Sobers, a reliable source of killer arguments, is beginning to see the light:
I see that in your worked example of a village shop, you state that LVT will transfer the tax burden from business [activity] to residential land. Is this politically viable? It may make economic sense, but not political sense...
The outrage that would occur in the Guardian reading classes if a business owner suddenly paid no VAT, no income tax, no business rates, no CGT and no IHT would probably cause spontaneous combustion!
Being an economist not a politician, I replied: "That is a bonus and not a drawback."
Two Birds, One Stone!
1 hour ago
29 comments:
I have a practical question Mark, how to determine the Value in the LVT?
Apply commonsense.
1. Work out how much you have to raise to replace all other taxes.
2. Rough guide: if we want to raise £300 billion a year (in the UK) and there are 3 million acres of privately 'owned' developed land, that's £100,000/acre/year or £21/sq yd/year.
3. Observe that there is a close link between people incomes (and hence current tax burden) and the value of the home they live in or business premises they trade from.
4. So in the spirit of upsetting as few people as possible (and making the system flat rather than regressive or progressive), base the LVT/sq yd in each smaller area (I suggest post code sector - about 3,000 adresses) on total property values averaged out/sq yd.
5. Take all sales of land and buildings in each postcode sector in the last five years (in which at about a quarter of all plots were bought and sold), tot them up and divide by total plot sizes and times by 8% or so.
6. For example, bog standard semis in average area, sell for £150,000, plot size 400 sq yards, tax = £12,000 per annum or £30/sq yard.
7. To allow for wiggle room for Pensioners, churchyards and other things where people will be squealing for exemptions, pitch the rate slightly higher than necessary (if pensioners and churches pay less or nothing, everybody else has to pay a bit more).
8. The whole exercise could be completed in a month with a team a half a dozen data processors at HM Land Registry (who can cross refer to VOA data and lists of premises liable to Business Rates, Council Tax, which cover about 95% of UK land by value).
9. The missing bits (agricultural land) is registered at Rural Payments Agency (so that they get their CAP handouts!), so that's 99% of land by value covered.
10. Job done.
5. and 8. are the real problems.
although robust, using size of a property isn't that logical, given vastly different valuation multiples for different types of property, just the difference between sub basement and first floor flat with exactly the same space is a factor of 2 within the same building. The problem as always with any tax system is that adding complexity is costly and reduces robustness.
Which leads onto the problem with 8. The scale of the data that would be needed would require an IT team a order of magnitude greater than you're talking about, although obviously you'd get savings from the rest of the tax system.
BR: "using size of a property isn't that logical"
Why not? A tobacco tax is a tax on tobacco; whether you take three puffs and stub it out or smoke it down to the filter, the tax is the same. A tax on land values is a tax on land values, not the use to which it is put.
"the difference between sub basement and first floor flat with exactly the same space is a factor of 2 within the same building."
People in blocks of flats will have to decide themselves how to divvy it up. At the moment, they all pay the same council tax.
"The scale of the data that would be needed would require an IT team a order of magnitude greater than you're talking about"
OK, call it sixty people. The point is that HM Land Registry already hold all this data in computerised form - they know prices paid and plot sizes. They even publish plot sized for premises liable to business rates on line.
For sure, some individual sales will throw up unusually high or low value, but if you are averaging out about a thousand sales in each sector, the end result will be robust.
More to the point, it is RELATIVE values (between different areas) and not absolute values that matter. In each area there will be sales at undervalue (to relatives or by asset strippers) and at overvalue (mortgage fraud). So once you have decided average selling values and totted them up, you multiply this by an arbitrary per centage. I suggest 8%, but on closer inspection it might turn out to be 7.634% or 8.1666r%.
You've said its a land value tax, but in implementations its an average of the land in your area's value multiplied by your land size tax. So my point stands in that your system won't tax Value, but an approximation which could be out by a factor of 2 within the same building and a lot more within the same street.
Additionally with a rate above long term interest rates the present value of all future tax claims exceeds the value of the property, in which case its more than a nationalization of land. ie 8% discounted at 5% as a perpetual is ~ 160%.
They did the rating review in Northern Ireland "it is alleged"by driving round at ten mph estimating house values by a quick once over.There were very few appeals and the system is holding up.
Over here you could do the same or use the Google street scene thing.
Then you could get the householder to self value the land part by recourse to the Assoc British Insurers' website which would give the value of bricks and mortar which when deducted from the assessed house price would give you the land value (known in the trade as the 'residual' method).
