Wealth tax is becoming, or has become?, a core Lib Dem policy. Nick Clegg shakes his head alongside his Cabinet colleague the Chancellor of the Exchequer announcing that the coalition government will not introduce a mansion tax. Vince Cable is back on the World at One the next day defending it.
There has been much discussion as to whether wealth and mansion taxes are fair. But fairness is a very subjective concept. Some think that wealth taxes appropriately ask the rich to shoulder relatively more of the financial burden imposed if we needlessly insist on the financial orthodoxy that the government budget must be balanced. Others think that very rich people can manipulate their affairs to artificially decrease their income and so should be taxed on their wealth. Yet others think that assets bought out of taxed income should not be double taxed.
But there is also the question of the practicability of wealth and mansion taxes. The only two points at which wealth can be taxed is at sale, or at the death of the owner. This already happens through stamp duty and inheritance tax. Otherwise it is possible to tax only income, not wealth. Wealth and mansion tax proposals in fact rely on the assumption that the value of someone’s house or asset is a surrogate measure of their income. This assumption is untrue, unkind, and unnecessary, thus failing the three great moral criteria. Income tax is the fairest progressive tax on individuals, since even sales taxes are notoriously regressive. But to remain fair it must also leave a fair proportion to the income earner.
The only other way a wealth holder or mansion owner can pay tax on their wealth or mansion is by a forced sale of their asset or house. This is a very illiberal idea, and would in any case have huge impact on the housing and other asset markets. Taxing their savings is the only other resort. We effectively do this anyway through low interest rates and a little inflation. But this returns us to the fundamental question : such tax proposals are in fact proposing a tax on the income of those who own certain assets above a certain value. It makes no sense. We can in fact only tax their income. We should therefore scrap all wealth taxes, including any mansion tax proposal, and Council tax, and rely on the classic mix of income, sales, inheritance, corporation etc taxes. Liberal politics should also eschew its growing tendency to slag off the rich. The vilification of any target group in society is illiberal and worrying, but sadly tends to characterise any society coping with difficulty.
Current wealth tax proposals are also driven by the obsession with balancing the government’s books. But the economy is suffering from a deficit of demand. The last thing we need is higher taxes : we need higher spending. Lib Dems who have escaped the mansion tax should get out and spend their savings. Vince could lead the way! Happy Christmas.
* Geoff Crocker is a professional economist writing on technology at http://www.philosophyoftechnology.com and on basic income at www.ubi.org. His recent book ‘Basic Income and Sovereign Money – the alternative to economic crisis and austerity policy’ was recommended by Martin Wolf in the FT 2020 summer reading list.
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133 Comments
I’m sorry but I can’t resist…
“The only two points at which wealth can be taxed is at sale, or at the death of the owner”
Really? Is there no way (I don’t know, through, say, a tax on land values, or council tax bands that more fairly reflect accumulation of property wealth)? It cannot be beyond the with of man to devise a practicable system along these lines.
I am genuinely unaware of anybody – liberal or not – who is proposing forced sales. Straw man…
Nor is wealth taxation about “slagging off the rich” or “vilification.” Liberalism is about freeing people from the concentration of power, and it is the accumulation of wealth – whether through income, property or any means – in the hands of a fortunate few is what is illiberal.
The argument most of us make in favour of wealth taxes is not that the wealthy are some group to be attacked, but rather that a proportion of their wealth is accumulated through luck and through communal things. Sharing in that luck (the same way that social security should mitigate people’s bad luck) and asking the wealthy to contribute a fair share to the upkeep and advancement of common goods is what wealth taxes is about, not vilification.
tempting to reply at length but perhaps some other time…
There has been a long standing group within the Liberal tradition for the creation of a Land Value Tax (of which a mansion tax is the poor cousin) where the intrinsic value of the land is taxed on an annual basis (not the value of the property upon the land but the land itself).
This does not require the massive revaluation of vast numbers of property but just the annual calculation of local land values and the charging of the owner a tax based on the lands current intrinsic value. As well as taxing large land owners it also encourages the efficient use of land as the owner will need to extract value from the land or dispose of the asset.
Several economists have calculated that a properly structured LVT and other resource based taxing could replace the requirement of having any income taxes at all (although there is likely to be a transition period when both are payable on a cross over)
I cleave a little closer to Joe Chamberlain’s and Lloyd George’s views on the taxation of land (and wealth). The possessors of landed wealth are the lilies of field who toil not neither do they spin and yet benefit from their ownership of land and property. A land value tax is the means by which this may be achieved. Add in a substantial re-vamp of council tax with large upward extensions of the valuations with a removal of loopholes and second home concessions and we might begin to see what Chamberlain and Lloyd George sought.
The article does present the gut-reaction about wealth taxes that many of the public will feel, especially with regards to the subject of a mansion tax.
Wealth taxes should be targetted towards unearned wealth (such as house price appreciation) in unhealthy markets (such as the monopoly of land ownership), should be a replacement for unhealthy taxes on labour and enterprise (such as income tax) and should be applied fairly and proportionately for all wealth. The mansion tax fails two of these criteria as it only applies above an arbitrary threshold, and is therefore a tax targetted at the rich, and there is no proposal to reduce income tax (or any other tax) in return, so is clearly an additional tax rather than a replacement tax. I would argue, therefore, that proposing a ‘mansion tax’ is detrimental to the already difficult task of persuading the general public of the benefits of land value taxation as a replacement for other forms of taxation.
Given that the article states that “the only two points at which wealth can be taxed is at sale, or the death of the owner” and yet we know Council Tax exists – I think this whole article same safely be disregarded as nonsense. Professional economist and published author? Not your best work I would suggest. Sorry.
“Can” not “same”. sorry for typo.
The problem we’re grappling with here is that there is a super rich class who view tax as something for the “little people”. Sorry Geoff, but we’ve tried income taxes and they simply don’t work in making the rich pay even a minimal amount to the state.
The benefit of a Mansion Tax is very simple. The fact is that unlike income or other forms of asset, it can’t be hidden or taken abroad. The very fact that rich Tory donors have been queueing up to try and stop the idea is concrete demonstration that it would work.
Until Geoff can come up with a similar tax that has the same advantages in making the rich actually pay something (not even a large proportion) towards the maintenance of societies that allows them to make money in the first place, then I think we should be sticking to our guns on this one.
The value of one’s house is only one aspect of ‘wealth’.
The generous pension terms of senior MPs represent huge reserves of personal wealth that would be much simpler to tax.
@Steve
“The article does present the gut-reaction about wealth taxes that many of the public will feel, especially with regards to the subject of a mansion tax.”
The latest poll shows 73% support the Mansion Tax. It’s a great idea and I don’t really see any cogent arguments here against it.
Thanks for all the comments, (apart from Billy Boulton’s gratuitous insult), but not one respondent has tackled the point that any such land, wealth or property tax, will in fact be paid from income and not from the asset, unless the asset is sold. The same does apply to Council Tax (again Billy Boulton) – it’s paid from income – people do not sell their houses to pay it. The house is simply a surrogate measure for income, so since income is in effect payiing the tax, it’s income that should be (and is being) taxed. As for fair shares, we do have a system where the top 1% of tax payers already pay 27% of all personal tax. There has to be some limit on the progressive nature of taxation.
You say we should keep VAT for goods and services, but that there should be no taxation at all of property. As a professional economist, why do you think one kind of consumption (housing) should get a tax break relative to everything else? This is especially crazy given that taxing land doesn’t result in there being less land – unlike the losses produced by most other taxes – and given the waste and danger of pouring investment into property bubbles.
The IFS think council tax should be restructured to be essentially equivalent to VAT on the annual consumption of property, and that has a lot to commend it. Also, what of capital gains tax?
We constantly hear how the “poor” should not expect to live in Houses that they can not afford, So why shouldn’t the same rules apply to those living in mansions?
The latest 2011 census, showed a huge increase in people having to rent from the “private sector” many of those people are charged extortionate rents and are reliant on HB to meet these costs. The government are reducing the amount of support by reducing the LHA. The governments position is, if you can’t afford to live there, move elsewhere cheaper.
Surely the same standards should apply to those home owners living in properties worth £2 Million or more. If you have accumulated the property through inheritance or through any other means and cant afford the mansion tax, then sell up and move elsewhere.
We should not have double standards in society where those wealthy home owners that own their home are able to regard the property as a “home”
and the less well off that rely on social housing or Private renting have to regard the property as a “place to live”
Adam
It’s a question of stocks and flows (well analysed in Wynne Godley and Marc Lavoie’s ‘Monetary Economics’ http://www.palgrave.com/products/title.aspx?is=0230500552) . We can if we want tax housing when built, when rented, when sold. These are flows, as is tax. But taxing it when only owned is problematic. I repeat my claim that any wealth or asset tax is in reality paid from and therefore a tax on income, so we might as well be straightforward about it. Capital gains are also only taxed when realised and not simply when held. If we are to tax things owned, then to be fair it should be all things owned. If one person has £2m in the bank and another buys a £2m house, why should only the second be taxed? If we want to tax land then we tax its rental income which we already do or its value at sale or death of the owner which again we already do.
Matt
I agree about the overall issues you raise in the housing market. A lot of this is due to very tight planning constraints which releases insufficient land and therefore bids up the land price. We need planning controls but in some cases I’ve seen recently they have become extreme and have not taken into account the huge need for a big growth in new housebuilding. But this is a separate issue and doesn’t get round the point that so called wealth taxes are in fact paid from income.
Prateek Buch
Despite your claim to the contrary, we’ve now found someone – liberal or not I know not – who is advocating forced sales – see matt above who writes
‘If you have accumulated the property through inheritance or through any other means and cant afford the mansion tax, then sell up and move elsewhere.’
@Geoff Crocker
“Despite your claim to the contrary, we’ve now found someone – liberal or not I know not – who is advocating forced sales – see matt above who writes”
To be fair, I don’t think Prateek Buch was referring to the ordinary man in the street, when he said “I am genuinely unaware of anybody – liberal or not – who is proposing forced sales” I would assume he was referring to a political party or such a person like an Individual MP.
My comment was just a personal opinion from an ordinary individual whose not affiliated or a member of any political party or association and which carries absolutely zero political weight
@ RC “Sorry Geoff, but we’ve tried income taxes and they simply don’t work in making the rich pay even a minimal amount to the state”
According to HMRC the top 1% earn 10.8% of the income but pay 24.2% of the tax. The top 5% earn 23.6% of the income but pay 44.3% of the tax.
Would you care to correct your statement ?
http://www.hmrc.gov.uk/statistics/tax-statistics/table2-4.pdf
Alex Marsh has effectively debunked the ‘it’s all the fault of the planning system’ argument (with a great link to speeches by Churchill when in his Liberal period) which points at land ownership as the biggest issue.
http://www.alexsarchives.org/?p=4779
The distinction between wealth and income is a fair one but of very limited relevance. If I own a large house but have insufficient income to pay a tax on it how then am I able to heat my house or maintain it? It’s a matter of priorities and in reality I probably can’t afford the house.
This is semantics. Wealth earns income. Mansion tax or land value tax can be paid by the income earned on that wealth. Whether you call them wealth taxes or income-from-wealth taxes is neither here nor there. As long as the property is being put to good use there is no more need to sell it to pay the tax than there may be to pay the interest on the mortgage.
There is no reason why tax can’t be levied on wealth. If HMRC can cope with Self-Assesment Income Tax, it could cope with Self-Assessed Wealth Tax.
Matt
I think your point of view counts more than you give yourself credit for – you have an equal voice and an equal vote.
Simon McGrath
How does 44.3% of the tax paid by the rich not amount to ‘even a minimal amount to the state’?
Liberal Eye
Sorry but you’re wrong about this at the moment. Land is available currently at historically reasonable prices, but getting planning permission is more difficult and more expensive than ever.
RIchard Church
Whether you call them wealth taxes or income from wealth taxes is very much here or there. In the second case (which is what they really are except at sale or death) then we can simply add it to income tax without huge expensive asset valuation exercises.
Paul R
You haven’t addressed the issue at all. But it would be interesting to get HMRC’s view on it if they weren’t prohibited from public comment.
The only argument I can find in favour of a mansion tax follows exactly the opposite logic to those proposing it. Several respondents in this thread, and Danny Alexander often on tele, claim that the super rich could not avoid a mansion tax by relocating their mansion abroad. In fact, globally mobile super rich people who have no commitment to the UK can do exactly that. They can sell their UK mansion and buy elsewhere.
This however may well have one good effect. It may reduce property prices which have become astronomically out of reach of the UK resident population. But the mansion tax would have to be far higher than a paltry 2% to achieve this result. So as proposed, it remains an income tax, using house value as a surrogate measure for income.
@geoff – indeed i was making the point to RC that his statement was nonsense.
@Geoff Crocker
If you going to make claims that, apart from existing stamp duty and inheritance taxes, “Otherwise it is possible to tax only income, not wealth”, the onus lies with you to prove this assertion, not on others to disprove it.
Are you really trying to suggest you would be unable to fill out a Self-Assesment Wealth Tax form if Parliament/HMRC required you to do so? Perhaps your personal affairs really are that complicated but for most people they aren’t.
Income tax applies to souces of income regardless as to whether they are earned through labour. Income from wealth (or wealth tax) is unearned, and it is entirely appropriate that it should be taxed in a different way from earned income. The best way to do so is by its source,eg wealth.
Paul R
No doubt we could all fill out an annual self assessment wealth form if that’s want you want. But the cost of this would be very high, and any tax resulting would in the main still be paid from income, so why bother?
Richard Church
As you say, unearned income is currently taxed as income, so there’s no need to go through the wealth loop.
Why do you think land is available at historically reasonable prices?
I disagree with Alex in so far as whatever the nature of land ownership, planning remains a signifcant problem, precisely because it continues to operate a “lumpy” release of land that only the largest developers (and landowners) can benefit from. But land *would* be available at “historically reasonable prices” if planning were relaxed. Nontheless that would still leave rent. Maybe much less rent, over time. But rent nonetheless.
And that seems to be the crucial thing the OP is missing, an understanding of rent. It would be better to describe LVT as taxing “rent” rather than “wealth”. The “wealth” in property is in fact accumulated economic rent, for the most part (as an accountant you’ll presumably agree that the capital, the house on that site, deteriorates and has to be depreciated over time in normal accounting practice).
