George Monbiot has an excellent article on tax in the Guardian this morning. At its core is an argument for land value taxation, which he explains has long had powerful support. As he puts it:
In 1909 a dangerous subversive explained the issue thus. "Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains — and all the while the landlord sits still. Every one of those improvements is effected by the labour and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived ... the unearned increment on the land is reaped by the land monopolist in exact proportion, not to the service, but to the disservice done."
Who was this firebrand? Winston Churchill. As Churchill, Adam Smith and many others have pointed out, those who own the land skim wealth from everyone else, without exertion or enterprise. They "levy a toll upon all other forms of wealth and every form of industry". A land value tax would recoup this toll.
What Churchill was more broadly describing was the concept of economic rents. So is Aditya Chakrabortty in the Guardin this morning when he says with reference to the philosophy of Davos:
[W]hat's wrong with the argument the Terry Leahys and the Bob Diamonds make for their extreme wealth? Look, the line runs, we work bloody hard for it; we're worth it. And it's true: unlike previous generations of the ultra-wealthy, many of the modern super-rich work for a living, in running major businesses or in finance (although the Davos guestlist still includes plenty of sheikhs and royals). But that doesn't mean they truly earn the millions they claim.
Take a look at who's in the Davos set. Last spring, two American academics, Jon Bakija and Brad Helm, and a US Treasury official, Adam Cole, published the most comprehensive analysis yet of the richest 0.1% earners, based on tax returns. Of these top dogs, nearly two in three were top corporate executives and bankers. And the story in both those professions has not been of brilliant returns to shareholders or vast improvements for society, but of wealth extraction and lobbying politicians, Davos-style. In particular, the tale of modern high-finance is of generating transactions, whether in corporate mergers or sub-prime mortgages and then skimming off some of the cash.
That's extracting rent in exactly the same way that the property owner does. Economically the logic is the same. This is all unearned income, and we should not be granting it favours which increase the divisions and stresses in society; we should be taxing it.
That means we need land value taxation for sure, but we need progressive income taxation, capital gains tax at the same rate as income tax and enforceable corporation tax too if these rents are to be collected. And then there's the need for reform of inheritance tax.
I really must get round to writing the Joy of Tax. It is next on my list.
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You don’t like farmers? Business owners? There should be no reward for the increase in personal risk? Nothing to encourage the wealthy to invest in new and risky businesses? Nothing to encourage innovation?
Maybe the rewards for taking risk and being innovative should be membership of some sort of influential group. We could call it “The Group”. No, that sounds like a therapy session. The Team? Too corporate? Too sportsy? Wait, I got it, something that sounds a bit more fun. Let’s call it the Party…
Politely, that’s ludicrous
You started it…
You want to tax someone for owning something. What if they spend money and effort improving it, you want to increase the tax they pay? What if the property is owned by a charity, will they have to pay?
If a person builds a business and then sells it once it’s a success, you want to tax them as if they had earned the income in a low-risk, statutorily protected manner?
As to the idea that corporate executives don’t work for their money, that is ludicrous. Sure, it is always possible to find those who have engineered contracts that ensure huge reward for little effort, but they are a small minority.
Oh dear
Time for you to do some basic economics
Sorry – but I haven’t got time to teach I here
Oh dear
Time for you to do some basic economics
Sorry – but I haven’t got time to teach it here
While I can see the value of a land value tax in taxing unearned monopoly profits, my problem with a land value tax is the risk that it will be used to drive low income small holders off the land.
There are situations where individuals own small parcels of land out in the sticks that have none of the advantages Churchill describes. General land values are driven up by its scarcity and the desire for investment. Why should a small holder be penalised for that and forced to sell if the tax bill cannot be met. There are people trying to live alternative lifestyles on the land which are at most subsistence and generating little in the way of cash income.
If there was to be a land value tax there would have to be safeguards built in akin to the capital gains tax private residence exemption for “permitted area”. The judgement of how big a permitted area should be for a smallholder given the different qualities of land throughout the UK would be complex and vexatious and bound to cause grief for a lot of people who do not deserve it.
