Monday, August 29, 2011

Land value tax makes the front page

Lib Dem tax plans target affluent areas

Front page of today'w Telegraph. "Vince Cable the business secretary yesterday hinted at a tax on land values that would hit big landlords." Woohoo! I just re-read a reply I got from Vince back in 2007 discussing general mishandling of house price inflation.

Posted by voiceofreason @ 09:43 PM (1658 views)
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15 thoughts on “Land value tax makes the front page

  • mark wadsworth says:

    This is all promising stuff, but they are being amazingly amateurish in presentation.

    LVT (or whatever) is not a tax on wealth (income tax, VAT and corporation tax are the main taxes on wealth) and the fact that money will go from wealthy areas to poor ones is irrelevant – that already happens with income tax and so on.

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  • People need to become more aware of alternative methods of taxation.

    It’s all good dog!

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  • Hey-ho – must be getting close to party conference time again..

    Realistically, the Lib-Dems hopes of avoiding obliteration at the next election hinge on winning votes from Labour voters – at the local elections this year they were wiped out when facing Tory opponents, but did less badly against Labour.

    So, ‘soak the rich’ will be their rallying cry at the next election – but they’ll be lucky to hold ten seats..

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  • mark wadsworth says:

    I keep telling them that “soak the rich” is a non-starter and that any shift towards LVT has to be offset by equal and opposite measures to “unsoak the rich” by scrapping the 50p tax rate, inheritance tax, SDLT and so on.

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  • I can see an argument for taxing owner-occupiers as if they were receiving a rental income from the land or property. I also see no reason why any property (primary residence or not) should be exempt from capital gains tax. But I can’t see an argument for LVT on top of income tax (in the case of landlords for example). Nor can I see an argument for LVT completely replacing income tax – that’s like saying that if the income you are able to generate is not derived from the value of the land you occupy then you don’t need to pay any tax on it at all. Some people are better able to take care of themselves and they have a responsibilty to support those less able through taxation. Its also often said that LVT is the only tax you can’t avoid by moving it offshore but surely if someone earns a high salary in this country and then lives extravagantly abroad then that’s exactly what they’ve done?

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  • mark wadsworth says:

    Shawkie; “if the income you are able to generate is not derived from the value of the land you occupy then you don’t need to pay any tax on it at all.” Nope, because you’d always pay tax on the value of the land you occupy, whether that’s for business or private purposes, whether as tenant or as owner.

    “if someone earns a high salary in this country and then lives extravagantly abroad then that’s exactly what they’ve done?” High earners would be perfectly free to do so, but where’s the advantage? They’d then be treated as resident in the other country and although their income is tax free in the UK it would be liable to income tax in the other country, and whether they then buy an expensive house abroad or buy a cheap one here is much of a muchness.

    Or look at it this way – let’s imagine we phased in LVT in parallel to the existing tax system, but gave everybody a £ for £ credit against their other tax liabilities. So if you are a very high earner paying £50,000 a year income tax/NIC, there’d be no marginal cost to you in occupying a huge great big house on which the LVT bill is £50,000 a year. So people would all choose the optimum position by occupying a house on which the LVT bill is roughly equal to their existing tax bill. So most tax would be LVT and income tax, NIC receipts would be net +/- nothing (large notional bill minus large LVT credit).

    If you then just scrapped income tax, why would people’s decisions suddenly change?

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  • MW:

    I meant that you wouldn’t pay tax on the income. Obviously you’d pay tax on the land value. Suppose that you live in a hut in the middle of nowhere and somehow make something which sells for a large amount of money. The income is not derived from the value of the land in the sense that you could do the same thing from any other hut in some other middle of nowhere. You’d end up paying a tiny amount of tax which would reflect your land usage but not your ability to support your fellow members of society.

    I’m not suggesting that the person in the second example would be resident abroad for tax purposes. They would have a very modest property here but would spend their leisure time in their foreign mansion and/or retire there.

    “If you then just scrapped income tax, why would people’s decisions suddenly change?”
    If you have LVT in parallel with existing taxes then there is no earthly reason for people to reduce their LVT bill since they can use the credits against income tax (which they would otherwise have to pay). Suppose that you then reduce income tax people suddenly have the option of reducing their LVT bill to match their new reduced income tax. If you scrap it altogether then they would seek to reduce their LVT as far as possible.

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  • MW: I’ve posted a reply but annoyingly I forgot to use my password so it might take a while to appear.

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  • mark wadsworth says:

    “You’d end up paying a tiny amount of tax which would reflect your land usage but not your ability to support your fellow members of society.”

    Correct, but people like this are few and far between. That argument has about as much validity as complaining that teetotallers shirk their duty to pay tax by not buying booze.

    “They would have a very modest property here but would spend their leisure time in their foreign mansion and/or retire there.”

    Why? There would be no earthly advantage to them, the choice is pay income tax and buy an expensive house abroad or buy a cheap house here. The markets will adjust prices up or down so that there is no net advantage to either course of action – don’t forget that when Brown increase top rate of tax to 50p, a lot of people went to Channel Islands or Switzerland and house prices in those countries went UP as a result.

