There are plenty of articles explaining why
taxes on the rental value of urban land/location* are the best kind of taxes,
some of them start with the underlying moral arguments – that land is a free
gift of nature or that 95% of location values are created by the whole of
society (“Location, location, location”) – and some skip straight to the positive
outcomes (more efficient use and allocation of land, no deadweight costs).
(* Please note that agriculture measured by
farm gate prices is only one per cent of the UK economy and the rental value of
all farmland, three quarters of the UK by area is only one per cent of the
total rental value of urban/developed land. It is barely worthwhile collecting
taxes on the value of farmland, this is a non-issuer).
Just for a change let’s start in the middle and
look at this from a purely pragmatic point of view and compare and contrast
three basic kinds of tax in terms of these five headings:
i)
assessability
ii)
collectability
iii)
dead
weight costs
iv)
ability to
pay
v)
willingness
to pay
I’ll put numbers on all this in a later post –
it is most illuminating if we assume that the government rolled all existing
“taxes” (i.e. ignoring duties and rents in the narrower sense) into one single
tax which would have to raise about £450 billion a year – this post is just to
illustrate the principles.
Poll tax
i) These are easy to assess, it is simply the total tax revenue required divided by the number of adults obliged to pay it.
ii) Collectability is appalling, as we well know.
iii) Ignoring the enormous costs of chasing all the people who can’t afford to pay, poll taxes score well in terms of dead weight costs as they are not a tax on income, so they are an incentive to earn as much as you can rather than being a disincentive.
iv) They score appallingly on ability to pay, by definition, as there is no correlation between the tax and your assets or income.
v) Everybody hates paying tax. If the entire government were funded by a Poll Tax then the top third or quarter of people by assets or income would do well out of the system if everybody pays up, but they would have the same incentive to cheat as anybody else by e.g. claiming to be non-resident.
Further, there is no
correlation between the amount you pay and the benefits you receive from
society as a whole. S successful stockbroker who takes the subsidised train out
to his four-bed detached house in the catchment area of a good state school in
Surrey clearly receives far more benefits than an unemployed ex-steel worker in
a council flat on Tyneside.
Taxes in turnover, employment, profits and
income
These include Value Added Tax, National
Insurance, corporation tax and income tax. Please note that VAT is not a
harmless tax on “consumption”, it is a tax on gross profits of unfavoured
productive businesses and is simply not applied to most profits derived from
land ownership or banking.
i) Assessability is not impossible, as we know,
but most businesses have to cope with four layers of tax on income and split up
their turnover, expenses and residual payments out into VAT-able and exempt
turnover (or expenses); into payments to employees and the self-employed and
into taxable and non-taxable profits (reinvested profits are by definition
matched by capital spending or capital allowances). Individuals have to go
through the same rigmarole.
ii) Collectability. There is every incentive to
avoid taxes. If it is simple evasion then economic activity still takes place,
but the residual rates of tax have to be increased on those who are not in a
position to hide their income (or who are just too honest for their own good).
We know that even in the UK – which has quite a good record of compliance)
there are huge amounts of evaded and unpaid taxes.
iii) Dead weight costs. These are enormous of
course. These costs refer to the huge but invisible costs of all that economic
activity which simply does not take place because of taxes. It is estimated
that every 1% on VAT costs 100,000 jobs, for example, the impact of the other taxes
in isolation is not quite as dramatic, but it all adds up. So businesses go out
of business (or never get off the ground) and we end up with mass unemployment.
The total deadweight costs are ten or fifteen per cent of GDP, i.e. between
£100 and £200 billion a year (more than enough to eradicate our trade deficit
and to turn it into a comfortable surplus).
iv) Ability to pay. These taxes score
relatively well on that front, by definition. But remember that if you look at
all these taxes in the round, the marginal rate for our median taxpayer (basic
rate employee not entitled to tax credits working for a VATable business) is
fifty per cent, with much higher rates for higher and additional rate taxpayers
and the highest rates of all for those receiving means tested benefits. Again,
the people who lose out most are those who pay little or nothing in cash terms
– in other words all the failed businesses and the unemployed.
v) Willingness to pay. Although most people
comply, this is only grudgingly –they are too honest to cheat and there is a
vague understanding that somebody has to pay for all the things the government
does. But there is absolutely no correlation between the amount of tax you pay
and the benefits you receive from the government. If anything there is a
negative correlation because the highest earners receive nothing in cash
benefits and are more likely to pay extra for private security, private health
insurance or private education.
