Sunday, July 1, 2012

Another voice in favour of LVT

How our tax system hurts workers and rewards rentiers

Here's a hypothetical question: if you inherit a house, worth a million pounds, and rent it out for £50,000 a year, should you pay more tax on that income or less than someone who works an 80-hour week for the same salary? Some readers may disagree, but I think that you should pay more. You've done nothing to earn that money – you simply own a property that somebody else finds useful. But if you own a property, you only pay income tax on the rent you earn from it. If you work for your income, you pay three income taxes – there is national insurance and, effectively, employers' national insurance too. That brings the effective tax rate paid on PAYE income up to 40pc for basic rate payers, compared to 20pc on non-PAYE income. The worker pays a higher tax rate than his landlord.

Posted by drewster @ 05:58 PM (1422 views)
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9 thoughts on “Another voice in favour of LVT

  • mark wadsworth says:

    Yeah! Another glimmer of hope at the end of the tunnel.

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  • Brilliant.

    However, only the land element is unproductive (i.e. rent seeking) as the building elements were someone’s effort and also require maintenance. Building element is the same as renting a car, a tools out really.

    Because of this, the land element should be taken away via LVT, and the rest should be taxed at the same rate as labour. We then need to combined the NI smoke screen into a single income tax rate. ( Thought I suppose on can argue that a landlord is not entitled to contribution based JSA or state pension even though the equivalent income based benefits pay the same amount)

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  • “and the rest should be taxed at the same rate as labour. We then need to combined the NI smoke screen into a single income tax rate.”

    …. of 0%. Now you’re talking.

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  • mark wadsworth says:

    J, the hard core land value taxers also say that the ideal rate of income tax on earned income is zero per cent (in which they are almost certainly correct).

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  • @MW But we don’t have to agree with them. LVT is a fine idea, but why should any element of rent (= by definition unearned income) be completely untaxed? Part of income from labour is rent too … I’d do my job for less money … I’m sure most doctors, bankers etc. would too despite protestations to the contrary.
    N

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  • mark wadsworth says:

    NickB, if location rent is black and earned income is white, then yes, there are shades of grey.

    Income from government protected monopolies like copyright or patents is dark enough grey to be taxing (but at a lowish rate because the beneficiary created it, he’s just paying for protection).

    Income which is boosted by barriers to entry (like e.g. where taxi drivers permits are restricted – you can deal with this by taxing their income or by the more obvious route of scrapping the restrictions on the number of permits).

    Income which is boosted because of successful lobbying, like doctors, in which case the government (the main employer of doctors including quasi-self employed GPs) can simply bump down their salary to a smaller amount. Or London Underground train drivers.

    And there is quasi-land stuff like radio spectrum or aircraft landing slots, but they can be auctioned off, so that’s more or less like normal land.

    And so on ad infinitum, but even if everybody is a specialist in his field and this earns a little bit of monopoly income or rent or premium or whatever, so what? It all cancels out and either is spent in the productive economy (hooray!) or it goes into land rents (and get taxed accordingly).

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  • MW
    In a free market economy lots of it would go into the doctor’s salary etc, meaning we are paying too much for her (productive economy) services. Imagine land were nationalised and rented out for the public purse at market rates. Would doctors still be able to amass fortunes at our expense? Maybe I am missing something, but I think they would.
    N

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  • mark wadsworth says:

    NickB, it is a well documented fact that the GMC conned Labour into doubling GP’s pay from about £50,000 to about £100,000 in the space of a couple of years. The extra £50,000 is clearly wasted and down to government stupidity or corruption. Another thing which drives up doctors’ pay is barriers to entry. For sure, they are expensive to train, but if we trained twice as many at a cost of £x billion a year, would not their salaries plummet, possibly saving the taxpayer more than £x billion a year?

    Doctors’ salaries are even higher in the USA because their market is even more rigged, in relative terms, the NHS does a fantastic job (similar results for less than half the price).

    So this issue is solvable.

    A less well known fact is that the NHS pays off the mortgage for GP’s premises, often with residential above, so clearly there is a huge advantage to being a GP in an expensive area instead of a cheap one.

    So yes, this would solve your second issue, very much so.

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  • Mark, you are often right, but I find it a bit naive to compare tube drivers with doctors! Is not all about training cost, is about human capital with very limited supply. Do you seriously believe that we could find twice as many young bright and hard working persons that could handle 12 years of the most demanding training and produce twice as many doctors without a massive depression in quality? If anything, doctors are undervalued in the current scheme of things. Maybe GPs appear slightly overpaid relative to specialists, but seeing what other groups get, all of doctors need an upward correction to get “fair value”.

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