Wednesday 19 May 2010

Killer arguments against LVT, not (36)

Over at HousepriceCrash, Tom 101, at comment 8 said:

MW, What are the downsides of LVT? I read an article a while back on the planned introduction of LVT in Auckland and how poor people who happen to live in an affluent area would be priced out of their homes because of its introduction.

To which I responded, at comment 12:

Tom 101, the traditional "killer argument" deployed by the Home-Owner-Ists is "what about a poor widow living in a mansion" (and all its variants).

This is twaddle of course; most poor people leave in small houses or in cheaper areas where LVT wouldn't be much; most rich people live in big houses in nice areas where LVT would be a lot.

Assuming that other taxes were cut accordingly, shifting from income tax/VAT to LVT would help the 95% of poor people who live in small houses [or in cheaper areas]. The 5% of poor people who happen to live in a big house in a nice area will have to trade down; roll up the tax to be repaid on death; take in a lodger; get their heirs to pay it etc etc. Such is life.

Without LVT, when that little old widow in a mansion dies, her heirs will of course sell the house to a rich person; LVT merely speeds up the transfer of nice houses to [high income] people (which is fine - that is the whole point of being rich) and does not fundamentally alter anything much.

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In case readers of this 'blog imagine that I don't live in the real world, I, like most middle-aged 'bloggers, have parents in their seventies who bought their house for about £2,000 back in the 1963. They struggled, scrimped and slaved for a few years to pay off the mortgage, but the high inflation of the 1970s eroded the value of the mortgage, and hey presto, by the late 1970s they paid off the mortgage out of petty cash. They traded up once and now live in a house 'worth' £270,000.

So effectively, they have lived completely mortgage and rent-free for over thirty years. If somebody stumbled into power and adopted my plan of replacing all existing property and wealth related taxes* with a flat 1% tax on residential property values, replacing my parents' current Council Tax bill and TV licence fee (which cost them about £2,000 a year, let's say) with a £2,700 LVT bill - but in turn scrapping Inheritance Tax (you never know, they might have some other loot tucked away) and Stamp Duty Land Tax (which would knock 3% of the selling price, at current rates), would I be too mortified? Nope.

If they don't want to pay it, then let them roll up the tax. Seeing as in the long run property prices rise slightly faster than wages (i.e. 4% a year nominal, let's say), the value of my 'inheritance' is still going up by 3% a year. And if it turns out that my parents have MEWed to the max and spent it all on new cars and holidays abroad, and I inherit nothing, well so what? It's their house and they can do with it what they like.

And if whoever is in power decided to go further, and to shift from taxing incomes and production to taxing land values, then every £1 that is taken from 'my' inheritance goes 50p to my parents in terms of cheaper goods and services (less VAT!) and 50p to me as a saving in income tax. Even if the tax were 4% of property values per annum, at least the nominal value of 'my' inheritance is not going down - it's the same as if my parents had £270,000 in the bank and spent all the interest every year, but no more than that.

Just sayin', is all.

* Council Tax less Council Tax Benefit, Inheritance Tax, Stamp Duty Land Tax, TV licence fee, Capital Gains Tax, Insurance Premium Tax, VAT on domestic fuel etc. You can do the same exercise for commercial land and buildings by starting with 'Business Rates'.

7 comments:

Tim Almond said...

And if elderly people moved out of high-demand areas and into places like Lincolnshire or Wilts/Somerset borders, LVT would probably become insignificant.

I say "become" because the LVT as of now would be quite high. But liberalised planning and the removal of the NIMBY effect would lead to developed land down there costing little more than farmland.

Anonymous said...

"most poor people leave in small houses or in cheaper areas where LVT wouldn't be much; most rich people live in big houses in nice areas where LVT would be a lot"

"Nope", to coin a phrase. It depends what you mean by "poor". You are as usual blurring the distinction between being rich in assets and being rich in income. You can own a big nice house but have hardly any income (archetypal widow for example) in which case...

"The 5% of poor people who happen to live in a big house in a nice area will have to trade down; roll up the tax to be repaid on death; take in a lodger; get their heirs to pay it etc etc. Such is life."

"Such is life." Easy to say if you're not likely to be a victim.

"If they don't want to pay it, then let them roll up the tax." Ah, yes. So LVT is really Inheritance Tax in disguise. Put it another way: it's a wealth tax. Attractive if you're a Socialist I guess.

Ed said...

You are as usual blurring the distinction between being rich in assets and being rich in income.

Let's imagine I have a very low income and live in a tiny house in an undesirable part of the country (so LVT, if it existed, is extremely low). Nevertheless, I am having trouble getting by (paying the bills, including various taxes). I also happen to have £1 million in gold sitting in a bank vault. Should I get extra handouts from the taxpayer? Should I be excused from having to pay taxes?

No? If we shouldn't make allowances for the asset-rich, income-poor whose asset happens to be a lump of metal (or e.g. shares in companies that don't pay any dividends), why should we make allowances for the asset-rich, income-poor whose asset happens to ownership of a piece of dirt?

bayard said...

Ed, because a house is mostly also a home and a home has sentimental value, unlike a lump of metal. I'm not saying I agree with it, but the argument runs:

The little old lady is going to suffer distress at selling the mansion she has lived in for more than half her life. We shouldn't be causing distress to little old ladies, therefore we shouldn't have a tax regime that forces her to sell her home to make ends meet.

Mark Wadsworth said...

B, sure, hence the roll-up option. Or if she wants the house to 'stay in the family' she can ask her heirs to pay as they go along.

She is not 'forced' to sell her house any more than young people of today are 'forced' to put off getting married and buying a house because houses are so ridiculously expensive.

Ed said...

a home has sentimental value, unlike a lump of metal.

If I actually had £1 million of gold in a bank vault, I could get sentimental about it!

We shouldn't be causing distress to little old ladies, therefore we shouldn't have a tax regime that forces her to sell her home to make ends meet.

Why not? Why discriminate in applying a tax on land values on the basis of age or gender? If we have a 20-something man who owns a large house but has little income, do we let him defer the tax? How do we determine the cutoff points in terms of age or income?

Unlike Mark, I wouldn't allow the roll-up option. Selling the house is one option, equity release is another. A third might be to sell the freehold to the land but keep the leasehold. The new freeholder will now be responsible for the LVT, and the ground rent they will charge can be covered for years by the cash received from the sale of the freehold.

Mark Wadsworth said...

Ed, thanks for back-up, but...

"Unlike Mark, I wouldn't allow the roll-up option. Selling the house is one option, equity release is another."

A roll up is no different to equity release in economic terms, it's just that in practice I trust equity release companies even less than I trust the government.