Thursday, 8 March 2012

Wealth tax is typical Llib Dem insanity

I am really struggling with all the newspaper comments about the split in the Government over raising taxes in the budget. First of all, the Country is in no state to have taxes raised. The better option by far is to cut Government spending and there are so many targets, the Foreign Aid budget, the NHS etc etc. It's crazy to be even considering tax rises until Government spending is less than 40% of GDP.

Also though,  it is the economic illiteracy of the Lib Dems that is on annoying. They love the 50% tax rate and don't want to get rid of it. Instead the moronic Vince Cable has fallen in love with his idea of a Mansion tax - the one he looked so stupid over at the last election. Determined to get it through they want some kind of deal with the Tories.

The illiteracy is that you can't tax capital. Taxing 'wealth' as they call it only makes it disappear. The Land Tax concept hits the same point. Its a simple example:

I earn a million pounds and pay 50% in income tax today. With the remaining £500,000 I buy a house, which now attracts a large council 'mansion' tax, say £5,000 a year. After 10 years, I have been taxed for 10% of my investment. Now that our property bubble is over, maybe there is no or only a nominal increase in house prices. I am worse off. With inflation, this affect is even more damaging as the taxes will rise and the value of money will shrink and if house prices stay stable I will have had my equity eroded away.  Now £500k does not buy you a very nice house in London, maybe a half decent flat. But there will be no point to this.

You just can't tax wealth, only income. If you tax wealth then it will all disappear over time and then you have nothing left to tax (or its value drops below the threshold where the tax is set) - you literally erode away long-term value in return for taxes today. On income or spending people retain control over their spending and can try to save or keep their heads above water. Even capital gains is on income.Once you move to pure wealth taxes the game is up as it becomes so hard to store any value without the Government taking a chunk of already taxed income - it is a disastrous policy.

Of course, this won't happen as people are not stupid. Instead they won't buy houses that face this wealth tax. They will rent from Special Purpose Vehicles or find some other way of getting around the taxes. Ultimately they will store their wealth offshore away from the wealth taxing state. The stae will rapidly become poorer as capital flees. This is not sensible policy, its madness.

32 comments:

Hayek was right said...

Economically illiterate. They're proposing to tax wealth (as its harder to avoid / evade than income taxes), whether its paid for from other capital or income matters not.

And whether the house is owned by an individual or an SPV the tax still gets paid, and will be reflected in the rent. Its called tax incidence.

Whether a tax on property is more or less detrimental to economic growth is another issue. But tying up capital in trophy houses is not productive.

Basic economics has never been needed for a career in the City.

Sebastian Weetabix said...

"Basic economics" is certainly an impediment to being a decent human being at times. These Limp Dumb LVT nutters are just closet Commies, out to make everyone a tenant of the state. While they burble on about tax incidence they are ignoring the injustice of forcing pensioner property owners to sell up to meet a tax demand for a property they paid for out of their already taxed income decades before. We should allow the poor old sods to die on the spot if they wish & then tax the inheritance. (Wait - isn't that what happens now??)

What the Govt. should do is close that ruddy loop hole that allows foreigners to own property through offshore vehicles. No one could possibly object since those affected mostly don't have a vote and it just brings foreign residents' tax burden in line with everyone else.

Budgie said...

I did say right at the beginning of the Coalition that it is extremely unlikely that the government could cut departmental budgets using the top-down, managerialism of this Coalition.

Osborne (et al) should understand (but don't) that the Coalition's efforts are frustrated by departmental managers' special pleading and direct resistance all the way down the line.

Only two methods work (assuming that the EU would let us): close the entire department; or work with the department at their level, on a daily basis, adjusting the legislation that the department administers to reduce the departmental workload.

The latter method requires hard work, intelligence and sovereignty. It has worked well in Canada and New Zealand. The Coalition's method has never worked anywhere.

Budgie said...

There is another, simpler, fault with a land tax: it makes you into a serf.

Steven_L said...