And in an LVT based tax system you would be expected to cut your cloth according to your means. Absent destructive taxes on production (such as income taxes) people would have more to accumulate to ensure they could still pay their community generated rent on their property for as long as they wanted.
That said, I still believe that the mansion tax is destructive toward the end goal of LVT. One of the crucial benefits of LVT is that when applied to all it reduces the cost of all proeprty – something those struggling to meet rent or mortgage payments on outrageously overpriced properties (because of land rent and easy money inflating the value disporportionately). It is not simply a “tax” to get government income as the mansion tax is. But a way of deflating all land values to the benefit of all (but the few who have multiple homes they rent out and from whicih currently capture that publicly created rent).
But as anyone renting or paying a mortgage knows at present knows, you already pay this rent to someone, usually the previous owner or the landlord. LVT simply spreads this out and splits it into rent on the capital which goes to the capital owner and rent on the land which goes to the group that creates (and destroys on occasion – in which case the LVT falls) the value of locations, the community.
The poor widow bogey, as Churchill called it, is largely a myth – a very small problem – that will only be a problem during transition, and for which several feasible solutions, such as rolling up the tax until death or sale, have been proposed time and time again. However I’m sure I saw somewhere that research had shown that a very small percentage of people actually have the problem of a high value home with little or no income that would require them to make different payment arrangements for such a tax.
Geoff,
The introduction to the Land and Property Section of the Mirrlees Tax review The Taxation of Land and Property has the following to say:
Most taxes nowadays are levied on flows of income and of expenditure. But land and property have been taxed for centuries—certainly for longer than income—and they continue to form an important part of the tax base in
most advanced economies. There are good economic reasons for this. The supply of property, and
especially land, is not very responsive to its price, which means that it can be taxed without significantly distorting people’s behaviour. The ownership of land is also generally visible and easily established, which makes it relatively
straightforward to identify who should be paying the tax. The fact that land and property have identifiable and unchangeable geographic locations also makes them natural tax bases for the financing of local government.
But deciding exactly how to tax land and property is particularly complex, because they combine a number of characteristics that each suggest different tax treatments. Take a house. It sits on land, the value of which we might
want to tax because the land is completely fixed and the return to it is an economic rent. But the house also provides services that are consumed by the occupier—just as a fridge or a car does. So it is natural to think that the
value of this consumption should be subject to VAT. The house is also a valuable asset, whose value rises and fluctuates like those of stocks and shares. So we might see homeownership as a form of saving that should be
taxed consistently with other savings. Also important is the distinction between owner-occupied and rented property. Ideally, we would want to treat these consistently. But, at present, their tax treatments are quite different in the UK, providing a clear bias towards owner-occupation.
Business property also combines characteristics that suggest different tax treatments. We would ideally like to tax the commercial use of landconsistently with other uses, while treating the property built on it consistently with other inputs into the production process.To understand how to tax land and property, it is important to keep these
issues and themes distinct. To be clear:
• Land, whether used for business or residential property, can be taxed at an arbitrarily high rate on economic efficiency grounds.
• Business property is an input into the production process and, on efficiency grounds, should not be taxed.
• Owner-occupied housing combines the features of an investment and a consumption good, and we should consider its taxation from both these points of view.
• Rental housing is an investment good from the point of view of the owner and a consumption good from the view of the renter. Overall, there is a presumption in favour of taxing it at a similar level to owner-occupied housing.
In this chapter, we start with a discussion of the case for land value taxation and the practical difficulties that may pose. We contrast the strong case for taxing land values with the strong case against taxing business property. We go on to look at the taxation of the consumption value of housing and conclude that, in the UK context, council tax should be reformed so that it more closely resembles a genuine tax on the consumption value of housing. The asset-like properties of housing mean that it should also be brought into the savings tax regime outlined in Chapter 13. Finally, we consider stamp duty land tax, finding little to say in its defence.
It is worth noting two further issues that are important in the taxation of land and property, though we do not pursue them further.
First, taxes on land and property have strong historical ties to local taxation. This is, in part, due to the widespread view that such taxes are partly ‘benefit taxes’, a charge for the goods and services provided locally. It also reflects the immobility of property—it is clearly associated with the location. In the UK, council tax—an annual tax imperfectly related to the value of domestic property—is the main tax base for local government, though the majority of local government income comes directly from central government. A very complex system of ‘equalization’ exists, giving larger grants to those local authorities with a more limited tax base—where properties are less valuable—to try to ensure that, if all local authorities spent at the level judged appropriate by central government, they would all levy the
same tax rate on properties of a given value. We do not explore these issues further. For the most part, the question of how to tax land and property can be separated from where the power to tax is located. For example, reforms to
council tax could be accompanied by adjustments to grants that maintain the existing distribution of spending power across local governments.
Second, land and property are hugely important socially and economically. Having enough housing available to accommodate the population comfortably matters. Decisions over whether to develop land for business or
housing use contribute to the structure of the economy. The impact of the housing market on the macroeconomy is great enough both to have influenced the decision not to take the UK into the euro and to influence regular decisions over interest rate policy. Changes to the tax system aimed at increasing the availability of housing and of business land have been proposed, as have changes that, it is claimed, will reduce volatility in the housing market. We note these issues below in relevant sections, but they are not the focus of our considerations. Other policy choices, in particular over the planning regime—the desirable reform of which is well outside the scope of this review—are likely to be more important in this context.
Jock and Joe
Thanks, although I feel overwhelmed ! Jock, land prices for plots I have an interest in have fallen from a peak of around £1.3m/acre to around £700/acre today but there are signs of them moving up again. Joe, I understand the theoretical underpinning for taxing land but we come back to the need for tax to be paid from flow, ie income? Is the claim that we could tax landowners into bankruptcy and force their land onto the market thus depressing land prices?
Geoff,
I would suggest consideration of two approches:
1. Replacing higher rate and additional tax element of income tax with a form of property tax as outlined here; A mansion tax to replace higher rate tax
2. Imputed taxation of the rental benefit of owned housing as outlined here: Reducing the Tax Favoritism for Housing
It may be preferable to base taxation on Land Value only and exclude the rental value of built improvements.
In the first case, we are seeking to replace higher rate income tax with a property tax on the top 15% of land and property owners as against the top 15% of earners. The two groups may be broadly the same, but for those earning below the higher rate threshold (the grannies) there would be no property tax to pay.
In the second case, we are seeking to redistibute the tax burden more equitably and across the generations on the basis of ability to pay.
@Simon McGrath:
“According to HMRC the top 1% earn 10.8% of the income but pay 24.2% of the tax”
That is the top 1 per cent of those who declare taxable income. Quite a lot of very rich people who effectively live here in the UK for as much of the year as they feel like pay nothing at all other than top rate Council Tax on one or two dwellings.
@Geoff Crocker
Why Bother?
Because Wealth and Income do not directly correlate to each other.
A person can be very wealthy as a result of inheritance or capital gains (I..e. an IPO) which may or may not have been acquired while the person was tax resident in the UK. They could still be low income though (they are living on their wealth or have only a low paid job).
Equally well a person can be low wealth (e.g. a young person from an extremely poor background) but high income (they have just started a surprisingly succesful new business or gotten a well paid job).
If we can operate a Self Assesment Income Tax, we certainly can operate a Self Assesment Wealth Tax.
Staggering article.
Alistair
Staggering comment. What’s your point?
Joe
I’ve read your intial article. You have to hedge with lots of income reservations eg for asset rich, income poor, excluding basic tax rate payers etc so why not accept that taxes are paid out of income and therefore it’s income that is in reality being taxed?
Tony Dawson
I’m no defender of tax dodgers but the settlement for non doms is that they either pay all tax in the UK or elect to pay a £30K (I think) flat rate? They claim they pay tax elsewhere where they live. Difficult to police this one.
Paul R
But tax is still paid from income
Geoff,
the issue of land/property taxation is principally one of economic efficiency, as Mirrlees observes in his review. Land Value tax has a long and distinguished pedigree.
“Ground-rents are a still more proper subject of taxation than the rent of houses. A tax upon ground rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground.”
Adam Smith – Wealth of Nations (1776)
Landlords grow rich in their sleep without working, risking or economizing. The increase in the value of land, arising as it does from the efforts of an entire community, should belong to the community and not to the individual who might hold title.
John Stuart Mill – Political Economy (1848)
The tax upon land values is, therefore, the most just and equal of all taxes. It is the taking by the community, for the use of the community, of that value which is the creation of the community.
Henry George – Progress and Poverty (1879)
Roads are made, streets are made, railway services are improved, …water is brought from reservoirs a hundred miles off in the mountains – and all the while the landlord sits still… To not one of these improvements does the land monopolist contribute, and yet by every one of them the value of his land is sensibly enhanced.
Winston Churchill – 1909 People’s budget
Search out every problem, look into these questions thoroughly, and the more thoroughly you look into them you will find that the land is at the root of most of them. Housing, wages, food, health…
David Lloyd George – Aberdeen, 29th November 1912
If a tax were imposed equal to the annual use value of real property ex its improvement, so that it would now have no net earnings and hence no capital value of its own — progress would be orderly and its fruits would be equitably shared.
John Kenneth Galbraith – The Affluent Society (1958)
So the question is, which are the least bad taxes? In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago.
Milton Friedman – University of Chicago in 1978
Land value taxation is a “no-brainer”…It is both fair and efficient. It should be adopted.
Martin Wolf – Financial Times
The taxation of future growth in land values “to eliminate the fever of land speculation that has ended up destabilising the entire global economy”… is what Labour should have done and should commit to in future.
Polly Toynbee – 13th July 2010
The wealth produced over the centuries by the efforts of the community is reflected in land values and is therefore a proper target for taxation.
Vince Cable – In foreword to ‘The Case For A New People’s Budget’
“The underlying intellectual argument for seeking to tax economic rents retains its force.”
Mervyn King, in the standard textbook on the British tax system: Kay & King, 1990
Joe
You’ve researched some very laudable quotes. But the fact that someone however important they may be says so without explanation doesn’t establish a point. It remains the case that both from a moral and practical point of view, one can only tax the rent, not value. Several of the quotations make this distinction and seen that way I agree with them. I’ve always earned according to Ricardo’s labour theory of value myself 🙂
Geoff,
while LVT at present remains a niche concept, there is a nonetheless a wealth of published material on the basic economics of the idea, not least by the economists quoted above.
Tony Vickers of ALTER – (Action for Land Taxation and Economic Reform) . recently published a short article in Liberator magazine (page 28) arguing that implementing land value taxation would kick-start growth: Time for Lo-Tax . The main elements of the proposal by Tony are:
-Basing LVT on rental value not capital value, because property/land rents are much more stable than prices.
-Using LVT not just for local government but mainly for national taxation.
-Establishing that all land is eventually taxable, so a coherent and complete register of ownership and value can be undertaken.
-Exemption for low-value land and small sites, also a tax-free element for owner-occupiers, linked to local land values, to encourage spread of ownership.
-Make the ‘tax shift’ revenue neutral by law, thereby requiring offsetting reductions in others taxes for every budgeted increase in LVT.
-Use of ‘precepting’ (as happens now with multi-tier local government) to enable the simplicity of a single national tax administration to be combined with full autonomy for every elected council (and devolved governments) in rate setting: local billing authorities would be abolished.
-Treating owner-occupiers as having notional rent paid to themselves (what they would earn if their home/business-site was rented), so that LVT can be subsumed within the income and corporation tax systems.
-Allowing LVT liability of owner-occupier pensioners and other claimants to be ‘rolled up’ and only paid (with interest) upon death, sale or re-mortgage of property.
Thanks to @liberaleye for the citation. Without going too far off topic, I’d just clarify that my point was not that there are no problems with the planning system, but that the Government’s almost exclusive focus on planning being the root of all evil is unhelpful. It ignores the behaviour of the house building industy (which at the moment is posting triple digit percentage increases in profitability but not on the back of actually building many houses) and the way the land market functions. A solution to the UK’s long standing housing supply problem has to be holistic and include consideration of all the relevant components.
My view on the taxation of wealth is largely in line with Joe Bourke.
Also, Prateek made an important point about concentrations of wealth at the start of this thread. The last thirty years has seen a significant redistribution of resources towards the (super) wealthy. This concentration of economic power confers to their interests an influence over the political process that is unhealthy for a liberal democracy. The increased entanglement of economic and political power was well documented by Democratic Audit earlier this year. We move ever further from the pluralist ideal. Whilst changing the structure of income tax to be more progressive would be one way to seek to slow (but not reverse) this process, these political-economic entanglements are precisely the reason why we’re not going to see these sorts of policy changes.
Also, you have to be clear what you’re trying to achieve with wealth taxes. Some of the reasons why taxing property/housing wealth is argued to be desirable are not primarily to do with raising revenue they are to do with stabilising the housing market. If they worked then revenue raised would be lowered because house prices would not be so volatile. This would be of substantial social benefit and improve intergenerational equity, but it’s not a fiscal benefit to the government. That adds a further layer of complexity to the complexity identified by Mirrlees.
Those taxes would surely have to be paid out of current income or through the sort of deferral mechanisms already referred to. And if someone either couldn’t afford it or felt they didn’t value housing consumption sufficiently to justify the holding costs then they’d move somewhere smaller/cheaper. That would lead to a different utilisation of the housing stock, which, if it means those who value the consumption of the good most highly are making use of it, would conventionally be seen as better.
Staggering becaused the forced sale argument is fallacious. An asset rich but cash poor mansion owner occupier may be forced to downsize for any number of reasons, ranging from not being abke to afford a heating bill for their mansion to not being able to afford to replace a leaky roof. Why would these reasons be moral and fair but a sale to pay a wealth tax unfair? A lot of these people would not be enduring double taxation but merely single taxation, having accumulated wealth by for example, flipping their primary residence to dodge capital gains.
Alex Marsh and Alistair present a very different conceptualisation of wealth tax to that advanced by the Lib Dem leadership. To Nick Clegg, Vince Cable, and Danny Alexander, it’s about the wealthy contributing more to balance the nation’s deficit. In this guise it’s a hidden income tax, since they don’t seem to be trying to redistribute assets.
