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Isn’t a Flat Tax better?

More arguments against LVT come from an advocate of the Flat Tax. The author suggests a 20% flat rate above £20k, Why 20%? Why 20k allowance? Would that be the same for a big company as a one-man business? What counts as deductable expenses? It isn’t quite as simple as it looks at first glance.

The objector raises some complex and interesting points (below, italics) which are here answered.

Don’t get me wrong, I’m no expert on public spending, 20% and 20K threshold is just an example the actual figure could be anything arround this mark so long as the result is one tax rate with one threshold.

Yes, people would argue about deductible expenses etc but we already have the infrastructure in place to deal with it. However, instead of the dozens of tax levels, threasholds, tax credits etc… the infrastructure only has to deal with one threshold and one tax rate.

The main problem I see with Land value tax is the the “Assessed annual rental value” part. Look at the ridiculous (relative and absolute) valuations that exist for council tax at the moment. The system still relies on many officials being involved in the process of rental assessment. The potential for disagreement and inconsistency is huge.

For example, I can forsee the situation where a large freeholder owns such a large amount of land in one isolated area that it becomes very difficult to objectively assess the market rental value of that land. If the freeholder owns all of the land in one area then he controls the market. What If he owns the land and does not rent it? We then have to have an army of land value assessors with a huge amount of influence over our lives.

Without a good indication of the likely assessed rental value for each area of the country, I think there would be greater uncertainty of the impact of its introduction in comparison to a flat rate tax.

I think ultimately the execution of the simple concept of land value tax would become mirred in bureaucracy and inefficiency and take a long time to introduce. In contrast, the impact of a flat rate tax is easily understood by everybody, could be introduced within a couple of years and can be handled by the existing infrastructure scaled down.

Taking the points made in order: under a “flat tax”, there are two marginal rates, 0% and the flat rate tax. The Institute of Fiscal Studies has modelled the consequences of various revenue-neutral flat tax options in the UK context, assuming no change in existing thresholds. Four options were examined, leading to flat tax rates of between 22% to 37% if tax credits were included in the system and no less than 46% if National Insurance contributions were included as well. The author’s figures for a 20% flat tax starting at £20,000 are unrealistic. Furthermore, the concept of “income” is not as simple as advocates of Income Tax would like to believe. Does it include the value of goods and services exchanged by barter or in the domestic economy? What constitute legitimate expenses? What about investment income? Capital gains? How is inflation to be allowed for?

The problems with Council Tax valuations are specific to that tax. Banding is itself problematic, there is a need to assess buildings and the valuation list is 17 years out of date. Of course somebody has to do the land value tax assessments and, initially especially, there would be appeals whilst the system was bedding-in. However, the land value tax would be an immediate replacement for both the Council Tax and the Business Rate, so no additional staff would be required and the existing infrastructure could be used for assessment and billing. It is also the case that information regarding plot boundaries, values and ownership are in any case required for effective land use planning and a land value taxation system avoids the necessity of obtaining this as a separate exercise.

Reference is made to a large freeholder owning and possibly not renting a large amount of land in an isolated area. It is interesting how objections to LVT have to postulate unusual and hypothetical situations. It is difficult to envisage the circumstances just described, although it brings to mind, perhaps, somewhere in the north of Scotland where one individual might own half a county. Such land is likely to be worth next to nothing, and there are bound to be comparable areas – for example, where the land is used for shooting.

The effects of introducing land value taxation are predictable. Vacant and under-used sites will be disposed of and brought into use. This will stimulate, first, the building industry, and then business in general, as premises become more readily available at lower cost. The accompanying reductions in existing taxes will also stimulate the economy; ideally, these tax cuts should take the form of increases in tax (including National Insurance) thresholds. This will reduce the gross cost of labour and stimulate employment, thereby reducing the government’s benefit bill.

On the final point about bureaucracy, we would agree that the wrong sort of land value tax could indeed become mired, and that is why the Campaign advocates an ad valorem tax based on annual rental values. Rental value is really the value of location, a concept well understood by everyone, from householders,  allotment holders and street traders to buskers and Big Issue sellers.