Killer arguments against LVT, not (16)

The Fat Bigot, opposing LVT, came up with this:

I don't look on home-ownership as the "ultimate goal" whatever that means. But I do see it as a way that I can have somewhere to live without: (i) having to bear a continuing cost simply for being based within these four walls and (ii) the cost of housing me being a financial burden to anyone else...

Now, my memory isn't what it was, but TFB reminds me a lot of another fellow 'blogger who once cheerfully admitted that he had bought a three-storey townhouse in the early 1990s and carved out an sold a basement flat ten years later for the same amount as he originally paid for the whole house, so in an indirect way, said fellow 'blogger is being housed at a much younger person's expense but I digress...

The more stridently you argue your case, the more it seems apparent to me that your version of LVT is akin to an amalgam of council tax and an annual capital gains tax on a purely notional capital gain. By the time someone sells that gain could disappear yet the house owner will have been forced to pay as though it represented a financial benefit to him.

That, I think, is my strongest objection to your version of LVT. It is based on the premise: "you have made a gain, therefore you will be taxed on it", yet no gain is made until the asset is liquidated. If and when the asset is liquidated, truth will supersede hypothesis and whether there really has been a gain will be proved. Until that time everything is a paper exercise in officially estimated notional gains and losses.

OK, let's imagine a simple world without any taxes at all, zero inflation, low interest rates and no taxpayer-funded old age pensions. Our mythical pensioner has saved up for old age, and on retirement he owns an average house worth £150,000 and also has £150,000 in cash savings. He lives in the house and spends all the interest he earns, leaving the entire capital value of the house and £150,000 to his heirs.

As we know, we do have taxes and pensions. The tax on the interest is a reasonable 0% or 20% (depending whether it's in an ISA or falls below his personal allowance); we have council tax and the TV licence fee that cost him close to £1,500 a year, i.e. 1% of the value of his home (which is why I've long said we ought to replace all property-related taxes with a flat tax of 1% on property values, which we shall consider to be a rough approximation of Land Value Tax for the purposes of this discussion) and he is collecting a taxpayer-funded pension of £6,500 a year (or whatever the Pensions Credit level is).

Our hero is paying (say) 20% income tax on typical interest income of 5%, so each year, he's paying 1% on the capital value of his savings and 1% on the capital value of his house. So the interest income he can spend (assuming he wants to leave £150,000 cash to his heirs) is depressed slightly. But the value of his house is increasing at a long run average of 2.7% faster than inflation (because property prices rise in line with earnings in the long run), so the real value of the cash he has left over stays flat but the real value of his house tends to increase.

Meanwhile somewhere else, we have a pensioner who owns a house worth £300,000 and has no cash savings. He'll cheerfully collect the £6,500 taxpayer funded pension and pay no income tax (as he has no taxable income). Why is it wrong for him to being put on par with the first pensioner, and asking him to pay 1% of the value of his house in tax every year as well?

There'd be no point in asking the pensioner to pay this in cash every year, of course, that would just drive him into the arms of some scuzzy 'equity release' company, but the deal would be, the tax gets rolled up and repaid by the heirs when they inherit. Because of the maths, the real value of what they inherit, after inflation, would still be considerably more than £300,000 because the 1% tax only collects a third of the otherwise tax-free gain, and not one single penny of the annual use value.

If the pensioner in the more expensive house doesn't like it, he can always trade down into a £150,000 property, save £1,500 a year in tax and have some interest income to spend as well (isn't people-saving-to-be-able-to-support-themselves-in-retirement supposed to be A Good Thing?). The second pensioner is still streets ahead, in tax terms, as the house probably cost him about £30,000 thirty years ago; while the first pensioner has built up his £150,000 savings out of post-tax income.

Y'see, it's helpful to look at both sides of the equation.