Friday, May 6, 2011

Number One Way to fix Everthing – Land Value Tax

Land tax is fair, and it's not just a fringe issue

Fairly standard article. One of the commenters (with whom Physiocrat is still doing battle) came up with a new killer argument against LVT - he reckoned replacing taxes on income with LVT would make him better off. So we agreed that most people would be better off, if he's one of them, so what? He insists that this makes it a bad tax. Weird.

Posted by mark wadsworth @ 11:52 PM (1899 views)
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30 thoughts on “Number One Way to fix Everthing – Land Value Tax

  • When you look at the trillions of offshore hot money (made up of tax evasion, criminal/drugs money, kleptocrat money fleeing developing countries – courtesy mainly of the City and Wall Street – and corporations avoiding onshore regulation) that disrupts currencies and trade, inflates asset prices and is behind the explosion in global inequality then you realise that one the best arguments for relying mainly on land taxes for govt revenue goes as follows: you can tax land, labour and capital but only one of the three can’t run.

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  • You tell ’em Mark.

    They don’t like it up em!

    Fair trade, fair taxation, the two go hand in hand.

    ~ Cronyism is a cheaters ploy that eventually destroys the game for everyone else.

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  • Must we keep supporting Royal-ism at all costs?

    I thought God was meant to save them.

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  • mark wadsworth says:

    Icarus, to paraphrase – “If it’s not nailed down, then don’t tax it.”

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  • general congreve says:

    Theoretical question about LVT for Mark Wadsworth:

    Say an individual builds up a successful business, he eventually buys himself a decent 5-bed house with a fair-sized garden for him and his family and pays off the mortgage, plus saves a decent little nest egg. Then unfortunately his business goes under, being out-competed by the likes of Tesco and Amazon. No worries as the absence of a mortgage means he can afford to get a low paying job locally that keeps him and his family ticking over just fine as things stand. But under LVT rather than income tax, he’d be asked to pay levels of tax he could no longer afford? Despite his property gains being fully bought and paid for from the result of hid previous hard work? Am I correct, or barking up the wrong tree?

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  • letthemfall says:

    The article defines the Tories pretty well – the party of entitlement. But look at the support they’ve receive from the unentitled over the years. The small portion of the population that owns the majority of the land has its entitlement preserved complicitly by a much larger portion. Under these circumstances, how will LVT ever make it on to the ground, so to speak. And on Thurs, the Libdems were booted out and the status quo opted for in the referendum. Someone give me a reason for optimism.

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  • gc,

    (If I may just reply on Mark’s behalf)

    You’re correct, yes. However is that such a bad thing? Land is fixed: if this person is given an exemption then somebody else won’t be able to buy that house. The unseen would-be buyer will be living in a smaller house, despite perhaps earning even more than the first person did at the height of atheir business success.

    Secondly remember that the value of land depends largely on location. If the five-bedroom house is in Richmond-on-Thames, within walking distance of the mainline station 30 minutes from Waterloo, then the tax would be high and yes he would have to move. However if it’s a five-bedroom house in rural Lincolnshire then the tax would be easily affordable even on a low wage.

    The worst-case scenario is that the family has to move house; either to a less wealthy area, or staying in the same area but in a smaller house.

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  • mark wadsworth says:

    GC, yes, people will always come up with boo-hoo hardship cases, so what?

    Drewster has given the practical answer – this man is worse off because he got it wrong on the transition.

    But your example is completely contrived – if we’d always had LVT, then he would have paid far less tax in the past while he builds up his business, and its his decision if he wants to spend some of his income on living in a big house. If his business then fails, well he has to trade down again. And what happens if under LVT his business continues to thrive and he stays in the same house? Then he benefits disproportionately, doesn’t he?

    In any event why are people are so obsessed with the few theoretical examples of people who will lose out? Why are people so prepared to ignore the simple fact that the current tax/Home-Owner-Ist system keeps the economy permanently ten or twenty per cent below its potential, keeps millions unemployed or under-employed (which then burdens the productive economy even more), discourages work and enterprise and ecnourages land speculation, causes house price bubbles, financial recessions etc?

    If fifty-five million people end up better off under LVT and five million worse off, then tough, that’s as can’t be helped. It’s idiotic to say it’s better to keep fifty-five million people worse off just to preserve the benefits of the five million.

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  • gc – how much of his property gain was the result of hard work and how much was the result of increasing land values, thanks largely to the tax system (LVT-free) and other government policies?