But to Alex Marsh and Alistair, it’s about redistributing assets. Alex Marsh admits that such wealth taxes would have to be paid out of income. They are both perfectly comfortable with the outcome of forced sales of houses as a result of a mansion tax. To get there they deploy various justifications, from perfecting the housing market to assuming that those who own more expensive houses only do so by nefarious means. To them it appears to be impossible to be virtuous and to own any substantial asset. Their state would leave no-one unexamined. Whether a family home had been bought from post tax income with no knowledge of future wealth tax regimes, or had been inherited post inheritance tax, their system would show no mercy. I don’t own a mansion, But I do not share their careless regaling of those who do. We have been there before. It’s not a liberal society.
Personally, I favour income tax over land value tax. Its hard to see how you can keep taxing people on the value of their land if their income doesn’t cover it. What happens if the property and land value rises in an area because for various reasons that area becomes more desirable. Wealth Tax I have less of a problem with. That fact is there are families who have been sitting on unearned inherited assets for hundreds of years and there’s no reason that just because some distant ancestor bopped the right person over the head around the time of the Norman Conquest that this accumulated wealth should continue to remain in the same family in perpetuity. To me the answer to this is increased inheritance taxation
Fair points Geoff,
The rationale for LVT and tax reform generally should be economic efficiency, not a quick fix to balance the nation’s deficit or a populous measure for bashing the rich.
Capitalism like democracy has its flaws but is better than any of the alternatives that have been tried. Inherent in capitalism is a level of inequality and indeed there is nothing to fear in people prospering from their own efforts or even a fair dose of good fortune in being the beneficiary of an inheritance or being born in the right place at the right time.
However, to preserve Capitalism and economic order we do need to guard against extreme ineinequalities of wealth and income. As a society, we have to provide a means by which all can earn a living and support themselves. Many feudal societies have gone through a process of Land reform and redistribution to peasant farmers as an attempt at achieving this. In our modern developed society giving everyone a few acres of land to farm would not do much for us. Recognising Land as a common public good that can generate tax revenues to contribute towards the shared costs of defence, law and order, health, education, welfare and local services has the same implicit moral basis as Land reform.
Personally, I think the prospect of replacing all or most taxes with LVT is somewhat Utopian and have never seen a worked through plan that could deliver that equitably. Economically, I have longed been persuaded of the Labour Theories of Value of Smith, Ricardo and that great admirer of capitalism Karl Marx. I therefore see value added as the primary basis for taxation in the modern state. So, I would agree with your contention that we should principally rely on the classic mix of income, sales, inheritance, corporation etc taxes
There is nonetheless, in my opinion, a very good argument to be made for capturing economic rents in the tax base, not only from Land but in other common goods such as the broadcasting spectrum and airport landing slots. Not a wealth tax, as an individuals wealth should not be the basis for taxation, but a Land Value Tax as proposed by Tony Vickers in his Liberator article.
So, I would agree with your contention
Glenn
We agree that wealth taxes default to income taxes. I also share your distaste for an unequal society where disadvantage and massively unequal opportunity start at birth, where the aristocratic rich have the land, the education, a grip on the offices of state, the judiciary etc. And there’s no doubt that UK has been, and in many ways continues to be, such a society. So I agree with you on the need for redistribution, certainly in terms of distributive justice, but also pragmatically, since the children of the aristocracy are by no means the most talented contributors to society. Hence inheritance tax.
However the picture changes within one individual’s lifetime. It’s now possible for someone to start from scratch with no inheritance, take great risks, acquire extensive skill, create initiatives which employ many others, and thereby generate personal wealth. For such a person the wealth is post 40% income tax. For the net amount to then be taxed again at 40% inheritance tax when they die means that they are allowed discretion over only 36% of the value they have created. In this case there may be an argument for a higher band of wealth created in one lifetime to be free of inheritance tax or taxed at a lower rate in the way that CGT is now at 10% for the first £5m any one individual makes in their own lifetime? (Incidentally the Lib Dem leadership is always telling us that they managed to get CGT increased to 28% whereas in fact it was reduced to 10% for this first £5m per person lifetime).
Joe
Surely any value has to be, or be readily capable of becoming, monetised in order to tax it?
And if the process of monetisation proved to be harsh, a tolerant society would surely look for more humane measures, including if necessary compromising on pure economic rent theory ?
What’s so difficult about exempting private family homes with no land except a garden – one per “household”, held in no more than two personal names? Slap a heavier tax on second homes, homes with associated land that could produce an income, homes owned by 3 or 4 legal owners and all houses owned by companies, charities or trust corporations.
Geoff Crocker
But there is also the question of the practicability of wealth and mansion taxes. The only two points at which wealth can be taxed is at sale, or at the death of the owner. This already happens through stamp duty and inheritance tax. Otherwise it is possible to tax only income, not wealth. Wealth and mansion tax proposals in fact rely on the assumption that the value of someone’s house or asset is a surrogate measure of their income.
No, it is based on the idea that a society in which wealth differences are maintained forever over the generations is one which will become increasingly divided and reduce the liberties of those who have not inherited wealth. We are already seeing this with the decline in home ownership and those who for whatever reason have been shut out of inheritance have no chance of ever owning their own home – and their children, grandchildren, great-grandchildren for ever will be similarly shut out.
Wealth tax can be paid by rolling it up and making it payable upon death. This is fairer than inheritance tax – the issue of someone who dies leaving a large property to someone who dies fairly shortly afterwards is a fair point to criticise inheritance tax. Wealth tax also ends the way inheritance tax can be avoided by giving the property before death, and the various tax avoidance schemes that work around that.
It would seem sensible that there is a needs-based tax allowance on any tax on housing, so that it would come in only on occupation above what might be regarded as reasonable family need. In that way, if the heirs do have a direct need for the housing because they live in it they will not be adversely affected.
I appreciate that for sentimental reasons proposals like this are hard to push forward. We seem happy to load young people with nominal loans for the payment of higher education, or at least we have done this against their protests, but not so happy about this nominal building up of debt by older people. However, as I wrote above, the consequences of not doing it are dire.
Matthew Huntbach
You start off by saying no and then proceed to agree with me!
I think however that your proposal to roll up annual wealth tax to replace inheritance tax is more complex adminstratively than a straightforward inheritance tax. Don’t you want parents to be able to give anything tax free to their children at any point in their lives? This argues against your other very valid point that the younger generation are relatively disadvantaged compared to their parents and that some intergenerational transfer would be very welcome?
Geoff, you misrepresent me. I have absolutely no issue with people owning mansions or multiple properties. I just would prefer an annual tax on residential property above a certain value instead of stamp duty and largely in place of inheritance tax, and it should be paid by the owner, whether that be a trust a company or an individual. I might even make one residential property per person exempt from inheritance tax. You are against forced sales but there are many forced sales under the current system, eg when a child looks after their ageing parent but has to move. The reality is that wealthy people avoid most of the current taxes using Trusts and other mechanisms. The current tax regime is not fit for purpose.
Geoff.
Thanks for the reply, I broadly agree with not taxing lifetime earnings taxed twice at a very high rate. To me the problem is that you need some kind of mechanism to stop wealth being endlessly being passed down from generation to generation, otherwise you end up replacing one kind of aristocracy with another. Maybe a form of death duty that increases the further away you get from the original earner?
Alistair
I admit to not understanding your point fully, and maybe to inadvertently misrepresenting you, firstly because you only said my post was a ‘staggering article’ which was very difficult to interpret, and secondly because in your later post you said my argument about forced sale was fallacious and then proceeded to accept the possibility of forced sale. I am not against forced sale per se and accept that downsizing is often necessary or indeed desirable at certain points in life. I am against a state policy or state tax which casually and carelessly forces home sale. I think this is inhumane whoever it’s directed at. I am very uneasy at the nature of such a state. I’ve worked in Russia for 20 years of my life and seen it (ie an uncaring state) in operation.
You still don’t respond to my point that the annual wealth tax you advocate would have to be paid from income (if not from forced sale or savings). It’s in effect an income tax so why not call a spade a spade?
You also assert that the rich can circumvent tax – this is a popular myth and must have HMRC laughing – they are not the pushover many seem to think but are a ferocious, cynical and unbelieving bunch (and that’s to the nice guys).
Land value tax is OK, but is in effect a tax on actual or notional income from capital rather than a redistributive tax on capital. It does not redistribute the ownership of capital.
“The only two points at which wealth can be taxed is at sale, or at the death of the owner. This already happens through stamp duty and inheritance tax.”
The trouble is that the purpose of Inheritance Tax is currently vitiated by unlimited exemptions for early enough exemptions for lifetime capital gifts and for agricultural land, unquoted businesses, majority shareholdings in quoted companies (think Philip Green and the capital value of a £300 million dividend!) and Alternative Investment Market shares. As a result, some inherit billions while others inherit nothing, and one third of all land is still owned by the families who seized it at the time of the Norman Conquest.
It is time to replace Dynastic Capitalism with Democratic Capitalism, by introducing an Asset Welfare State in addition to the Income Welfare State. The former would reduce to some extent the need for and cost of the latter
The point of taxes on capital ought to be to redistribute capital ownership. This can only be done at the point of transfer from each generation to the next.
What a long way the Liberal Democrats have moved away from the Preamble to the Constitution of the Liberal Party, which called, as it still does, for liberty, PROPERTY and security for all.
Guided by this, the Liberal Party has adopted UK Universal Inheritance, financed by reform of Inheritance Tax including abolition of unlimited exemptions as above, reduction of the rate of tax for giving and bequeathing to 10% and making it deductible from a new progressive tax from 10% upwards on lifetime receipt of unearned gifted and inherited capital, including the Universal Inheritance amount.
All UK-born UK citizens would receive a minimum capital sum at 25. UK-born because of it being an inheritance from the past, and because you have to draw the line somewhere. This is the way to gradually bring about a property owning democracy in each new generation. It could be £1,000 for all UK-born 25 year old UK citizens in the first year and be increased annually by the same amount for UK-born 25 year olds for ten years or more. 10% of the average wealth of every adult and child in the country is or the order of £12,500, according to the Office of National Statistics.
UK Universal Inheritance has been Liberal Party policy since 2005. Clearly not many Liberal Democrats are thinking along these lines. And even if they were, I am afraid that the Social Democratic fanatically pro-EU influence would disapprove of discrimination in favour of UK born UK citizens!
Glenn
We definitely agree on the principle. Re the mechanism, I’m not sure it would prove possible to disentangle elements of wealth passed down through generations, or more generally beneficiaries, from other wealth created later, in the way your proposed mechanism would require? Perhaps another idea would be to keep housing inheritance tax at current threshholds (or even lower the threshold?) whilst increasing the threshold on lifetime gained wealth? This may overlap with the lifetime £5m CGT threshold I mentioned.
LVT is not really a tax anyway, and certainly not a wealth tax.
I define a tax as a levy on something you own. As the value from a location is a natural resource not generated by a landowner, it cannot be properly defined as private property.
LVT is better described as a location benefit fee. A fee being a charge for the use of something you don’t or cannot own.
The benefit obtained from a property sited on a valuable location is a consumption. A consumption of a natural resource. It is as ludicrous to describe this as a wealth tax as it would be to describe the auctioning of 3G bandwidth as a wealth tax, or the levy imposed on North Sea oil companies for excess profits from the intrinsic value of oil as a wealth tax.
Property owners are currently not paying the full ammount for the consumption of location values. Yet these values are not made or sustained by property owners. They are by Government expenditure and wider economic activity.
By not paying for this, property owners are in effect helping themselves to the product of some else’s labour without compensation ie theft or slavery.
Who are the professional thieves? the parasites, the slavers? Banks, landlords and property companies. They are the only ones who stand to lose from the collection of these resource rents/incomes aka unearned income. Everyone else who goes to work and pays tax gains hugely.
Geoff
You say
“If one person has £2m in the bank and another buys a £2m house, why should only the second be taxed? ”
If someone has £2m in the bank earning 2.5% they will earn £50,000 interest on which they will pay £10,000 income tax p.a. And hopefully the bank will do something useful with some or all of the £2m.
If they buy a £2m house they will only pay around £2,000 in council tax p.a. and the money tied up will not be doing anything useful.
Also, if the value of the home increases that will be nothing to do with any work on their part.
@ Dane Clouston
LVT is not a tax on Capital because returns from Land ownership are not made from Capital investment. Yes you my have bought a licence to “mine” land values in the same way you might buy a title to a gold mine. However, unlike a gold mine, any return above capital investment and a reasonable profit ie monopoly income, is not collected by the Government.
Incomes from capital investments need to be sustained by more capital investment. Returns from monopoly incomes don’t. Hence income from Land is not a return from Capital. At least not the owners capital anyway 😉
I’m not at all clear why we would want to tax anyone’s wealth, capital, inheritance or incomes? They have been EARNED. That’s a good thing isn’t it?
Why not just collect unearned incomes? Unearned incomes syphon money from the productive economy. Not collecting it is actually a bad thing in itself ie a deadweight cost.
Government could fund itself entirely from unearned incomes. This would be a very good thing, wouldn’t we all agree?
So why on earth are we discussing wealth taxes etc?
@Joe Bourke
Exemptions are a very bad idea. Poor Widows in Mansions have made many times the original price of their property in unearned capital gains. Over 1000% in some cases.
Now if they don’t have the revenue stream to pay for it, the payment could be deferred until a change of ownership. IH, SDLT, CT etc would have been abolished and other taxes reduced. That should sweeten the pill, if they decide not to downsize (which would be a good thing for society in itself), or they can downsize and cash in a considerable unearned capital gain.
What about poor widows with an enormous collection of rare ferraris? If they can no longer afford to maintain or put petrol in them, should they also receive a tax payer subsidy? If not why?
Stephen
True but you could expand all sorts of examples downstream. The houseowner could let for about 4% and gain £80,000 rent and pay £32,000 tax.Etc. My point is really that why should someone who has chosen to buy housing be taxed differentially to someone with the same income who has spent their money in some other way? We come back to income tax rather than mansion tax being the fairer tax.
Dane Clouston re ‘The point of taxes on capital ought to be to redistribute capital ownership. This can only be done at the point of transfer from each generation to the next.’
I agree that intergenerational transfer should see some levelling process and if the current taxes aren’t achieving this then they should be modified so that they do. A mansion tax as currently proposed however will not achieve this. I do still repeat my view that wealth one person has created in their own lifetime should be treated differently than wealth which they themselves have inherited. And I certainly like the policy for a universal credit of the sort you describe. Let’s do it !