It 'll be interesting which method they use in Ireland proper where they are now embarked on land value taxation (see Smart Taxes Ireland website).
Valuations are a problem in one respect certainly: they drag on giving the saboteurs time to organise.Both the British land taxes of 1909 and 1931 spent months and years dicking about with valuations.
BR: "You've said its a land value tax, but in implementations its an average of the land in your area's value multiplied by your land size tax."
Correct.
"your system won't tax Value, but an approximation which could be out by a factor of 2 within the same building and a lot more within the same street."
Absolutely not, that's simply not true. I don't just say these things. I once spent a day picking a few post code sectors at random and doing a spreasheet with the last ten sales and plot sizes. There is no exact correlation, but applying an 8% tax to the averaged out value = a rate of between 6% and 10% on the most recent selling price.
As to the block of flats, firstly, the rental value of the flat on the first floor is not double the rent of the flat in the basement, it's only about 25% higher; secondly, the tax is on LOCATION value. Whether you live in basement or first floor, you are using the same shops, station, roads, libraries and you have access to job opportunities in the same area.
"Additionally with a rate above long term interest rates the present value of all future tax claims exceeds the value of the property, in which case its more than a nationalization of land. ie 8% discounted at 5% as a perpetual is ~ 160%."
Absolutely not, you are completely wrong. It is a straight replacement for income tax, VAT, council tax, IHT, the lot. I refer you to my power point slideshow on The Laffer Curve, GDP and the rental value of land.
In any event, can you complete in a hundred words or less: "Income tax, VAT and National Insurance are NOT nationalisation of labour, neterprise and investment because..."?
See also what DBC says, they actually did this in Northern Ireland five years ago (admittedly that was an 0.8% tax and not an 8% tax) but the principle is the same.
BR, your maths is also incorrect:
Your said: "Additionally with a rate above long term interest rates the present value of all future tax claims exceeds the value of the property, in which case its more than a nationalization of land. ie 8% discounted at 5% as a perpetual is ~ 160%."
If the annual income from something is £50 and the expected return is 5%, it is worth £1,000. If we tax that income at 40%, the net income is £30, so the value of the asset falls to £600 (£30 ÷ 5%). So a 40% tax on the income is like a 3.33% tax on the selling price (£2 ÷ £60).
Ergo, a 8% tax on the selling price = a 61.5% tax on the income (whether cash or in kind). In case that's not clear, the tax is £50 x 61.5% = £30.75 and residual income is now £50 x 39.5% = £19.75. The capitalised selling/investment value of the £19.75 = £395. So the 8% tax of £30.75 = 8% of £395 (give or take a bit of rounding).
Don't forget that the selling price of land and buildings is already depressed by £350 billion in taxes on economic output (income tax, VAT etc), so lifting that burden and replacing it with a £300 billion LVT might even have a small positive value on selling prices (in which case, the 8% rate is too low, not too high).
So then rename the tax Location Value Tax.
I'm not plucking figures out of thin air, I rent the top flat in a large converted house, the ground floor flat is worth double the basement flat based on where they were bought last year. LocVT would tax those properties at the same rate, so clearly there are some huge problems with such a simplistic mechanism. Thats not even dealing with the fact the newbuild house across the street is about the same size and 30% cheaper. Approximating individual plot value as = average land value * plot size, will obviously work on average, however when you are talking about thousands of pounds of difference in taxation then people will very much care about the standard deviation.
With long term interest rates on average at 5% the annuity factor is 1/5% = 20. so 20x8% = 160% is the present value of the tax. ie. a property at £100k, would owe a tax of £8k in year1, discounted by 1.05 so 7.6k, 7.2k the year after, 6.9k, 6.5k, etc etc as its present value today the summation of those is £160k.
The reason a 20% VAT tax is not nationalization because the present value of that tax as a percentage of the present value of all production is handily 20% given a constant tax rate and so not greater than the value of production.
BR: "LocVT would tax those properties at the same rate, so clearly there are some huge problems with such a simplistic mechanism."
How the owners of those flats divvy up the bill between themselves is up to them. However, the owner of each flat is getting precisely the same LOCATION benefit, as explained.
Your maths is still wildly wrong. If owner of £100k flat currently pays £8,000 in income tax, council tax, VAT etc, which all depress the prices that people can afford to pay for that flat.
If in future he pays £8,000 in LVT (but no income tax, council tax, VAT etc) where is the big difference?
