Should we tax housing more? An alternative argument for land taxes

Supporters of a Land Value Tax (LVT) usually argue on the basis that land is either morally or economically special. I disagree with both of these contentions, as once land is owned it has effectively the same moral and economic features as all other forms property.

Nevertheless, I will present an alternative argument for placing additional taxes on residential land in a country with planning rules such as those found in the UK.  This is because in the UK land use and development restrictions reduce the stock of housing available.

The green-belt is the primary example of such restrictions, but other planning restrictions also play their part. After all, we would expect in a highly urbanised country to have less spread-out suburban housing and more high-rise accommodation.

I am not against these rules and restriction (though perhaps the precise extent of things like the green-belt should be reconsidered from time to time).  After all, we all value our heritage, countryside and desire a pleasant urban environment. There are disadvantages to US Sprawl and the Hong Kong high-rise. However, it is important to be aware of the impacts of such building restrictions, which is a reduction in living space.

Put simply, the policies increase the cost of housing—one of the reasons housing is so expensive in the UK. Those who do not own urban land are made additionally worse off and those who own urban land are better off than they would otherwise be. Non-owners have to pay more for where they live, while owners will have more valuable land at their disposal. These are extreme distributional consequences and we need to consider ways to ameliorate the effects of them on those who are worse off as a result.

This creates an additional argument for taxes on land because the value of the land to those who own it is increased and those who do not own land in urban areas will have to pay more than they would. The tax would attempt to redress the imbalance, and perhaps encourage more effective land use.

One immediate complaint against a land-value tax (that I have made myself) is that people have bought and sold land at prices that take account of the policies above. If someone has just paid a huge amount for a house they have a good cause for complaint – they paid a large amount and now they have to pay an unanticipated tax as well that.

In an ideal world, therefore, a tax on realised land profits would be more appropriate. Taxing the capital gains on primary homes (as any other houses are, in theory at least) would do something to ameliorate the distributional imbalances between home owners, and do so in a way that was targeted at the real winners from land value increases. However, it does not provide much incentive for people to make more intensive use of the existing stock.

A more progressive housing tax could therefore also be an important tool, albeit not at the kind of rates that Land Value Tax proponents would tend to desire. Revaluing the council tax in order to add more bands, or imposing an additional mansion tax, are therefore potentially justified as a response to the distributional impacts of development restrictions. It would hopefully discourage people from taking up a lot of space and thereby free up more space for others. Even if it did not have such strong behavioural effects it would at least raise tax revenues that would be spent in a progressive manor that would compensate some of the losers from development restrictions.

I think that this argument should have some traction even to those who do not believe that land has any special moral or economic properties with tax implications. It even appeals to those with a strong (but qualified) belief in the free-market as the restrictions on the free-market are the reason for needing a correction. 

New Book: Philosophical Explorations of Justice and Taxation

I have received delivery of the latest book to which I have contributed a chapter. Here is a photo! 

This one is "Philosophical Explorations of Justice and Taxation" and comes from an excellent conference I attended in Salzburg. 

It is out at the end of February in hardback and will be available as an e-book. For more information about the contents click here. 

Edited by Helmut Gaisbauer, Gottfried Schweiger and Clemens Sedmak, it is part of a series of books: Ius Gentium: Comparative Perspectives on Law and Justice

My chapter provides a more ecumenical argument for hourly averaging than I provide in my other work (which takes an explicitly resource egalitarian approach). In this article I argue that a lot of political philosophies would imply the need for a progressive but economically efficient tax system. I then argue that hourly averaging presents a unique method for achieving these two aims simultaneously.

Is Rethinking Taxation for you? (Handy flowchart)

Should you read my book Rethinking Taxation (or at least my blogs about the CLIPH-rate tax) ?

If you think it's not a great idea you can write and explain why and possibly save others the bother.

Who is rethinking taxation for?

(Or should it be For whom is Rethinking Taxation?)

My recent book Rethinking Taxation may appear to be a technical proposal that would be of interest to a narrow subset of policy-makers. I hope that such people would be interested in new ideas and proposals.

