Monday, February 09, 2009

Corporation tax

Larry Elliot writes on tax incidence (which skewers, once again, the ridiculous Richard Murphy, who maintains that this tax incidence idea doesn't actually occur as regards corporation tax).
In the end that means you and me, since business passes on its share of the tax bill through lower wages, higher prices or reduced dividends.

Timmy notes that corporation tax doesn't really serve the purpose that it is billed as serving.
We then need to move on to decide which of those three groups does indeed carry that economic burden and empirical studies suggest that it’s about 70% which is bourne by the workers in the form of lower wages.

Corporation tax is thus not fit for purpose. It’s sold as a tax on the companies (obviously not true) and if not that, as a tax on capital. Which it also isn’t. So if we really want to tax returns to capital we need to abolish corporation tax and replace it with something else.

Some time ago, your humble Devil proposed a very simple tax regime: a flat tax on income (with, of course, a high personal allowance), and only personal income should be taxed. Instead of having different rates for capital gains, dividend payouts, etc. we should simply tax income.

The only tax is a tax on personal income: it doesn't matter where that income comes from—what the source or provenance of the income is. It would be eminently easy to administer and there would be very few loopholes.

It would also stop organisations such as The Guardian, for instance, from conducting a disgustingly hypocritical campaign in which it accuses corporations of not paying enough tax when its parent company—Guardian Media Group—paid no corporation tax on its £300+ million profits last year.

27 comments:

Mark Wadsworth said...

Right wingers always have this knee jerk thing about corporation tax, which completely misses the point.

*sigh*

1. It’s not as bad as VAT, which raises twice as much as corporation tax (in the UK), and which increases prices to consumers, reduces income of businesses, depresses output and adds to distortion between VAT-able and non-VAT-able parts of economy.

2. It’s not as bad as Employer’s NI (which raises about as much as corporation tax), which adds to cost of doing business, depresses wages and reduces employment levels.

3. If you exempt ‘companies’, then partnerships will just all incorporate, so for a given level of total revenues, the rate of income tax charged on employment income will go up even further so any modest gain from cut in corporation tax is wiped out immediately.

4. Corporation tax is not charged on reinvested profits, by definition. It is only charged on ’surplus’ profits that end up as cash in the bank or as dividends. So corporation tax is just an administratively simple version of a tax on ‘income from capital invested in UK regardless of domicile of owner’ (instead of capital gains tax or higher rate tax on dividends, that are truly grim taxes and subject to all manner of avoidance).

5. For sure, at the very margin, corporation tax might just persuade some businesses to move offshore, but that is largely down to wage or other cost differentials (e.g. corporation tax in China and India was 35% last time I looked). Companies like Tesco can’t just shift all their supermarkets offshore, and even if you buy foreign manufactures in the UK, the bulk of the selling price accrues to the UK part of the supply chain.

*/sigh*

PS, if we are going to chat gaily about 'tax incidence', the only tax that bears neither on entrepreneurs, innovators, investors or employees is Site Value Rating or Land Value Tax, which is borne entirely by the landowner, it has no deadweight cost (some would argue it has deadweight benefits).

Blue Eyes said...

Partnerships would pay income tax on the money they pay themselves, would they not?

I would have a flat income tax and a carefully worked out property tax. Actually I would have two income taxes - one for central government (tiny) and one for local government (small).

Dave said...

One tax band only.
Threshold set at 20k
No Allowances.
No allowances

Oh and.....

no allowances.

That should make it easy to calculate, so that HMRC won't fuck it up and all those tax avoidance specialists can go fuck themselves.
And if you don't like like it fuck off.

Mark Wadsworth said...

BE, "Partnerships would pay income tax on the money they pay themselves, would they not?"

If you tax them like companies, yes. So if partners make extra profits they don't need to spend, they can leave it in the partnership bank account and roll it up tax free, as opposed to employees, who can only save after-tax income.

This goes against all three of Dave's eminently sensible golden rules, being 'no allowances', 'no allowances' and 'no allowances'.

DK is virulently opposed to property taxes, BTW, that's why I snuck it in as a PS.

Intruder said...

An income tax would be easy to avoid legally, and requires huge amounts of intimidation of the law-abiding to keep them law-abiding.