This logic also applies to city fund managers who 'tax' the 'wealth' they manage at anything up to 3% per annum then?

i.e. Don't use city fund managers or your savings and pensions will all be 'taxed' away (and turned into London town houses, which must not be taxed).

Anonymous said...

Years ago when I were a lad there was such tax called Schedule D Tax Used to upset my old man if I remeber correctly, we did not live in a mansion

CityUnslicker said...

hayek was right - challenging comment, always appreciated.

- It does matter re income or wealth, when you have no capital you cannot save and therefore invest - you have no money. Then you can't get any tax becuase there is no source of capital - you have eaten your golden goose rather than just lving off the eggs.

- High value property may not to you be a great to you but to London it is - often the money is coming in from wealthy foreigners and drives a huge amount of other service businesses like cleaning, concierge etc. Where would you rather the wealth was stored, in vaults in Switzerland?

- tax incidence, cobblers. People avoid taxes and sometimes even evade them. The more intrusive the tax, the further people will go to not pay them. SPV's or some such will be designed to avoid the tax, just as others note here that ways to avoid egregious stamp duty have been developed for many years.


Budgie - entirely agree with you about the cuts. they just can;t see the Canadian way.

SL- You do have a choice with City fund managers though. I agreee what hey do re taxing your capital in effect - hence I avoid them where possible. But you can have a SIPP or invest your own money if you want. tax by the government is legally enforceable.

Budgie said...

It may be fashionable to dream up new ways of taxing us all, but shouldn't we be thinking of ways to cut taxes instead?

I would like to see government below 30% GDP, not ever expanding on the back of novel taxes that always become extra taxes.

Unless we have all recently become socialists who think the state can do no wrong?

Steven_L said...

You do have a choice with City fund managers though.

As opposed to living in a Notting Hill town house, which the trophy wife insists on at pain of leaving you?

People surely do have a choice where they live?

BlackRaven said...

you can tax wealth. it is only if the tax rate is over real long term interest rate that you are defacto nationalizing the asset.

Bill Quango MP said...

I can't get into the homeowners debate. Can't face it.

However, where are all the stately homes like Downtown Abbey, that had existed for hundreds and hundreds of years.
Why did they fall into ruins?
What happened to the estates that had generated untold riches for centuries?

Is this one for history corner?

CityUnslicker said...

Sl - they do indeed, they can choose not to live in the Uk even and put their money elsewhere - just the same as the city investors...

BlackRaven - surely that is a given, how is the tax rate going to be be below inflation rate - a tax of under 10% is pretty unlikely - even with the rampant house price inflation that the UK has - the government will can always raise a tax.

Like Budgie points out, how often to we see taxes abolished once in place as opposed to slowly increased?

BQ - maybe one for history corner indeed.

CityUnslicker said...

Sl - they do indeed, they can choose not to live in the Uk even and put their money elsewhere - just the same as the city investors...

BlackRaven - surely that is a given, how is the tax rate going to be be below inflation rate - a tax of under 10% is pretty unlikely - even with the rampant house price inflation that the UK has - the government will can always raise a tax.

Like Budgie points out, how often to we see taxes abolished once in place as opposed to slowly increased?

BQ - maybe one for history corner indeed.

Hayek was right said...

Reply to City unslicker


"It does matter re income or wealth, when you have no capital you cannot save and therefore invest - you have no money. Then you can't get any tax becuase there is no source of capital - you have eaten your golden goose rather than just lving off the eggs"

Agree but house is not only store of wealth, most owning more than £2m house will have healthy income otherwise cant afford running costs. And where there is the odd one owned by a granny, she should sell and use the funds more productively rather than living in a few of the many rooms. Totally ineffective use of value. Yes its her property, her choice, but why should it not be taxed when everything else is?

You mention Switzerland, there as a house owner you pay a tax that reflects the rent you would otherwise pay, amongst other things it helps keep price rises in step with inflation and discouraging speculative binging.