Marginal land would have marginal taxable value
With respect Richard thats not an answer unless you can provide a full definition of what you mean by “marginal land”. Some people may have acquired a small amount of good land that provides them with a subsistence living. For instance it would have been possible to buy agricultural land in Lincs 25 years ago at £2,000 an acre, now its nearly £10,000 an acre. The land does not generate 5 times the income it did 25 years ago. There would have to be a de minimis level like an annual personal allowance or a cgt relieved permitted area to protect such people.
Picking up Carol Wilcox point below along with Chris’s point above, a sensible approach would be to tax the land value and offset that tax liability against any Schedule D tax liability arising from the productive use of that land. That would knobble the speculators while leaving those generating productive income from it unaffected.
Phil
Some of the proponents of an LVT I know of would also introduce a ‘Citizens Dividend’ (in lieu of elements of the existing benefit system and/or tax allowances) which would offset increased LVT. Plus, if LVT replaced other taxes, then LVT on the smallholding could be offset elsewhere.
I don’t know how well the maths works.. but that’s the theory. Some people end up being worse off… but the intention is that it would be entirely ‘progressive’.. albeit relative to land ownership rather than income. Someone earning £100k a year but living in a bedsit in Gateshead (if there is such a person) would pay much less tax directly (but, if they were to then spend that money they would, I guess, indirectly contribute to the LVT of whomever they were to buy stuff from.. and if they were to invest in companies then the returns would be affected by LVT paid by the companies).
Google Mark Wadsworth’s blog. He seems to consider LVT as a solution to almost everything.. so proceed with due caution.. but he puts forward plenty of ideas and arguments to think about.
Aren’t there are plenty of people who work hard and don’t get paid for it? A history academic once told me 20% of the land of GB can be traced back to direct descendants of the Normans. Which means for many a century a lot of the wealth creation of these lands have had little to do with skill,initiative,even education, and a lot to do with capital, and as Warren Buffet has called them, “members of the lucky sperm club”. Would it be good policy to install Romeo Beckham as England football captain based on the fact that his dad was great? Yet this has seemingly been the picture for centuries,if the cream truly does rise to the top, what have the ultra-rich got to be afraid of when talking inheritance tax? Unspent,unused,untaxed capital in the system does little good to the economy as a whole,Adam Smith whose book “wealth of nations” Maggie Thatcher used to carry around in her handbag even said,”the gluttony of the rich is an unproductive labour”. Time maybe then in this century to make it beneficial for all.
I’ve just done a brief paper for IPPR which shows that the revenue from LVT could replace all property taxes, including CT, NNDR, SDLT, and Income Tax for the 90%, with plenty over to cut other taxes, like VAT. This would then produce a virtuous circle of increasing economic activity and increasing revenues.
Carol, will this be published?
No, Tony Dolphin requested it as part of a bigger paper on new policy initiatives which he is assembling.
@Zappia
Tony Dolphin is the Chief Economist at IPPR. I guess the final paper will be available on the IPPR website eventually – unless it has been specially commissioned by an outside party.
I’ve read lots of interesting stuff about how LVT might be used to replace other forms of taxation.
Our host, however, appears to view it only as supplementary. I’m not sure that there’s scope to add a new tax with material revenues without reducing existing taxation.
I’m keen to hear from the people who see LVT as a route to fair taxation. Not, so much, those who merely see a route to more taxation… though, I accept, it could be both.
I clearly see it replacing council tax may be SDLT
These are pretty small though.. and are already variants of a land tax. Just replacing those wouldn’t be the seismic move towards wealth tax that’s needed.
The distinction between earned wealth and unearned wealth is completely valid.. even if there is good reason to consider that some ‘earned’ wealth is less earned than some other.
Shifting the tax base from one to the other, surely, needs us to reconsider how income (personal and business) is taxed. We can say to Starbucks (for instance) ‘we’ll properly tax you on the value of your premises… and the profit you have left after that is yours to do with as you please’*.