However, the proposals should interest to a much larger group than that.

Economists and those interested in political economy should be interested in the proposals as introducing hourly averaging (and indeed the wider CLIPH-rate tax if all components of my proposal were adopted) would change many aspects of the economy. Since my argument is that it would change them for the better economists should be keen to investigate whether my claims on this front are correct.

Obviously I am motivated by social justice, and this is something that might put some economists off as they do not wish to engage in such issues. However, since the economy (and certainly taxation) is bound up with social justice it would be wrong to ignore these issues.

On the subject of social justice I think anyone interested in making the economy fairer should be interested in the CLIPH-rate tax. I believe that everyone has a duty to do their bit to ensure that their society is fair (even if that is just making informed political choices when voting). While in theory I think that means that everyone should take an interest in new economic proposals I realise that some people will be more engaged with these ideas and debates than others.

Some people have expressed concerns about the CLIPH-rate tax, and I discuss these in my book and in blog posts. However, no-one has yet convinced me that these problems a) are insurmountable and b) outweigh the benefits of the system.

This isn’t to say that the world is a long way from introducing hourly averaging – totally changing the tax system isn’t an easy thing to do. But if it is the right thing to do then it should be done, and in the short term should be seriously researched.

Feudalism and capitalism

Anyone who seriously declared themselves a supporter of feudalism would rightly be laughed out of whatever room they were in. The idea that people should obtain a higher or lower position in society solely because of their parents is horrendous. It does not treat people properly, let alone equally. Furthermore, it does not give foster equal opportunity and is an inefficient way to use talent and resources.

However, while capitalism is contrasted with feudalism as an economic model it seems that some of the problematic aspects of feudalism lived on. A recent journal article, summarised in a guardian article, has shown that most wealth gets passed on, along with other types of privilege that go with it.

Perhaps (ignorant historical conjecture klaxon) as part of the bargain in the slow transition from one type of economy to the next the fact that capitalism allowed the transfer of wealth and resources through generations. This meant that those who were wealthy could continue to pass on their wealth.

So there is a certain similarity be`tween free-market capitalism and feudalism where people are free to pass on privilege. The libertarian ideal of even less regulation and taxation does not seem likely to interfere with the passing on of wealth – it actively allows it even more than current societies. So what are the alternatives?

Anti-capitalist egalitarians might want to make it impossible for some to have more than others, and support the removal of the market economy in order to achieve this.

Supporters of meritocracy might want to remove the opportunity for people to obtain anything unless they have earned in (what they consider to be) the appropriate manner. Markets would be highly important for the purpose of determining what people should obtain, but they should not be able to pass on that wealth.

What the two views above often share is a distaste for the passing on of wealth. Those who wish to pass on their wealth are violating the ideals of either social equality or just deserts.

These views are far too extreme, however. Wanting to live in a fair society should not mean you should not desire to help those you love and care about. Whatever the source of this motivation, it does not seem to be a bad thing to want to help another person, even though it is often a very partial and economically inefficient position to take.

The liberal egalitarian approach that I take steers the right course through all these waters. As well as allowing people to act on their legitimate desire to give to others

Nevertheless it is right to tax resource transfers which are gifts between private individuals at highly progressive rates. Those who benefit the most from such transfers should pay a lot of tax on such transfers. The main reason is that this is a very good form of tax revenue—it does not stop people from working and investing if they are taxed on unearned wealth. Indeed, you would expect people to work and invest more if they are less confident of getting hold of significant familial support. Plus the people who benefit from large unearned transfers are (by definition) very fortunate people who can and should pay a lot more in tax than those less fortunate than them.

As a further advantage, taxing all such gifts would make the positions in society open more on the basis of talent and effort rather than family support.

The main point I wish to make in this blog is that while I argue for my CLIPH-rate tax proposal from a liberal egalitarian basis it actually mimics a lot of the features of the meritocratic one. By taxing all income including gifts and inheritances, and taxing unearned income at a higher rate than earned income, it should generate a highly meritocratic society.

