Thursday, 16 January 2014

Land Value Taxation, part 2: Why arguments for the LVT don’t work

In a blog earlier this week I explained how changes to the tax regime can create windfalls or immediate costs to owners of the types of property affected by the change. For example, a tax on housing will hit the owners of housing at the time the tax is announced as their asset will immediately drop in value in line with the newly increased tax.

I’m sure those of you who have read my previous post explaining the LVT can all work out where I am going with this. If an LVT is introduced it will reduce the expected income on rented land; more of the rental income than expected will be lost to the tax. Similarly, for people who own and use land their cost for continuing to use the land will immediately rise. Buyers will not be willing to pay as much as they will now expect to pay the tax in order to enjoy the use or investment income from the land. These future owners will not pay anything as the result of the introduction of the tax, nor will the past owners who sold up before the announcement.

For this reason, a big question for supporters of the LVT is whether to compensate owners of land upon the introduction of the tax. This was considered, for example, by J.S. Mill back in his 1848 economics textbook. A pure version of the LVT would provide this compensation in order to ensure that the tax only falls on those who might benefit from increases in the value of land. However, if the government compensates landowners it will suddenly need to find a huge amount of revenue which will only be repaid over a number of years. Government revenues will take a huge hit in the short and medium term and the LVT will not bring in any substantial revenue for many years. This leaves the government to rely on loans and other taxes in the short term.

This also means that all the increases in land values that occurred up to the introduction of the tax are not taxed by the pure LVT. To make matters worse, if land values don’t increase after this point, then it will take ever longer to repay the debts taken on. Supporters of LVT tend to assume land will always increase in value, but this is much more likely if there is an overall increase in productivity and population (or that the increase in one over-rides the drop in the other).

The “pure” version of LVT would therefore raise much less revenue than the “impure” version, which can be considered a wealth tax. I have argued in a previous post that wealth taxes are generally regrettable, though they might be acceptable in some cases. However, the impure LVT is even more troubling than other forms of wealth tax. This is because it is a discriminatory wealth tax. I refer to it as such because the tax only falls on those who hold a particular kind of wealth, namely land.

Consider a group of imaginary people to see the problem. Take four economically fortunate individuals who have various forms of investments, and two less economically fortunate individuals who have scrimped and saved in order to purchase some land. Anna, Bernie, Celine and Daryl all receive a significant inheritance (in an unjust society where inheritances are entirely untaxed), while Enid and Fred are diligent savers investing for their impending retirement. Anna and Bernie inherit a large amount of land while Celine and Daryl inherit money. Bernie sells his land to Fred and invests in other things, while Daryl decides to purchase land with his inheritance. Enid, meanwhile, invests in the stock market. Then the government suddenly announced an impure LVT.

Anna, Daryl and Fred face an immediate loss in the value of their investment. Meanwhile Bernie, Celine and Enid are entirely unaffected. This imposes a wealth tax on those who are unlucky enough to have chosen to invest in a particular kind of investment. Some of those taxed were economically fortunate, but Fred was not. Furthermore, some of the most fortunate people are unaffected, even if their good fortune arrived in the shape of gifted land. The introduction of the impure LVT is like a game of musical chairs, whereby those left holding the land at the time in question lose out.

One argument that I have seen in favour of a land tax is that land should not have been privately owned in the first place—it has been stolen from the community and those who benefit from this theft can have no complaint if their investment loses value. The problem with this argument is that Bertie gained from the supposedly unjust theft of land—his family were landowners for centuries—but he did not pay any of the tax. Bernie sold his land to poor old Fred. Fred did not gain from the land; he merely lost his retirement investment. Meanwhile Bernie got away with a land-based fortune intact. I don’t agree with the idea that landowners are in a morally more questionable position than others (though it is true that most of the landowners in England and Scotland in the past centuries got it through very questionable means).

If we wish to tax the previously undertaxed wealth of the economically fortunate a more comprehensive wealth tax would be much more principled than an LVT. The pure LVT will raise very limited revenue and fail to tax those who benefitted from land and economic fortune in the past if it is pure. Furthermore, the impure LVT should be rejected as a very blunt and discriminatory wealth tax that will also fail to fall consistently on those who have benefitted from either land or good economic fortune.

This only leaves the argument for the LVT that in the longer term it will tax those who benefit from the increased prosperity of the whole community. This occurs because the increased wealth in the community will translate to more valuable land. However, if this is the basis for taxing land then a comprehensive acquired income tax of the kind I propose in chapter four of my forthcoming book, Rethinking Taxation, is much a better option. This would take into account the profits that people make on any investment. It would therefore fall on all those who gain from increased prosperity, not just on the landowners who benefit from it.


