An eternal fall back argument against Land Value Tax is that 'pensioners would be forced to sell their homes'*, which Winston Churchill dismissed as 'The Poor Widow Bogey' over a century ago** when he was still mates with Lloyd George (PS, that speech is worth reading in full, ninety per cent of it still applies today). A secondary argument is that 'I want to be able to leave the value of my home to my children', which slots in neatly at point 8. below.
1. People use this to argue even against the most modest kind of property tax, such a having income tax on the notional rental income (formerly known as 'Schedule A taxation' scrapped in 1963 or thereabouts, see famous quote by Dearieme's father) or, in my terms, a flat 1% tax on residential property values (which could and should replace Council Tax, Stamp Duty, Inheritance Tax, TV licence fee etc).
A modest tax such as this would leave most households slightly better off on an annual basis (as compared to Council tax and TV licence fee), and for those that pay more, they can either ask their heirs to pay (as a quid pro quo for one day inheriting the house - the value of which would be boosted by up to 5% if Stamp Duty were scrapped) or be allowed to roll up the unpaid tax to be repaid on death (which is why Inheritance Tax would have to go as well). In the long run, these families would be no worse off either. The people who would be worse off are non-doms who own huge villas and are exempt from Inheritance Tax anyway.
2. This argument clearly doesn't hold against a modest property tax, so let's examine what might happen if we scrapped all taxes on incomes and production (from worst to 'least bad': VAT, Employer's National Insurance, higher rate income tax , Employee's National Insurance, corporation tax and basic rate income tax) and just raised as much as we could from a tax on land values (whether residential or commercial).
3. Before we put numbers on this, let's look at the justification for the Basic State Pension or Pensions Credit (which ought to be rolled into a non-means tested Citizen's Pension, of course) - surely it is there so that people who are beyond working age (as arbitrarily decided) have enough to support a certain standard of living (as arbitrarily decided).
4. Let's not forget that I am a UK resident Englishman who has not the slightest intention of moving abroad again (I once lived in Germany for nine years, that's enough for me), who has every intention of surviving well into pension age (or dying in the attempt), so I have to come up with some sort of plan.
5. Assuming we don't just cop out and give owner-occupying pensioners large discounts or exemptions (and I wouldn't be totally averse to this as an interim thing for the next couple of decades), let's imagine we had full LVT without exemptions, and the tax on each property were around 7% of its current market value (which sounds like a lot, but don't forget that the downside of scrapping taxes on incomes and production is that most of the benefit would merely boost rents or selling prices), the LVT on a median home would be about £11,000 per annum (it could be anywhere between £nil on a small flat in a high tower block in an undesirable area up to £100,000s for a mansion in West London, of course).
6. So the basic state pension would have to be increased so that the average pensioner household can still afford a certain standard of living. In practice this would mean that the Basic State Pension/Pensions Credit would be approx. doubled for pensioners who do not receive additional public sector pensions. I guess that a Citizen's Pension of about £250 a week would cover it (i.e. pensioner couple with no other sources of income in a median house still has £10,000 a year net income from the taxpayer).
Doubling the Basic State Pension/Pensions Credit would 'cost' an additional £50 billion per annum or something, i.e. a large part of LVT receipts from pensioner households would be divvied out again as an additional Citizen's Pension (and some of it used to pay for non-cash benefits such as their healthcare costs and long term care etc).
7. This still wouldn't be enough to pay for the tax of A Poor Widow In A Mansion, but hey.
I guess politically it would be impossible to actually repossess the homes of Poor Widows Who Don't Pay Their LVT Bills, and politically necessary to them with at least £100 a week to live on after deducting the LVT from their Citizen's Pension, so a Poor Widow In A Median Home would get £13,000 a year Citizen's Pension and the amount of LVT collected would be restricted to £8,000 a year, and the shortfall of £3,000 would just be rolled up for later.
If the annual shortfall is huge and the Poor Widow lives for decades, then the arrears might exceed the value of the house (which would probably have gone to rack and ruin because the Poor Widow can't afford the upkeep), but hey, in that case the family comes out slightly ahead.
8. Those people who genuinely 'want to leave the value of their home to their children' have a simple choice, of course. Assuming a single or widowed person retires at 65 in a very nice house worth £200,000 (rebuild cost) with a higher-than-average LVT bill of £20,000 wants his or her children to inherit as much of that as possible, what they'd do is trade down into a nearby very nice flat costing £100,000 (rebuild cost) on which the LVT is only £5,000; that frees up an extra £100,000 to be left to the children or grandchildren; and they can also squirrel away some of the £8,000 a year net income they receive from the taxpayer. What could possibly go wrong?