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  • MW,

    Perusing the Guardian comments, the biggest objection is the case of pensioners. Income-poor but home-owning pensioners – also the core Tory vote – would surely be worse off under this system? Unless there was an exemption like our current council tax benefit for pensioners?

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  • mark wadsworth says:

    D, yes, I’m amazed that anybody writes an LVT without briefly outlining how valuations would work and what relieving measures he proposes for pensioners, which is always smart a*se objection number 1.

    Out of many suggestions, my current favourite is “Just exempt pensioners’ sole main residences”. That’s nice and simple, although it would be very distortionary

    The next step is introduce a very low level LVT of (say) 1% of the value of pensioners’ sole main sole residences, capped at (say) £400,000 per year (like in Northern Ireland), which would raise (say) £12 billion a year, pay it into a separate earmarked pot, and then dish out the total proceeds as extra Citizen’s Pension, which they could call “LVT credit”, of about £1,000 per pensioner per year. For about half of pensioner households, the extra £1,000 LVT credit (x 2 for a couple) is enough to pay the LVT anyway, or even lead to a net refund, some will break even and only the top third will end up a few hundred pounds worse off. These people can opt to roll up any shortfall (again, like in Northern Ireland).

    So this would split the pensioner vote quite nicely – half would be in favour of LVT and half would be against, thus solving the problem.

    So pensioners in high land value areas are subsiding pensioners in low value areas. Further, we could scrap Inheritance Tax (which only raises £3bn a year anyway) on all assets except such sole main residences, i.e. value up to £400,000 you pay or accrue every year, and over £400,000 it’s paid in one go when you peg it.

    Then each year, as far as is politically possible, the tax and the LVT credit and the upper limit of £400,000 (and the IHT threshold) get shuffled upwards, until after ten years or twenty years, pensioners are paying the same LVT as everybody else but getting a massive “LVT Credit” (in cash) of about £8,000 per pensioner so those who live in the smallest or cheapest houses are still being subsidised by those in the biggest or most expensive.

    Clearly, if you are getting Citizen’s Pension of £7,500 a year (using Iain Duncan Smith’s suggested rate) and £8,000 LVT Credit, this would be enough to cover the LVT bill on the median house (say £12,000) and leave enough to live on (everything else will become cheaper once income tax and VAT are scrapped, etc). And for a pensioner couple, they’d still be able to afford to live in a house up to the eighth or ninth decile, even if they only had £31,000 CP + LVT Credit between them.

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  • 5. drewster said…The worst-case scenario is that the family has to move house; either to a less wealthy area, or staying in the same area but in a smaller house.

    ~ At least people would have a house, small or large. This is what this system is pointing to general congreve.

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  • 9. mark wadsworth said…So this would split the pensioner vote quite nicely – half would be in favour of LVT and half would be against, thus solving the problem.

    Come election day……

    ~ Love it!

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  • It’s all starting to sound like a proper democracy. Heaven forbid. 😉

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  • The bottom line is that LVT would be a ‘game changer’. It will act to dis-obsess the British public re housing and force them to take a far more considered view on property purchase, while shifting the emphasis and the motivation toward income. Change is never painless. But it’s necessary for Britain. LVT is one means by which the necessary transformation to greater competitiveness can be made, should the usual suspects not see sense. It’s not a punitive tax, but a fairer offering, which Mark Wadsworth has more than adequately explained in the time I’ve been here.

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  • mark wadsworth says:

    Dill, thanks, I’ve just been a bureaucrat most of my life, my particular obsession is “making things work on an administrative level” and I prefer to leave the philosophical and moral debates to others.

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  • general congreve says:

    Just had a quick read. Point taken, just wanted to clarify how LTV would work in practice.

    Now we’ve got that cleared up, what would I do if I was a stinking rich [email protected] and about to get pole-axed by LTV? Simple, sell the trophy home, downsize to something more affordable and hide away the proceeds in physical metals etc. Result, much lower tax take, as income tax no longer in force and no one wants large house on large amounts of land that incur huge amounts of LTV. So I get off scott-free (with the exception of having to downsize) hiding my wealth off balance sheet and the proles end up getting the LTV raised on their 2 and 3-beds to make up the tax shortfall, meanwhile my tonnes of untaxed income keeps me able to afford a fantastic standard of living of eating out every night, buying flash cars and having loads of expensive holidays in my untaxed holiday homes abroad.