Physiocrat said...

Sorry I missed the opportunity to comment on this before. A tax on the rental value of land is not a wealth tax. It is a tax on an actual or imputed revenue stream. The PRICE of land is the capitalisation of the expected rental income stream. The purchase of a land title is the purchase of a revenue stream, like an annuity. Land ownership is a legal fiction. In reality it is an entitlement to a bundle of rights, guaranteed by a government.

This rental income stream is largely sustained by taxpayer spending eg defence, the rule of law and upholding of property rights, the provision of infrastructure and amenities. Thus, the proximity of good local facilities such as roads, schools, parks, etc, has a critical effect on land values. Conversely, if the infrastructure is neglected, the value of land can collapse, as will have happened in areas flooded early in 2014. Land value is also sustained by direct payments eg agriculture grants.

The value of land is the market value of this infrastructure. Land value taxation is about getting people to pay for what they get, and not making them have to pay for what they do not get, and for that reason it is an equitable tax. It has nothing whatsoever to do with INCREASES in land value, but is about covering the costs of that which sustains current land value. Under an LVT system, the owner of land in a flood zone would pay a tax reflecting the low rental value of that land.

It is worth remembering that because circumstances can change, the purchase of a land title is essentially a gamble. Under an LVT system the element of gambling would be removed. In the absence of an LVT system, governments come under pressure from landowners who would prefer their bets to be one-way only.

dougbamford said...

Hi Henry, I accept that I could have distinguished price from value more clearly in my post, but I stand by the point.

However, I don't see any reason to disavow anything else I said.

When an LVT is introduced it is effectively a tax on people who have a particular kind of wealth. Some of them may have that wealth illegitimately and some may not but that doesn't pertain to either of our points here. Do you think, like many 19th Century proponents, that landowners should be compensated for the immediate drop in the price they could obtain from their asset after the introduction of the land tax?

Most of your points could be turned onto other factors as well - e.g. people only get a good wage because of the infrastructure that enables their firm to be based where it is rather than somewhere else, so the wage is a result from that infrastructure.

I think the points you make are fine - people who own assets are benefitting from a whole system that sustains their price/value. That's why all unusual returns should be taxed at higher rates - whether they are investment returns on land or corporations, gifts and bequests, or high pay and bonuses.

Tax the economically fortunate, not just the fortunate landowners.

Ben Jamin' said...

All changes to our tax/economic system produces one off winners and losers. That cannot be a legitimate argument about the merits of a proposal, else nothing could or would ever change.

How we mange transitional issues, if at all, is a separate issue.

The arguments against the abolition of slavery, perfectly mirror those against the introduction of an LVT. Slaves were considered private wealth/capital, private property, with legal title and paid for out of earned income.

The fact we compensated the "losers" the slavers, I find reprehensible. Not as reprehensible as drawing a line in the sand and allowing people to keep their present level of slaves, but no more. Else the UK would still be a slave owning nation.

The only, precise, market based compensation we owe the community (the State), is the rental value of Land we exclude others from using, and some other Pigouvian taxes on externalities.

All taxes and costs are "land taxes" insofar as they lower rental income/selling prices. The more indirectly they do so, the more unfair they are and the more inefficient they become.

Infrastructure raises the value of Land. Yet we tax people bluntly on their income/profits whether they use or benefit from that infrastructure or not. In doing so we are penalizing them for contributing to the community, distorting incentives, lowering output.

If anyone is worse off after a shift from taxing output to land rents, it is because they were a net burden on the rest of society. We should no more offer economic parasites compensation than we should have compensated the slave owners. We can however offer them roll up and deferment.

LVT isn't a wealth tax, or any kind of tax. It is payment for use of something that isn't your property. It is thus a user fee, or rent. It is akin to paying for any other good or service, or compensation for a benefit received, or a burden caused. All based on choice and the market.

dougbamford said...

Hi Ben Jamin' - I don't find your arguments convincing in the slightest:
The offensiveness of slavery was that it is unfair for one human to own another. This doesn't apply with land.
If the ability to earn returns without effort then there is no difference in owning land and getting returns to stocks and shares.

Ben Jamin' said...

Odd that you assert it's unfair for a human to own another, with no justification given, and then say it doesn't apply to land. Again no justification.

I said that the arguments against the abolition of slavery were exactly those used against an LVT. You haven't refuted that.

Futhermore, you should have been able to deduce that those arguments do not establish property rights.

Which then, begs the question, what does? You should have been able to fill in the gaps.

