Sense and nonsense on taxes from the Lib Dems

It adds that the current system of council tax should be replaced with new rules including “a revised form of property taxation to make it more efficient (through basing it on undeveloped land values), targeting wealth”.

OK, very good, inching towards proper land value taxation.

However, the policy paper says that even as councils get more financial freedom, they should also face rules to transfer money from richer areas to poorer ones.

A reformed local government finance system would include an “equalisation system to shift resources from the wealthiest to the neediest areas,” the report says

Not very good. The entire point of LVT is that as it\’s the surrounding environment which produces the land value, the tax should be levied upon the value created by the surrounding environment. Taxing the value added in Mayfair in order to subsidise the value not created in Stockton on Tees doesn\’t really make much sense. What incentive do people have to add value in either place if that value either disappears or the money turns up without the value having been added?

And this is just silly:

As well as taxing property values, the Lib Dem paper says councils should have the right and ability to raise “additional taxes” to fund specific services and costs.

For example, the paper suggests a” small per drink surcharge in town centre bars and pubs, borne by drinkers themselves”.

Who actually bears a tax, rather than who pays it, is not something you can determine by legislation. Let\’s assume that they mean that busy city centres, with hundreds/thousands out boozing of a night, are where this tax should apply. OK, so there\’s this 10 p a pint extra tax on a pint to pay for the policing sort of thing.

If everyone turns up as usual and drinks the same amount then it will indeed be the consumers who pay the tax. However, if a few, some, decide not to, decide to stay at home/drink on the beach/in the park/drink less, then the tax will not be solely borne by the drinkers. Lower takings will mean less profit for the pubs, meaning the pubs (and ultimately, landlords) will be carrying some of the tax. Lower drinking overall would mean that workers in breweries would be bearing some of the tax. As with shareholders in breweries.

It gets worse too: if the drinkers consume the same amount of alcohol but at higher prices they will, presumably, being income constrained, purchase less of other products. So the producers of midnight kebabs and their workers will carry some of this tax.

Now, maybe that first order incidence of the tax is sufficiently important that we\’d be happy to levy it. We do with ciggies for example. But it just isn\’t true that by declaring that \”drinkers themselves\” will pay the tax that it will in fact be drinkers paying the tax.

As with so much in economics the answer is \”it depends\” see?

5 thoughts on “Sense and nonsense on taxes from the Lib Dems”

  1. 1. See also: “VAT is not a tax on consumption. It is in fact a tax on gross profits or ‘value added’ which happens to be partly borne by the consumer, but as the consumer does not have endlessly deep pockets, as a matter of fact it is mainly borne by producers.”.

    2. “it’s the surrounding environment which produces the land value” correct. But is is entirely erroneous to say that Mayfair land values are generated by the activities of Mayfair people in Mayfair.

    Mayfair benefits from the whole of London and the whole of London benefits from the South East and the South East benefits from the whole of the UK.

    Or put it another way, if London became a separate country and the UK shifted its new capital city to Stockton on Tees, you might find land values go up a lot in Stockton on Tees and fall a bit in Mayfair.

  2. I am not an economist but it appears that the direction that taxation is following (all taxation) is ever upwards. Should this continue there will come a point when 60% and then 70% and possibly 80% of our income will go in taxation. Indeed, it could well go higher. Of course, the revolution would occur somewhere along this upward path. Motto – Tax may well be necessary but too much tax will destroy us.

  3. “Taxing the value added in Mayfair in order to subsidise the value not created in Stockton on Tees doesn’t really make much sense.”

    What MW said.

    In a situation with independent self-financing Spencian parishes, I’d tend to agree with the original point. At the moment we don’t. A huge proportion of public sector financed development is allocated by central government. As with Business Rates, having a reallocation between regions would provide a market driven mechanism to compensate those areas which are disadvantaged by central government decisions.

  4. “What incentive do people have to add value in either place if that value either disappears or the money turns up without the value having been added?”

    Well that the value of their land goes up? Your argument seems analogous to the idea of that C02 taxes only work if spent on CO2 mitigation or prevention.

    On drink taxes, that it’s shared between the producer and consumer seems a pretty good thing in this example. The amount paid by kebab shops would be very small and at that remove it’d be odd not to start counting the benefits that the tax provides which don’t go to the government.

  5. Let’s see, how many pubs a week are closing? Last I heard it was of the order of fifty five a week. Have we acquired a new puritan government whilst I wasn’t looking?
    Message to government…”get your thieving hands out of my pocket”.

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