    Maybe I’m wrong, but that’s one possible way I see it playing out.

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  • the number cruncher says:

    GC @ 12

    Thats fine – he lets another family have his big house and he lives in a small house, on his own, drooling over his gold and has bags of money as his missus has divorced him for some less cheap [email protected] He could probably afford a Russian bride and be found dead floating in the Volga on a holiday to see the new ‘in-laws’, after she found out how to get access to the money and gold.

    We can all speculate ad infinitum, but that does not take away the essential economic healthy outcomes of a general LVT. And the first one would be rewarding those who do productive work while punishing the parasites and layabouts.

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  • mark wadsworth says:

    GC, why do people always say that under

    1. Rich people will downsize into small houses
    2. Poor people will be forced out of their homes
    3. Therefore the tax take would fall and there would be mass homelessness?

    You must know for a fact that this isn’t realistic. That’s like saying “If we have VAT on new cars, then nobody will buy a new Mercedes for £100,000 any more, they’ll all just buy second hand to minimise the tax” That simply has not happened in the real world, has it?

    Remember that these effects are perfectly counter-balanced by the fact that

    a) LVT is payable whether the property is occupied or not, so the rich person who wants to downsize firstly has to find somebody to buy the house from him.

    This purchaser has to pay the LVT in future, so the price of the house will adjust down for the LVT burden (but adjust upwards because the purchaser no longer has to pay income tax or VAT, receives a Citizen’s Dividend and so has twice as much disposable income).

    So that big house will always be occupied.

    b) The same logic goes for poor people.

    There will be some up or down sizing (which is A Good Thing), but there will always be as many people upsizing as downsizing, and there will always be more tax collected from the expensive areas than the cheap areas because people are quite clearly prepared to pay more to live in the nice areas than the not so nice ones – it’s like people are prepared to pay more for a new Mercedes than for a new Ford. Not everybody, of course, but enough people for Mercedes to be able to charge higher prices for a better quality product.

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  • @11

    Apologies, Mark. Unintended implication. I should be clear that my comment is my own opinion shaped by considering your argument.

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  • general congreve says:

    @13 and @14 – Easy guys, this is the first time I’ve really entered the LTV debate in any detail on here and I’m just playing devils advocate.

    Totally get the rebalancing issue of more income vs. cheaper houses vs. more tax on land/property. Just think that if you are a parasite (or a hard-working businessman unfortunately out-competed by Tesco), you’ll find ways to game the system, such as downsizing and transferring wealth off-balance sheet into other assets. Admittedly this achieves the LTV goal of getting them off the best bits of land, so LTV will do what it says on the tin in the first instance, it’s just a case of whether the parasites won’t find other avenues through which to continue their easy lives and distort the system.

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  • the number cruncher says:

    Sorry GC

    You explore the issues and I will cool my turbos. One idea of Georgism(LVT) is that in efforts to “game” the system it will actually put more money into the productive economy, such as the creation of new business for our Tesco affected friend. So the economy grows, where the reason for many business failing is that rents are too a high a burden to even start a business.

    Tesco are of course masters in the monopolistion of land, anti competitive land-banking and have the power to affect the planning system for their own advantage. Land and favorable planning treatment are a major factor(but no the only one by a long shot) in letting Tesco out-compete small rivals. All would be hugely reduced with LVT.

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  • mark wadsworth says:

    GC, also with a full on LVT system there would be absolutely no need to hide any assets anywhere, as there would be no tax on them.

    And what’s the point of being rich if you aren’t going to have the nicest holidays, the nicest cars, the nicest houses? There are plenty of rich people who rent nice houses for large sums of money (i.e. me) who could easily halve their rent by moving into somewhere smaller and cheaper, but we are happy to pay the higher rent because it’s simply worth it. Why would LVT suddenly change this? Whether you’re paying it in privately collected tax to the landlord or publicly collected tax to HM Revenue & Customs, where’s the big difference?

    I’d like to give a real life example of how and why LVT works:

    1. Switzerland has something called ‘lump sum taxation’ for rich foreigners, whereby they can there without paying any income tax on their non-Swiss income AND INSTEAD the Swiss take the annual rental of the house you are living in, times it by five and call it your notional income on which you pay income tax (between 25% and 40%, depending which canton).

    2. Then they times the rental value by a hundred and call it your notional wealth and charge you wealth tax on it (between 0% and 1%, depending on Canton).

