Monday, February 09, 2009

Comment of the Day...

... comes from Harry Haddock who (amongst others) is arguing against Mark Wadsworth, on this post, about the relative merits of Land Value Tax and Value Added Tax.
I find it odd that the laws of economics magically change depending on the product being sold.

For instance, if my product is leased land, apparently LVT is a super duper tax that cannot be passed on by me, as the market decides what the rent is, and I have to absorb this additional cost and put up with it. Hurrah, we've bashed the evil landlord. Hurrah!*

However, if my product is a leased car, apparently VAT is an evil, authoritarian tax that is instantly passed onto the consumer, increasing car rents, causing plague, famine, and making landlords even more evil than before. Booooo. Evil landlords. Boooo*.

Strange that, eh?

* Georgist porn added for amusement value.

Succinctly put, methinks.

16 comments:

Idle Pen Pusher said...

LVT is wrong, but not for this reason. Supply curves for land are more inelastic than anything else.

Wealth should not be taxed because a) it has already been taxed when it was income, b) there is no transaction beween individuals and therefore it isn't the state's business to interfere and c) it already taxes wealth quite enough as it is via inflation.

Idle Pen Pusher

Mark Wadsworth said...

HH can say what he likes, but anybody who understands elasticity of supply and demand, and supply demand curves undertands this.

You can all stick your fingers in your ears and shout la la la, that is rather strange behaviour from somebody who yesterday did a post on tax incidence.

This is not about bashing landlords, any more than people who support VAT want to bash producers. The fact is they are bashing producers.

Longrider said...

I had a fascinating discussion with Mark on this. I remain unpersuaded - having done some sums and being horrified by the results. The problem with taxing land as it is "wealth" is that it is not liquid. A couple of years ago I was property wealthy and income poor. Under LTV I would have been placed under extreme pressure to sell as my property tax burden would have been increased by 50%. A tax that is not based on ability to pay is inherently unfair - and that is the biggest charge against LTV. Having property does not mean that I have the liquid funds to pay tax on it. It is unlikely that I could have afforded rent - which for a similar property would be higher than my mortgage - and, frankly, why the fuck should I?

I struggled through on my own and am managing to pay off the debts incurred. That's the way I do things - I sort out my own problems.

Mark is arguing for rolling up other property/wealth taxes, which sounds reasonable enough. However, for most people these taxes either do not apply or they only apply very rarely. How often do we pay capital gains, IHT or stamp duty? Therefore, for most of us, LTV would be a significant tax hike.

Until that one is resolved and it is cost neutral for those of us who are not first time buyers, I remain opposed.

Paul Lockett said...

"I find it odd that the laws of economics magically change depending on the product being sold."

They don't.

The fundamental difference with land is that it is in fixed supply.

Take the example of the 3G licence auction. If the government had just given them away, rather than auctioning them off for £billions, do you believe the phone operators would be charging less? The laws of supply and demand say they wouldn't.

Irrespective of the economic arguments, I still don't understand why, given a choice between LVT and sales taxes, anyone with libertarian sentiments would plump for the one which requires extensive government monitoring of the population to collect and enforce.

As far as I'm concerned, any tax on entirely private transactions is inherently unlibertarian.

Mark Wadsworth said...

Returning to HH's comment: "I find it odd that the laws of economics magically change depending on the product being sold."

They don't. There is one set of interlocking laws that cover three basic possibilities:

1. Price inelastic demand/elastic supply (for example petrol, booze, fags). However high the tax thereon is, the consumer bears nearly all the additional cost imposed by the tax. Selling fags in the UK with 90%-odd tax is just as profitable for Phillip Morris as selling them in Malta or Greece with 30% tax.

2. Price elastic demand/elastic supply, i.e. most things. A sales tax like VAT is split three ways: price paid by consumer goes up; price received by producer goes down and quantity produced and consumed goes down.

3. Price elastic demand/INelastic or fixed supply - in particular land (but also airport landing slots, 3G licences - whether this is fixed because of government restrictions or not is by the by). A tax on such supplies is born by the supplier, the tax is just an overhead that the supplier cannot pass on.

