Onus Probandy left the following comment on Killer arguments against LVT, not (64):
Your sums don't add up.
£40 [Land Value Tax] per annum per acre [of farmland] and 8% LVT [on the total capital value of residential or commercial buildings]. £40 / 0.08 = £500. Please tell me where I can buy farm land at £500 an acre. Are you making some in built assumption about land getting revalued once LVT is in place? Even with that, £500 an acre sounds incredibly low.
My suggested figure of £40 tax per acre of farmland per year is based on the current annual rental value of UK farmland, which ranges between £30 and £100 depending on what type of land and where (so obviously the tax would be between £20 and £80 per acre).
The figure of 8% on the other hand relates to the capital selling value (at averaged out 2005 - 2010 prices) of non-agricultural developed land and buildings, and is the ballpark figure which would be required to replace all other taxes.
These are two entirely separate calculations.
It is quite true that UK farmland currently sells for £5,000-plus per acre, but this price is vastly inflated by the agricultural subsidies of (about) £75 per acre (and the exemption from Inheritance Tax and Business Rates). This is seen as a minimum, inflation linked income backed by the government so a very low discount rate of about 1.5% is applied (which is also the rate of return on index linked bonds, for example). Plus in the past couple of years there has been a bit of a bubble in farm land prices because of higher commodity prices (which in turn are rather bubbly).
Whether and how far the capital selling price of farmland would fall if LVT were introduced is a separate topic - remember that farming (like all other economic activities) would henceforth be income tax free and the Citizen's Income payments (the flip side of Land Value Tax) would tend to subsidise agricultural wages or the small-holder lifestyle*. And it would not just be the 'agricultural value' that is exempt from Inheritance Tax but the full market value.
* The main brake on agricultural land values would appear to be planning restrictions - if a potential small-holder were allowed to buy a couple of acres and build his home (or polytunnels or some stables for pony trekking or whatever) on it, he might be perfectly happy to pay £5,000-plus per acre.
Monday, 6 September 2010
Fun With Numbers
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8 comments:
I hate to nit pick; but these figures are important for the LVT argument I think. I also accept that these are ballpark figures, I'm not trying to get these things correct down to the pound. But they seem an order of magnitude out to me at the moment.
annual rental value of UK farmland, which ranges between £30 and £100 depending on what type of land and where (so obviously the tax would be between £20 and £80 per acre).
20/30 = 66%
80/100 = 80%
LVT of between 66% and 80%? Surely not?
The figure of 8% on the other hand relates to the capital selling value (at averaged out 2005 - 2010 prices) of non-agricultural developed land and buildings
So LVT is a different percentage for different land? I had thought that the land would all be valued and then taxed in some consistent manner. If the powers that be can pick a percentage based on whatever rules they feel like, why bother with the valuation? What is to stop them asking for whatever amount they want since that's effectively what a variable rate allows them?
8% of 5000 is £400.
I accept that the current price for land is inflated, and would reduce significantly if all those subsidies were chucked out. But 75 a year on 5000 capital invested is 1.5%; and would surely not change the 5000 asking price that much?
None of that explains how you're getting a £40 per acre, when £400 an acre seems more like where it's going to end up?
Farm land might be inflated but by those figures its not "vastly" inflated enough to explain how land that costs £5000 an acre now, would cost £500 an acre with LVT; nor why £500 an acre justifies a 66% tax?
As always: I'm not an accountant, so I accept that I often need this stuff explaining very slowly... I am trying to understand though.
"It is quite true that UK farmland currently sells for £5,000-plus per acre, but this price is vastly inflated by the agricultural subsidies of (about) £75 per acre"
Who gets the £75, the landowner or the tenant?
OP, the calculations are all pretty circular, but let me also point out to you:
Average farm land selling price = £5,000 per acre
Average residential land (site only) = £750,000 per acre (i.e. 150 times as much).
(Quite what would happen to selling prices of land if we had LVT I do not know, neither do I know what the ratio of values of residential land-to-farm land would be and neither do I care very much)
Average farm income = £40,000 to £50,000, so a tax of £400 per acre is completely off the scale, it is way too high, that'd be like 100% LVT plus 100% income tax.
The other rules are
Rule 1. A 'median' household (i.e. slightly below average) pays as much LVT as it receives in CI. So farming couple, 150 acres, pay £6,000 a year LVT and receive 2 x £70 x 52 weeks CI (net receipt by couple of £1,280).
Rule 2. A household's LVT should be roughly equal to the income tax/VAT/NI is currently pays.