    3. They could of course save themselves the bother and just say that you pay around 8% of the capital value of the house you live in (or less or more, depending on which canton) – the final tax bill would be exactly the same!

    So, this would put everybody in the UK in exactly the same favourable position as tax exiles in Switzerland (in the UK, a rate of about eight per cent on the current market value of all land and buildings would be sufficient to replace all taxes.)

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  • general congreve says:

    @18 – Is that 8% per annum as values stand?

    I presume the introduction of LVT could push property values down, in which case I assume the tax percentage will increase to cover the tax shortfall?

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  • 19. general congreve

    Not if we had some ‘positive’ deflation.

    That’s what an efficient economy with sound money should bring about.

    Things get cheaper and our standard of life greatly improves.

    Can you see what the problem is yet? Hint, central banks and a bigger slice of the pie..

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  • mark wadsworth says:

    GC, the 8% is just total income tax etc revenues to be replaced (£320 billion) divided by total value of UK houses (£4,000 bn) plus minus lots of adjustments for commercial premises, pensioners etc etc. The £320 billion is a known figure, the 8% is just to make it easy to understand.

    And why would house prices change much? If your income tax goes down by £1,000 and LVT goes up by £1,000, why does it make a difference? Even if they did change, if the tax on your house is £15,000, then it’s £15,000 regardless of the house price. It’s like fuel duty is 59 pence per litre, regardless of the price of oil.

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  • mark, I am reluctant to do it but I could demolish almost everything you have said in the above few posts (particularly the numbers). The general is actually closer to the mark than he imagines. I am a big supporter of LVT, as part of a tax regime, but full LVT would be a disaster. Would you be terribly offended if I got stuck in on the next LVT post? You kindly published me on your blog (even if you sneaked in the flash towers bit!), which makes me a little reluctant to roll up my sleeves, so I will let it be, if you would rather I did.

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  • mark wadsworth says:

    F

    1. Feel free to come up with your own figures.

    2. If you think I have completely misunderstood Swiss lump sum taxation, then please explain it yourself.

    3. Having full-on LVT may seem a bit radical, I’d happily settle for replacing Council Tax with a Domestic Rates system like in Northern Ireland (look it up yourself) just as a very modest start.

    4. But the fact is, while earned incomes are skewed (a lot of below average and average earners, a few very high earners) the distribution of land ownership is considerably more skewed than that (half the country owns nothing, if you include tenants and people with big mortgages). Crudely speaking, the top ten per cent of earners earn a third of all salaries, but the top ten per cent of landowners (if you include banks) own two thirds of all land (or whatever the figures are).

    5. Let me remind you of the pub example, the total bar bill (i.e. tax revenues) is a known figure, it’s only a question of the most equitable way of divvying it up:

    – everybody pays the same (Poll Tax)
    – non-earners pay nothing, average earners pay two thirds of the bill and the highest ten per cent pay one-third (income tax)
    – everybody just pays for his own drinks (Land Value Tax).

    6. Of course there’d be a welfare system under LVT (so everybody gets a small share of the profits from the pub) so even those on low incomes will be able to afford drinks.

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  • “But the fact is, while earned incomes are skewed (a lot of below average and average earners, a few very high earners) the distribution of land ownership is considerably more skewed than that (half the country owns nothing, if you include tenants and people with big mortgages). Crudely speaking, the top ten per cent of earners earn a third of all salaries, but the top ten per cent of landowners (if you include banks) own two thirds of all land (or whatever the figures are). ”

    I couldn’t agree more. LVT as part of a tax regime would go some way to redressing this imbalance, which is why I’m all for it’s inclusion in our tax regime. I believe in partial LVT and you believe in almost full LVT. The differences are quite small.

    This is where it could get quite fraught. My evaluation is anchored by numbers and your evaluation is anchored by numbers. Unfortunately one of your key numbers is wrong. I believe that this factually incorrect number is revealing because it (to my mind), demonstrates that you are aware of the disastrous consequences of a more realistic number. Other than that, I will keep my powder dry for another day

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  • mark wadsworth says:

    F, please be more specific – which number?

    There is a lot more to these workings than meets the eye, e.g. I haven’t included 100% of VAT receipts because if we scrap VAT on petrol and booze, then we could increase fuel and alcohol duty a bit, for example. the above headline figure of 8% assumes pensioners don’t pay a penny (for political reasons) but the tax they don’t pay will be made up by Business Rates (which of necessity would go up by half or even double in some places).

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