Benj and Joe
The discussion on LVT is fascinating and deserves its own Op-ed where the idea is set out in full? I’d be happy to contribute to a debate on it.
@Geoff – You ask why someone who has invested their incomein property should pay more than someone who has just spent it. The whole basis of the tax system is, inevitably, punishing the responsible. You could equally argue why someone irresponsible like me, who is wasting their computer science education by just teaching English should pay less income tax than someone actually working in IT as I could if I wanted.
Geoff Crocker: “any such land, wealth or property tax, will in fact be paid from income”
Sorry, nope, we’ve done that one before. There is earned income (from jobs or productive investment) and unearnedd income (mainly location rents). Having to pay rent out of ‘earned income’ is very very bad. Paying it out of ‘unearned income’ does no harm to anybody.
1. Rents and mortgage repayments are made out of (taxed) income anyway. From the recipient’s point of view, a large part of that (the location element) is unearned – and it is ultimately the RECIPIENTS who will bear the tax, not the payer.
2. Every £1 LVT (or council tax or Business Rates or whatever) reduces the purchase price of the house by about £20. So what you all future generations lose on LVT they gain in mortgage repayments.
3. Local rents (and hence house prices) are a function of local average wages. So it the wages for an aveage type job are higher in some areas, rents and house prices are also higher by the same amount. That extra element that a bus driver, receptionist etc can earn in London rather than in Newcastle is unearned, and that unearned bit is currently being snaffled by landlords (or vendors).
4. The logical conclusion of Georgism is the Citizen’s Dividend instead of silly current welfare system. As a question of basic maths, the median size household in a median size home, under a full-on LVT only system would have an LVT bill of around £10,000 a year and total Citizen’s Dividend of £10,000 a year. So there’s a tax to be paid and everybody gets his little share of unearned income with which to pay the bill.
5. For sure, some people will pay far more LVT than they get in Citizen’s Dividend. But so what? unlike income tax, where the payer gets nothing in return, if you are willing and able to pay lots of LVT you get something very nice in return – namely a nice house to live in!! What’s not to like?
Mark Wadsworth
‘Sorry, nope, we’ve done that one before’ sounds very superior. I’d like to see you set out your theory of capital, value and rent more completely and show how these values can be monetised. Your first point is not in dispute and owners of capital pay income tax on this unearned income (although they may have bought the asset from earned income). Your second point is interesting – can you prove it? Your third point is exaggerated – the common complaint is that wage differentials are not sufficient to meet location rent differentials. Your 4th point needs more exposition…
“The only two points at which wealth can be taxed is at sale, or at the death of the owner. ”
Well – insofar as this is true – doesn’t it follow that we should base our wealth taxation policy on inheritance tax?
We need a more effective tax on wealth to stem the rise in social inequality. We also need it because we are struggling to bring in enough revenue any other way. The tax dodgers, and those who would argue that rich people should be left alone because they will only dodge more tax if they are pushed too hard, are winning.
The one time when you can be fairly sure that taxation of wealth is not going to cause too much temporary pain, is when the wealth that is taken by the taxman is wealth that has not yet been passed over to its new owner. In other words, when it’s the estate of someone who has just died, and the tax merely reduces the inheritors’ windfall gains. So the taxman can levy substantial sums, without agonised cries of pain (whether real or faked) from those paying.
With any other form of wealth tax, including the mansion tax, the Tory press will have a field day hyping up the hardship caused, widows being forced to sell their mansions and sleep rough, etcetera, the usual nonsensical but effective propaganda. So with any other form of wealth tax, the taxman can only afford to bite little and often. That means multiple expensive administrative valuation and taxation exercises every time he makes a little bite. That means most of the tax income swallowed up in tax gathering costs.
Don’t lose the opportunity to tax wealth. But do it in a practical way that works!
Benj,
“Exemptions are a very bad idea. Poor Widows in Mansions have made many times the original price of their property in unearned capital gains. Over 1000% in some cases. ”
This is where LVT purists get over enthusiastic. The average home (flats and houses) price in the UK according to the Land Registry is £161,000 (i.e. buildings and Land). Just taking the top 15% or more of Landowners into the LVT tax net is going to bring in something in the order of 4 to 5 million homeowners in London and the South East as well as the more affluent suburbs of the UK’s major towns and cities. While the top 15% by value are mostly those that are currently higher rate taxpayers and non-doms in Central London, only a very few are living in what might be described as mansions.
Once you reach retirement age, particularly if you are living on a modest income, you may wish to downsize from a family size property to economise on costs. Many will however need to consider what is fast becoming the norm – Long term care in their latter years. Private nursing home care for the elderly (ofter widows or widowers, sometimes both together) is currently costing an average of £1000 per week in the South-East. Fees at that level quickly extinguishes the assets of most homeoners except the very affluent with assets and income sufficient to meet this need. Is it really sensible and practical to add the burden of deferred Land Value Taxes to what for more and more of our elederly citizens is the only asset they have. Is it not prefarable to leave assets available to fund Longterm care (instead of relying on an increasingly reluctant state) and with luck leave enough to contribute towards a deposit on a home to their grandchikdren?
LVT has a lot of potential benefits, but is only practical above a tax free threshold for homeowners. In my view, that threshold should include both an asset exemption based on capitalised rental value and an income exemption for UK resident taxpayers, set at the current higher rate tax threshold. This mirrors the system currently in place for state financial assistance with Long tern care costs, albeit social care limits are set at very low levels.
If we don’t break up big estates to redistribute the land, and by taxing acquire back for society the pure rent element that has arisen on large holdings from economic development, then is it not true that landlords will become the ultimate beneficiaries of all economic progress made b y others? I don’t hear the neo-liberal marketeers complaining much when poor families are put on the streets through the operation of the financial system.
I cant debate with someone who claims that it is a myth that the rich circumvent taxes. Are tax lawyers mythical in this parallel universe? Do trusts not exist? Offshore accounts? Tax havens? I guess you have a map at home with many holes where the likes of Switzerland and the Caymans should be.
Absolutely right Alistair.
I also do not understand why the suggestion that high-value properties cannot be taxed “because tax is paid out of income-flows” is produced with such an air of apparent aplomb. Schedule A tax was levied on the notional income of owner-occupiers from their property, this notional income simply being added on top of the income covered by the other schedules.. Provided that the threshold is raised high enough to lift it clear of the ordinary householder (as indeed should be done for inheritance tax, and its rate greatly increased) there seems to be no problem. If however neo-liberal economist we seem to be dealing with objects, we could always take the EU Banking view; and make the liability payable by handing over part or all of the property in question, as is imposed I think on the real assets of the Greek nation by demanding mineral resources, islands and the like, , if our objectors prefer that method It at least avoids taxing property income. and would have an egalitarian effect domestically (unlike the regressive effect on Greece as between nations of international EU seizures).
Mark Wadsworth wants a Georgist land tax regime. David Allen wants rigorous inheritance tax. Joe Bourke points out that we need to leave the elderly with sufficient resources to pay for care. Alistair doesn’t want to allow claims that not all rich people circumvent tax, and Michael Parsons objects to my perceived ‘aplomb’ in pointing out that tax is almost always paid from income.
Henry George’s claim that all value could be imputed to land and therefore that only land value tax is needed was massively disputed by Karl Marx who pointed out that value is imputed elsewhere, ie to labour and to capital. Indeed value has to be imputed where it is created and taxed there. Value also derives from technology, from IPR, from market power. It’s possible today to create huge value for example via the Internet with almost no land. So I agree with Marx on this one. Furthermore it seems impossible to me to implement Georgist proposals onto an economy that it organised on different principles. Georgism needs a clean sheet?
I largely agree with David Allen and in fact with Michael Parsons that large estates should be redistributed intergenerationally but I still suggest that lifetime wealth creation should be treated differently. The economy needs entrepreneurial effort, unless people want to return to moribund state industry.
Joe is right about the need to ensure the elderly have resources to meet their need for future or current care.
My response to Alistair who doesn’t want to debate points he doesn’t agree with is that I challenge the generality of his claim. Many many rich people pay their full tax without any attempt at evasion. I don’t accept slagging off of whole groups in society. Clearly some do avoid or evade tax, and HMRC have become ever more strenuous and vigilant in closing these schemes down.
I’m touched by the ‘aplomb’ Michael Parsons ascribes to me, but it remains the case that almost all taxes are paid from income streams. Many of the arguments made for wealth taxes specifically presume that owners have the income to pay. So I repeat my view that wealth should be taxed at sale or death and otherwise we should call a spade a spade and tax income (alongside the other range of current taxes)
I’ll give you an example of the hidden dangers of land value tax.
I have an elderly relative who brought a small rural property in 1969. He;s a respected academic and ploughed a lot of his earnings into the property to turn it into his home. It generates no income. It isn’t the den of a rapacious landlord or anything else, It”s just a very nice converted farm, with a couple of acres of land in a scenic area.’ It’s now valued at close to £2000,,0000. He has a good pension and still earns money from some academic work.Someone please explain to me why someone who has contributed and still contributes to the greater good should be taxed out of his home.?
Sure there are people sat on vast amounts of unearned wealth and redistribution is a fine moral principle. But not everyone living in a nice house with a bit of land is in the same category. You do not right historic wrongs by creating new ones. The danger with the Land Value and mansion tax model is that it will not hit the mega rich. but will cause problems for people who have, over a lifetime of work, simply made a nice comfortable life for themselves. To me the answer can only be through income and inheritance..
Geoff:
“I’d like to see you set out your theory of capital, value and rent more completely and show how these values can be monetised.”
“Your first point is not in dispute and owners of capital pay income tax on this unearned income (although they may have bought the asset from earned income).”
Earned is earned. There is no need to draw a big distinction between ‘labour’ and ‘capital’. Machines are made using labour, machines require labour to operate and maintain, machines depreciate and have to be replaced. It is up to an individual whether it is more efficient for him to build something by hand or to build a machine which will build it for him.
And then there is unearned (from the point of view of the recipient). If one town has no restrictions on the number of taxi driver permits it hands out, then the market will find the correct fare/earnings for taxi drivers. That is earned income.
If the number of permits is limited to below this, then there will be fewer taxi drivers (obviously) and so fares/wages for taxi drivers will be higher. That extra income is unearned, and they guard it jealously. And they monetise that extra unearned income by selling permits in the grey market.
That permit is more or less the same as land. A small group wins and a larger group loses. there are deadweight costs and from the point of view of the paying passenger, the permit system acts the same as VAT, but with the VAT being privately collected.
” Your second point is interesting – can you prove it?”
Yes. See this article esp. bullet point 3.
http://markwadsworth.blogspot.co.uk/2012/08/earnings-property-taxes-house-prices.html
“Your third point is exaggerated – the common complaint is that wage differentials are not sufficient to meet location rent differentials.”
It is not exaggerated. Common sense tells us this, and it is backed up in real life.
See e.g. previous article or these relating to the UK
http://markwadsworth.blogspot.co.uk/2011/10/estate-agents-surprised-that-age-old.html
http://markwadsworth.blogspot.co.uk/2012/10/actual-rental-growth-verses-sic-regular.html
“Your 4th point needs more exposition…”
The best argument for LVT is that location rents are generated by society as a whole, be that the state of the economy or local amenities. So they certainly do not belong to the landowner, they belong to society as a whole. Now, we know that not everybody contributes equally, but a good starting point is to assume that they do and dish it out as a Citizen’s Income.
In fact, replacing the current welfare system with all the means testing and high marginal rates and pitfalls and traps with a Citizen’s Income is a good idea in and of itself. The question is then – is it better to fund this out of taxes on people’s income or out of taxes on the rental value of land? I’m sort of against income tax on earned income (and all the stealth taxes on income like NIC and VAT) on a moral level, and on a practical level it has huge deadweight costs.
Geoff is right about the need to base taxation around value creation and notes the observations of Karl Marx on Labour value theory, that remain as valid today as they were in his time.
The factors of production, however, include Land and well as human resouces and Captal created by labour in the form of buildings, plant, machinery, technology, know how and intellectual property.
Land, or more specifically locations, has specific characterist that differentiate it from Labour and mobile capital. It’s scarcity lends itself to monoply by a rentier class that allows surplus value created in the economy to be accumulated by Landowners and providers of mortgage finance. It’s price or rental value is not determined by costs of production but by the economic surplus created by the primary factor of production – namely human capital.
Mark Wadsworth blog includes some excellent examples of has this process works in practice and his argument that LVT coud serve as a sound basis for a Citizen’s income is shared by many, including myself.
If charts and statistical correalations are not your cup of tea and you can spare 35 mins, you might watch this excellent Australian documentary Real Estate 4 Ransom
@ Joe,
The asset rich, income poor. Why are they? They have a valuable asset because as productivity in the economy rises, this crystallises as higher house prices not disposable income. That’s why these huge capital gains are unearned.
They are income poor because they have had a lifetime of paying 80% of their incomes in taxes, and 25 years of being saddled with a back breaking mortgage. So what they gain on the swings they’ve more than lost on the roundabouts of tax.
Under LVT they would still have a valuable asset, although on average 65% less than current values. However, they would have a working life of paying no taxes on income, VAT etc and a reduced mortgage by 65%
In other words, they will still have a nest egg in terms of their property, but would have had far more disposable income in order to save for their retirement.
They can stay in the same property, pay their LVT and still be better off. Or they can downsize and be much better off.
The point being, only banks, landlords, property companies and those paid to administer our tax system lose. Good, they are parasites.
Everyone else is necessarily better off. Even poor widows in mansions. If they don’t pay for their care who does? A poor widow in a council house?
Mark Wadsworth
I read your article on property tax and property value but your study of US incomes, rents and property prices in no way justifies your assertion that in the UK ‘Every £1 LVT (or council tax or Business Rates or whatever) reduces the purchase price of the house by about £20. ‘ Furthermore your article introduces a wide range of assumptions which you don’t bother to justify and infers causal relationships from lines of fit to scatter diagrams without reporting either coefficients or correlations. Where you do report an R squared, it’s -0.51 but deemed good enough for your argument. I suggest you get your work peer reviewed.
benj.
the argument for LVT is based on ecnomic efficiency. I see LVT as an appropriate element of a wide-ranging program of tax and benefit reform. The purpose, from my perspective, should be to capture the benefit of ‘economic rents’ within the tax base.
