This letter was in the Guardian today, and is an idea that now has to be on the agenda for debate:
Seumas Milne is right that governments should start bailing out the real economy, rather than the banks, with public investment for growth (The elite still can't face up to it: Europe's model has failed, 3 November). But from where will the funds come for this? A Tobin tax will not generate sufficient, even if it could be made to work internationally, but there is alternative.
A central cause of current economic instability has been the astonishing accumulation of private wealth to the richest 10%, and the use of this in deregulated global markets for speculative trading and purchase of assets including property, currencies and commodities (Markets slump after Greek referendum call, 1 November). So the $43bn funding gap ofGreece's government is matched by about the same amount going offshore, much of it reported as being put into the London property market by wealthy Greeks. This continues to rise while others slump. On a larger scale we might look at the New York Mellon Bank, which holds the assets of high worth people, and whose website notes that it is "focused to help clients manage and move their financial assets". These, in this one bank are listed as $25.9trn, which is of course enough to pay off the US national debt, solve the euro debt crisis and have change.
The world is awash with cash, while the productive capacity of its peoples and industry is the greatest in human history. But instead of taking some of these assets and using them to promote investment in a sustainable economy, the preferred government solutions are to print money and impose cuts which affect the poorest and create unemployment. The first of these generates inflation, damaging pensions and savings while adding to the financial stress caused by the second.
The obvious solution is a wealth tax on the richest 10%, which we first advocated a year ago. Now the head of the biggest bank in Italy, Corrado Passera, is also promoting the idea, saying that Italy's $2,750bn debt could be resolved by a tax on Italy's private wealth. This is five times the size of its debt. It also shows how misled we are by media and political commentary on "countries going bankrupt", when what is actually being described is a cash flow problem.
Other solutions such as effective income tax will be needed in the long run but what is crucial now is a fundamental restructuring of social wealth to repair the huge damage caused by the release of the free market, and the political courage to plan an economy of the future.
Professor Greg Philo
Glasgow University Media Group
I see all the problems, but when these bail outs are for banks and private wealth held within them Greg's proposition which seemed off limits when he first promoted it now seems to be worthy of serious debate.
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I certainly think we need wealth taxes. Income inequality is being pushed up the agenda – but wealth inequality is far worse.
My preferred option is a hefty Land Value Tax – it’s the least distortinary tax and merely ensures that socially created value is socialised.
I would not object to separate taxes upon the built value of property and on financial wealth. These though should have fairly high thresholds and fairly small rates.
Although I of course agree that LVT is the most effective wealth tax, I think that the current situation is so extreme that Greg’s one off tax should be pushed into the debate. Our debt is equivalent to what the super rich hold. They don’t need it, they never earned it. Actually they don’t really know what to do with it since the opportunities for investment are being gradually closed down. They should be shamed into handing it over to avoid intense civil unrest.
Richard, what would you consider as a “fair” distribution of wealth?
Obviously it is subjective as to what distribution you think is fair. But looking at first principles, we can see how the wealth was gotten and see if that was earned or not.
Inherited wealth is not earned, so I think an inheritance tax is fair. The current one has too many loopholes, but I agree with it in principle.
The uplift in land values is not earned either. Say an underground railway line is built. Those who own the land above this line will see an increase in their wealth, even if they did not do a thing to design or build or operate that railway line. Hence there is a strong moral case for taxing land values. There is also a strong economic case – economists from Adam Smith through to Milton Friedman see this as the least bad tax.
Agree with those sentiments – see The Courageous State – out next week – for more
Agreed.
Governments consistently underestimate the seriousness of the crisis. They focus on preserving the privileges of the few rather than taking effective action.
There are plenty of good ideas for dealing with the crisis. Unfortunately governments will only implement policies that impoverish the rest of us.
The only reasonable solution to the economic/financial crisis I can see involves government offering to settle any borrower’s mortgage debt in exchange for comparable land-linked payments to government. Sovereign governments settle the debt with banks for new Treasury Notes.
As the government does this, it’s a simple matter of abolishing, reducing and/or agreeing the removal of taxes on production. Government deficits rapidly turn into government surpluses – as shown in Hong Kong which collects substantial government funds through land-linked payments.
Trying to institute a “wealth tax” is a sticking-plaster to cover up the system’s upward gush of wealth caused by the doubly-injust mortgage system and by government debt. We need to stop government policies of upward wealth redistribution, not try to add compensatory downward redistribution.
A Land Value Tax is superficially appealing to some but creates economic shock through balances sheets and cash flows. This, and its confiscatory nature makes it a non-starter.
Location Value Covenants are designed to eliminate economic shock and avoid the political hot-potato of confiscating economic rents.
And respectfully, this is a non starter too
Richard,
I don’t think LVT is a non-starter. It is getting more prominence – Nick Boles, Andy Burnham, it’s always bubbling below the surface in Lib Dem policy circles.
It needs to be sold as part of a tax shift, that encourages work and enterprise and penalises windfall gains, speculation and privilege. The pitch to the median voter is that this tax will be used to lower rents, provide more affordable housing, ensure more jobs are created outside of the SE of England and reduce say, you’re income tax bills – the pain will be borne by idle aristocrats and greedy speculators.
As part of the tax system LVT makes sense
Georgist claims it can replace all taxes make no sense at all
I think the best way to have a wealth tax is move to a “recurring stamp duty” , stop all real estate stamp duty and have 1% on the last transacted price for property over 250k , and .25% for propery under , .5% a year on all equities not held inside a pension wrapper, and .5% on all cash deposits , these are all easy taxes to impose and very difficult to avoid, the property tax set up and the share tax set up are in place already on purchases and the cash deposit tax could be put in place on any bank that wants the government guarantee on deposits, or indeed the license to accept deposits in the uk …
The easiest answer is in fact a stamp duty on all bank transactions….