I also believe it would generate an egalitarian society where everyone interacts as equals, though again this desire is not my own primary motivation for supporting the proposal.

The CLIPH-rate tax is therefore a form of capitalism that would truly break away from the vestiges of the old order and its hierarchies. 

Cumulative Advantages of the CLIPH-rate tax

My CLIPH-rate tax proposals represent a major change in the administration of taxation and benefits. It requires the authorities to obtain information about the number of hours people are working, or to assign hours to those who have a valid claim for additional credits. I admit this is no mean feat.

So why is it worth investigating the advantages of such a difficult undertaking? One point to make is that there are multiple advantages to the scheme and if you add these together then cumulatively, the proposal becomes attractive.

In previous blogs I have highlighted why hourly averaging should be good at taxing the rich, helping the poor (by which I mean low-earners), and do so in a way that would encourage economic activity and growth. However, will these advantages really outweigh the costs of administering the system?

I would like to suggest one reason why they might, under the heading of cumulative advantages.

This is just a way of saying that hourly averaging achieves many things using one system. This system would replace many other taxes and benefit payments and roll them into one single system. The CLIPH-rate tax would subsume all forms of income tax and if revenues allowed it could enable the removal of VAT/Sales and corporation tax. It also counts capital gains and gifts and inheritances and so these would fall under its remit.

More importantly hourly averaging would replace a lot of benefits that currently exist. It would replace disability benefits, unemployment benefits (jobseekers allowance), child benefit and tax credits/earning subsidies. Assistance for carers and students are included in the single system as well. Furthermore, if people’s incomes are closer together there is much less justification for other benefits (such as housing benefit in the UK).

Rolling together many taxes and benefits into one system should make the overall system a) easier to administer for governments and civil service, and b) easier for people to understand and engage with. Furthermore, one major system is much less liable to tinkering and political point-scoring when compared to the possibilities opened up by many systems that the public do not necessarily understand very well.

I have emphasised that is good at taxing the most economically fortunate and assisting the least economically fortunate, but one concern is that it will also require the assessment of many people who seem to be in the middle. This leads to the worry that a lot of time and effort will be expended on people who are neither highly fortunate nor unfortunate.

In response to this worry, I would argue that the information that hourly averaging provides might show us that many of those who are considered to be ‘in the middle’ are actually either quite fortunate and should be taxed more (or encouraged to work more) or that they are not as fortunate as they appear and should really receive extra assistance.

With the full information about the amount of earned income people have received in their lifetime compared to their unearned income and to the amount of hours they have worked in order to obtain this earned income, we can make much better judgments about economic fortune.  We can then tax and redistribute in a much more appropriate manner.

A lot of time, resources and effort are expended on the current system. This contains lots of components which are administered separately and do not always work very well together. I see no problem in expending a little bit more of these if it would achieve much better results. 

Hourly averaging and taxing the most fortunate

In my recent blogs I have explained why hourly averaging is a very useful method to assist the least fortunate: it provides an earning subsidy that contains a strong incentive for people to work more hours.

Perhaps I have assumed that it is obvious why hourly averaging offers an excellent method to tax the most fortunate at appropriately high rates. Put simply, a lifetime hourly average is the best feasible and measurable gauge of each person’s economic fortune. To show why I will describe eight people, who fit into some fairly simplified but important categories.

Some of the imaginary persons find it easy to do well in the job market. They might earn more because of their natural talents, their connections, or simple good luck. Others, however, are unable to earn high wages because they have not benefited from such good luck. Another dimension of luck is that of family background, people can either come from a rich family which offers them support or a poor family which is unable to assist them in ways that will generate more income and wealth.

