Sunak vs Truss: Debt, Inflation and Levelling Up

The Conservative leadership contenders ask:  When does the Covid-induced public debt start to get paid off? What about inflation if we reduce taxes to ease household finances? How do you achieve levelling up?

A FT letter writer Mark Hofman in August 2020  said that in the example of Japan which has had huge public debt levels for a long time:

     'government bonds held on the balance sheet of the Bank of Japan are effectively the Japanese government owing the bond debt to itself...so why not put a line through those entries on each side of the balance sheet? The level of debt would be reduced without the        taxpayer having to pay anybody anything, and with nobody being poorer.' 

If there is a possibility of inflation due to this he says it can be resolved by raising the reserve requirements of commercial banks at the central bank (in the UK's case - the Bank of England). He asks: Why consider the conventional way of paying off this debt with taxes for generations, when there is a better way?

Beware of suggestions that governments are like households and must not spend beyond their income.  Householders are not like that as they cannot create their own money whereas sovereign govenments, with careful monetary control can do so safely, as Hofman describes. 

On levelling up:  Change how tax is raised by levying a small annual charge on the value of all land, including the value of the land footprint of all homes. At the same time any tax raised in this way would be allowed against a personal income tax liability. For many homeowers the total charge would not change. 

Benefits would accrue:

• House price rises - now with a land value levy - would slow or fall and homes become gradually more affordable since speculation would be damped down and a steadier market would encourage first time buyers. 
• Homes would become less attractive for pure investment rather than for living in personally. Recent governments just subsidise new buyers which raises the price of homes and brings developers more profit. The crazy price boom continues.
  
• More homes would be built as development would be encouraged - for example a house with a large plot would be built on to share the land value levy over new, extra homes. Or an extension to create a separate rentable flat. New homes would be built to low carbon standards. Countryside would be preserved.
• Renters would be helped as the land charge would be on the landlord. Landlords would be anxious to have their property occupied at lower rents rather than keep homes empty waiting for increased rent.
  

Levelling up at a stroke, for many. Those who are land rich and income poor, thus short of cash, would be allowed to defer payment until they sell the home. 

The young would be able to consider buying and homeownership would increase. Older people in large homes would be nudged into downsizing. The increasing wealth divide between homeowners and renters would ease.

For the common good we need such monetary and taxation policies. Which candiate, or party, will grasp these choice fruits?  

Posted by THE FREE LUNCH - FAIRNESS WITH FREEDOM Charles Bazlinton

             

Mark Wadsworth exposes Margaret Thatcher's Great British Property Brake Off

The need for wider media coverage on a drastically fairer tax system grows. The start of this was Henry George's seminal work on how to fund the services needed by the community using the community's self-generated land values.  It would involve charging freeholders/landowners an annual levy (LVTax) on land value only, quite apart from the value of a building built on the land. (* 'Annual Ground Rent'). Modern developments of his ideas involve making counterbalancing reductions in income tax and other such counterproductive burdens on creative work. 

Mark Wadsworth has written a short and comprehensive article on UK property market history which shows how political moves over the last 30-40 years have warped the market in favour of those Baby-Boomers who were fortunate enough to have been buying their homes since about 1970. Before then several regulations kept the lid on wild property booms.

In an unfettered property market the location value of a building plot rises to what Wadsworth calls 'unregulated' high values. A monthly or yearly manifestation of land value is rent. Now rent controls imposed since 1918 meant that rents were kept lower than otherwise for decades. The knock-on effect was that freehold prices were also kept lower enabling potential home-owners to compete with private landlords, leading  to owner-occupation rising from 30% to 60%  (1945-1980s). Also governments, pre-1970s, by building were adding to the affordable rent social housing supply which meant less call on the taxpayer through little need of the rent subsidy known as housing benefit.   Mortgage restrictions on borrowers (loan/income ratios) were about half current levels so there was reduced ability for buyers to bid up prices. Higher value homes were taxed though Schedule A taxation (to 1964) and Domestic Rates (to 1989).  

But these benign conditions did not last. The regulatory brakes started being let off the property market when Mrs Thatcher and Messrs Blair and Brown dismantled the above restraining forces and property prices rose high and higher to their unregulated values. Low earners, even mid-earners, are excluded from buying for themselves and this has reversed the decline in private renting - down from 50% to 9% (1945-1990) up now to 18% (2014).  Wadsworth does not mention the additional London effect of more recent years whereby new foreign/company freeholders have increasingly been bidding up property to park their wealth in a safe haven - then to add insult to the priced-out ordinary Londoners leaving many such properties unoccupied for long periods.  

Wadsworth's article is a succinct summary of historical politico/real estate wisdom, and the recent meddling. The meddling has had an expensive effect on everyone's taxes as welfare support is needed by people who are being priced out of affordable housing by the 'Baby Boomers...[who] genuinely believe that they are somehow morally superior because they 'rolled up their sleeves and paid off their mortgage' '. This is a huge social issue. It is coming home to roost for the growing number of renters who may need tax funded housing benefit to survive - despite themselves having to roll up their sleeves but still unable to pay the rent. Maybe the tide is turning with prices of London properties declining - partly due to specific property tax charges by Chancellors desperately needing funds to counteract the hugely expensive welfare effects flowing from the flawed housing system. 

But the property market bandwagon will continue to career dangerously on unless we adopt Henry George's insight of taxing land values. The need for an affordable home for everyone is too important to be tied up with the inevitable involuntary land speculation that every home owner is party to when they start to purchase.  For the sake of a more equitable society, everyone needs to feel the effects of some or all of these: rent controls; land value tax with lower income tax; property lending restrictions and increased house building. Whether the effects will be seen as benign or not will depend on how favoured we already are.    

*Annual Ground Rent  
Fred Harrison and Mason Gaffney have written a book Beyond Brexit: The Blueprint  which uses the term Annual Ground Rent to describe land value tax. AGR neatly describes LVT as the regular charge morally due from all landowners/homeowners to contribute to public services.  The book has been enthusiastically reviewed by The Georgist Journal ( March 2017 print copy) which also contains Mark Wadsworth's article.  
POSTED BY Charles Bazlinton. Author THE FREE LUNCH - Fairness with Freedom