I gave the example of three landlords with identical flats to rent out. One has no mortgage and doesn't bother declaring his income for tax; one has a medium sized mortgage and does declare his income for tax; the third bought at the peak and has mortgage payments that exceed his rental income. But they all charge the same rent. This is a simple observable fact.

"For instance, if my product is leased land, apparently LVT is a super duper tax that cannot be passed on by me, as the market decides what the rent is, and I have to absorb this additional cost and put up with it."

Exactly. For the landlord this is not 'super duper' but from the point of view of the productive economy, it is 'super duper' because it does not reduce economic activity and wealth generated by innovators, entrepreneurs, investors and workers.

"Hurrah, we've bashed the evil landlord. Hurrah!"

Who said "evil"? If you are like the socialists and want to put politics above the laws of economics to favour one particular group over another (like minimum wage, working time directive, subsidies for failing industries etc), then fine - if you ignore the laws of economics you will always end up making society in general worse off. I don't do politics, I do economics.

"However, if my product is a leased car, apparently VAT is an evil, authoritarian tax that is instantly passed onto the consumer, increasing car rents..."

As I said, with elastic supply/demand, the VAT is not 'passed on' in its entirety. The car hire place sees a fall in demand and has to bear some of the VAT itself.

"... causing plague, famine ..."

Again, I never said 'plague and famine', I said lower profits to businesses, higher prices to consumers, unemployment etc.

Mark Wadsworth said...

Longrider: "Until that one is resolved and it is cost neutral for those of us who are not first time buyers, I remain opposed."

Yes, I see your point, which is why I have now added a further tweak to the MW policy, namely existing home owners can stick with Council Tax, Inheritance Tax, Stamp Duty, Capital Gains Tax, VAT on domestic fuel and Insurance Premium Tax etc.

Tenants will be exempt from all the above taxes, and LVT will only kick in for each property the next time it is bought/sold. (unless people opt in to LVT).

Harry Haddock said...

You may say you are not interested in politics, only economics, but that's hocum. Tax is politics. Sure, it has economic effects, as do most political decisions, but it aint economics.

Even with your tweak, two political things happen, for which you need to consider the morality of those decisions, and cannot simply say 'meh, I'm only interested in the economics';

a) You legislate to ensure that, effectively, the only people paying inheritance tax are people who's business involves the use of land. This might get your leftist & georgist LVT supporting friends all moist, but as I see minimal taxation as a necessary evil in a minarchist society, rather than a tool for social engineering, it does nothing for me.

b) You almost guarantee that all 'social' housing will be state owned.

Longrider said...

...Council Tax, Inheritance Tax, Stamp Duty, Capital Gains Tax, VAT on domestic fuel and Insurance Premium Tax etc.

Of these, I was only paying council tax, VAT (which I could reduce by not buying non essentials) and insurance tax - which, again, I could minimise by not buying unnecessary insurance (most of it).

Mark Wadsworth said...

HH "Tax is politics. Sure, it has economic effects, as do most political decisions, but it aint economics."

1. Taxes have to be raised somehow, even if you have a minarchist state that spends maybe 5% to 10% of GDP on core functions.

2. I suggest that the tax should be raised in such a way as to damage the productive economy as little as possible.

3. Faced with a choice between taxes that a) make it easier for people at the bottom to work their way up and a tad more difficult for the already wealthy to merely stay wealthy OR b) taxes that make it more difficult to work your way up but a tad more difficult merely to stay wealthy, I would prefer the former (a).

Maybe modern Libertarian thinking is to prefer the latter (b). That is a purely political decision on your part.

Paul Lockett said...

HH: "I see minimal taxation as a necessary evil in a minarchist society"

Then why object to a tax which requires little bureaucracy in favour of others which require extensive monitoring and information gathering?

Harry Haddock said...

Paul / Mark

I primarily object to any tax that increases the states power to socially engineer a population. Thus, I object to LVT in it's pure 'single tax' georgist form. As Marks proposal stands, it still would empower the state in a manor they don't presently have, and in a way I find morally unacceptable. Note, my objection to LVT is purely this ~ a practical objection. Unlike many LVT advocates (not including MW in this, but ya Geolibs), taxation systems aren't a religion for me. show me away of implementing LVT that isn't an authoritarians wet dream, and we'll talk about it's relative economic merits. Otherwise, it falls at the first hurdle, and is off the table as far as I am concerned.