As a illustration condider the following:
UK GDP – £1.5 trillion . The UK’s GDP makeup is comprised of agriculture (1%), Industries (22%) and services (77% ). Services include Finance and banking, hospitality and retail. With more than 28 million tourist arrivals the tourism industry is worth £80 billion annually.
UK Public Spending – £677 billion . Pensions (20%), Health (19%), Welfare (17%), Education (14%), Other (29%)
UK Property Values – Residential £4.2 trillion, Commercial £300 billion. If an assumption is made that 50% of UK property value is attributable to the capitalised rental value of Land than the Land tax base is £2.25 trillion. To replace all current taxes with LVT and meet the public spending requirements with LVT alone would require a tax rate of 30%. of the base, across the board on all Landowners.
Now consider the average homeowner occupying freehold Land (exclusive of building value) of say – £100,000. They would need to be assessed taxation of £30,000 per yeari.e. far excess of the economic rents arising from their landholding. It is impratical for the simple reason that GDP or national income does not derive solely from the use or consumption of Land, but rather from a combination of the factors of production.
As Mirrlees noted “deciding exactly how to tax land and property is particularly complex, because they combine a number of characteristics that each suggest different tax treatments. Take a house. It sits on land, the value of which we might want to tax because the land is completely fixed and the return to it is an economic rent. But the house also provides services that are consumed by the occupier—just as a fridge or a car does. So it is natural to think that the
value of this consumption should be subject to VAT. The house is also a valuable asset, whose value rises and fluctuates like those of stocks and shares. So we might see homeownership as a form of saving that should be
taxed consistently with other savings. Also important is the distinction between owner-occupied and rented property. Ideally, we would want to treat these consistently. But, at present, their tax treatments are quite different in the UK, providing a clear bias towards owner-occupation.”
LVT on economic rents can be collected by imputed taxation of land rental values only a(t income tax rates), but it cannot wholly replace the primary source of taxation i.e, the generators of national income or GDP. This is why I believe it is best suited as a replacement for higher rate tax on incomes above the threshold and not as a general basis for taxation. This approach avoids the problem with asset rich, income poor homeowners and largely leaves owner-occupied housing assets as a form of saving for old age.
The annual flow of Citizens Income in the essential Income Welfare State is either enough to live on, year by year, or it is not. Problems either way. Either it encourages idleness or it needs supplementing. Financed by taxes such as LVT or a Mansion Tax on actual or notional income from capital including land, as well as by existing taxes on the flows of income and expenditure it will never bring about a much needed redistribution of the ownership of capital. The time to do that is at the point of transfer from each geneeration to the next.
The once-a-lifetime stock of Citizens Inheritance – a UK Universal Inheritance for all 25 year old UK-born UK citizens – in an Asset Welfare State supplementing the Income Welfare State, will never be enough to encourage idleness. But, financed by taxation on the stock of truly unearned gifted and inherited capital, it will bring about a much needed redistribution of the ownership of the stock of capital and genuinely greater equality of opportunity in each new generation. Those whose larger, often vast, gifted or inherited fortunes are taxed in order to provide inheritance for all will be less likely to be idle than before. For others, there will be less alienation, financial and social exclusion and young adult and parent poverty and more entrepreneurial activity and home ownership and opportunity generally.
The conservative political ideology of quasi-feudal unfettered Dynastic Capitalism needs replacing by a liberal political ideology of Democratic Capitalism and a truly property owning democracy. Dare I say Liberal Democratic Capitalism? Well, liberal Democratic Capitalism, anyway! But it will have to be in one UK country, not in one EU country. Let other countries follow with their own national universal inheritance schemes, as they followed the UK lead with privatisation of nationalised industries, for example.
@ Joe
Aside from the fact the figures you quote seem a little on the low side ( a google search puts commercial property at 717bn http://www.bpf.org.uk/en/files/reita_files/property_data/BPF_Property_Data_booklet_2012_v8_-_11790.pdf ) It should be remembered that rental values are depressed by taxes on productive activities. If these were eliminated you expect to see these rise substantially, perhaps double, even more on commercial premises because business has higher burdens.
So, given that “sin taxes” were to be kept, I see little problem LVT covering total uk Government expenditure. Especially so when you bear in mind a lower welfare bill (no taxes on productive activities = lower unemployment) as well as the expansion in GDP associated with the elimination of three sets of deadweight costs.
These being 1. Taxes on productive activities 2. Elimination of compliance costs. HMRC, payroll, tax accountants, lawyers etc. 3. Cost on production of by people making a living on unearned incomes, owner occupier businesses having an unfair competitive advantage.
I don’t have a precise figure for the above total, but one can imagine it to be substantial, in the order of many hundreds of billions per year.
No matter what the figures, all one has to do is apply some logic to situation. As I stated above, if unearned income enjoyed by the parasitic behaviour of landlords, banks, property companies and administrators where redirected back into the pockets of people and business, how could anyone be anything but better off?
As to your point about people using their property assets to pay for their care, I say do the majority of those assets really belong to home owners anyway? What about pensioners who have worked and rented all their lives?
benj,
the purpose of LVT is to capture economic rents arising from unearned increments in the value of land attributable to community investment in infrastructure.
The concept of economic rents should not be confused with commercial or contract rents derived from improvements to property. Undeveloped or uncultivated land has little value and will generally only be developed when community investment in thecsurrounding area makes it profitable to do so.
Contract rents should not be affected by LVT. The LVT is borne by the Landowner and not the tenant. If commercial rents were infact to increase as a consequence of reductions in taxes on Labour and Capital, then, ceteras paribus, wages could be expected to reduce and/or prices to increase to compensate .
It is completely unrealistic in my view to expect to replace all taxes, with the exception of excise duites and levies, with LVT and would in fact be self-defeating to the rational for LVT of economic efficiency in the form of the capture of economic rents for the common good.
In advocating tax reforms, it is not enoough that one can ‘imagine it to be substantial’. There needs to be a logical basis that is easily understandable by a sceptical public.
It is not really helpful to reduce a complex argument to “{if} unearned income enjoyed by the parasitic behaviour of landlords, banks, property companies and administrators were redirected back into the pockets of people and business, how could anyone be anything but better off?
As to the question – do the majority of property assets used to pay for care belong to home owners anyway? The answer has to be unequivocally, Yes. The right to quiet enjoyment of individual property is the foundation of a free and democratic society bound together by the rule of Law. The state has a right to assess a reasonable level of taxes in an equitable and just manner for the common good, but absolutely no right to confiscate or otherwise usurp the property of individuals
@ Geoff, as it happens, I did put the coefficient of correlation on all of the charts except one (where I forgot). You mention that on the bottom one it’s only 0.51 (as I said myself in the article “The coefficient of correlation is only -0.51 which is not particularly high, but better than nothing”) but the other charts show coefficients of 0.86, 0.87 and 0.90.
I’m not “justifying assertions”, there is a whole load of economic or finance theory on all this and I was just looking to see if the facts fit, and as it happens they do.
The reverse engineered chart shows that $1 extra property tax reduces house prices by $17. I think that “about 20” is good enough. Coefficient = 0.87.
Now, all of this, and all of the other things I linked to might be complete and utter coincidence, but apart from that, they are common sense theories based on observing real life and I genuinely believe that they stack up. Can you send me an email or something and tell me which bits you thought weren’t explained properly?
@ Joe “LVT on economic rents can be collected by imputed taxation of land rental values only a(t income tax rates), but it cannot wholly replace the primary source of taxation i.e, the generators of national income or GDP. ”
I dd the workings, and the current site premium element of UK resi land is £225 billion and rental value of commercial is £50 billion and farmland is tuppence ha’penny (possibly nil). So that is at least enough to replace VAT, NIC, Council Tax (and all the other bits and pieces except fuel, booze and fags duties) and keep income tax at a flat 20% or so.
From there on, you just reduce income tax and increase LVT £ for £ until the system is LVT only.
Again, I’ve done workings (on spreadsheets at least) but look at it this way:
£677 billion includes a load of deficit spending, the current tax system can’t cover it, so why should LVT?
A fairer comparison is current tax revenues, which are £569 billion according to PSFD.
Let’s assume that about £100 billion is raised from booze, fags, fuel duty (the same as at present + VAT thereon)
Let’s assume we get £30 billion from an 0.5% bank asset tax
So we need £430 billion from LVT.
Total value UK resi land is in fact more like £5,000 billion and commercial is £700 billion = £5,700 billion
Knock off £2,000 for rebuild costs = £3,700
Divide £430 required by £3,700 billion, OK, that’s more like 12% but it isn’t anywhere near 30%
Or look at it this way – £569 billion tax divided by 27 million households = £21,000 tax each on average. That money doesn’t just disappear, the state also pays out £400 billion in salaries, welfare, pension etc. Heck knows where the rest goes.
If an average household can afford to pay £21,000 tax under current rules, then it doesn’t matter how you raise that tax, the average will always be £21,000
And how much would median household pay in LVT? £569 billion x 7/8 = £500 billion. Divide that by 27 million households = £18,000. The median home value is two-thirds of the average (especially if you adjust for land only) so the median household LVT bill would be £12,000. Knock off Citizen’s Income from that if you want.
The median couple earning £20,000 each is currently paying about £16,000 in all the various taxes.
@ joe
Land rents/economic rents/unearned incomes, whatever you want to call them are set by affordability. Ricardo’s Law of Rent or something.
Therefore, as tax rises, rents go down. Tax goes up, rent goes down. Until you get your head around that, you’ll never understand why LVT can pay for all Government expenditure, with a surplus, and only capture unearned incomes/economic rents.
I think you may not appreciate that the true value of a location does not reveal itself until there are no taxes on production.
“If commercial rents were infact to increase as a consequence of reductions in taxes on Labour and Capital, then, ceteras paribus, wages could be expected to reduce and/or prices to increase to compensate .”
Why? People/business have more disposable income/profit, rents rise to match affordability. Government increases LVT to mop up the increase. We are back where we started(ish see below), why would prices rise/wages fall?
The only thing that would change is people would have more disposable income than now, given the current ratio’s between wages/tax/rent remain the same, not forgetting downward pressures on land values by better allocation of property resources.
“It is completely unrealistic in my view to expect to replace all taxes, with the exception of excise duites and levies, with LVT and would in fact be self-defeating to the rational for LVT of economic efficiency in the form of the capture of economic rents for the common good.”
That’s only an article of faith that on close examination is not born out by facts. Is there some reason you particularly want to tax incomes, wealth, capital etc?
“In advocating tax reforms, it is not enoough that one can ‘imagine it to be substantial’. There needs to be a logical basis that is easily understandable by a sceptical public.”
We only have academic studies to go on for a best guess on the dead weight costs of taxation. I believe it averages out around 15%GDP. As for the other two set of dead weigh costs, I know of no academic studies, but common sense should inform anyone the costs are not trifling. I sure if you were to make an educated guess, you wouldn’t be too far out. Just because we don’t yet have an exact figure should preclude us from mentioning such an obvious point.
“It is not really helpful to reduce a complex argument to “{if} unearned income enjoyed by the parasitic behaviour of landlords, banks, property companies and administrators were redirected back into the pockets of people and business, how could anyone be anything but better off?”
I’m actually going to take the above as a complement 😉
“As to the question – do the majority of property assets used to pay for care belong to home owners anyway? The answer has to be unequivocally, Yes. The right to quiet enjoyment of individual property is the foundation of a free and democratic society bound together by the rule of Law. The state has a right to assess a reasonable level of taxes in an equitable and just manner for the common good but absolutely no right to confiscate or otherwise usurp the property of individuals”
,
How can you talk about economic rent and come out with the above? I don’t want to tax any property, assets, wealth, earned incomes, whatever.
Btw, aren’t people’s incomes and wages their property too? Only asking;)
Mark,a few points, if I may.
1. Ricardo’s Law of Rent states that the rent of a land site is equal to the economic advantage obtained by using the site in its most productive use, relative to the advantage obtained by using marginal (i.e., the best rent-free) land for the same purpose, given the same inputs of labor and capital. the Law of Rent refers to the economic return that land should accrue for its use in production.
The law of rent makes it clear that the landowner has no role in setting land rents. He simply appropriates the additional production his more advantageous site makes possible, compared to marginal sites. The law also verifies the claim by Adam Smith that the landowner cannot pass on the burden of any cost such as land value taxes to his tenants, as long as such taxes truly do not bear down upon improvements and affect the relative productivity of his land compared to marginal land. For this to be true the tax must be levied on the rental value of land and not the rental income after it is taken by the landlord, otherwise landlords will be less inclined to rent.
Consequently, the maximum that it is possible to levy as LVT is 100% of the annual rental value of land on which improvements have been built.
2. UK Housing stock £4.3 trillion according to Savills report UK’s housing stock hits value ceiling of £4.3 trillion , commercial at 700 billion, farmland is tuppence ha’penny (possibly nil). gives us a nice round figure of 5 trillion.
3. Assume your estimate of the value of improvements at £2 trillion and apply a rent yield of 5% to the combined site value of £3 trillion i.e. £150 billion. This is the maximum economic rent that can be collected. Try to collect anymore and Land will have a negative holding cost. In such circumstances, no one in the UK will want to own land for their own use and Landlords will only be willing to rent when they can recover the excess of LVT over economic rents on site values, by increasing the contract rent payable by tenants forbuilt improvements. That would destroy the economic effiiency rationale for introducing LVT in the first place.
4. We currently have an unsustainable deficit of 120 billion, part of which has to be closed with tax rises. Tax receipts are projected to be £700 billion in 2015-16 with some way to go after that before debt financing stabilises. £150 billion of LVT or even your workings of the current site premium element of UK resi land of £225 billion and rental value of commercial of £50 billion, will be nowhere near the tax take required.
benj.
I agree with some of your points and disagree with others:
Agreed:
1. Property owners are currently not paying the full ammount for the consumption of location values. Yet these values are not made or sustained by property owners. They are by Government expenditure and wider economic activity.
2. LVT is not a tax on Capital because returns from Land ownership are not made from Capital investment.
3. Land rents/economic rents/unearned incomes, whatever you want to call them are set by affordability. Ricardo’s Law of Rent or something.
Diagree
1. Government could fund itself entirely from unearned incomes.
2. Exemptions are a very bad idea.
3. LVT can pay for all Government expenditure, with a surplus, and only capture unearned incomes/economic rents.
On your final question” Btw, aren’t people’s incomes and wages their property too? Only asking;” Yes, and like all property in a free society we don’t try to tax them at more than their economic value or appropriate them. Not even if they are the earnings of “parasitic landlords, banks, property companies and administrators.