All of these people freely choose (with no mitigating factors) to work full or part-time. If we look at some index of their income and wealth against which to tax them we would classify people as follows:

Person	Low or High wage?	Part-time worker or full-time	Rich/Poor family	Income/wealth
Adrianne	L	PT	Poor	Very Low
Brenda	L	FT	Poor	Low
Celine	H	PT	Poor	Low
Daphne	H	FT	Poor	Fairly High
Edith	L	PT	Rich	Middling
Fran	L	FT	Rich	Fairly High
Gina	H	PT	Rich	Fairly High
Hannah	H	FT	Rich	Very high

Table 1 : Fortune and work choice of 8 people

People’s income/wealth generally goes up as we move down the table and those at the bottom of the table are also more fortunate. A progressive tax system (which could capture returns to fortune from family transfers, investment income and earned income) would therefore tax Hannah more than Adrianne, which is the right sort of outcome.

However, taxing income and wealth does not capture the difference between all of the individuals. If we place people on a numeric scale for both their income/wealth rating and the areas in which they have good fortune we can see that in most cases there is a difference (see table 2). This difference tracks their decision to work full or part-time. There is nothing wrong with people making this choice of course. However, the choice does not indicate how economically fortunate they are – they just want to work fewer hours (for example because they want to spend more time on their hobbies).

One way to put the problem is that income and wealth can vary due to numerous factors including the choices that people make. Some of these factors will be examples of fortune, but income and wealth are influenced by other factors as well. The important factor here is the amount of time they work, though another factor could be their tendency to spend or save. This would also influence their level of wealth and investment income, and is reason to be cautious about taxing wealth, as I discussed in a previous blog.

Person	Income/wealth	Fortune in family or job	Difference between the two?
Adrianne	Very Low	Low	Y
Brenda	Low	Low	N
Celine	Low	Middling	Y
Daphne	Fairly High	Middling	Y
Edith	Middling	Middling	N
Fran	Fairly High	Middling	Y
Gina	Fairly High	High	Y
Hannah	Very high	High	N

Table 2 : Problem with tracking fortune on the basis of income and wealth

For progressive taxation on income that tracks fortune, there is a problem. Some full-time workers are taxed at higher rates than their fortune-level would appear to warrant (Fran, Brenda and Daphne) while the part-time workers are taxed at lower rates than their relative fortune level (Celine and Gina). If taxes were made less progressive then less tax revenue would be generated overall, leaving less revenue to assist people like Adrianne and Brenda.

The dilemma continues as well because while higher tax-rates might generate more revenues, they might encourage quite a lot of people to reduce their hours. It might encourage the Daphnes of this world to become like Celines, Frans to be like Ediths and Hannahs to be like Ginas. If people reduce their hours then everyone suffers as a) there are less goods and services available and those that remain will probably be more expensive (prices will rise) and b) there will be smaller tax revenues available to assist the less economically fortunate (particularly when we remember that tax revenues are required for important issues such as administering law, policing, democratic institutions, development, and for providing education, healthcare, support for the disabled and national defence).

Calculating taxation using a lifetime hourly average income enables us to much better tax people in accordance with their economic fortune. As table 3 shows, lifetime hourly average will coincide much better with good fortune.

Person	Income/wealth	Fortune in family or job	Difference between the two?	Lifetime Hourly Average Income
Adrianne	Very Low	Low	Y	Very Low
Brenda	Low	Low	N	Very Low
Celine	Low	Middling	Y	Middling
Daphne	Fairly High	Middling	Y	Low
Edith	Middling	Middling	N	High
Fran	Fairly High	Middling	Y	Middling
Gina	Fairly High	High	Y	Extremely High
Hannah	Very high	High	N	Very High

Table 3 : Lifetime Hourly Average for the eight people

Indeed, lifetime hourly averaging is potentially quite nuanced, and this points to the other major advantage of the system. Taxing people on an hourly basis means that the tax system gives people a strong incentive to work full-time rather than part-time. Adrianne will have a strong tax incentive to work longer like Brenda, Celine like Daphne, Edith like Fran and Gina to do like Hannah. It therefore has the opposite effect to all other tax proposals—instead of reducing the incentive to work this tax system would decrease it. This means that the economy will provide more goods and services (and therefore cheaper prices for these) than we would expect for any other highly progressive tax system.

We want to tax the most economically fortunate without discouraging economically productive activity and lifetime hourly averaging offers the best available means to do so.