Ergo, Mark, I regard your a/b choice as false, and do not accept it. I am not immune to the concerns you have visa vi housing bubbles. I have suggested ways to reform planning (ok, scrap planning) to help combat this, but I do not think the power LVT would give an authoritarian government over certain minorities, as long as they played the tyranny or the majority card correctly, a price worth paying. Ever.

Paul Lockett said...

HH: "show me away of implementing LVT that isn't an authoritarians wet dream"

Everyone has their own preference, but my personal favourite is the self-assessment system.

I don't understand why you think LVT would be an authoritarian's wet dream when most of the alternatives are far worse. Both sales and income taxes require an extensive bureaucracy to monitor every transaction or period of employment.

All that is required for LVT is a land register which records ownership. Given that the state is the body which grants land titles, I think that should be a given anyway.

Part of the reason I support LVT is that it requires far less state monitoring of the population than the alternatives.

Mark Wadsworth said...

HH, sure, let's scrap planning laws as well - that's the carrot, LVT is the stick, I see them as complementary.

PL "All that is required for LVT is a land register which records ownership. Given that the state is the body which grants land titles, I think that should be a given anyway."

Seconded!

More to the point, in the UK, HM Land Resgistry already records plot sizes, ownership and selling prices (and the bits of land that are missing can be reconciled from Council Tax & Business Rates and CAP subsidy registers).

All that is required is a rough and ready formula to calculate cost/value of buildings & improvements and there is your tax base (total value minus bricks and mortar for each postcode sector, agricultural land is very low value and not worth taxing IMHO), complete with names and addresses of landowners/taxpayers.

If you don't cough up, then HMLR takes a charge over your land, LVT is a renewal fee for exclusive possession. My magic fag packet says that it would require about a hundred additional civil servants to administer this, as against the tens of thousands involved with all the crap that LVT could and should replace.

Harry Haddock said...

but my personal favourite is the self-assessment system.

Before I respond to you both,let me be clear about this 'self assessment' system. Are you referring to the system that Georgists have often advocated to me ~ where an occupier sets his own value for his land, as do others in closed auctions, and if he is the highest 'bidder', he pays tax on that amount, but if he isn't, he is forced to sell to the highest bidder?

Paul Lockett said...

HH, in essence yes. The title holder would enter on the land registry the value he places on the land title and would pay tax as a percentage of that, with the proviso that he would have to sell, or increase his valuation, if somebody offered to meet his valuation.

I suspect it would be too radical an approach on its own, but I don't see why it couldn't work in conjunction with an assessed system; an automated valuation could be generated using market data and if the title holder felt the valuation was unrealistic, they could opt to use the self-assessment approach instead.

richard allan said...

Sales tax can very easily be used to "socially engineer" the population as it's almost guaranteed that different tax rates will be set on different commodities (eg. "necessities" vs. "luxuries"). As has already been pointed out, it requires a vast bureaucracy to administer. It is also rather heavily regressive, distorting the income distribution in favour of the rich. I really don't see much to like about sales tax from any perspective.

Whatever problems there may be with the implementation of LVT, anyone with a cursory knowledge of economics can tell you that it does not, in fact, have the same capacity to be "passed on" as sales tax. This was shown in my first year at the LSE, and again in my third year Public Economics module.

Harry Haddock has a habit of (mis-)characterising all support of LVT as the ravings of a socialist/someone with an axe to grind against landlords. I'm just a student of economics who realises that any improvements in "the economy" will be captured by landlords (just look at what's happened to land prices over the last 50 years), that landlordism's effects on infrastructure development are particularly crippling, and who understands that the massively unequal distribution of land in this country has no "productive investment" backing it up, just a history of criminality and government privilege. Telling the poor "Just buy some land if you want some!" rings incredibly hollow for me. Given the choice between two systems of tax delivering 10% of national income for public goods, I prefer the one which is simpler to administer, and delivers an actual chance of prosperity to the landless, assetless majority, rather than one that has nothing to offer to anyone other than the already wealthy. If that makes me a "socialist", or someone with "a hard-on for the landed gentry" then so be it.