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  • “Correct, but people like this are few and far between.”
    That statement is likely to be true at present precisely because under the current system there is no incentive for someone with a high income to live in a modest property. The current system rewards borrowing as much as possible against your income and investing it in a house and it has incentives for owner-occupiers. Even it were still only a few people they might still be each avoiding a large tax bill and a lot of people might have to pay a little bit extra to make up the shortfall.

    You said yourself “So people would all choose the optimum position by occupying a house on which the LVT bill is roughly equal to their existing tax bill”. It is exactly the same argument that says that they will continue to adjust their choice of house as you start to reduce their income tax bill. You get to the same place whether you introduce LVT first or reduce income tax first.

    “There would be no earthly advantage to them, the choice is pay income tax and buy an expensive house abroad or buy a cheap house here”. In my scenario the person pays no income tax either way (resident here for tax purposes) but can choose how much property to own here and how much abroad. I think your argument is that the market would adjust prices so that property prices here would be discounted to reflect the LVT due. If that’s true then you haven’t just replaced one tax with another leaving everyone roughly where they were before – what you’ve actually done is confiscated a portion of the value of everyone’s property.

    “For your arguments to stack up, we’d observe that ALL commercial premises in the UK would be standing empty, because they are liable to something very akin to LVT known as “Business Rates”.”
    I thought business rates were liable on empty premises. I thought that was precisely why commercial premises didn’t stand empty.

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  • mark wadsworth says:

    Shawkie: “there is no incentive for someone with a high income to live in a modest property” Yes there is – it’s cheaper. I could argue, that for rich people there is every incentive to drive a second hand Ford not a new BMW or to send their children to state school. Clearly, rich people decide that on balance, they are happier with a BMW and kids at private school.

    “I think your argument is that the market would adjust prices so that property prices here would be discounted to reflect the LVT due” Correct. If it costs £50,000 to rent a villa in France, the rental value of the same villa in England would be twice that (because without income tax people would have twice as much disposable income) so the LVT on that villa would be (say) £60,000 a year. Let’s assume our high earner owns such a villa, he can choose to rent out his UK villa for net £40,000 (gross rental value minus LVT) and rent one in France for £50,000. Why on earth would he do so as he would end up £10,000 worse off, as well as having to pay income tax in France if he becomes resident there?

    “If that’s true then you haven’t just replaced one tax with another leaving everyone roughly where they were before..” in terms of the amount of tax people pay, it might well stay the same, but unlike income tax which is just a penalty for working and earning more, those who are willing and able to pay the most tax get to live in the nicest houses as a quid pro quo.

    ” – what you’ve actually done is confiscated a portion of the value of everyone’s property” Can you explain to me how income tax, NIC and VAT is not confiscating a large amount of people’s hard work and entreprise, skills etc? Land ownership itself is privatisation of public property, and taxation of incomes is theft, so why not tax land values and make the punishment fit the crime?

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  • I don’t completely understand land value tax, however, if it would mean derelict land is built on rather than lying empty, it’s got to be a good thing.

    Perhaps, using my example below, someone could explain.

    In a nearby village, there is a plot of land that has had planning permission for several years for five small, two-up, two-down terraced homes, with very small gardens and parking spaces in front of each for one car. It’s the former site of the village hall, possibly half an acre – though I’m not a good judge.

    The land last changed hands about four years ago. At about that time, the council forced the new owners to demand the neighbour stop using it as an unlicensed scrapyard.

    My guess is that the owner paid a decent whack for it, possibly about £500,000, but could be more, and now, as house prices have fallen, cannot afford to build on it and the costs of the land plus building costs would mean they would be locking in a loss.

    My guess, again, is that they are desperately hoping house prices increase faster than building costs (some hope) so they can carry out their project.

    Again, my guess, is that there are similar acres of land with planning permission for homes across the county, where would-be developers daren’t build homes because they too would be locking in losses.

    If a land value tax were to be introduced, would the landowners in these cases be faced with a tax bill unless the land was developed? If so, would that be only the case if there was planning permission for it?

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  • mark wadsworth says:

    Stuart, you can make up your own mind what is the best strategy:

    1. Continue with the rigmarole of planning permission or just have a default rule that urban plots can be built up to the same density as surrounding plots, plus ten per cent for luck.

    2. Whether we apply LVT to urban plots anyway whether planning was granted or not (depending on your decision on Rule 1), from the date of grant of planning or from the time the buildings are completed.

    AFAIC, we might as well go for zoning (default planning permission granted for same use and density as surrounding plots plus ten per cent for luck) and LVT to apply immediately, so developers won’t worry about locking in losses, they’ll be mighty keen to get the houses built and sold on ASAP.

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  • MW: “If you then just scrapped income tax, why would people’s decisions suddenly change?”

    I don’t think we’re ever going to agree on the subject of whether people would seek to reduce their LVT bill or not so I’ll put the question another way. Why scrap income tax at all? Why not leave income tax and LVT in parallel exactly in the way you described? The only reason you’d scrap it if you actually wanted people to be able to reduce their tax bill below what they currently pay under income tax.

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  • mark wadsworth says:

    Shawkie: “Why scrap income tax at all? Why not leave income tax and LVT in parallel exactly in the way you described?”

    Running both in parallel is probably a good idea, actually, at least as a thought experiment.

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