A LV tax has many flaws - if a company pays £10K/month LVT or £10K/VAT they would have to get an extra £10K from their customers. So both push up prices. But with VAT if a company sells a seasonal product they pay more tax in season and less out of season. No bank loans needed. If they are going through a lean period (like many are now) they receive less custom and pay less tax.

VAT is also better for an individual - he can alter the amount of tax depending upon whether he's flush or skint. An LVT would force him to pay even when he was inbetween jobs. With VAT there is no monitoring of the individual, there doesn't need to be.

HMRC will still have to monitor the accounts of businesses, but the nature of VAT is that it is easy to track and thus almost documents itself. Corp tax is, like most other taxes, over complicated and costs too much to calculate and regulate.

Intruder said...

2 income taxes!

God help us from the bureaucracy!

I can't imagine a more common abuse than the council workers checking on their neighbours incomes. We already know that MPs and celebrities would be exempt from that list.

Mark Wadsworth said...

@ Intruder:

"if a company pays £10K/month LVT or £10K/VAT they would have to get an extra £10K from their customers"

Nope. If the business is a tenant, the LVT would be borne - legally and economically by the landlord, there is no extra cost to the business. If the business owns its own premises, it still cannot pass on that cost - prices are fixed by the market. Think about it, if shop 1 is a tenant (with high occupancy costs) and shop next door is owner-occupied (low occupancy costs), does the shop next door charge lower prices? No, of course not (unless they are daft).

"he can alter the amount of tax depending upon whether he's flush or skint". Again, if he is a tenant, he has got to pay the same amount of rent whether he's flush or skint (and LVT is borne legally and economically by the landlord, he cannot pass it on as higher rents, basic economics as borne out in practice).

If he is a home-owner, the LVT will depress the price of the house, so reduces the amount of mortgage he has to pay. He pays less mortgage and more LVT so is no worse off. If a mortgage borrower runs out of money he gets kicked out, just like a tenant. If a home-owner has no mortgage, then LVT, by definition, is affordable to first time buyer and only a fraction of the market rent, so is by definition 'affordable'.

"the nature of VAT is that it is easy to track and thus almost documents itself. Corp tax is, like most other taxes, over complicated and costs too much to calculate and regulate."

You have fallen for the Big Lies about VAT, a foul EU tax, much loved by politicians. It is far, far more complicated than corp tax, I work in tax, take it from me, that is a simple statement of fact.

Intruder said...

Of course the business passes on the cost of tax. The price they charge *has* to cover their overheads. It doesn't matter if it's LVT or higher rent or VAT - the consumer always pays.

With VAT the company benefits from a flexible system that doesn't kill them off in lean times. If they sell nothing one month they pay nothing. What business would want it any other way?

An individual cannot control the LVT he pays any more than he can control the rent - that is *not* a justification for LVT. At least, with VAT, he has some control over the tax he pays even if all his other costs stay the same.

With VAT rent is lower (no LVT to pass on) and therefore mortgages will be lower - the cost of a house is directly proportional to the equivalent rent, not to the stamp-duty or council tax band or LVT. Lower rents means lower house prices.

VAT is simple. You may work in tax but I suspect that means you are familiar with today's tax allowances/loopholes and can make sense of them. The rest of us can't so we need to employ tax people to work out what to pay. No individual needs that with VAT, and neither does any company.

Politicians love stealth taxes. VAT is the most open tax there is.

I enjoy your tenacity Mark, but we're discussing fairly trivial points - in the bigger picture, they both win because it removes me from HMRCs clutches - except with VAT there is a cleaner break and I have more control.

Mark Wadsworth said...

Intruder "The price they charge *has* to cover their overheads. It doesn't matter if it's LVT or higher rent or VAT - the consumer always pays."

Look up Ricardo's law of rent. The rent does NOT increase cost to consumer (except to the extent that equilibrium rents are too high in the UK because of planning restrictions). The rent is simply a balancing figure that mops up most of the business' gross profits.

Think about it - Primark charge the same prices in their shop on the High Street, Anytown as they do in their Oxford St 'flagship' store. But in Anytown, they sell 1,000 units a day and on Oxford Street they sell 100,000 units a day, so the rent on Oxford Street is a hundred times higher.

