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James Graham has done the short version of the Georgist objections to Conservative Plans over Stamp Duty and Inheritance Tax and, whilst I have blogged in the past about why we should indeed abolish IHT completely, I spotted this yesterday on "The First Post" which I think highlights a common confusion about IHT and, in particular, "real property" - ie your home...

Arguments for and against inheritance tax:

ARGUMENTS FOR (abolition/reform):

Inheritance tax no longer fulfils its original intention. Initially designed to raise money from the very wealthy, it now penalises more and more members of the middle classes. The very wealthy, however, can often afford financial guidance and find ways to avoid having to pay.

If that's what people are basing the inherent unfairness of IHT upon then I think they are wrong. Whilst one cannot argue with the second sentence (and the LVT solution would solve that fairly) I am not at all sure from the history of the various Estate Duty, Capital Transfer Tax and then Inheritance Tax regimes leading up to now that the tax was in fact "initially designed to raise money from the very wealthy".

In 1857 tax was due on estates above £20, though apparently rarely collected unless the estate was over £1,400. Using the RPI these two sums equate to just £1,200 and c£90,000 in 2006 prices, or £33,000 and £857,000 using average earnings indices. No, given the discussions around the various ways of levying land taxes in the People's Budget of 1909, I believe that death duties were intended to capture land value increases in a way that would not impact on the owner while they were alive.

It just so happens that around the turn of the 20th century, most land was in the hands of the "very wealthy" - landlords and large real estate holdings. Now, whilst it is much more widely spread, the increase in land values, seen especially in the past decade, are still a problem which the lifting of IHT thresholds will not address, in fact as James Graham points out, will exacerbate.

One other of the arguments for abolition in the First Post article goes as follows:

In taking a share of money from people who have already contributed income and capital gains taxes, inheritance tax is a form of double taxation.

This too is to misunderstand the nature of property price rises, where the increase in values comes from and so on. The property owner has not paid tax on the capital gains in their first home at least. Nor have they paid income tax on that increase. They may (but not necessarily I suppose) have paid income tax on the money used to buy the property in the first place. Nor have they contributed much, if anything, to the increase in value. That comes about because the location becomes more popular - more people need to have access to that location or ones like it. It is a monopoly profit in a zero sum market. Contrast this with the profit made from healthy economic investments such as equity in companies which only arise because someone, the company, is creating additional wealth.

Yet in attempting to take the family home out of IHT the Tories are doing precisely the opposite of what is fair and equitable. The monopoly "real property" profit the family is allowed to keep, whilst healthy investment assets are more likely to be taxed, if anything is. Of course I do not believe in waiting till someone dies before collecting the land value from the estate. It should be, as Adam Smith, Milton Friedman and Winston Churchill suggested the main or only form of taxation. Such would keep house prices down, allow people to save the rest of their income in productive assets instead, and be difficult to avoid, even for "non-doms". Then abolishing IHT would make sense, taking all the other productive capital assets out of what is a pernicious tax.

The Oxford Mail today reports on a particularly nasty little problem of flooding we have in central Oxfordshire, and for a city built around the confluence of two rivers it's one that needs to be addressed:

Flood relief scheme 'years away':

VICTIMS of flooding in Oxfordshire will have to stick with the sandbags for a few more years - as a proposed £100m flood relief channel is still at least a decade away.

How, I hear you ask, would LVT help. Well, for a start this debate has been going on for, as the article says, ten years and more already. Thus far, and no doubt until the Environment Agency gets government approval which it says it hopes to do next year, none of the solutions, let alone the £100m "gold plated" scheme mentioned, have any funding. And that's leaving aside the fact that DEFRA in its current state seems unable to stick to its budgets for things like flood relief, robbing them to pay farm subsidies and other things that it should be funding as well. Should - of course - in the sense of under current regulations, not in my opinion!

In the meantime all the properties affected by flooding have their values depressed. Not because they aren't nice houses, but because of their location in a now reasonably regularly flooding area. It's the land value that's being affected. In addition, insurance companies are wise to this and are now charging much higher premiums for insuring homes in flood risk areas.

But with the investment in flood relief measures, these values, and the ability to insure these properties would bounce back.

If we had LVT, first of all, the tax authorities (at whatever level of government) would be getting much less out of such locations. How could they lift the tax take from these areas? That's right, spend on the anti-flooding infrastructure and see the land values and therefore tax takes rise again. At the very least of course, the property owners there would have some small comfort that until that infrastructure was in place, the inconvenience of the flooding and higher costs of insurance would at least be offset somewhat by a lower tax bill.

It won't relieve the misery of coming downstairs to find your Axeminster in soggy ruins but at least it offers a way of financing and an incentive for government to get on with such infrastructure projects.

Technorati Tags: climate change, land value tax, london, oxford, property tax

In an article intended to solicit opinions under the heading "Should the Government attempt to curb house prices?" The Telegraph yesterday posed some very pertinent questions about the potential effects of government tinkering with house prices. Amongst all the various responses online at least - that it's all down to immigration, freeing up planning to release more land (presumably except anywhere near where the author lives), hitting second homes, buy to lets and so on - not one mentions the real solution - Land Value Tax.

But the questions they ask need to be answered by Land Value Taxers, particularly "Single Taxers" such as myself - those who propose eliminating all other taxes as far as possible and collecting the entire value of economic land as the sole revenue source for government (or, as I would prefer, for distribution as a Citizen's Income following the elimination of the state!). For what we propose would indeed reduce house prices and so put at risk what many home-owners and property investors see as their rightful wealth.

We have to offer responses as to why first, it's not their rightful wealth, that they have done nothing to earn the uplift in values they have enjoyed, and second, that the wealth itself is a chimera and their "loss" can be compensated for.

Anyone with an eye on the property market knows the issues as set out:

First time buyers are being forced into record levels of debt to get on the proper ladder, new figures have shown, with houses now less affordable than ever.

According to the Council of Mortgage Lenders, the average house buyer needed to borrow 3.37 times their income in May - the highest figure recorded.

Rising interest rates, continuing house price increases and an average stamp duty bill of £1,458 are all combining to price first time buyers out of the market. They now account for just 35 per cent of all mortgages taken out by people buying a home.

But I want specifically to address the questions they ask:

Should the Government attempt to make homes more affordable or should the market be left to its own devices?

Land does not and cannot operate as a properly free market. Unless you can find a way of creating unlimited amounts of it, and all locations have equal access to all other locations, locations are effective monopolies.

Is it reasonable for young people to expect to be able to buy their own home? Do homeowners who have benefitted from the boom deserve their windfall?

Should the Government ease planning restrictions to increase supply of new homes? Should stamp duty thresholds be altered to give first time buyers an easier route into the market? Should there be restrictions on second homes or buy-to-let mortgages?

Or do young people simply have to make the best of a bad situation? Should they live at home longer, as young people do on the continent? Should we accept that it is no longer feasible for us to be a nation of homeowners? How would you feel if the Government took action which reduced the value of your home?