* It’s OK. I don’t expect you to agree with that for a moment. But is that because you think it’s unachievable (on a practical level) or because you think it’s inappropriate from a moral/social standpoint?
Hi Carol, I’m probably missing the point here, but why wouldn’t a capital gains tax on property sale suffice? You only really get the benefit of the value of your land when you sell it anyway. Even speculators buy land with the aim of eventually selling it. If you have a capital gains tax at the same level as income tax, which I think Richard suggested, then speculators might be frightened off from speculating on land. Hence we won’t get these crazy property booms and busts.
In Australia, the NSW govt back in the 90s tried implementing a land tax on each property/home to the value of $1million and over. It caused a lot of grief, because as it turned out, we had elderly low income people that had been living in certain suburbs all their life now finding the value of their homes being well over $1 million (in areas that had traditionally been in the lower socio-economic bracket).
Capital Gains tax would undoubtedly have an effect on prices – as it does when it is applied in other countries. But it would not produce a significant revenue stream and there will always be lots of loopholes.
I repeat, LVT could replace all other property taxes and Income Tax for all but the top 10% income earners (who currently pay over half).
I don’t know the history of NSW land tax but my Australian colleagues do. Please take a look at this brilliant Aussie film: http://realestate4ransom.com/.
Thank you Carol, You mentioned that you were writing something on LVT as part of a bigger paper on new policy initiatives. I’m not sure who Tony Dolphin is, but will this be made available online? Would be most keen to read it.
And Richard, will you be covering this subject in your new book?
“Mr. Burns: Kent Brockman is threathening our ill-gotten gains.
Rich Texan: Goldarn it! I worked hard to ill-get those gains!”
What will happen when the prices fell? Will the gov return the money?
You are confusing income and gains
And annual value with increase in value
Both rather silly mistakes
It amuses me that you think that all these wealth taxes will have no impact at all on employment, investment or economic growth. Especially when most of your articles are mocking the Tories for lack of jobs, lack of investment and lack of growth.
Or is it that you just don’t care…….your quasi-religious desire to get back at the wealthy so overwhelming that you can ignore the inevitable larger damage in some vague future hope that the new super state will correct all problems.
P.S. If Chris above did need lessons in economics it would not be from someone who did not even finish their Uni course!
I think your last comment proves the absurdity of all the rest you say
I got a 2:1 from Southampton University
I don’t think they give them to people who don’t finish the course
I got a 2:1 from Southampton University
They don’t give those for not finishing or not understanding the course
That puts in context the rest of you bused comments
@Richard, can you please give an economic explanation of how wealth taxes impact employment, investment or economic growth. I’m sure you’ve read all the texts on the subject.
To continue, the only economic reason for not taxing wealth is that it is very difficult to do. However, LVT provides a very simple and unavoidable way.
Richards comment shows he doesn’t read much Paul Krugman. The Nobel prize-winning economists piece called the Twinkie manifesto explains how the US economy had it’s strongest rate of growth from 1947-1973 when higher rate tax was 91% and corporation tax was double what it is today. Did the world fall apart and fall into an economic black hole? No,but it did when poor people couldn’t afford their homes,and capitalism reverted to socialism so that the rich didn’t fail.
Yes, there should be a lot more tax on unearned income.
My landlord currently pays less tax on his passive rental “income” that he got from being lucky and buying property when it was stupidly cheap than our household whose working hours per week are over 70. This is grossly unfair and our landlord has done nothing to improve “his” property and we are not allowed to make it feel like home (not even put up pictures). This kind of unearned income discourages hard work after all, why work when you can get some mug to pay your “income” and you don’t even have to pay tax on it!
Income from rent is taxed in the same way and as part of your total income. If your landlord is paying a lower tax rate than the percentage paid on your entire household income (with its two (?) tax-free allowances, tax reliefs/credits etc.), then either your landlord is avoiding tax in some way or you misunderstand what their rental income is.