"With VAT the company benefits from a flexible system that doesn't kill them off in lean times." That's the point, VAT DOES kill off marginal companies (unless they have absolutely no fixed costs), as it's payable whether they are making profits or not, unlike corporation tax, which a marginal or loss making company doesn't have to pay (the same goes for Employer's NI).

"An individual cannot control the LVT he pays any more than he can control the rent"

Exactly. The rent you pay is a fixed amount - a landlord cannot 'pass on' LVT, it has to do with elasticity of demand and inelasticity of supply, it is always borne by the landlord (like his income tax or his mortgage costs) and doesn't cost the tenant ONE PENNY.

"With VAT rent is lower (no LVT to pass on)". I agree that as VAT reduces gross profits, it might depress rents somewhat, but LVT cannot be passed on! LVT comes straight out of landlord's pocket, there is NO impact on productive business, returns on capital invested, wages etc.

"Politicians love stealth taxes. VAT is the most open tax there is."

VAT is the sneakiest and most underhand tax there is. Even if it were a tax on consumption (which it isn't, it's a tax on turnover of certain businesses) people pay THREE times as much in VAT as in e.g. Council Tax. Council Tax is a proper in-your-face tax.

I am a free market economist, I know more about tax incidence than most people.

Roger Thornhill said...

Mark,

We have been round the houses so many times on your hatred of VAT, yet you cannot escape the fact that if you increase Corp Tax and drop VAT, the only benefit is to foreign exporters, as the only tax an importer pays is the profit from the margin they make on the goods, whereas the local producer pays tax on their profit as does the reseller.

You somehow try and convert this into a "subsidy" which is basically irrational.

VAT taxes spending when and where it happens. It taxes all products sold regardless of source. People are taxed when they spend, companies are taxed when they sell.

The Penguin said...

Get real gentlemen.

No chancellor is going to give up all those lovely taxes, they give him and his empire meaning. They provide work for countless bean counters, and lucrative earners for the tax lawyers and specialist (sad) accountants, and justify having all the powers and perks.

Simplify the system? Why that would never do! Would turkeys vote for Christmas?

The Penguin

Idle Pen Pusher said...

I'm with DK on this, though I'm not sure if I wouldn't also support a sales tax in addition to income, in order to spread the load wider and thinner.

Twig said...

1. Abolish
- IHT
- NICS
- Business Rates
- TV License Tax
- Tax on personal savings
- Stamp Duty
- Tax on pension fund dividends
- HIPS
- VAT on Excise Duty
- CGT
- Insurance Prem Tax
2. Freeze vat at 15%
3. Flat Income Tax say 25%
4. Personal allowance to be transferable between spouses
5. Flat rate road tax £100
6. Welfare benefits cannot exceed the personal tax allowance.
7. Retrain the legions of surplus tax lawyers and HMR&C deadwood to become useful and productive citizens.
8. Sit back a watch the economy boom.

Intruder said...

VAT is "payable whether they are making profits or not"

No no no

A company that makes umbrellas has to pay LVT whether they sell umbrellas in June or not. No sales? Tough - pay the LVT.

VAT is paid by the consumer and passed onto HMRC. A business never pays more VAT than they receive. As a tax guy you know this. If they don't sell any umbrellas they don't pay VAT at all. No sales? Well, no VAT to pay then.

In lean times VAT is better for the business.

"LVT cannot be passed on! LVT comes straight out of landlord's pocket, there is NO impact on productive business, returns on capital invested, wages etc."

A landlord, like a business, passes on his overheads. And that means tax as well. If you ignore that then you are ignoring a fundamental concept of making a profit. The consumer pays for the road tax that hauliers pay, that is passed onto Primark, that is passed onto the consumer. It doesnt matter what the tax or overheads are - the consumer pays for it.

"VAT is the sneakiest and most underhand tax there is. Even if it were a tax on consumption (which it isn't, it's a tax on turnover of certain businesses)"

How can VAT be sneaky - it's on every receipt. Insurance tax, airport tax, parking fines - they're all sneaky. The only way VAT could be clearer is to add it onto advertised prices like USA - where they add on loads of sales taxes, I find it makes it more difficult to work out what something will cost. So the way we do it is best.

VAT *is* a tax on consumption.

1) A business always pays less tax than they receive from consumers. Always. Give me one example where a business pays more VAT than they receive. They don't.

2) All overheads - including tax - are always passed onto consumers. With VAT it's clear what tax you are paying.