9. A slight variation of 8. is the mantra that 'The Family Home should stay in the family'. Again, this is easily fixed: instead of a pensioners rattling around in The Family Home while their children or grandchildren are priced out of buying a house and starting a family themselves, the pensioners could simply give The Family Home (and the corresponding LVT bill) to whichever child or grandchild wants it, and ask that child or grandchild to buy them somewhere smaller in exchange.
* For every seller there has to be a 'willing buyer' of course. And I'm guessing that most of those willing buyers will be today's 'priced out generation' who are currently 'forced' to either live in a very small home or vastly overpay for one suitable for bringing up a family. Boot, other foot etc.
** A lot of LVT opponents solemnly quote Adam Smith, who said that a tax should be payable when convenient; but he said this two centuries ago when there was no such a thing as a state/public sector pension system which is now the main source of income of about a third of voters; and at a time when most people were tenants (i.e. the tax would be payable by landlords). A tax on rents would not result in an increase in rents, of course - the only way to increase rents is to subsidise them, for example via Housing Benefit.
I have no idea whether Adam Smith would have supported the state/public sector pension system in its present size; or guessed that one day a majority of households would be owner-occupiers; but I am pretty sure that he would not have approved of the idea that the tax would only be applied to tenanted property and not owner-occupied property, as that would be taxing form over substance - it's the same people in the same houses.
Local Council Efficiency
2 hours ago
11 comments:
I don't follow your math. At the moment a pensioner living in their own (paid for) home, receiving the basic State pension, assuming no savings/private pension income, has the minimum income guarantee, which is £130/week. I don't know if you get the MIG you can also get council tax benefit or not. If not the average band D council tax is just under £1300, less 25% discount = £975 pa. So your sole pensioner has approx (130 x 52)-975 = £5785, or £111/week to live on. If they get council tax benefit as well that figure rises a bit.
If you double the MIG to £260/week, abolish council tax, and have £11K of LVT to pay, then you end up with (260 x 52) - 11000 = £2520 or £48/week to live on.
You also have to factor in that pensioners often live in larger houses in nicer areas, and large numbers of them would be in above average value houses, so the £11K estimate for LVT could be too low.
I really don't think you understand the visceral hatred LVT would inspire in people, especially the elderly, and those approaching retirement, who would (rightly in my view) consider they are being charged rent for their own house, which they have spent a lifetime earning enough money (and paying tax on that income) to pay for. Council tax is hated already, especially by the elderly, and that is only a £1-2K per year. Make that £10-15K pa and you'd have riots on your hands (if they could get to the riot on their mobility scooters that is).
Have you ever considered it is mainfestly unfair to start taxing assets purchased out of taxed income (ie peoples personal houses)? Its all very well for young people starting out, they would pay no income tax, and higher LVT. But a pensioner has been taxed on income all his/her life, and now you want to tax his/her only asset, the house. They would not benefit from lower income tax, not being of working age, and as for no IHT, that only kicks in when you're dead, so its not much use while they're still alive.
It would make more sense to say LVT was only introduced for people under a certain age, when they buy their first house, and continuing on any property they own thereafter. Thus it's introduction would be slow, taking probably 30-40 years to spread through the whole population. Thus eliminating the widow in her mansion problem, and any other anomalies. Young people would be no worse off than now, and older people would not be forced to alter their lives because of a sea-change in taxation policy.
S, good points, as ever:
1. "If you double the MIG to £260/week, abolish council tax, and have £11K of LVT to pay, then you end up with (260 x 52) - 11000 = £2520 or £48/week to live on."
That's why I said LVT actually demanded in cash from a single pensioner could be capped at £8,000 a year, see point 7, these are all just rough and ready figures.
2. "I really don't think you understand the visceral hatred LVT would inspire in people"
Oh yes I do, I know better than most. It just puzzles me why there is no corresponding visceral hatred of VAT or NIMBYism.
3. "Their own house, which they have spent a lifetime earning enough money... to pay for."
Not true, my parents, being average pensioners in their seventies paid off their entire mortgage out of their very average incomes between mid-1960s and mid-1970s and have been living rent free ever since.
Even I, late baby-boomer that I am, paid off my entire mortgage between 1998 and 2008 out of current income - and that mortgage was considerably less than the cost of renting.
4. "But a pensioner has been taxed on income all his/her life, and now you want to tax his/her only asset, the house."
Not true.
A state pensioners 'main asset' is his or her pension income, the bulk of which is paid or subsidised by the taxpayer, as well as the right to free healthcare, free public libraries, police, refuse collection etc.
5. "It would make more sense to say LVT was only introduced for people under a certain age, when they buy their first house, and continuing on any property they own thereafter. Thus it's introduction would be slow, taking probably 30-40 years to spread through the whole population...."
