Killer arguments against LVT, not (15)

From the comments in in part 14...

Sobers:

I think the answer to that is that people make their decisions based on the system we have now, not one that we might have in the future. It is unfair in my view to propose that the whole basis of the tax system is removed and replaced with a totally different one that will undoubtedly put many people at a disadvantage through no fault of their own. Changing tax rates is one thing, changing what is taxed entirely is a different matter.

Its like the old Irish joke, how do you get to Limerick; well, I would start from here! Given the current political, tax and planning systems, and the history involved, there is no way in hell that any govt is ever going to implement such a scheme, not least because it would involve a massive reduction in State power and tax revenue. If you were designing a tax system from new, for a new country, then LVT would make sense. But we aren't, so it doesn't (for us).

Good points, of course. Which is why my original plan of three years ago was to replace all property or wealth-related taxes (Council Tax, Stamp Duty Land Tax, TV licence fee, Inheritance Tax, Capital Gains Tax, VAT on domestic fuel and improvements, Insurance Premium Tax, Home Information Packs etc) and all property related subsidies (VAT zero-rating for new builds, Housing and Council Tax benefit for privately-owned properties) with a flat rate tax on residential property values (averaged out a bit over postcode sectors so that we don't need to value every single property), like they introduced in Northern Ireland in 2006 (where the flat rate is 0.78%, but it only replaced Domestic Rates, not all the other rubbish).

The fiscally neutral rate, at today's property values, would be about 1% per annum. Even if we only compare this with existing annual taxes (Council Tax & TV Licence Fee) a third of households would be better off, a third would notice no difference and a third would pay more. But even this third aren't worse off in the long run, as they save the 4% Stamp Duty Land Tax hit when they buy/sell and they don't need to worry about Capital Gains Tax (which in itself leads to misallocation of resources) or Inheritance Tax (which generates as much income for the tax-planning profession as it raises in tax) any more. If a pensioner owns a home where the LVT bill is significantly higher than the Council Tax, then they can ask their heirs to pay it or just roll it up to be repaid on death.

So that's how we get to Limerick from here. It's a massive simplification (with corresponding cull of civil servants), with more winners than losers, and worst case it would be no more disastrous than a 1% increase in mortgage interest rates - or do readers really thing that the base rate will stay at 0.5% for ever? From there on in it's just a question of cutting taxes on incomes and production; higher net incomes will automatically feed through into high property values and hence higher property tax receipts, even if the property tax rate were kept constant.

Anonymous said...

The current system penalises people, and so it's ok if LVT penalises people. Uh?

As I have explained at length before, the existing land-use-restriction system and the fact that income taxpayers subsidise property owners, penalises people who aren't on the ladder. And the only way for them to get on the ladder is to take on an extortionate amount of debt; it is a massive Ponzi scheme that has led to successive booms and busts over the past forty years.

LVT is like a user charge*; core functions of the state have to be paid for somehow, and it only seems fair to make property owners pay for those functions that enhance property values. By all means, argue that these costs should be divided by the number of adults and argue for a Poll Tax (which bears absolutely no relation to 'ability to pay') but we tried that and it was a disaster; and seeing as richer people live in nicer houses and vice versa, surely LVT is far more closely related to 'ability to pay', but without being a tax on income (hence having none of the deadweight costs of taxes on income, natch).

Peter, what externalities do you mean? You have to clarify. I thought I'd covered those, like the deadweight costs of land-use-restrictions, the lack of deadweight costs of property taxation compared to taxation of incomes.

Finally, DBC Reed nails it. Maybe people would be so repulsed by the idea of paying an ear-marked tax that property prices would remain so low and stable that the tax wouldn't raise much. That counts as a storming result in my book.

* Think about taxpayer-funded, State provided education. It's a disaster. The income taxpayer, the parent and the schoolchild are all being penalised. What would happen to net incomes and education standards if we scrapped it all, cut taxes and left everybody to fend for themselves? Would you count that as 'penalising sub-standard teachers, paper pushers, meddlers and conscientious parents on low incomes'? Probably yes, so what? You have to look at the sum total happiness of the largest number of people.