3) It is extremely easy to administer and there is no obligation on the part of the individual to declare income, expenses, spending - the VAT you pay is anonymous. Less HMRC bureacracy and loopholes. Massive savings reduce the overall tax burden dramatically.

4) Everyone has the option of reducing their VAT by reducing their consumption - that is a good thing for the individual.

"I am a free market economist, I know more about tax incidence than most people."

I don't even know what "tax incidence" is but I do pay VAT, Corp Tax, Self-Assessment, etc. and out of all of them guess which one can be calculated without someone who knows what 'tax incidence' is :)

Mark Wadsworth said...

Intruder:

My words: "VAT is "payable whether they are making profits or not"

To which you replied "No no no. A company that makes umbrellas has to pay LVT whether they sell umbrellas in June or not. No sales? Tough - pay the LVT."

I agree, if a company makes absolutely no sales whatsoever, it pays no VAT. But that is not what I said - I said "if it makes no profits". So if the business normally makes £100 sales and has £80 overheads, it pays up to £13 some VAT and £2 corporation tax. If its sales drop to £60, then it still pays up to £9 VAT but pays no corporation tax.

So in that case, the VAT bill may be what pushes the business into insolvency - not the corporation tax. In that sense VAT is far worse than corporation tax.

Again you repeat the Big Fat Lie that "VAT *is* a tax on consumption."

How is 15% VAT mathematically any different from a tax of 13% on the turnover of VAT-registered businesses that makes supplies to the end consumer? Answer, it isn't. If you all VAT a turnover tax, all of a sudden it sounds a lot less palatable.

Finally, you repeat the fundamental untruth "A landlord, like a business, passes on his overheads. And that means tax as well."

Imagine three indentical flats in a block, all going for the same market rent.

Landlord 1 bought his years ago, has no mortgage and does not declare his income. Landlord 2 has a smallish mortgage and is a law abiding citizen who pays full 40% tax (36% actually, but that's details). Landlord 3 bought at the top of the market and is now in negative equity with the mortgage from Hell, the repayments on which far exceed his rental income.

Please explain to me how landlord 3 'passes on' his higher costs, and why landlord 1 would charge a lower rent than Landlords 2 or 3. You can't, because they don't. Market rent is market rent.

Which brings me back to the LVT point - the landlord cannot pass it on. If the landlord gets too greedy the tenant just goes bankrupt or moves out to cheaper premises. So if your umbrella business is a tenant, he still has to pay the same rent (whether it's been a good or a bad month), and that rent is always inclusive of LVT - the business is not affected.

If the business owns the premises (and I explained all this above), then yes, they have to pay the LVT. But by definition this will only ever be a fraction of the full market rent. If tenant businesses can survive paying fall market rent, then a business who cannot even cover the LVT deserves to go out of business and make way for a more profitable one.

You then admit that you don't understand 'tax incidence', I am trying to give you lots of examples here.

Mark Wadsworth said...

Roger ...

... you cannot escape the fact that if you increase Corp Tax and drop VAT, the only benefit is to foreign exporters...

Firstly, I never said increase corporation tax. I said scrap VAT.

Secondly, if you, as a libertarian-who-doesn't-believe-in-free-markets want to discourage imports, by all means, have import duties. That is open and honest (albeit misguided). But why have a tax that hurts domestic producers and service providers as well?

Isn't that cutting off your nose to spite your face? Simple maths and reasonable grasp of retail industry tells me that is only a small fraction of the price you pay in a shop that actually goes to the overseas producer. The bulk represents income/profits of the UK based parts of the supply chain.

"VAT taxes spending when and where it happens. It taxes all products sold regardless of source. People are taxed when they spend, companies are taxed when they sell."

Well, apart from two big areas, housing and banking, which are VAT exempt or zero-rated, thus their effective rate of tax on profits is half that of the rest of UK plc. High taxes distort more than low taxes, obviously, but what is really stupid is to have some parts of the economy paying twice as much tax as other parts, that is yet another distortion on top.

As to VAT being a tax on spending, it's not. It's a tax on turnover, it is a very crude profits tax, with no deduction for salaries or interest costs.

Mark Wadsworth said...

For those who are interested in the difference between the legal and economic incidence of VAT and corporation tax on business, I did a crash course here.

Jock Coats said...