Glenn
I’ll give you an example of the hidden dangers of land value tax.
I have an elderly relative who brought a small rural property in 1969. He;s a respected academic and ploughed a lot of his earnings into the property to turn it into his home. It generates no income. It isn’t the den of a rapacious landlord or anything else, It”s just a very nice converted farm, with a couple of acres of land in a scenic area.’ It’s now valued at close to £2000,,0000. He has a good pension and still earns money from some academic work.Someone please explain to me why someone who has contributed and still contributes to the greater good should be taxed out of his home.?
Did the value of his property rise to £2,000,000 purely by his own work? Or did it rise through general changes in the economy from which he was able to benefit purely because he was in a position to buy this property in 1969?
As has already been pointed out, he is not being put in the position of being “taxed out of his home”. The suggestion is that a property tax could be paid in equity share. So it will be his heirs who have to pay for it. Is that fair? Well, is it fair that those who were not lucky enough to have as a relative a respected academic who could afford to buy a rural property with a couple of acres of land in a scenic areas should be shut out of the chance of doing so even more by the fact that they have to pay tax on their income which they might be using in the hope of buying a property, while those he did nothing for it except have the right relative get it for free?
If the heirs have a need for the property, they should contribute towards paying the tax – it would be cheaper than paying a mortgage for the same property. If they don’t have a need for it as they already own their own house, but wish to take it over, they could sell their house to pay the tax. If they have their own house, is it fair that now having inherited another they can own both, and rent one out making more money at the expense of those who were not lucky enough to have that sort of relative?
Geoff Crocker again asserts that property should be taxed only at sale or death,.with all the aplomb of the old non-sociological economics. But this us unsustainable: if we impose a tax on land, and the presumed income is not available to pay it, of course it will be paid when the land is sold to meet the bill, or taken by the State in lieu of payment. How else could it be? But a tax collected only on sale at will would be nugatory – a range of trusts, life-time gifts and transfers etc would avoid it, or else owners would simply hang on to land as some have done since the Norman land-seizures. Land taxed at death (inheritance tax?) is also liable to endless legal obfuscations and avoidances -as now..
As for stimulating enterprise by not taxing high income and accumulations etc. sound very bogus: the large-scale amalgamations, and growth by acquisition, stunt initiative surely? And the bungling and largely unpunished criminality of big international banks rouses little confidence in this sort of talk. In effect all these oppositions are simply traditional defences for illiberal oligarchy.
I suggest too that for rational discussion the mantra about “inefficient nationalised industry” should be scrapped: industries were nationalised because they were in inefficient, and in breakdown under private management, and then revived: gas and coal and agriculure are a good example. And also they generated nationalk control and could be the ehiucle for social controlk too.
Mark Wadsworth
Frankly I don’t find anything you write has been explained properly. One of us must be missing somthing.
Michael Parsons
I didn’t say property should only be taxed at sale or death but could only be taxed at sale or death. I rest my point and will maintain my aplomb intact. (is it a compliment ?)
Geoff,
would you agree with any of the following statements?
1. The flow of rents attributable to Land (groundrents) could, if desired, be taxed at higher rates than at present and potentially at up to 100% of the income derived?
2. The taxation of groundrents at 100% of the capitalied rental value of Land, would effectively render the capital/market value of Land to Zero, but leave the market value of buildings thereon intact.
3. A Tax on the Imputed rental value of land not rented (e.g residential property and undeveloped commercial land) could replace council tax and/or business rates or other taxes such as stamp duty, assuming similar council tax benefit and business rate reliefs as at present are kept in place.
Geoff,
Statement 2 above should read – The taxation of groundrents at 100% of the income stream, would effectively render the capital/market value of Land to Zero, but leave the market value of buildings thereon intact
@ Joe
From your comment to Mark
“4. We currently have an unsustainable deficit of 120 billion, part of which has to be closed with tax rises. Tax receipts are projected to be £700 billion in 2015-16 with some way to go after that before debt financing stabilises. £150 billion of LVT or even your workings of the current site premium element of UK resi land of £225 billion and rental value of commercial of £50 billion, will be nowhere near the tax take required.”
That’s because he assumes that if you agree, which you appear to, with Ricardo’s Law of Rent and therefore rents are set by affordability, when other taxes are reduced then eliminated, that figure of 275bn will more than double.
It has to. I’m a landlord, if i see my tenants are paying less and less income tax, NI, VAT etc I’ll put my rents up to absorb it. Futile of course, because it will just get reabsorbed by the Government by LVT.
Hence 275bn revenues goes to 550bn revenues.
The bulk of existing taxation just gets transferred into LVT. People still end up with higher disposable incomes though for all the reasons stated previously.
Are you a believer yet?
@Joe
Btw, I know I stated it before, but it is worth reiterating it again, just so we are clear. 275bn is not the true level of rental value of land in the UK. That amount is depressed because of taxes on incomes and consumption.
I wrote previously “Therefore, as tax rises, rents go down. Tax goes up, rent goes down. ” it should of course read, taxes go down, rents go up. Taxes go up, rents go down. Doh!!
Mathew
I believe in income tax and have already stated that I support inheritance tax. Obviously, to a great extent my relative has benefited from property price rises , although the property has also been extended. What I would point out is that this was done whilst paying 1960s and 1970s levels of income Tax .
Personally. I am less keen on removing people from income tax than most of the commentators on this forum. I think that the problem for low earners is that they aren’t paid enough, not that they are Taxed at too high a rate. It’s a road that leads to Mick Romney style statements about 49 percent of the population not paying any tax. The answer is finding ways of raising earnings rather trying to redistribute through the tax system . To me this means tightening market regulation and giving people back bargaining tools . The move away from income Tax simply disenfranchises people further. Why do politicians need to address the voters if everything is paid for by the banking system and glorified oligarchs?
@ Joe 15/12 10.46 pm.
1) Agreed.
2) and 3) There are different estimates of total current selling prices, I used to assume that the £4 trn or £4.3 trn was the correct figure, but other sources suggest that it is more like £5 try. Never mind, this is not the important figure anyway. I did very detailed workings based on house price and rental value in each of 2,800 inhabited postcode districts and I reckon the site-only rental value (plus Council Tax) of resi land is £225 billion a year.
Maybe you are right and it’s only £150 billion, that’s not really the point. Even if it is only £150 billion, that’s enough to get rid of Council Tax, SDLT, IHT and also reduce NIC and VAT by half.
4) There are two ways of closing that deficit – tax hikes or spending cuts. As it happens, I’d prefer spending cuts, but seeing as the deficit is £120 bn and according to your workings potential LVT is £150 bn, surely it is better to introduce LVT than it is to hike other taxes?
And even if you are correct and we wouldn’t be able to fund all government spending out of LVT (Benj explains why we probably would), then I’m not sure that’s relevant. The government wouldn’t be able to fund all its spending from fuel duty or SDLT, that does not make fuel duty or SDLT inherently good or bad taxes, does it?
@ Geoff 16/12 1.45 am, fair enough. But if you go and ask other people or just look at facts and figures you will probably come to the same conclusion as I do, namely that the good old fashioned economic basics like “supply and demand curves” are in fact a good reflection of real life, their effects can be observed and measured in real life using readily available information and that everything follows from there.
This thread is about taxing wealth, rather than about taxing income, is it not?
Would you Land Value Tax experts agree that LVT is a tax on the stream of the actual or notional annual flow of income from land which, however useful in other ways, would do little or nothing to redistribute the vastly unequal ownership of the stock of capital wealth in our country?
Would you therefore agree with Geoff Crocker in supporting the EU-sceptic Liberal Party’s UK Universal Inheritance proposal, as above, which is in keeping with the traditional Liberal Party Preamble to the Constitution, which calls for liberty, PROPERTY and security for all?
The proposal would tax (inherited) wealth in order to spread more widely the private ownership of capital, including land, in each new generation, in what would thereby become a more genuinely property owning, and therefore ultimately more stable, democracy.
Dane Clouston
I support wealth redistribution, but I’m not at all EU sceptic. In fact I’m a heretic who thinks UK should join the Euro and Schengen !
@Dane
A 100% LVT would eliminate location values from all property prices. So a £50,000 three bed terrace in Neath would still be worth £50,000. But that same terrace in Chelsea would be worth £50,000 too, Not £2,050,000 as it is now.
The Duke of Westminster’s wealth would be reduced by over 95% overnight.
I think that’s what we call an equalisation of wealth, wouldn’t you agree?
I think that’s what we’d call Not Going To Happen.
@ Richard Dean
Yes, there are some very powerful vested interests that have undue influence and access to power.
That’s why people like you should be pulling out all the stops so that ordinary people get to hear the truth.
Then it might just happen. We live in a democracy not a dictatorship. If things are shit ” Not going to happen” is your fault as much as anyone’s.
The truth is that Land Value Tax is both unfair and damaging.
It is unfair because the extra value of the house in Chelsea has been created by the residents of Chelsea. It was their labour which produced the money which alloed them to pay people to build the place. The extra value from their labour belongs to them – and they’ve already paid income tax on the money they earned, so LVT is double taxation.
It is damaging because it prevents poor people from owning land. Suppose you have the choice of either buying land at 1000 and owning it for good, or buying at 500 and having to also pay some unknown extra future taxes in perpetuity. As a poor person, I’d be ok to work hard to save the 1000 to own owutright, rather than saving only 500 and having the burden of all thos future taxes.
The only advantage to land value tax, as it used to be, is that you can’t move the land, and it’s easy to find out who owns it. That’s perhaps not so easy now if land is owne by corporations who are owned by shareholders including pension funds which means you and me (actually, not me, I’m too poor to put money in a pension fund).
LVT on rented housing will put the rents up for sure. Over time, so noone really knows for sure why the rent’s going up. Where else wll the landlord get the money to pay the tax?
Land ownership was what started civilization – people saying this is mine, which gave them the control whioch allowed them to control the crops and so farm efficiently. Taxing it is to go back many thousands of years.
How is your Envy button today? Can anyone press it?
LVT is one great big con.
@ Joe Bourke, addressing Benj, you said:
“Disagree … 3. LVT can pay for all Government expenditure, with a surplus, and only capture unearned incomes/economic rents.”
I’ve heard that KLN before, I’m not sure why it’s relevant or even whether it’s true (as Benj himself tried to explain). Again, this may appear to be a surprising conclusion, and I was inclined to dismiss it when I first heard it, but I have spent time looking at other countries; and the history of this country (land taxes were historically the main source of government revenue); and economic theory; and applied common sense and logic, then it seems reasonably plausible to me.
Full workings here.
http://markwadsworth.blogspot.co.uk/2012/12/killer-arguments-against-lvt-not-292.html
Richard Dean comes out with some cracking KLNs:
“As a poor person, I’d be ok to work hard to save the 1000 to own owutright, rather than saving only 500 and having the burden of all those future taxes.”
1. As things stand, “poor” people are taxed and priced out of buying land (mainly younger people in work).
We know as a matter of logic and fact that
a) taxes on land values reduce the mortgage repayments £ for £,, so if the NPV of the future tax payments is £500, then instead of paying £1,000 now, you have £500 to pay now and over the rest of your life, you will pay the other £500. The total cost is the same.
b) The recent decade or two of Home-Owner-Ist economic policies (reduce taxes on land, encourage people to speculate on land using borrowed money, increase taxes on earned income quite significantly) has led to a significant fall in owner occupation and a significant rise in private rentals among younger people in work (everybody under 40).
2. A “poor” person can far more easily afford to save up the deposit for a £500 house than a £1,000 house. If he can save up the deposit five years quicker, he has saved himself five years in rental payments as well.
3. Assuming taxes on income are reduced, then it is far easier to save up that £500. Once you have bought the house, you are paying a more LVT and less income tax, what’s the problem?
“Land ownership was what started civilization – people saying this is mine, which gave them the control whioch allowed them to control the crops and so farm efficiently. Taxing it is to go back many thousands of years.”
Historically, in this country and many others, taxes on land values were the main source of government revenue. He is conflating “ownership” with “right to exclusive possession”. There are a lot of tenant farmers, they work just a hard, if not a little bit harder than owner-occupier farmers.
“How is your Envy button today? Can anyone press it? LVT is one great big con.”
Weird.
When I suggest that we roll all taxes on income (Income tax, VAT, NIC, corp tax) into a flat income tax/corporation tax of 20%, people say that this is pandering to the rich or a rich giveaway (and I don’t think any UK politician would dare suggest it). So this change is presumably the opposite of the politics of envy.
But when i suggest that we also have a flat tax on the rental value of land, I am accused of politics of envy.
Why is it more envious to tax unearned land values than it is to tax earned incomes?
Richard Dean is the Grasberg gold mine of all KLN’s 😉
Only joking Richard, but you are a legend.
http://en.wikipedia.org/wiki/Grasberg_mine
Seriously though Richard, you’ve had this all explained to you a hundred times yet you still come out with statements like “LVT on rented housing will put the rents up for sure. Over time, so noone really knows for sure why the rent’s going up. Where else wll the landlord get the money to pay the tax?”
There’s no point in debating with you when the theory and the reality has been carefully and patiently spelt out numerous times.
All that I will say, you are quite right to be sceptical of ideas you haven’t come across, or thought of yourself, however an open mind will give you the pleasant experience of serendipity. Try it, you might like it.
Sorry, if that sounds personal, but when you make statements like “How is your Envy button today? Can anyone press it?
LVT is one great big con.” it’s the least you can expect.
The effect of LVT can be best shown by way of simplified examples.
Firstly, replacing business rates with LVT
A shopkeeper is paying rent of £20,000 per year and business rates of £2000 – Total Cost £22,000. The shopkeeper pays £5000 in income tax from his net profits of £25,000. This is the maximum rent and tax that the shopkeeper is able to pay from his profits and it leaves him with a net income of £20,000.
The Landlord receives £20,000 and pays £10,000 interest on a £200,000 mortgage loan. He pays basic rate tax of £2000 on his earnings. The Landlords net income is £8000.
The lender pays £2000 tax on his interest income of £10,000, that leaves him with a net income of £8,000.
The governments tax receipts are £11, 000 (£7,000 from the shopkeeper, £2000 from the Landlord and £2000 from the Lender).
