DBC Reed throws down the gauntlet

DBC Reed left this comment on Killer arguments against LVT, not (37).:

At some point somebody who knows more about tax than I do has to come up with a combined tax, deducted from salary PAYE, with a landed property element that varies on a reciprocal basis with the earned income element, so that increases in land tax due are compensated by reductions in income tax-without the punters noticing what is going on (because total deductions don't change).

This will also deal with Henry's caveat that effective land taxes saws off the branch you're sitting on and lowers the tax take (not when income tax goes up to compensate).Not that I'm keen on Income Tax. It only involves integrating Income Tax records with Council Tax, not that difficult with computerised records. Not that I'm keen on computerised records either: file cards + fax machines represent the future, as I'm apt to say to people wandering boredly away.

Combining property tax and income tax, and collecting both via the PAYE system would be the easiest thing in the world. You just gross up everybody's Council Tax bill (or Sentinel Tax bill, or whatever) for the prevailing income tax rate and deduct it from everybody's personal allowance.

A. For owner-occupiers it's very straightforward, for example, let's say somebody currently has a salary of £27,000 and a Council Tax bill of £1,000. He currently gets a personal allowance of (say) £7,000, so of the £27,000, only £20,000 is subject to tax, so he pays 31% x £20,000 = £6,200 income tax and National Insurance plus £1,000 Council Tax every year, total tax £7,200.

B. Under the merged system, you divide £1,000 by 31% = £3,226. This would be deducted from the personal allowance, so his new personal allowance = £7,000 - £3,226 = £3,774. His salary remains at £27,000, of which £27,000 - £3,774 = £23,226 is now taxable at 31% = total tax £7,200, so in Year One, there is no change to his total tax (only he doesn't have the hassle of paying the Council Tax by direct debit - it gets deducted at source).

C. Now, let's now assume that in Year Two we want to collect twice as much in Council Tax (or whatever we call the property tax with which we replace it) and that this would enable us to cut 5% off Employee's National Insurance. Our hero's basic personal allowance of £7,000 is now reduced by (£1,000 x 2) divided by 26% = £7,692, so his personal allowance becomes negative £692 (a so-called K-code - the PAYE system can deal with these, of course), so he pays tax and national insurance on £27,000 (his salary) plus £692 = £27,692 at a rate of 26% = £7,200. Again, our hero notices absolutely no change.

D. Of course, I tweaked the figures to show that for yer average 'hard working homeowner', shifting from taxing incomes to taxing land or property values wouldn't make any difference. Obviously, people with a relatively high income-to-property value ratio would end up better off and people with a low income-to-property value ratio would end up slightly worse off, but that is the general idea. And I suggested reducing Employee's National Insurance rather than income tax to try and narrow the gap between the tax burden on employment income and on other income.

E. You can do the same with the self-employed - you just add the property tax bill to the annual income tax return, which is normally sent to that person's home address.

F. You can do the same with the State Pension - instead of paying out £100 a week and charging £1,000 a year Council Tax, they could just pay out £81 a week in State Pension. For sure, I'd replace all these different taxpayer funded pensions with a Citizen's Pension of rather more than £100, different topic. If the average property tax bill doubles to £2,000, and bearing in mind that there are on average 1.5 pensioners in a pensioner household, you just hike the Citizen's Pension by £12.80 in Year Two.

G. With buy-to-letters with little or no earned income, you can put the onus on the mortgage lender to add the tax to the monthly mortgage payments, and in turn the buy-to-letter adds it to the rent, so tenants (and people who live with their parents) would get the full personal allowance of (say) £7,000 - the extra net income they get from the National Insurance cut in Year Two would in nearly all cases be more than the extra rent that the landlord charges. Once the mortgage is paid off, see E. above.

H. And so on. None of this is rocket science.

I. Bonus points to the first person to leave a comment saying "Yeah, but what happens if the 'hard working home-owner' loses his job? Would the local council repossess his home?". Assuming he has a mortgage, he would lose his house sooner or later anyway (which would happen even if there were no property taxes at all). What's the big difference? If he has no mortgage, and loses his job, then the property tax gets deducted from his Citizen's Income, same as F. above. If he's a tenant and loses his job then he gets evicted, simples.