Wednesday 3 September 2008

"Salmond confirms council tax plan"

More madness, this time North Of The Border.

Assuming that this is fiscally neutral, who are real winners and losers from all this?

Winners will be those with low incomes relative to the value of the property they own, that means:
- pensioners in big houses and their heirs, obviously.
- second home owners.
- people who own BTL properties in Scotland. Even if their rental income is taxable, by definition, this is only a fraction of the tenants' income (so a landlord's income-to-property value ratio is low), hence the income tax that landlords will pay is only a fraction of the income tax that tenants will pay. But if they scrap Council Tax, the rent the landlord can charge increases as the rent can take up a larger share of tenants' 'housing budget' (which of necessity includes Council Tax, rent and utilities).

Losers will be those with high income relative to the value of the property they own, in particular, tenants (who own no property whatsoever). They'll end up paying for the value of local services (as this is included in their now increased rent) as well as for the cost of local services (the bulk of which they will pay for via the Local Income Tax).

And even an average household with an average income in an average home for whom this is at first blush a straight swap will be slightly worse off in the long run, as the Scottish economy will grow slightly more slowly.

So, cynically, Scotland looks like a good place to invest for a BTL-er and/or buy a second/holiday home (especially if you're English!), once the market has bottomed out again.

Morons, honestly.

11 comments:

AntiCitizenOne said...

It will also raise punish people who work more.

Anonymous said...

I earn 30k a year and my wife and I live in a modest band A council house. We currently pay about 950 quid a year council tax. What do you think the difference to me will be?

Mark Wadsworth said...

Rick, if you own your home are probably £200 or so better off (ignoring overall slowdown in economy).

If you rent, you'll find that your rent will go up by the best part of £950, and your income tax bill will go up by £750, so you'll 'save' £950 Council Tax but overall you'll be about £500 worse off.

Mark Wadsworth said...

Richard, we'll see what happens to rent levels. I would expect them to go up by roughly the amount of the council tax cut, in your case, you'll be able to put up the rent by nearly £900.

I have no idea what your rental income and income tax bill thereon will be, but I am sure it is a lot less than what your tenant is paying in income tax, as her salary is probably five times as much as the rent you are charging.

But we don't need to debate this - time will tell! Please ask the SNP to keep a close eye on rent levels.

Anonymous said...

Mark Wadsworth: "Morons, honestly."

Shome mistake surely. Alex was chief economist somewhere or other. This must be a good plan??

Mark Wadsworth said...

Anon, it's a f***ing brilliant plan!

All things being equal,
1. Gross wages will be a bit lower (slower economy); 2. Net wages will be a lot lower (lower gross wages minus an extra 3% tax);
3. House prices will be higher than they otherwise would be;
4. Local councils will no longer be democratically accountable for their local spending - they'll just be subsidy junkies from Scottish parliament.

So the choice of living North or South of the border will be made all the easier, and Scotland will become a nation of low earners run by corrupt subsidy junkies.

sanbikinoraion said...

Why wouldn't landlords compete against each other for business, holding each others' rents down?

Mark Wadsworth said...

S, rents are indeed set by 'market forces'. But as I have explained above, landlords will be competing for a larger pool of money.

It's basic economics and borne out in practice. The land value taxers know a case of a certain street in London where one half was in a high C Tax borough and the other half was in a low C Tax borough.

Rents and house prices in the low C Tax borough were higher than in the other half. Obviously - if the C Tax is lower, you can devote a larger share of your housing budget to rent or mortgage repayments.

So it's not just idle theory, despite Richard Thomson's insistence that the laws of economics don't apply in Scotland.

I bet you a dollar to a dime that if they actually make this change, after a few months we'll be hearing horror stories about tenants (like Richard Thomson's nurse) complaining that their rents have gone up by 10%-plus.

Richard Thomson said...

No, Mark - the laws of Economics certainly do apply in Scotland. My contention is that they don't apply anywhere in anything like the way you appear to think.

You said earlier that in your view, under LIT I'd be able to put up my rent by £900, since that's what my tenant's housing budget would have 'increased' by.

Let's say you're right and all of a sudden, landlords in the street decide to hike rents. The difference in my tenant's disposable income as a result of the tax change in the example given would be £150, not £900.

If I put up the rent by £900, they would either have to forgo consumption elsewhere, or would move on quickly, with moving on being the dead cert option. As such, it's only an additional £150 a year that I could try and go after.

Even then, you're assuming that landlords have full knowledge of their tenants earnings, and that they will always try to screw as much out of their tenants as they possibly can. That's just not how the property market works, I'm afraid.

I'd offer you a wager, but since you seem thirled to the idea that this will slow the Scottish economy (evidence?), perhaps you don't think I'd be able to stump up in the unlikely event of my being wrong...

Mark Wadsworth said...

Richard, let's not have silly bets on how this will affect house prices (which are busily falling, so all this will do is slow the fall slightly) or by how much it will slow the Scottish economy (that is subject to millions of other factors).

Let's have a serious bet on rent levels. They will go up, as my real life example from that street in London showed.

Richard Thomson said...

I think that rent levels are likely to go up, Mark, but for other reasons.

They'll go up because demand for property will continue to outstrip supply. They'll go up because BTL landlords will want rents, as far as possible, to exceed their increasing mortgage payments. They won't go up as a result of a move from CT to LIT.

By definition, the difference in what people pay in LIT relative to council tax will vary from case to case. The rent you can charge, on the other hand, unless you can find a sucker, is governed, yes, by the amount someone can afford to pay, but it is also governed by what they are prepared to pay.

That decision is based on what equivalent properties in the same area go for, which leads to a uniformity which belies how disposable incomes and therefore 'housing budgets' may vary from case to case.

Theoretically, I could charge my nurse tenant an extra £150. However, what about a lawyer renting an identical flat in the same block, who earns £50,000 and will therefore pay more in LIT than in CT? Since their housing budget will then have gone down, will that lead to a reduction in their rent since they can't afford to pay more? Will their rent just stay static? And even if I could get away with it, once my tenant found out how much less the lawyer was paying, just how sustainable do you think would be the resulting rent differential between the two properties, let alone across an entire property market?

I do see your point. I just think it makes for an interesting tutorial debate, rather than as any kind of indication as to what would transpire in reality.