Killer Arguments Against LVT, Not (290)

We've got ourselves a real f-ing smart arse over at Liberal Conspiracy:

... the poorest still have to pay rent don’t they? And who do you suppose is going to see their rentals go up in price [if we had LVT]? You can’t stop tax incidence...

[LVT would be] paid by farmers isn’t it? So instead of costing X it would cost X+1. Well to cover that cost farmer will charge X+1 won’t he (or is most often the case X+1+a little extra). You are not going to stop the passing on of tax costs to the next link in the chain and finally the consumer. Again, tax incidence.

The incidence of a tax on the rental value of land is always entirely on the landowner. It cannot be passed in higher rents or higher prices.

Can shops put up their prices just because their rent goes up? Nope. They either pay the higher rent or go bankrupt. That sets the upper limit of the rent. Can a landlord with a mortgage put up his rent because interest rates (privately collected LVT) go up? Nope, because there is an upper limit to rents and he is already charging it!

Let's take a simple example of why high taxes on earned income kill the whole economy stone dead and why high taxes on rental income have no such effect:

1. The council owns some sites for market stalls which it rents out. Local wages are £20,000 a year and if you trade from one of these sites, you can make £40,000 a year profit. So people are happy to pay up to £20,000 a year rent.

2. Let's assume that the local council has power to set income tax rates, and the rates for trading income and rental income are currently both 30%.

3. The council then decides to sell off the market stalls and some bright spark in the finance department lays out the following options:

a) Sell off the market stalls and keep the flat 30% tax rate on both types of income,

b) Sell off the market stalls, reduce the tax rate on rental income to 0% and increase the tax rate on trading profits to 100%, or

c) Sell off the market stalls, increase the tax rate on rental income to 100% and reduce the tax rate on trading profits to 0%.

4. We can rule out (b) because if it is impossible to make a post-tax profit from trading from a market stall, nobody will want to rent them and the rental value will also be £nil.

5. (a) is of course a possibility worth considering. On total profits of £40,000, the site owner and the trader between them would pay £12,000 in tax, and the council gets a lump sum receipt from the sale of the plots, which is soon spent.

6. But what happens if the council goes for option (c)?

- Investors will clearly not be interested in buying up the sites because their net rental income would always be £nil so the price they will offer is no more than £nil.

- The only people who will be willing to buy the sites will be the traders themselves. They know, for a fact, that they can earn £40,000 profits (before rent) and that they are happy with post-tax income of £14,000 (because local wages are £20,000 less 30% tax = £14,000), so they will be happy to buy the sites subject to an LVT of £26,000. They will have no upfront cost of buying the site, because a 100% tax depresses the purchase price to £nil (investors won't out-bid them).

- So really, the council could achieve the same thing by selling the tenants the sites with a 100% interest-only, non-repayable, non-recourse, variable-rate mortgage. It just has to set the price and the interest rate so that the interest comes out at £26,000.

7. Remember that rent, taxes on rent and mortgage interest are the same thing. So before the "privatisation" of the sites, the council was collecting £20,000 in "rent" and £6,000 in "tax". Now it is collecting £26,000 in "LVT" (or indeed interest from the interest-only mortgages).

8. Why does anybody think that market traders would then put up their prices? The amount of money which their customers can spend has not changed, so neither do their prices or their turnover, or their gross profits before rent etc.

9. Even though market traders think that they are paying tax on their "profits", this is not true. The incidence of the LVT is entirely on them in their capacity as "land owner". For example, if one of the traders wants to retire and sub-let his site, can he charge more than £26,000 a year in rent to his sub-tenant? No of course not.

10. Would the retiree not make bloody sure that he gets a tenant in ASAP, seeing as he needs to cover his LVT bill? Of course. So the tax is no disincentive to trading from that site, no more than the rent was originally.

Here endeth.