- 'High value property may not to you be a great to you but to London it is - often the money is coming in from wealthy foreigners and drives a huge amount of other service businesses like cleaning, concierge etc. Where would you rather the wealth was stored, in vaults in Switzerland?"

Yes, and the business is coming here for clear rule of law, depth of markets etc. If Russian oligarchs want to hide out here for all these benefits they should pay. Dont believe they or the hedgies will all decamp to Dubai. If these guys are so bloody talented why do they need to be here to make their money, why dont they go and do it in Somalia. Thats right they cant they need our markets, professional advisors and infrastructure. In Greece the shipping magnates dont have to pay tax on income as a sign of the gratitude of the nation. I'd sooner our tax system was more like the Swiss than the Greeks, how about you?

- tax incidence, cobblers. People avoid taxes and sometimes even evade them. The more intrusive the tax, the further people will go to not pay them. SPV's or some such will be designed to avoid the tax, just as others note here that ways to avoid egregious stamp duty have been developed for many years.

Bet the oligarchs and hedgies pay their council tax. Because if they dont the Bailiffs have right of entry. Cant see the trophy wife being too happy as the neighbours see her Louis 14th Chaise long and overpriced Hirst pill box being hauled into the back of a van. Won't be invited to cocktails again will she. They'll pay.

Anonymous said...

i propose a tax on windows
we had one until 1851.
this time it should be a tax on every device that has ms-windows on it.

Limp Dumb said...

Limp Dumb here...Can't argue with some of the comments here but you can't all be right.

Anyway, we hate tax as much as you do which is why we want so many of the low paid OUT of the tax regime.

Do I have your support?

BlackRaven said...

"BlackRaven - surely that is a given, how is the tax rate going to be be below inflation rate - a tax of under 10% is pretty unlikely - even with the rampant house price inflation that the UK has - the government will can always raise a tax."

if it is 10% or over i would be very very very surprised. i think about 1% is the level you could get away with.

i actually think if they really wanted to go ahead with this they should tax inherited wealth rather than just wealth.

ps. why do they make these captcha things so difficult now, i spend longer trying to decipher the letters than typing the post.

Blue Eyes said...

CU, what is your view on business rates? Business rates are effectively a land value tax on a particular proportion of the land. Do people move their shops and offices out of the UK? Do people choose not to build skyscrapers in high value (and therefore highly taxed) parts of the country (e.g. the City/London Bridge/Waterloo?)

Mark Wadsworth calculates that to replace all other taxes, a Land Value Tax would have to be 8% annually. And if all other taxes were replaced do you think you would be better or worse off, overall?

I do like your harrumphy posts, but they don't always make sense.

Electro-Kevin said...

The Mansion Tax is most definitely not sensible.

However, I can see a reason for incentivising single persons not to occupy family dwellings in high population areas.

Also - the Tories can't cut tax either, not with this level of spending.

BlackRaven said...

an 8% tax on land would be nationalization, additionally it would lead to terminally falling land prices and declining tax revenue.

the tax rate cannot be above long term real interest rates. if it is the present value of the tax is greater than the value of the land.

Blue Eyes said...

Yes but the 8% figure is deliberately extreme and for the purpose of argument.

Income taxes are about 50% at the moment.

I'm not arguing for it necessarily, but I am trying to point out that CU's doomsday scenario of replacing the 50p tax rate with a bit of extra property taxation wouldn't necessarily destroy the economy and there might be upsides.

Remember also that the 8% would generally be paid out of earned income rather than capital gains. A bit like Council Tax and Business Rates are at the moment.

Land taxation is far less revolutionary than some would have it.

BlackRaven said...

i agree that land taxation is not revolutionary. the issue is the level and how it is calculated. MW is so obsessed with the idea he can't see that those are significant and important restrictions.

real long term interest rates are ~0% now so there really isn't much money to be raised from land taxes at the moment.

Blue Eyes said...