Of course a certain Mr Smith of Kirkauldy, Fife wrote that the two forms of revenue that could most bear a tax were on luxuries (ie VAT) and on ground rents (ie LVT)...:-)

Budgie said...

For B2B a product bought for £100 and sold for £200 incurs VAT £15 out and £30 received. The difference (£15) is then paid to HMRC. So, for B2B, VAT is tax neutral but administratively costly. Only the retail buyer pays VAT in the end. So VAT could be replaced by a purchase tax, saving a large amount of admin, paperwork and HMRC supervision.

Intruder said...

Thankyou Mark, that's more informative.

"So if the business normally makes £100 sales and has £80 overheads, it pays up to £13 some VAT and £2 corporation tax. If its sales drop to £60, then it still pays up to £9 VAT but pays no corporation tax."

Ignore Corp Tax for the moment. What you're saying is that - all things being equal:

If they sell £100 and pay £80 they still have to pay £13 LVT. And if sales drop to £60 they still pay £13 LVT. And if they sell nothing thjey still pay £13.

right?

"In that sense VAT is far worse than corporation tax."

Yes, in that sense it is. But in your example LVT is worse.

"How is 15% VAT mathematically any different from a tax of 13% on the turnover of VAT-registered businesses that makes supplies to the end consumer?"

But LVT isn't based on turnover - you pay it no matter how bad a patch your company is going through.

"Please explain to me how landlord 3 'passes on' his higher costs, and why landlord 1 would charge a lower rent than Landlords 2 or 3."

Easy - market economy. If there are more people renting than places to rent then the price of all 3 rises. If there are less people then the ones with the higher overheads need to move onto another business. The landlord1 with no overheads has accumulated enough wealth to buy landlord 3s flat at a discount rate and makes more money...

"Which brings me back to the LVT point If the landlord gets too greedy the tenant just goes bankrupt or moves out to cheaper premises."

Yes but 'too greedy' is a comparative term. They could all be 'too greedy' and what you mean is if landlord 3 prices himself out of the market - in which case he will go out of business. If they all pay LVT then they will all need to pass it on or take a hit in their profits. Even the places that are cheaper for the tenant will pass it on. It's the same as any compulsory overhead.

"So if your umbrella business is a tenant, he still has to pay the same rent (whether it's been a good or a bad month), and that rent is always inclusive of LVT - the business is not affected."

Yes it is - the business has to pay £13 added on by the landlord irrespective of sales. The business *is* affected!

"a business who cannot even cover the LVT deserves to go out of business and make way for a more profitable one."

Well, apply that reasoning to your previous examples - if landlord 3 cannot cover his overheads he deserves to go out of business. However I'm not sure a wise tax actually helps put companies out of business.

"You then admit that you don't understand 'tax incidence', I am trying to give you lots of examples here."

And very good they are - I think they amply demonstrate that VAT is better for businesses in lean times.

You're not going to change your opinion, are you :)

Intruder said...

Anonymous Budgie said...

"So, for B2B, VAT is tax neutral"

precisely - there is no tax for companies - only consumers, as with any other tax.

"So VAT could be replaced by a purchase tax, saving a large amount of admin, paperwork and HMRC supervision."

Not really - if I setup a company that didnt get audited by HMRC, it would purchase everything VAT-free and then write it off to me.

The VAT has to be audited down the whole line - but the beauty of it is it's-self auditing. A company has to have books, and they record the £100VAT purchase from company nbr 12345678, so that company has to have a balancing entry.

If they don't match then one of them has made a mistake - so simple even a computer could check it.

Harry Haddock said...

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

Budgie said...

Intruder said: " .. if I setup a company that didnt get audited by HMRC, it would purchase everything VAT-free and then write it off to me."

This type of fiddle would be no more prevalent than under the pre-VAT Purchase Tax scheme. Fraud is possible in any system but annual accounts (for corporation tax) would still require submitting to HMRC and Co House as currently required.

Gareth said...

"Look up Ricardo's law of rent. The rent does NOT increase cost to consumer (except to the extent that equilibrium rents are too high in the UK because of planning restrictions). The rent is simply a balancing figure that mops up most of the business' gross profits.

