Killer arguments against LVT, not (24)

Richard Teather (who did a fairly decent 'flat tax' manifesto in 2005) did a 'think-piece' over at the Adam Smith Institute explaining why reintroducing Schedule A taxation, to broaden the income tax base and hence enable the income tax rate to be reduced, would be a good idea. Interestingly, this proposal was already in Patrick Minford's flat tax proposal of 2006.

Arguments against were invited today.

martinwc2 chimed in with the inevitable...

Surely the main argument against a tax on homes is that cash is demanded when there is no underlying cash flow? E.g. income tax arises upon cash income, even with capital gains tax, it falls due after a realisation. With houses, cash is extorted and funds must be taken from elsewhere. It's utterly irresponsible to force house sales to meet tax or force borrowing, especially when values fall as well as rise..."

Richard Teather replied rather nimbly with this:

As I said, we already tax people where there is no cashflow. We tax employees on non-cash benefits (company cars, private healthcare, etc.). A property tax is very similar - the company car saves you the expense of buying your own; home ownership saves you the expense of rent. There are other examples already in our tax system of taxing non-cash income, but the "benefit in kind" tax on employees is the main one.

I gave a more detailed reply:

@ Martinwc2. You are advancing what Winston Churchill and Henry George dismissed as the "Poor Widow Bogey" over a century ago.

There are four stages to the home-onwership life-cycle. Even if the property tax were an additional tax (I'd like to see any new property tax replace Council Tax, Stamp Duty and Inheritance Tax as a start, for example, and then use it to reduce income tax rates by broadening the base), then ...

1. People saving up a deposit to buy their first home. Any property tax acts like a higher interest rate, so prices would adjust downwards and their total cost of purchasing is fixed as a certain fraction of their net income. So they can obviously afford it.

2. First time buyers, who have a mortgage debt approx equal to the value of what they have bought. As they ought to have budgeted with a possible increase in interest rates of a few per cent (depending how pessimistic they are) the sensible ones will be able to afford a 1% or 2% charge on capital values, as it's no worse than a 1% or 2% interest rate hike. This would be easily affordable if such high tax rates reduced income tax by an equal and opposite amount.

3. People who have paid off or nearly paid off their mortgage, who thus have lower mortgage repayments than those in category 2, and hence can also easily afford it (esp. if income tax rates reduced).

4. Retired people. They could simply 'roll up' the tax to be repaid on death (which is why I would always recommend getting rid of IHT as a quid pro quo - IHT only raises £3 billion, about as much as the TV licence fee, but is a particularly spiteful tax in its own right).

Now, let's try and invent a system that treats all asset classes the same. Ideally, people save up some cash to live on in retirement (as well as paying off mortgage). If they are cautious, they only spend the interest element, so on death, the nominal value of the cash = the nominal value when they first retired.

Similarly, as the long run trend in house prices is to increase in line with wages growth (about 2% faster than RPI), as long as the annual tax is less than 4% of the nominal value of the house (a very, very high rate indeed!), the nominal value of the house minus rolled up tax [on death] would still be no less than its nominal value on retirement (taking a long run average sort of view). So the annual rental value is not actually taxed at all - this is earned and consumed while you are still alive - much like interest income (glossing over the fact that interest income is and should be taxed if we are to have the broadest tax base and hence the lowest overall rate).