No it isn’t
It’s not subject to NIC for a start
It may not be comfortable to be in negative equity, but so long as you can still afford the mortgage it is not impossible to cope with. The mortgagees would have to live with it too when mortgagors want to move. The alternative for the banks may be that they are liable for the LVT on the part of the land value which they in effect own. (Property tax bills on mortgaged homes in the US are the responsibility of the mortgagee.)
This is a transitional problem in implementing a very sensible policy and there would be a huge revenue stream with which to give transitional relief.
If the tax goes up on the landlords, wouldn’t they simply sell up and invest in another assets class which produce a better post tax return? You are always mentioning that capital is very mobile. I understand that current rental yields for domestic properties are pretty poor so it’s already a marginal activity for most landlords from an income perspective with no medium term prospect of any capital return. Net result will be a lack of houses to rent (or if landlords don’t sell increased rents to tenants with nowhere else to go). That doesn’t sound like a good result.
You assume a rationality that has never existed in UK brick an mortar
You also assume there ar better alternatives
Lack of renters means reduced house prices which means that ordinary families can afford to buy instead of rent. The rental stream from the bricks and mortar diminishes over time, it’s only the land element which gives the ‘landlord’ a profit. There should be very little difference between the cost of buying and maintaining a house and renting it. Landlords do perform a valuable service – not everyone wants to rent for various reasons, but families usually want stability with their accommodation and owning should be the affordable standard.
The reason why we don’t have affordable housing – that basic human need – is because we don’t tax land and instead allow publicly created land values to accrue to landowners. As Monbiot explains, land value taxation is not really a tax at all – it is a fee for exclusive rights to part of the commons.
@Carol Wilcox – as you accept house prices go down for everyone. I, for one, wouldn’t welcome being in a negative equity situation. I am sure that other ordinary families could find themselves in a similar situation.
Surely the issue is to put measures in place that prevents income form being untaxed. It won’t be easy and will include dealing properly with the Non-Dom farce,abolishing self-employment, stamping on the plainly ridiculous situation whereby income from assets owned off-shore are not taxed in UK (Yes Richard Branson and the Barclay Brothers this means you). When the effective tax rate of the super rich is in single figures and the middle class pays 25%-40% something is very wrong. If the rich decide to move away – tax them as they leave!
You don’t like plumbers? Electricians? Plasterers? Why do you want to abolish self-employment?
Once the rich leave, who will you tax? Bear in mind that these same rich people are among the lowest per capita charges of state spending; so each one that leaves is a net loss on the state balance sheet. The middle classes will have to pay more taxes for each one that leaves.
The rich don’t leave
let’s get real
Richard theres something wrong here. A commenter comes on suggesting that self employment should be abolished. A fundamental attack on the human right to deploy ones labour as one wishes. And you do not rebut it in your usual robust manner. Are we all to be wage slaves?
I can see that you must be ill and deserve a day off, or even a long weekend. Best wishes for a speedy recovery.
I must be unwell
I’ve been self employed for more than half my life
“My landlord currently pays less tax on his passive rental “income”…than our household whose working hours per week are over 70. This is grossly unfair… This kind of unearned income discourages hard work after all, why work when you can get some mug to pay your “income” and you don’t even have to pay tax on it!”
Please can we frame this comment? It says it all – and is a true & shaming vox pop from life in London and many other places in UK today.
Those “free market” morons who come on here don’t even understand their own Adam Smith. We are doing everything to foster a rentier economy, which is crazy.
(i) see comment above about tax on rental income being treated as part of your overall income;
(ii) try to remember a large proportion of these “evil landlords” are not rich, they are middle income people who took out a “buy to let” mortgage with a view to it boosting their savings for retirement.
A large number also evade the tax due – HMRC say so
I see that the usual old killer arguments are being wheeled out again, I’m surprised that the Poor Widow In A Mansion hasn’t popped up yet.
Frankly, at the risk of sounding fundamentalist (like Lee T suggests), if you actually apply logic and numbers to any of these killer arguments, not only do a lot of them cancel each other out but they all just melt away.
I’m summarising and debunking them all here