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.
Elevate their cause?
1 hour ago
14 comments:
"The end game is not just taxing land (or wealth) for the sake of it;"
It is if you are a left-winger: the idea is to get the rich to pay more, full stop.
"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"
I get the feeling that is the point. The Left are home-owners and want other people to be those paying more taxes. The best tax is one that someone else pays, not you.
"The Left are home-owners and want other people to be those paying more taxes. The best tax is one that someone else pays, not you"
I get the very strong impression this is true with Murphy.
Also, using LVT, you can hoist the Tories by their own petard if you know your stuff.
This should be reason enough for the Lefties to prefer it to a wealth tax, but the fact they don't shows what their priorities really are.
Working class are shafted by Left and Right. I'm convinced they've evolved into a symbiotic relationship that keeps out any new ideas out and themselves in power.
I suppose Zakat in Islam could be viewed as a 2.5% annual wealth tax: you don't have to worry about evasion and avoidance if you call upon a supernatural enforcer. ;)
B, yes, fair summary.
BJ, "I'm convinced they've evolved into a symbiotic relationship that keeps out any new ideas out and themselves in power". Yes of course, does anybody think otherwise? The Tories have no principles whatsoever apart from being re-elected, Labour pretend to have some sort of (socialist) principles but really, that's just their way of getting votes.
This boils down to Indian Bicycle Marketing. It's Pepsi-v-Coke, or Martini-v-Cinzano-v-Campari.
GC, not if the 2.5% is privately collected, it's just rent or interest.
Mark et al above agreed about left and right.
When I read Murphy’s ‘Joy of Tax’ I found his account of LVT satisfactory (so too his MMT 101 and the new podcast). Without dusting J of Tax down, I recall he provides a criteria of a ‘good’tax as does MarkW here. You can argue, that he fails on his own test. I also recall, for example, he looks at a Tobin tax. But, I think not weighing taxes in merit order; is a feature, not a bug in his world view.
If he did make it to high advisory office he wants political‘wiggle room’ for himself and his new master.Nevertheless, at the moment, he is still acting broadly as a good citizen blogger - in my opinion. Lola I enjoy reading Tim W's blog too, and have seen the 'ragging stuff' ;)
However,to get to a deep criticism of LVT we should not look at a messenger, but to a source. Consider this recent MMT thread.
Neil Wilson
Friday, August 21, 2020 at 0:30
“where they correct market failure, as with land value tax.”
There’s little merit in the land value tax. It’s a relic of an idea from a bygone age that serves little purpose in a world where IP is what actually matters.
As Bill puts it
In general, there is nothing particularly incompatible between the introduction of a broader LVT at the Federal level to replace or reduce other taxes currently levied and the insights provided by MMT.
However, once you understand MMT, you realise that the discussion of the design of the tax system is quite different than just raising income from the most ‘efficient’ means.
The Georgists would do well to come to terms with that and demonstrate how a LVT would work to free up real resources to give the real space for governments to spend.
There doesn’t appear to be any analysis provided by Georgists to calibrate the impacts on non-government spending of such a tax and how this would alter the tax mix required to maintain full employment spending levels and satisfy the socio-economic spending goals of government.
It would help if MMT supporters spent less time obsessing about tax. Tax is financial sewerage. Ordinary people aren’t interested in talking about it and even less in paying it. Get it dealt with in the simplest way possible (almost certainly a payroll tax of some sort paid by the employer – since that frees up the required real resources and keeps it away from ordinary people) and move onto the stuff people want to talk about – like jobs, and mortgage rates, schools, hospitals and pensions.
So Wilson/Mitchell provides a problem both for Murphy and all LVTers in general. Pretty neat :)
At the moment, my answer to Mitchell would be that we simply reverse his Olive branch to LVT in para 1 and 2. LVT does the heavy lifting as more bad taxes are replaced one by one (in Liberal economics, it corrects huge market failures). Assuming here the MMT JG: this policy correction will have less and less lifting to do over time. Yes MMT tells us the state has the policy space to carry out the JG. But LVT simply reduces the programme size for getting to full employment over the time frame of its introduction. (I personally accept Wray’s JG model here).
It would help if MMT supporters spent less time obsessing about tax. Tax is financial sewerage. Ordinary people aren’t interested in talking about it and even less in paying it. Get it dealt with in the simplest way possible (almost certainly a payroll tax of some sort paid by the employer – since that frees up the required real resources and keeps it away from ordinary people) and move onto the stuff people want to talk about – like jobs, and mortgage rates, schools, hospitals and pensions.
Sorry my setting up this last bit is Niel concluding not Bill.
L, yes.
MW people who say things like "There’s little merit in the land value tax. It’s a relic of an idea from a bygone age that serves little purpose in a world where IP is what actually matters" don't have the faintest grasp of numbers.
For sure, in principle land and IP are much the same. But the value of UK rent is hundreds of times as much as all the money that Microsoft, Google, FB etc rake off.
Think about it - how much do you think these companies get off an average UK household per year (profit per user)? Maybe £50? £100? What's the rental value of an average house?
Twats.
@Mike W
To which I'd reply, that paying the LVT, is in principle, the same as paying for goods/services received and has the same socio-economic impacts. That our share of land rent is collected/spent on our behalf by the state is a separate issue.
Wilson/Mitchell don't provide a problem, they merely show a lack of understanding.
Wouldn't an LVT indirectly capture a lot of IP rent too, because much of that rent is baked into higher land prices anyway, eg the very high land prices of the Bay Area and Seattle (internet giants) and Los Angeles (entertainment)?
Benj, ta.
GC, up to a point, yes. But that is pretty irrelevant to an ideal UK tax system. The only proper way to capture IP rent is for the government to charge IP holders for the value of their legal protection. This can only be done by negotiation.
How do you even define wealth? Does it include racehorses, pictures on the wall, jewellery, old books?
I once knew a poor old woman who lived in sheltered accommodation. On her wall was a valuable picture done by a relative who was an artist in the nineteenth century. Wealth?
BTW land is not wealth. A land title is a claim on wealth.
Phys, the idea of a general 'wealth tax' fails for practical reasons. What does it include? How do you value stuff? How do you deal with people who 'forget' to declare stuff? Doesn't it unduly discourage saving or investing?
"What does it include?"
Generally, things that are not owned by the proposer.
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