Think about it - Primark charge the same prices in their shop on the High Street, Anytown as they do in their Oxford St 'flagship' store. But in Anytown, they sell 1,000 units a day and on Oxford Street they sell 100,000 units a day, so the rent on Oxford Street is a hundred times higher."


I think Intruder's point is this: Increasing the cost of running a business, be it through introducing an LVT, increasing rents, increasing VAT or any other tax, increases the cost to the consumer.

In your example the rents are static. They are not the same from store to store, but they are static.

If both rents were to double what would Primark do? Maintain prices but trim their business costs (through cheaper quality stock or less staff) or put up prices accordingly. Either way the consumer pays - through poorer quality service or goods but at the same price, or through maintaining the quality but at a higher price.


Besides which...

The landlord on Oxford Street would need to know Primark's rent in Anytown, Primark's sales in Anytown and Primark's sales in Oxford Street to price it as you suggest. How likely is this? The rent for Oxford Street is more dependent on other rents on Oxford Street and the landlord's cost of ownership than it is dependent on sales and rents in Anytown. Rent at one site is not solely a function of rent at the other.

The profit at Oxford Street is 100 times the profit at Anytown. If I have read this explanation of Ricardo's Law of Rent correctly wouldn't this be excess productivity the Law of Rent implies should be swallowed up by the landlord at Oxford Street? This would surely only be true if Primark make no profit.

Mark Wadsworth said...

Intruder, you are labouring under a fundamental flaw here: "But LVT isn't based on turnover - you pay it no matter how bad a patch your company is going through."

Nope. LVT comes out of rent. The business has to pay the same RENT INCLUSIVE OF LVT whether or not it is going through a bad patch. It has to do with elasticity of demand and inelasticity of supply.

"If they all pay LVT then [landlords] will all need to pass it on or take a hit in their profits"

As much as landlords would love to 'pass it on', they simply cannot, see real life example in response to Gareth below. So they have to take a 'hit in their profits', sure, landlords won't like this, but that is a separate issue. The point is that LVT does not depress economic activity, increase prices to consumers, reduce profits of the business or depress employment levels.

Gareth "The landlord on Oxford Street would need to know Primark's rent in Anytown, Primark's sales in Anytown and Primark's sales in Oxford Street to price it as you suggest."

Maybe the landlord doesn't know all this, but Primark certainly does, it then works backwards from its expected gross profit to work out how much rent it can pay (this is Ricardo's law). If this is as much as or more than the next highest bidder, it moves in to those premises.

"If both rents were to double what would Primark do?"

It would close down that store, like Woolies. Woolies' collective landlords decided that other potential tenants - Tesco Metro, for example - would be able to pay a slightly higher rent. Woolies did not just put up their prices by whatever amount they'd need to afford the rents because they face their own supply/demand curve and simply could not do so.

"Rent at one site is not solely a function of rent at the other."

Wrong again. Primark are indifferent whether they are at 94 Oxford St or 123 Oxford St, as are its competitors. The rent they are prepared to pay at any of these sites is a function of their own gross profits, which for retailers tend to equalise out at the rent that the most profitable retailer can afford to pay while leaving them with a reasonable net profit.

I agree that Ricardo's law is sometimes exaggerated. The rent can never swallow up every single penny of profits or there'd be no point being in business. What rents do is soak up MOST OF OR NEARLY all the extra profits that a business can make by being at a more favourable location.

Paul Lockett said...

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

They don't. In both examples you gave, supply and demand explains the effect perfectly well.

Cars are in variable supply, so, unless the person who is using the car happily takes the full VAT increase, then the market will be suppressed. If the VAT is passed on, demand will be suppressed; if the VAT is borne by the hire company, supply will be suppressed.

Land, in contrast, is in fixed supply. Landlords could try to pass the tax on, but that would suppress demand, resulting in some plots of land going unused. As overall supply is constant, the only logical response for those landlords with empty plots would be to undercut other landlords to attract tenants; they couldn’t reduce supply because what they are selling isn’t manufactured. That process of undercutting would continue until rents settled at the original market rate.

As an example, consider what would happen if, instead of auctioning North Sea oil drilling rights, the government just gave them away. Would you expect that to result in lower oil prices? Simple supply and demand says it wouldn’t.

Anonymous said...

"only personal income should be taxed. Instead of having different rates for capital gains, dividend payouts, etc. we should simply tax income."

Yup - I've also wondered why not do this.