For a farming couple on £40,000, tax/NI is currently £40,000 minus two personal allowances x 28% income tax and Class 4 NIC = £7,840. £6,000 is a bit less than that but in the same ballpark.
You can do the same exercise with housing, at an average overall income tax/NIC/VAT rate of 40% and an average price-to-earnings ratio of 5, a flat tax of 8% on house value sees most people little better or worse off (assuming exemption or deferment for pensioners).
Similarly, on a median home of £150,000, the tax would be £12,000, which is much the same as CI for two adults, two kids (2 x £70 + 2 x £35 x 52 weeks).
B, legally, the CAP is supposed to go to the occupant (whether tenant or owner-occupier), but economically, all subsidies accrue to the least elastic factor (TM Dearieme's Dad), i.e. the land (in this case).
Further, a landowner can sell off the right to receive the future CAP payments as a separate asset from the land (complete madness, but there you go). That's a bit like giving your children up for adoption but continuing to claim the Child Benefit and Child Tax Credits.
@Mark:
What you write is fine, but you've not really addressed my point.
You've talked about what the two groups "should" be paying; rather than what they "would" be paying.
Saying LVT should equal Tax/NI/VAT is an excellent principle, but how is that calculated? It seems that in your examples you are calculating LVT by using the current tax system -- that surely can't be how it would work? I think you need to show how LVT would calculate, and that people would end up about the same as they are now (give or take). You've only shown one half of that.
At present, I can know what my salary is, and look up the percentages and the allowances and calculate my tax. With LVT, I presumably have to know what my land is valued at and lookup a percentage. What is that percentage? How is it assigned? Is it the same for everyone? Who is going to decide the "value" of my land?
I am open to the idea of LVT and CI, your blog is persuasive -- but I am slightly uncomfortable with the idea that so many of the "knobs" for LVT are determined centrally, by bureaucrats who have a great incentive to constantly raise tax. If they are the ones who say "ah, you are on land worth... 100,000 according to my table, and we'll assign you to band 14B", then we're all slaves.
There is no arbitrary assignment in income tax. My salary is an absolute. The tax man has to say in advance what everyone pays.
The sort of thing I would want to hear is
- The value of your land is the last sale price, adjusted for inflation using index X.
- Your tax will be a flat rate of 8% of X per annum.
- You may opt to have that tax paid over the year using the PAYE system.
OP, I've spent the last four years arguing with the purists who go on about "annual site only rental values" (which has academic merit but nobody knows how to guesstimate it in advance) and so this is my rough and ready system (it's as good as anything else) which gets us most of the way to purist LVT but in one single leap (PS this method applies to non-agricultural land & buildings).
So my suggestion is, all land is divided up into smaller areas (like a postcode sector - about three thousand houses), all sales in that area (as recorded by HM Land Reg) in the last five years are added together and total purchase price divided by total area of plots = average "total built value per sq yard". That x 8% = £x per square yard.
Each plot of land (regardless of what is on it) in each postcode sector then pays the tax on its own actual plot size x £x.
There is no magic about the 8%, that's just the rate that would be approx. fiscally neutral. If you are a very low tax chap, you might go for 5%, if you are big state, you might go for 9%, as a moderate in all things, 7% would be approx. fiscally neutral - but there is the hassle that pensioners want discounts, so the rate on everybody else would have to go up to (say) 8%. That's just maths. There must be a break even point at which winners and losers cancel out.
As to 'faceless bureaucrats' constantly hiking the rate - that is the beauty of LVT - it is a completely IN YOUR FACE tax and not a stealth tax (like VAT or income tax or NIC).
You can rest assured that politicians will tend to increase property taxes a lot more slowly than they can increase revenues from stealth taxes (which is why property taxes tend to fizzle out again over time, because the politicians find is easier to get money off you in other ways).
As to collecting through the payroll, that's a splendid idea, as it letting banks add it to you mortgage repayments and them dealing with it.
@Mark:
Thank you for the excellent explanation. It answers my concern that LVT would be easily manipulable by being inconsistent. The answer is: it's not inconsistent. The method you describe is perfect. To my mind the 8% (at this theoretical discussion level) is arbitrary, I don't mind what you pick as long as it's the same for everyone.
As to banks collecting the tax: that's a fine idea. Isn't it slightly broken by the fact that not everyone has a mortgage?
You might argue that not everyone has an income so the same applies to collection by PAYE. But everyone will have citizens income under the MW tax system...
Anyway -- that's just quibbling over details now. Thank you for the explanation.
OP, my pleasure.
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