What ever it is, it cannot therefore apply to humans or land.

The value of stocks and shares are (to a larger or lesser degree) created by the owner of those shares, who by risking capital provided liquidity needed for the that enterprise to thrive.

Property rights come from the creation of value. Nothing else.

dougbamford said...

Don't be silly, I'm hardly going to justify the full property system in a comment on a thread. The position I take on this is a fairly standard one in political philosophy.

The Left-libertarian view you seem to be espousing is also a reputable position, though not so widely held.

However, if it is about getting unearned income there is no difference between someone receiving a million pounds worth of shares from their parent or grandparent or land worth a million pounds. It's all unearned income.

Someone at the moment considering purchasing land or shares is doing so with the risk that they will lose their value. The company might go bankrupt and (albeit less likely) the land might be lost to the sea or disaster or pollution.

The value gained from land or shares depends upon the same thing - the value of these a year or ten years later will depend on how the society/economy is doing. So why distinguish between gains from one source rather than the other?

Physiocrat said...

I was not aware that you had responded to my point. Land is not wealth. A land title is a claim on wealth ie a claim on the rental income stream from the land. It is just a piece of paper issued by the government, backed by the force of law and recognised by the rest of the community. It is in that sense no different from an award of patent or a share certificate or currency note. A land title is a monopoly award over a parcel of land.

Since the award is derived from government, government has every right to change the conditions - more right, I would suggest, than it has to confiscate wealth produced by human labour, through the mechanism of income taxes.

People need to understand this, and acknowledge that the purchase of a land title carries with it the risk that a government might in the future change the terms and conditions.

Physiocrat said...

"The value gained from land or shares depends upon the same thing - the value of these a year or ten years later will depend on how the society/economy is doing. So why distinguish between gains from one source rather than the other?"

Much of the value of shares consists of land rental income. The remainder is the reward for work. That is why the distinction can and should be made.

Ben Jamin' said...

The value derived from land hasn't been produced by human effort. That from capital has.

So the income from land is unearned, and the value from capital is earned.

Just because someone leaves capital to their children, doesn't diminish the fact that capital has been earned. How people chose to dispose of their property doesn't suddenly make it "unearned".

I can defined a just property system in one sentence. The creation of value confers property rights, nothing else.

That was easy wasn't it?

Seeing as you are the Phd in Political Philosophy, you should be finding this easy, yet your level of any basic understanding of the subject, hence your level of debate is shockingly bad.

Is that a person attack? When you start calling people silly, without justification, you can expect it right back at you.

I've taken time out to help you. You obviously think you've got nothing to learn. Fine, good luck with that.

dougbamford said...

Hi Henry - sorry I haven't had time to go through all your comments. I'm teaching an online course at the moment which is taking up a lot of my spare time.

I don't agree with your theory of property rights though...which isn't to say your view isn't a valid one.

Your definition might not be entirely unproblematic for you get though -
1. does it mean that a worker should own what they produce rather than their employer?
2. What happens to the ownership of something once it's creator dies? Does it revert to the government? Is it available for the first person who gets hold of it? i.e. why should they get to decide who gets the property next?

Basically, a lot of what exists is no longer owned by the person who created it. You are talking about where original property rights come from but that is just part of the story.

Essentially, property rights also involve a transfer right, but we can specify the rules of this right as we want. I say that we can tax people when they transfer their property (whoever created it), because they are then interacting with the wider economy and society.

My view is that if someone keeps makes or grows something for their own use they shouldn't have to pay tax on it. Which is a bit closer to your view. It is only when they engage with others that tax becomes a possibility.

You talk about value but surely the value of me selling my tomatoes I've grown (or whatever) depends on how well the economy is doing? Your point about the value of land depending on how the economy/society is doing also applies to all other exchanges as well.

Mark Wadsworth said...

Doug, as you explain, imposing LVT rights the cumulative collective wrongs of the past. Yes, those who sell up in time will get away with it, and a handful of recent cash purchasers will take a hit.

So what, you can't make an omelette...

Further, having LVT in return for lower sales and payroll taxes will also right the wrongs that would otherwise be perpetuated in the future.

So on balance, a big win for LVT!

Mark Wadsworth said...

Doug, as you explain, imposing LVT rights the cumulative collective wrongs of the past. Yes, those who sell up in time will get away with it, and a handful of recent cash purchasers will take a hit.

So what, you can't make an omelette...

Further, having LVT in return for lower sales and payroll taxes will also right the wrongs that would otherwise be perpetuated in the future.

So on balance, a big win for LVT!

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