We introduce LVT @ 100% and abolish Council Tax.
The Shopkeeper is able to pay rent of £22,000 without affecting his profits and continues to pay £5000 in income tax. His after tax income remains at £20,000.
The Landlord receives £22,000 in rent. Based on Land Values we allocate £11,000 of rents to land and £11,000 to the shop building.
The Landlord pays 100% LVT on the Land rent of £11.000 less attributable interest of £5000 i.e. £6,000. He pays basic rate income tax of £1200 on his profits of £6000 from building rents. The Landlords net income reduces from £8000 to £4800. The market value of the shop reduces from £400, 000 (20,000 x 20) to £220,000 (£11,000 x 20)
The Lenders income and taxes are unchanged. (The Loan to Value ratio of the mortgage has increased from 50% to 90.9%. The Lender may as a consequence seek to increase the risk premium element of the interest rate).
Government tax receipts increase by £3,200 to £14,200 at the expense of the landlord. (Shopkeeper £5,000, Landlord £7200, £2000 from lender.
Secondly, replacing council tax with LVT
For an individual renting a family home at £20,000 per year and paying council tax of £2000. The outcome for all the parties is the same as that of the shopkeeper example.
For a homeowner, the outcome depends on his marginal rate of income tax.
The homeowner has a joint mortgage of £200,000 on a house valued at £400,000 on which he pays £10,000 interest. He pays £2000 in council tax.
His income and that of his spouse is £25,000 each on which they pay income tax of £5,000 each.
They will be assessed an imputed Land Value Rental of £10,000 and pay basic rate income tax of £2000. They will no longer pay council tax, so their position is unchanged. Higher rate tax payer will pay an additional £2000 per year in these circumstances. Additional rate taxpayers slightly more.
Government tax receipts increase by £2000 from higher rate taxpayers.
LVT can be a powerful tool to address the drain of resources from productive activities to Landholding, if applied sensibly and appropriately. It weakens the arguments for tax reform to make exaggerated claims.
benj – Land prices and the incidence of taxes on productivity are not so simple. There is no reasom why rents should increase as a consequence of introducing LVT (beyond the compensating adjustments for council tax & business rates), unless a government was foolish enough to try and collect more than 100% of the economic rents on comercial property (i.e. the extra market rental value attributable to a site by virtue of its location over and above the near zero rental value of marginal land). Such a policy would neccesitate assessing LVT on even worthless land – if you could find anybody willing to make such a donation. There may be potential for residential rents to increase were personal disposable incomes to be hiked by the ellimination of income and other taxes, but such increases are more likely to be seen in social housing, where tenants enjoy a below market rate of rent than in the private sector, I would also expect the withdrawal of housing benefit and other rent subsidies to occur as direct taxes were reduced. Consequently, I think it very unlikely that we would see dramatic increases in housing rents as a consequence of a shift from income taxes to LVT.
Seriously, benj, people have explained this to you so often, it’s amazing you still let people push that Envy button! Can you not come out of the cocoon and open your eyes and see?
Joe’s got it right. LVT only works if you simplify. It would be a disaster in the complicated real world. Even so, he makes a meal of it. He wants tools. He’s pushing your button so he can have some!
@ Dean
Ok, how’s this for simple. As I said to Joe above.
“{if} unearned income enjoyed by the parasitic behaviour of landlords, banks, property companies and administrators were redirected back into the pockets of people and business, how could anyone be anything but better off?”
I’ve been a profession BTL for over 20 years. If an LVT were introduced I’d stand to loose almost everything. I’d certainly have to go out and look for a job.
Now, tell me. How is that pushing my “envy button”?
Oh, don’t tell me, you don’t believe me?
You could also try this for simple?
How about we all keep what we produce, and only pay for the natural resources we use?
Do you agree with this? Because if you do, you’re right behind a 100% LVT.
Am I the only person reading this thread and feeling like I’m learning less the longer the answers get?
@ Joe
Look I’m not an “expert” in any of this. Mark is, so is Henry at landvaluetax.org . They’ll both be able to explain, hopefully clearer than I’ve managed, that what I’ve told you is 100% correct.
You know about affordability and Ricardo so it’s just a case of you putting 1 and 1 together. It really is.
Mark has provided you with some links, but if you still don’t get it, please email Henry. It’s really important you understand what I’m staying is correct, because the consequences are important. Apologies if that sounds patronising, it’s just that you’re almost there 😉
Mark,
thanks for the link to your blog workings. My criticism of the contention that any increase in disposal incomes automatically generates rent increaes, falls into serveral catergories, some of which follow:
Firstly, the current historically high level of disposable income that is absorbed by housing costs Britons pay 40% of income on housing costs – making UK the most expensive place in EU after Denmark and Greece. Current levels of rent are driven not solely by levels of disposal income but by lack a geneal lack of affordable housing supply across many areas of the country.
Secondly, the impact on disposal incomes of a significant proprtion of the population on social housing subsidies, housing benefits, in-work tax credits and benefits and tax allowances. Shift in the tax base and the incidence of income taxes will necessarily see disposal incomes reduced by this element of the tax and benefit systems.
Thirdly, the still high proportion of home ownership in the UK acts as an alternative to rented property. I can see the reason for replacing council tax with LVT for owner-occupiers as a more equitable distribution of the tax burden across income deciles and generations. It is not apparent to me, what would be gained by replacing income tax with LVT for this majority group of taxpayers.
Fourthly, Ricardo’s law of rent refers to the economic return that land should accrue for its use in production.It is Increases in the productivity of Land, not a shift in the incidence of taxes, that will cause rents to rise. The Law of Rent implies that wages bear no systematic relationship to the productivity of labor, and are instead determined solely by the productive capacity of marginal land,as all production in excess of that amount will be appropriated by landowners in rent. Shifting the incidence of tax does not of itself increase productivity beyond the marginal gains that accrue from the relief of the deadweight costs of tax on production.
Ricardo noticed that the bargaining power of laborers can never dip below the produce obtainable on the best available rent-free land, because whenever rent leaves them with less than they could get on that free land, they can simply move to the new location. The produce obtainable on the best available rent-free land is known as the margin of production. Since landlords have a monopoly over a given location, the only limiting factor for rent is the margin of production. Thus, rent is a differential between the productive capacity of the land and the margin of production.
As regards your comment that property taxes were historically the principal tax base in the UK, that was true of a society dominated by agricultural production. Income taxes were introduced during the Napoleonic wars. The industrial revolution and subsequent development of the welfare state has fundamentally changed the relatinoship between Landowners, Labour, Capital and Entrepreneurs our modern economy and the basis on which taxes are raised.
PS: I like both of these ideas as a starting point for development of a positive tax reform program:
“When I suggest that we roll all taxes on income (Income tax, VAT, NIC, corp tax) into a flat income tax/corporation tax of 20%, people say that this is pandering to the rich or a rich giveaway (and I don’t think any UK politician would dare suggest it). So this change is presumably the opposite of the politics of envy.
But when i suggest that we also have a flat tax on the rental value of land, I am accused of politics of envy.”
I have to look that up, benj! 🙂 I’m sure it’s a compliment.
Money isn’t held in land, it’s held in banks. If I buy land, I release the money in exchange for the land.
So releasing land doesn’t release money!
(ther’s a joke in there, by the way!)
Ok, so Grasberg is not nice, you were being offensive, but I’m used to it. No worries. What’s going on there has the appearance of colonial exploitation, environmental irresponsibility, and massive corruption, although things can have very different implications in the 3rd world. LVT hasn’t got much to do with it.
@ Joe
Just to say the points you raise are very apt. My worry with LVT is that it would produce TOO much revenues to the Government by an up ward spiralling effect. So we’d end up with a Government swallowing up 65% GDP instead of 45%GDP. And no one would end up with any extra disposable incomes.
Of course, there are also many downward spiralling effects, you mention some. Now, exactly at what point they balance out at is beyond my ken, and might need an economist too work it out.
However even if it did balance out roughly where we are at 45% gdp, on a like for like swap of rental values should still double.
Anyway, let’s is what Mark has to say, I’ll be interested in his response to you. Thanks.
@ RD
“Ok, so Grasberg is not nice, you were being offensive, but I’m used to it. No worries. What’s going on there has the appearance of colonial exploitation, environmental irresponsibility, and massive corruption, although things can have very different implications in the 3rd world. LVT hasn’t got much to do with it.”
Funnily enough, and all joking aside, you couldn’t be more wrong. If you look at third world countries, it is precisely because the poorest are being deny access to the revenues of their natural resources that they are locked in poverty.
They are pushed out from prime farm land and forced to the margins, which has disastrous consequences for our environment. Why? Their corrupt governments don’t charge the correct resource rents, but chose to pocket bribes instead. Just another reason LVT is a good thing. Alleviate world poverty and save the environment.
Geoff Crocker
I only mentioned that the Liberal Party is EU-sceptic to distinguish it from the Liberal Democrats. I re-joined it when I found it was supporting Gordon Brown in opposing the UK joining the Euro!
I am glad you agree on the redistribution of the inheritance of capital.
“benj”
What would LVT do to the value of assets other than land?
It seems to me that there is a vast difference in political acceptability between taxing the receipt of unearned gifted and inherited assets and taking away 95% of the value of property sites with a 100% Site Value Rating.
Mark Wadsworth
Owner occupation. Too many people own houses they do not live in: too many people live in houses they do not own.
Do you agree that taxing and positively redistributing the inheritance of wealth in each new generation would cause landlords to sell houses they do not live in and enable more young people to put down deposits to buy the houses they live in, or other houses to live in? Poor people will become less poor when they receive a basic minimum of inherited capital financed by tax on large cumulative lifetime totals of gifted and inherited wealth.
It does seem envious to tax away the current value of land owned by the living. It seems less envious to tax away some of the value of gifted and inherited assets not yet received by beneficiaries, in order to enable others in the same next generation to inherit a basic minimum inheritance.
UK Universal Inheritance reduces assets unearned by beneficiaries which they have not yet received, in order that others may inherit, so is not confiscatory on assets accumulated or already inherited by the living . 100% LVT seems confiscatory on assets accumulated or inherited by the living, so will arouse violent opposition.
However I hope you and other LVT enthusiasts agree that LVT and taxing inherited wealth in order to finance UK Universal Inheritance are not mutually exclusive.
Actually the rental value of the Graberg mine is probably zilch. What would you do with it, apart from die from the poisons? LVT is not the solution there.
@ Richard
From Wiki
Freeport, the owners of the mine made an operating profit of 4.1 bn $ from 6.4 bn revenue in 2010.
So, the answer to your question is……….mine for gold? It looks quite a good business to me.
benj,
I have read a good deal of what Henry Law has to say on LVT and agree that he is very knowledgable in this area.
I would agree with Mark Wadsworth, that whether or not we see exponential growth in land values/economic rents and the LVT that can be derived therefrom, is probably not relevant to where we are at this juncture of the debate on Land reform and taxes. In fact such Longer term perspectives may cloud the issues of immediate concern.
I would be fully supportive of the proposals put forward by Tony Vickers of Alter, being taken up as Libdem policy – with two important amendments:
Firstly, I would not seek to tie our hands by making the ‘tax shift’ revenue neutral by law, thereby requiring offsetting reductions in others taxes for every budgeted increase in LVT.
Secondly, I would like to see a low income level exemption (as we currently have for council tax) for owner-occupier pensioners and other claimants.
The main elements of the proposal by Tony are:
-Basing LVT on rental value not capital value, because property/land rents are much more stable than prices.
-Using LVT not just for local government but mainly for national taxation.
-Establishing that all land is eventually taxable, so a coherent and complete register of ownership and value can be undertaken.
-Exemption for low-value land and small sites, also a tax-free element for owner-occupiers, linked to local land values, to encourage spread of ownership.
-Make the ‘tax shift’ revenue neutral by law, thereby requiring offsetting reductions in others taxes for every budgeted increase in LVT.
-Use of ‘precepting’ (as happens now with multi-tier local government) to enable the simplicity of a single national tax administration to be combined with full autonomy for every elected council (and devolved governments) in rate setting: local billing authorities would be abolished.
-Treating owner-occupiers as having notional rent paid to themselves (what they would earn if their home/business-site was rented), so that LVT can be subsumed within the income and corporation tax systems.
-Allowing LVT liability of owner-occupier pensioners and other claimants to be ‘rolled up’ and only paid (with interest) upon death, sale or re-mortgage of property.
@ Joe
“Secondly, I would like to see a low income level exemption (as we currently have for council tax) for owner-occupier pensioners and other claimants.”
If I vociferously disagreed with you on that point alone, I think we might really be splitting hairs. I personally think it’s an unnecessary proviso, if the glide path in where to be over 20 years.
One other idea I had, which was not popular, is that even if we had roll up, the amount finally taken by the state wouldn’t come to more than the location value. I don’t know why, it just seem consistent.
The other point to deal with is negative equity. On who’s shoulders should if fall. I favour the banks 😉
@ Benj, feel free to go into battle with RD, I haven’t the energy any more.
@ Joe Bourke “Britons pay 40% of income on housing costs – making UK the most expensive place in EU after Denmark and Greece. ”
Yes, on average, Britons pay x% of their post tax income in housing costs.
But it is not a fixed %.
The % of disposable income that people in lower wage areas pay in housing costs is lower than in higher wage areas.
I’m sure I linked to one of the bits of research saying this.
It is because Ricardo’s Law still holds as much as it ever did. If net wages for an average sort of job (receptionist, book keeper, plumber, bus driver, whatever) are £7,000 a year higher in a high wage area (London) than in a low wage area (North West), then the rent (or mortgage payments) for average sort of housing will also be £7,000 higher in the high wage area. The relationship for very high earners is not so strong, they spend a declining share of income on housing (a premier league footballer on £10 million a year does not spend £4 million a year on housing), and obviously with very low earners, there is a minimum housing cost that does not fall below a certain limit.
Think about it – if a bus driver could move from the north west to London and earn £7,000 extra but rents were only £4,000 higher, then a lot of them would all move to London. If enough of them do it, then bus drivers wages in London come down and bus drivers wages in north west go up; similarly, rents in London would go up (more people) and rents in north west would go down (fewer people). Sooner or later the old equilibrium “a bus driver cannot make himself better off by moving to a high wage area” is reinstated.