Taxes on the rental value of land
Land Value Tax in all its guises scores well on
all fronts and seem to combine the best aspects of the other two types:
i)
Assessability.
Is easy. As a layman, you cannot begin to guess how many adults live in a
particular home, how much they earn or what the turnover and profits or a
particular business are – it requires the force of law to make people disclose
all these things.
But working out the rental value of each site
is very easy; all you need to do is to know selling prices and rental values of
a reasonably large sample of residential and commercial premises in each
smaller defined area. You then subtract the rental value of similar premises in
the cheapest area and the balance is the “site premium”, i.e. the “location,
location, location” value which is generated by society as a whole.
ii)
Collectability
is also a doddle. Whoever is registered as the owner at HM Land Registry has to
pay the tax each year. If that owner does not pay, then the arrears can easily
be registered as a charge and once two or three years’ arrears have been built
up, the title is auctioned off and the arrears withheld from the sales
proceeds. For sure, some land owners are not yet registered at HM Land
Registry, but that is far from saying that the land itself is not registered
and this has never been a hindrance to collecting Council Tax or Business
Rates, which have the highest collection rates of all taxes at 98% or so.
iii)
Taxes on
the rental value have zero dead weight costs – like a Poll Tax - as they are
not related to private income or output. There is plenty of evidence to show
that they tend to stimulate the economy because land and buildings will always
be put to their most efficient use, in other words it would be too expensive to
keep valuable urban sites out of use or to allow buildings to fall derelict. If
taxes on land replace taxes on output and employment etc, then this would shed
the economy of the existing dead weight costs.
iv)
The
traditional main argument against taxes on the rental value of land is “ability
to pay”, the Poor Widow Bogey. They say that the tax would hit the “asset rich,
cash poor”. This is a non-argument in practical terms because it would be easy
to give such people discounts, exemptions or even better, the opportunity to
defer and roll up the tax to be repaid on death.
It is also only a transitional issue and does
not apply to the working population (the “wealth creators”) anyway. By and large, low-income people move into
cheap houses and high-income people move into expensive houses. Each purchaser will
take the tax into account when deciding which house he wants to buy and will
reduce the amount he is prepared to take out as a mortgage accordingly, so in
real terms, the tax costs him nothing. It is the same with business tenants –
they work out how much premises are worth to them, subtract the Business Rates
and pay the smaller balance as rent to the landlord.
v)
Willingness
to pay. Today’s land owners spit feathers about Business Rates and Council Tax,
and we know that the banks and land owners (and their stooges in the press,
Parliament and academia) have been are running a highly successful anti-LVT
campaign for a century.
But look at in terms of tenants and the next
generation of purchasers. Unlike taxes on income, there is a perfect
correlation between what you pay and what you get. If you are willing and able
to pay more, you get somewhere nicer, if you are unwilling or unable to pay,
you get somewhere not so nice – but this is exactly the same allocation as
under current rules whereby land/location values are collected privately by the
current land owner when he rents or sells.
This is absolutely no different to owners of
big cars paying much more in VAT on the new car, in fuel duty or road fund
licence. If we go with the fiction that VAT is borne by the purchaser, does
anybody complain that VAT on new cars is unfair, as it does not relate to
“ability or willingness to pay”? Of course not – if you can afford a new BMW,
you pay £10,000 in VAT and if you buy a run of the mill family saloon, you only
pay £4,000 VAT. If you can only afford a second hand car, you pay little or
nothing in VAT.
Summary
Land Value Tax has all the merits of a Poll Tax
– it is easy to assess and has no dead weight costs, but beats it hands down in
terms of collectability, ability and willingness to pay (there is a match
between amount paid and benefits received).
Land Value Tax has all the merits of taxes on
income as in the medium term as it relates to ability to pay (once everybody
has “right sized”) but none of the disadvantages – it is easier to assess and
collect and has no dead weight costs. It also beats it hands down in terms of
“willingness to pay”.
So besides the moral or philosophical arguments
and the fact that LVT leads to better outcomes (an LVT-only world works better
than a world without government or taxes), it is quite simply the case that LVT
beats all other forms of tax in a simple everyday pragmatic sense.
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