land and buildings which are rented out would be much lower than the effective rate on the assets held by productive businesses:

Example:
Mr E owns a house worth £1 million which he rents out for £40,000 a year. A 10% tax on his investment income = £4,000 = 0.4% of the value of the home.
Mr F has built up a proper business with assets of £1 million which pays him dividends of £100,000 a year. A 10% on his investment income = £10,000 = 1% of the value of the assets in the business. It stands to reason that the return on productive assets is higher than the return on land and buildings, as there is more risk and effort involved. In fact, a large part of Mr F's return might be his own efforts - what if his business has minimal assets but pays him a £100,000 dividend each year?

And of course, the extra income tax collected from investment income (once you factor in 'tax planning' and evasion) would be very little, so it would fails the same basic test as Wealth Tax.