Or, to put it in NPV terms, the current NPV of his annual £8,000 income tax, VAT, council tax = £160,000; the NPV of the £8,000 LVT is also £160,000.
In the abscence of any taxes at all (and assuming the tooth fairy paid for all 'local services'), the selling price of the flat would quite clearly be £260,000.
An 8% tax is a 61.5% tax on the actual or notional rental income from the building. It is a bit far fetched to describe is as a 160% tax, you've got the fractions wrong.
You compare £160 with £100 and say 160%. Incorrect, because £100 is the NET figure. Trying comparing £160 with £260 instead.
Using your logic, the 50% top income tax rate is actually 100%, because the NPV of the future tax payments = the NPV of the future net income.
The outrage that would occur in the Guardian reading classes if a business owner suddenly paid no VAT, no income tax, no business rates, no CGT and no IHT would probably cause spontaneous combustion!
Spontaneous combustion? So we lose a few Graun readers? I'm struggling to see the problem.
Of course, the result would actually be similar to what these sorts of people are constantly calling for: more help to disadvantaged areas. And we could do it with a lot less government-employed bureaucrats.... ah... now I see the problem...
There is nothing "wildly wrong" with the maths, £8000 a year PV'd with 5% discount rate is £160k.
You can argue that the value of property would rise because of removing other tax burdens, however the noise in that estimation is enormous and doesn't include the drop in value of a house because of the LVT, I find it very hard to imagine that houseprices would increase in value. All of which is totally irrelevant, the tax as you said would be based on the selling price of the house, unless you intend to have a 5yr period where no tax at all is paid but households are informed of the coming changes? so whatever equilibrium value it found after the changes, and then the present value of that tax on the traded value of the house would be 160% pv'd, it would be absurd to quote the percentage instead of an observable number but on a number that is theoretical, especially when it would be initialized based on historic traded values.
I'm with Joseph T - hard to see any downside really. I'm sure we could grind to a full recovery once we had got over the initial grief. Oh about 10 nanoseconds or so.
That is an enormous fudge to say that location benefits are being taxed now rather than land value, given that location benefits would be the same independent of size of the house?
Houses of the same size in the same street are worth very different sums of money but would pay the same tax, that standard deviation will cause huge problems.
BR, if your maths is correct and mine is wrong, then the 50% higher income tax rate is in fact a 100% tax rate, because the NPV of the tax is = the NPV of the residual after tax income.
Selling prices of land and buildings are a residual figure, which takes into account tax rates, average incomes, interest rates, artificial scarcity and so on. The £100,000 selling price for the flat is the NET figure AFTER TAX.
In any event, these percentages have nothing to do with anything. You asked me how it would work and I explained it. The tax would be between £30 and £60 for most areas (rising to £100s for city centres and £1,000 for central London), end of discussion, no back chat.
Except I am dimly aware that there is such a thing as 'shroud waving' so sure, the rate would be set such that local councils only have to collect 80% of the theoretical total tax take, so that they can exempt pensioners, for example. That's politics, not economics.
JT, Chuckles, ta for support :-)
BR: "Houses of the same size in the same street are worth very different sums of money but would pay the same tax, that standard deviation will cause huge problems."
Well, firstly they're not worth different amounts, secondly, they all get the benefit of the same location - if one person allows his house to fall derelict and somebody else builds a loft conversion and side extension and keeps it in tip-top condition, that is entirely up to them. I see no reason to reward the former and punish the latter.
And problems for whom? The people who have not staked everything on rising house prices (or who are tenants) and actually go out to work, and who keep their houses in good repair and have maybe invested a bit of money in shares will be clear winners under this.
"The outrage that would occur in the Guardian reading classes if a business owner suddenly paid no VAT, no income tax, no business rates, no CGT and no IHT would probably cause spontaneous combustion!"
That has just sold LVT to me. Mark, I think that's a quote you need to have permanently displayed on your site.
TCO, thanks, but that particular stroke of genius was from Sobers.
While I haven't studied all his figures, I rather agree with BlackRaven. Ignoring whether or not LVT is 'a good thing' in principle, the method of calculating the values by averages over a fairly large area (3000 houses) is going to throw up lots of anomalies. You are effectively using plot size as a proxy for land value, when it isn't necessarily the greatest factor. I could buy a house for £100-120K in one area in my town, it would have 3 beds, and a decent garden. But its a rough area, so prices are depressed. Elsewhere in the town, and not far away so within the same LVT valuation area, the same sized house and garden is probably worth £150-175. So their LVT would be identical despite house A being 'worth' £50K less.