Therefore, although your 40% figure is broadly correct, it is not the relevant one. The point is that nearly all of extra earnings go into rent (in the short term). The opposite force is that people’s “basic minimum” standard of living also goes up over time, but just not quite as fast.
“The Law of Rent implies that wages bear no systematic relationship to the productivity of labor, and are instead determined solely by the productive capacity of marginal land,as all production in excess of that amount will be appropriated by landowners in rent.”
Yes, but as you say yourself, times have moved on.
The agricultural model he used assumes that the landowner is employer and landlord at the same time. The net wages after deducting rent on the hovel they live in would be the same all over the country.
But nowadays, the employer and the landlord are two quite different people. It is quite clear that gross wages are very different depending on where you live (London higher than north west, UK higher than Poland but lower than Germany, Europe higher than India and India higher than Africa) and that this does have to do with productivity (not of the individual, but of the whole society).
But if you compare between regions, the extra wage you can earn in high wage area (for doing basically the same job as in low wage area) is pretty much the same once you net off the rent you have to pay for the privilege of living in the high wage area. Differentials in wages can be competed away by people moving to high wage areas, but the rental value of land in high wage areas cannot be competed away by landowners in low wage areas moving their land to high wage areas 🙂
Mark,
that all makes sense on the face of it, but in the article I linked to on UK housing costs you will note the following:
“UK families are among the worst off in Europe when it comes to housing costs, spending more than 40% of their household income on rent, mortgage payments and other living costs, according to the housing charity Shelter.
…in France, just 5.2% of the population face such unaffordable costs compared to three times as many in the UK. Of the 29 countries analysed, only families in Denmark and Greece are worse off, making the UK the third most expensive place to live in terms of housing costs. UK families are now worse off than many countries with ailing economies, such as Spain, Italy and Portugal. Cyprus is the cheapest country, with just 2.5% of the population facing unaffordable housing costs, equivalent to one in 40 people.
Shelter said a chronic lack of affordable homes in the UK means the situation is set to get worse. The housing shortage has forced house prices up, which has had the knock-on effect of forcing potential homeowners into the expensive private rental sector.
These figures are the evidence that the UK housing market is deeply dysfunctional. With so many families spending huge amounts of their income on their rent or mortgage, people will be making daily trade-offs between food bills, filling the car tank with petrol, and paying their housing costs.”
Families in the UK pay an average £6,760 a year in housing costs alone, with mortgaged homeowners paying £7,436 compared to £8,320 for private renters, according to the 2010-11 English Housing Survey. Tenants in social housing pay an average of £4,108.
This is not set to get better any time soon. While the situation is bleak at the moment, a succession of governments failing to provide much-needed affordable homes means that the future facing our children and our children’s children is only set to get worse.”
In short, earnings/disposable income increases do not explain why we are faring so poorly as compared with other developed economies in Europe with similar per capita GDP or why the % of income allocated towards rents/housing costs has increased so dramatically in recent years.
As UK disposable incomes (and certainly any discretionary element) have been squeezed in recent years we have seen a stabilisation in house prices (at least outside London) and commercial rents, but a meteoric rise in residential rents. Ricardo’s law sems to hold good for Land prices, but a chronic shortage of rental accommodation relative to demand (driven by both lack of access to mortgage finance and increasing population) is driving rents ever upwards, in the opposite direction that Ricardo’s law predicts.
In Greece where there have been precipitous falls in disposable income, rents and housing costs appear to remain stubbornly sticky.
The factors impacting the UK housing market are multiple and while regional wage differentials are a significant element, it can be observed that they are not by any means the only factor. It is for this reason among others that a healthy dose of scepticism should be exercised in anticpating results over and beyond what can reasonably be expected in the way of tax revenues on a conservative estimate of existing economic rents.
Geoff
No:because by saying property should only be taxed at point if death or sale you were committing yourself to policy futility; and you said it in a manner that suggested ‘should’ meant ‘could’ ( all that stuff about “flows”), and I don’t think I am alone in that impression, even allowing for the fact that most economists can’t write for toffee. Your “aplomb” seems to reside in the repetition of the old neo-conservative saws from the eighties in disregard of the development of economic sociology since; so about as exciting as Jack Horner’s plums.
Glenn 16th Dec ’12 – 5:17pm
Am I the only person reading this thread and feeling like I’m learning less the longer the answers get?
Agreed Glenn. LDV policy restricts originating articles to 500 words but comments in this thread exceed that hugely. The huge amount written about land value tax in the thread is confusing. A separate article setting out the basic principles being argued would be preferable to strings of arithmetic using undeclared and unexamined assumptions. Benj for example, having posted extensively then tells us ‘Look I’m not an “expert” in any of this. Mark is, so is Henry at landvaluetax.org . They’ll both be able to explain, hopefully clearer than I’ve managed, that what I’ve told you is 100% correct.’ ! Sounds a bit like Russell’s paradox.
It’s rather hi-jacked the original article which was essentially arguing that tax can only be paid from cash flows unless it forces assets and houses to be sold. Therefore tax the cash flow ie the income whether earned or unearned.
“It’s rather hi-jacked the original article which was essentially arguing that tax can only be paid from cash flows unless it forces assets and houses to be sold. Therefore tax the cash flow ie the income whether earned or unearned.”
Or from future cash flows(upon change of ownership), which is a bit like what happens when you agree to a mortgage, ie future cash flows from your earnings. No different really.
Or from future cash flows(upon change of ownership), which is a bit like what happens when you agree to a mortgage, ie future cash flows from your earnings. No different really.
Very difffent really. Nobody who currently owns a house bought it expecting to or agreeing to any wealth or land tax. Are you suggesting a new regime where a wealth or land tax kicks in each time a house is sold? Or would you introduce a wealth or land tax forcing sales? As my previous post says, your proposal needs a more fundamental presentation and reasoning than all the sound bite comments and strings of arithemetic in the thread.
@ Geoff
Yes but do have a right to expect taxes never to change? Like Council Tax, which is a bit like a LVT only massively regressive.
I know you are going to find this factious, but when they tried to abolish slavery one of the arguments against doing so was exactly the same as the one you have just put forward. ” we paid for our slaves with the full expectation of a return for our investment. It’s not just to take our property away from us!!”
And the analogy is a very good one if you think about it. Your unearned income is someone else’s earned income. So, what is that then? Theft? Slavery perhaps?
Even so, it’s not all bad for those who have bought a house with no expectation of a hike in taxes is it? How much unearned capital gains are they sitting on? Have a look at historical house prices and we’ll let you do the math this time 😉
Geoff Crocker
Very difffent really. Nobody who currently owns a house bought it expecting to or agreeing to any wealth or land tax.
Is there no-one alive who bought their home before 1963?
@ Geoff
If there were a 20 year glide path in to a 100% LVT, would this resolve some of your worries?
Benj
It’s up to you to set out your proposal more clearly. I have as you ask thought about your analogy with the slave trade and concluded very easily that it is not as you claim a good one since there are clearly other moral factors involved. Matthew Huntbach’s comment doesn’t address my point at all. The land value tax proposal needs to do better. If an idea cannot be argued succinctly it’s not a good idea. And Marx didn’t agree, so you have some pretty mighty intellectual opposition.
This whole thread completely misses the point. Tax is not whatever the Treasury can squeeze out of the public: tax is not a punishment and it must not be arbitrary.
So what is tax?
Tax is two things: it is a financial charge for the hidden or underlying social costs in an economy, such as education or security; and it is an investment in the type of society people want to live in, which includes provision for the sick and elderly. Often the two overlap or combine.
What this thread fails to mention is that fair and sufficient revenue raised by tax is best calculated across the widest possible base according to the expenditure necessitated by those activities deemed legal and legitimate. Tax is a function of capital and must be used to build capital (social, environmental, financial or otherwise).
However taxes also distort markets because political value judgements are made about the manner in which capital accumulates. Tax competition between jurisdictions further complicates matters.
The current problem can be summarised as a product of the current age of globalisation, where capital flows are managed and manipulated to take advantage of tax competition. Since access to international markets is not equal harmful imbalances arise, creating a double whammy of additional spending demands on states and more regressive effective tax rates on individuals.
So the proposition that wealth can only be taxed when transactions are made is at best unimaginative – cash and capital flow in different ways – and the solutions to the revenue problem are not national, they are global.
I thought Margaret Hodge made a very good point when examining Amazon – a company which operates a .co.uk domain, with warehouses, distributors and management all based in the UK should expect to pay UK taxes on the profits of all company activities within the UK. That this doesn’t happen implies the tax and regulatory system is not operating as it should.
A return to feudal-style land taxes like Burgage, Socage and Carucage is nothing more than a direct response to the breaking down of barriers to capital flows and the failed regulatory system, but just as the feudal tax system collapsed because of popular discontent at unfair exemptions and outright evasion (as well as resistance to the consequent inhumane social bondage) the simplistic introduction of land taxation alone will neither raise enough nor have desirable human outcomes.
Instead tax types and rates must begin to be coordinated internationally, while tax havens must be brought into line so that they can be held to account responsibly. We could attack the tax pirates directly, but it is far better to blockade the pirate harbours.
Because it is difficult and dangerous to coerce cash flows then we must want to capture capital flows, and land, as in jurisdictions, not LVT, is the answer.
@ Geoff
Here’s an article on LVT by Sam Brittan in the FT
http://www.ft.com/cms/s/0/1e98b4da-5d56-11e1-869d-00144feabdc0.html#axzz2FRFnXcLS
The comment thread is a very interesting one, well worth a read. I was particularly struck by this quote from it.
http://www.ft.com/cms/s/0/1e98b4da-5d56-11e1-869d-00144feabdc0.html#ixzz2FRLwAQJL
“During the [American Civil] war I served in a Kentucky regiment in the Federal army. When the war broke out, my father owned sixty slaves. I had not been back to my old Kentucky home for years until a short time ago, when I was met by one of my father’s old negroes, who said to me: “Mas George, you say you set us free; but ‘fore God, I’m wus off than when I belonged to your father.” The planters, on the other hand, are contented with the change. They say: “How foolish it was in us to go to war for slavery. We get labor cheaper now than when we owned the slaves.” How do they get it cheaper? Why, in the shape of rents they take more of the labor of the negro than they could under slavery, for then they were compelled to return him sufficient food, clothing and medical attendance to keep him well, and were compelled by conscience and public opinion, as well as by law, to keep him when he could no longer work. Now their interest and responsibility cease when they have got all the work out of him they can.”
From a letter by George Jackson, dated 1885, reprinted in “Social Problems” by Henry George
Landowners, don’t have to do the coercion anymore. That’s been contracted out to the government.
As far as there being a clear and succinct proposal, as has been stated previously- You keep everything that you have earned, and only pay for what you have not earned.
That’s not a sound bite, but the basis for a simple and transparent way of organising society.
It’s just as relevant for big government, or an anarchy. That why it attracts support right across the political spectrum. Marxist’s included.
I’m sure Mark would be delighted to set out a proposal on this site, if you gave him an invite. These comment threads are not necessarily the best way to get a point across, as you’ve observed.
Hmmm..A simple point about tax payments? Well you started off by saying we can only tax income not wealth, because assets have to be cashed-in to meet taxes on them. But surely that is fallacious and has led to the lengthy disputations that followed? You have simply elided earned and unearned and capital sales as income. Taxing imputed rent from large land-holdings would be a social policy aimed at breaking-up estates in the interest of redistribution of land and a general right of access to it. It would have the same motivation as changing farm-subsidy policies in favour of small-holdings and away from the old “wheat barons.” Especially too if we redirected support to English free-hold horticulture which as largely a joke though what there is can be very well done: it needs a massive expansion which land redistribution could achieve, along with encouragement of new entrants to farming. Again it is sociology of economics you need to look at: institutional effects on transactions and plans. For example, revising marriage laws so a son can take charge of the family farm without being prevented by family fear that his wife might walk away with half of what generations have built up simply by sleeping with the local romeo might speed technological advance by allowing new managerial control.. Monetarist talk about flows and assets is really very wide of the mark when it comes to land questions, socially advantageous developments and rights. Markets might work for goods, less well for labour and not at all for land – the further the S/D and tax analysis gets away from commodities the less use it is.
Michael
Hmmm. You seem very confused. One minute you want to tax imputed values to redistribute large land estates. The next minute you want the son (sic) to take on the father’s farm which ‘generations have built up’. You’re right in saying that farming needs new entrants. The zero land cost which is in generational family farm accounts is a deterrent to this. You need to think your sociology of economics through more carefully. As for correcting my admittedly occasionally loose vocabulary, I am of course making the point that tax can only be paid from cash. Earned and unearned income generate cash so can be readily taxed. Assets may generate unearned income but may not. They may only have imputed rents. If the Lib Dems want wealth taxes which force asset sales to generate tax to pay them, then as you say the policy becomes one of major restructuring of wealth holding. That’s not what Vince and co seem to be proposing but if they are then the party needs to be clear about its objectives and the associated mechanisms and effects.
We need to reclaim commonly created wealth to pay for common services. And leave private income in private pockets. It is that simple !!!!! Currently we do exactly the opposite, with private individuals and organizations appropriating common wealth. Hence we have trickle up effect. In the USA the top 1% own more wealth than the bottom 90% , the UK is not far behind – this indicates an economic system that is badly broken.
It is no secret that the tax system is a convoluted mess, in need of radical reform. Currently we tax a man’s labours, his production, in Income Tax. We tax trade in Sales taxes. We take the fruits of a man’s labours. These “bad” taxes penalize production and trade. It is ludicrous to be penalizing and discouraging production and trade. These are exactly what we should not be taxing at all. These point should be encouraged.
Where does the revenue come from to pay for public services? Well there is:
1. Commonly created wealth.
2. Wealth derived from use of common wealth.
3. Wealth in extraction of common resources.
4. Use of common resources.
These form the pool for which public services should be funded
Commonly created wealth in the UK overwhelmingly is in the form of the lift in land values – this can be easily reclaimed. The land values were created by collective economic community activity, not the landowner. Other forms of common wealth are the extraction of resources like oil and gas (shale gas in the near future), use of the waters for fishing, charging for use of the electromagnetic spectrum, air corridors, streets by taxis, etc., etc.
Revenues from land alone in the UK can eliminate income and sales taxes. The others forms can go towards reducing or eventually eliminating corporation tax. As enterprise would expand by eliminating taxes on production and trade, HMGs expenditure would be much less.