Absolutely splendid idea, which I have advanced myself within LVT circles. I see absolutely no reason to oppose this type of gradual transition.
You could always try to "sell" the idea Mark by pointing out that many people are going to have their houses confiscated by Social Services anyway to pay for their Care Homes. V. persuasive.
D, that's a dark and dangerous place!
Current Home-Owner-Ist thinking is that The Taxpayer should not just pay for the care but even more to ensure that vacant homes do not have to be sold.
I suspect the people who are squealing the loudest about the Taxpayer paying for residential care for old people are said old people's children, who want to both avoid their duties to look after their parents in their old age and inherit their parents' house when the parents die.
"It would make more sense to say LVT was only introduced for people under a certain age, when they buy their first house, and continuing on any property they own thereafter.
It does seem a little strange for a property tax like LVT to be applied on the basis of who owns it, but fair enough if it (eventually) gets LVT in place. However:
* We could apply LVT to all commercial property (replacing business rates etc) immediately.
* We could also apply LVT to all private-rented property immediately, i.e. shifting from council tax paid by the tenant to LVT paid by the owner(s) of the freehold.
* Obviously LVT should be applied to all derelict property immediately to force the freeholder to do something useful with the land or else sell it/give it away to someone else who will.
* LVT should be implemented on all property when it changes hands. Thus the exemption from LVT should only apply if you stay in your current home. If you move, you start paying it on your new place, and the new owners of your old home have to pay it as well.
I'd also note that while I generally oppose introducing more complications into the system, if we are shifting from taxing incomes to taxing property, any benefits of lower income tax rates or a citizens dividend should only go to those subject to LVT on _all_ freehold property that they own.
B, that's true as well I suppose.
Ed, I have proposed something along those lines before, but there would be a problem with applying LVT to all subsequently sold properties because this would discourage pensioners from down-sizing.
Mark, to clarify, which bit is the problem? The introduction of LVT on their old home for the new owners? Or the fact that they have to start paying?
For the former: what happens if a young person buys the pensioners home (or inherits it). The young person is supposed to pay LVT, so we can't give them an exemption just because they buy/inherit a privileged property. Charging LVT for the next owner will depress the selling price, which I think is fair - the pensioner cannot expect to live tax free and get the resale value of their home protected by giving it privileged status.
For the latter: The objection to LVT for the pensioners is that it forces them to downsize, so we give them an exemption to prevent that (bad idea IMHO, but lets go with it for political reasons). However, they cannot carry that exemption to other properties as this distorts the market. What if they buy a flat from a young couple who were paying LVT? Does LVT from that property stop? Does this give the pensioner yet another advantage over the single person who also wants to buy the flat? Given that a pensioner downsizing from a large family home in London or the SE of England could have an unearned gain and surplus cash more than many people will earn in a lifetime, is it really such a problem for them to start paying LVT on their new flat?
Ed, fair points all. And you are probably right, I'm thinking politics here rather than cold logic...
1. In my own thought experiment, what happens is that all the properties on your list (commercial and residential landlords, first time buyers etc) start paying LVT from Day One, but they pay no VAT, income tax, council tax etc and no income tax or corp tax on the rental income of landlords.
2. Tenants would have to be exempt from income tax of course, because their total rent includes the LVT (whether that is morally allocated to the landlord or the tenant is neither here nor there).
3. Businesses who are owner-occupiers can choose of course which system they want to be in.
4. Anybody else who wants to opt in to the new system can do so, of course.
5. This just leaves us with people who like the old system who want to move - and I am stuck here as to what is less bad.
If we make it a personal right to continue paying tax under old system, then at least people can downsize.
If we make it that any purchase and sale triggers LVT from there on (with corresponding income tax exemption), then this would discourage pensioners from downsizing - but I suppose if we adopt my "much higher Citizen's Pension if you downsize and start being liable for LVT" then that may not be an issue.
Main arguments against LVT people don't like it, government's don't like it.
PW: those are arguments in favour!
1. Levying LVT would make it quite clear how much tax you are paying (and make people think about what they are getting in return). People hate paying tax as a general rule (unless Somebody Else is paying it or it's a stealth tax) so that gives plenty of political pressure to keep govt spending down.
(LVT is a completely harmless tax anyway, as all it does is adjust the transfer of wealth from sellers of land to buyers of land, hopefully getting the net transfer down to £nil).
2. The govt won't like it because LVT is an 'in-your-face-tax' and they'll have to be honest about how much they are raising. Just imagine instead of hiking VAT by 2.5% in order to collect an extra £11 billion (they hope!) they only had the option of raising Council Tax by 50%. They'd have thought long and hard about that, wouldn't they?
So the only way to boost receipts is to actually do what govt's are supposed to do, which is make the UK a more desirable place to live or do business.
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