Works brilliantly and lets HMRC access all bank records to stop evasion
Stamp duty is a fine tool for discouraging transactions. That’s why it should be abolished for property transactions.
And you would replace it with LVT?
A what rate?
I for one would like the value of land to be near nationalised – I’d start with a low rate, but would happily see it become quite large.
If we were to move to annual taxes on property, then transaction taxes like stamp duties would be abolished.
Eventually I would like to see a large land value tax – along with carbon taxes, road charges, a property and financial wealth tax, taxes on financial services, reforms to pension tax relief etc in order to pay for increases in the income tax threshold, reduction in NICs, the replacement of council tax and an introduction of a citizen’s income. If we’re going to think radical, why not go the whole hog?
LVT should be collected at 100% of rental value, otherwise injustice remains. All land value is either given by nature or created by public investment and human activity. It would be ridiculous to just take a tiny percentage in order to replace SDLT.
And 100% rental value will be how much?
Can you lay out real life examples?
Richard,
I emailed a friend, Tony Vickers, who is the Chair of ALTER – the Lib Dem LVT campaigners. I copy his response:
————————————————————————————————————–
Best estimate I can offer comes from Fred Harrison’s book “Ricardo’s Law” (I think) where, from recollection, he says that there is about £120bn of
annual rental value from land alone. So a 100% tax on that is the same
amount.
However, if you taxed rent at anywhere near that rate, there would be
massive effects on economic behaviour – even before you did it, triggered by
the announcement or the build-up period towards that rate. People would be
much more likely to sell land, lowering the value of the thing being taxed –
but also to invest in productive activities, because of the corresponding
fall in taxes on earnings and profits.
So you have a very large margin of error inherent in any calculation of this
nature.
What I usually say in answer to such questions is “More than enough”!!
Because the ‘deadweight burden’ of existing taxes on the economy is around
30%, every £ raised from rent equates to about £1.40 in those other taxes.
So we would need ‘only’ (say) £50bn/yr from LVT to replace (say) £35bn of
existing tax.
Tony Vickers
If you have a 100% LVT, things would look rather different from today’s UK. Somewhat simplifying the situation, and using ballpark figures:
An average house might rent (from a landlord) for £45,000 per annum
The purchase price would fall to around £80,000.
The LVT on the house might by £40,000 per annum.
On a rented property, the landlord would net £5000 per annum.
So the amount raised by LVT would be about £880bn per annum.
Government spending on real services might be £440bn per annum.
This would leave government in surplus of £440bn per annum, producing an annual dividend payment to citizens of £7333 per annum each.
Obviously you wouldn’t need Corporation Tax, Income Tax, VAT etc. Nor would you need Jobseekers’ Allowance, Housing Benefit and other transfer payments.
The big win, of course is that the size of the real economy would be much higher, since deadweight costs of tax and welfare would mostly evaporate – including the burden of tax evasion, minimisation and avoidance measures. Mortgage debt would mostly fade out too – why try to stretch your finances when a house costs just a couple of years of rent?
I’m sure others would have different figures. Factoring in commercial real-estate, a carbon tax for example changes things a bit.
I think a system with these kind of figures would be reasonable and fair…
I’m mildly bemused at taxing at twice the required rate….
“I’m mildly bemused at taxing at twice the required rate….”
I’m surprised you’re not already used to the idea – taxes collected are already far in excess of net government spending on services. Public sector employers even have to remit taxes on their own employee’s wages!
Obviously you would allow people to pledge their Citizens’ Dividend to an LVT bill. The home owner would get a regular statement showing the LVTs and any Dividends netted off. You then settle the net, not the gross.
So a household of four persons in an average house pays £889 per month net. On the other hand, the same family in a half average LVT house receives £778/month. It’s an “integrated tax and benefits system”.
Of course at present government budgets are hugely inflated from welfare transfers and pensions. So taxpayers are paying nearly double the rate needed to fund government services. The non-integration of tax and welfare inflates the magnitude of payments and the consequent scope for political manipulation of for fraud.
Any other “killer problems” with 100% LVT with Citizens’ Dividend?
Respectful I am only interested in politically viable proposals
Yours are not so I will not be posting more of your comments which do not in my opinion add to debate
Dr. Wrigley’s analysis is interesting. I don’t see why it’s politically impossible, if introduced in the right way. Who’s going to object?
I’m not stopping him arguing for it
But I have the job of reading this stuff and candidly don’t feel inclined to do so when I do think it politically a non-starter
If you are thinking of blocking Dr Wrigley from making any further comments on your blog, I think that’s very unfair Richard. If you merely want to stop repitition on this particular post, again I think it would also be unfair but more understandable.
I appreciate that you have to read and approve each of these comments – but that’s the price you pay for having created a very successful blog. It’s to your credit that it has become a forum for discussion of radical, progressive alternatives.
I am a supporter of LVT and a Citizens’ Income(/Dividend whatever you may call it). I accept it is very unlikely at this point to see them introduced, but if we block discussion of them that makes it even unlikelier. I’m sure many of the ideas we now take for granted – universal suffrage, universal health care, too were seen as political non-starters. Thank God discussion on these topics weren’t closed down.
I’m not for a minute saying they shouldn’t be discussed
I’m just saying that piggy-backing them on here may not be the best way to do it
Do it on a dedicated blog!