Gah! The point here is that a "Mansion Tax" or extra Council Tax or however it is configured would be to *replace* other taxes, such as a lowering of the 50p rate or whatever.

Are you seriously saying that a rise in Council Tax or Business Rates with a corresponding cut in National Insurance would trash the economy?

BlackRaven said...

"Are you seriously saying that a rise in Council Tax or Business Rates with a corresponding cut in National Insurance would trash the economy?"
No, I didn't say that did I. I said that a tax on an asset above real interest rates is de facto nationalization, politically unacceptable and will result in falling asset prices and falling tax revenues.

The idea that removing some income taxes will compensate for that and stabilize asset prices is bad "spreadsheet maths".

Steven_L said...

So we have to have zero tax for rich Arabs of they won't come and play roulette here?

Who cares? They just make the housing more expensive for everyone else and spunk a bit of cash at Rank Group.

They'll still come here to play roulette and do hookers but they will use hotels instead of a tax free bolt hole.

Reducing business and payroll taxes would bring more useful people here, like people that have invented valuable IP etc.

BlackRaven said...

They have almost zero effect on the median house price.

To write off the economic activity that spending brings is churlish.

Regardless, it is a non issue with regards to the level of an LVT.

Blue Eyes said...

"I said that a tax on an asset above real interest rates is de facto nationalization, politically unacceptable and will result in falling asset prices and falling tax revenues."

NOBODY on here has suggested that. Vince Cable's rather idiotic Mansion Tax would not do that. Stop using stupid straw man arguments against a re-balancing of land taxes against income taxes.

BlackRaven said...

real interest rates are very low, CU's figure of 10% and MW's figure of 8% are both way above it.

mombers said...

Does anyone think that it is economically literate to attempt to collect tax on people making minimum wage in order to provide local services to people in Kensington and Chelsea or other wealthy boroughs of London? Because this is what happens. K&C gets £25m from central government as a Revenue Support Grant. Taxing work means that people will work less or will work on the black market. Is it really worth it to make people unemployed just so that old folk in K&C can enjoy free public services from the state? Get rid of income tax and replace with a property tax to fund all local services except for the very poorest of councils. Those who gain less from the change (i.e. who do not contribute much to the economy but own trophy houses) are not the people who need help and encouragement. Old folk who want to stay in their mansions can defer until death or sale.
BTW Adam Smith was a great fan of taxing land and he was not economically illiterate.

Mark Wadsworth said...

Oh dear, I've only just spotted this one.

While your arguments about taxes on wealth eroding/discouraging people from building up private wealth (income tax, SDLT, CGT, inheritance tax, you name it), the rental value of land/location is simply not private wealth, it is national wealth, created by the whole of society, the rental value cannot be eroded by taxation, however high the rate, and it cannot be shifted abroad.

See also "Business Rates", see also the fact that the UK historically had LVT as the main source of government revenue, see Hong Kong etc. Try applying logic, my KLN #204 refers.

As to my 8%, that is merely total current tax revenues divided by total current value of UK land and buildings to give a rough idea of how much LVT would be under a full on system.

It stands to reason that the bulk of people would be able to afford this, instead of median household paying £12,000 PAYE, VAT, Council Tax etc etc, they'd pay £12,000 LVT. What's the big problem?

Mark Wadsworth said...

BE; "a tax on an asset above real interest rates is de facto nationalization, politically unacceptable and will result in falling asset prices and falling tax revenues."

Nope, exactly not, because LVT is on the rental value. Rental values are largely unaffected by interest rate changes - that is why asset prices are the inverse of interest rates, because the annual yield stays the same.

Even if the LVT were on capital values, there is no Laffer Curve cut off point above which revenues start to fall, they just flatten off (do the maths, working backwards from the annual rental value and capitalising the residual rent etc).

A full on LVT might or might not result in lower house prices, but is that a bad thing? Again, nope.

Mark Wadsworth said...

Oops, that last one was directed at Black Raven, not Blue Eyes.