If you are going to sell LVT to the masses, they are not going to be happy if they are paying more than someone mile away, who has a more expensive house than they do. And because of who lives in rough areas, its poorer people who will end up paying the same as the wealthier people in their middle class housing estates down the road.
You have to remember in the UK a large part of the value of the house is not its size, or its state of repair, or its location to amenities, but the social class of the neighbours. Put bluntly, no-one wants to live next door to chavs, and property prices reflect this. An average based system on such a large area can never take this into account, and will always produce 'unfair' outcomes.
S: "Ignoring whether or not LVT is 'a good thing' in principle..."
That's one heck of a disclaimer. Compared to any other form of tax, it is absolutely splendid in principle, and all other taxes are totally evil. I just take the time and trouble to go through the practicalities.
"Elsewhere in the town, and not far away so within the same LVT valuation area, the same sized house [worth £100 - £100k in rough area] and garden is probably worth £150-175."
Firstly, there are no such wild fluctuations with a postcode sector (and local councils will be free to sub-divide if they so wish). And if there are, then everybody pays on average value of £135,000. The higher earners in nice area benefit by £2,000 p.a. and the lower earners in rough area lose out by £2,000 p.a. Big deal. That's no more than the child benefit which the Lib-Cons are going to take away from some higher earners.
Secondly, it is far more likely that there is a £50,000 value difference between a rough postcode sector and a nice postcode sector (but identical houses). So the tax per house in the nice area will be about £13,000 p.a. and in the poor area will be £9,000.
The low income people in the rough area aren't too fussed because most of this will be covered by CI, and the people in the nice area probably have incomes that are a lot more than £4,000 p.a. higher, so they can easily afford it as well (by definition).
And anyway, over time the valuation could become more sophisticated. And there would, no doubt, be some sort of appeal/review process.
BE, the problem with 'sophisticated' is 'complicated' and 'complicated' means 'expensive and open to political meddling'.
My view is, people will adjust to the system - if you want to buy in area such-and-such, the tax is £x,000, end of.
Higher income people will continue living in nice areas and lower income people will continue living in rough areas. House prices will adjust up or down a bit in relative terms and after a couple of years it will just be accepted as normal.
Sobers, can you tell me the postcode you are talking about and a few street names in rough and in nice areas? I'd be very surprised if the differential were that high (not that it's an issue anyway).
I won't give you details of where my mate lives, but give you another example in Swindon (thats where I live close to):
Old Walcot vs Walcot/Park North. The latter is a 1950s council estate, the former 1930s private estate. Separated by the A4259 (Queens Drive). A 3 bed semi in Old Walcot goes for C. £200K (http://www.rightmove.co.uk/property-for-sale/property-31562297.html?premiumA=true). Across Queens drive you can get this: http://www.rightmove.co.uk/property-for-sale/property-27645592.html?premiumA=true
for £95K.
I would hazard a guess the plots are similar. Even if they aren't, there won't be 2 times the difference.
The biggest factor in those relative prices is not amenities, or size, its the social makeup of the area. Walcot is a rough council estate, Old Walcot is a well-to-do middle class estate. But they are side by side, divided only by a main road.
S, nice try, but please note that the second house is a repo that's being flogged off by the bank (which depresses asking price by at least a quarter) and the first one is being sold 'normally' so asking price will be about 20% above what it will eventually sell for. So the real difference is more like £120,000 to £160,000.
I also note that the second one is in Maitland Road, SN3 3HG and the first is in Thurlestone Road SN3 1EQ. So while they are in the same postcode district (SN3) they are not in the same postcode sector (SN3 3.. is different to SN3 1..).
I rest my case. A postcode sector is small enough for most purposes (we can tweak this all a bit more later on).
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"The biggest factor in those relative prices is not amenities, or size, its the social makeup of the area. Walcot is a rough council estate, Old Walcot is a well-to-do middle class estate. But they are side by side, divided only by a main road."
So? How is 'having nice neighbours' not an amenity with a clear market value?
It's like parents (Muggins here included) are prepared to pay £10,000 a year per kid to send their kids to private schools. Are the teachers that much better? A bit. Are the facilities that much better? A bit.
But the main difference between private school and state school is that a private school is full of kids whose parents are a bit pushy and care and tell their kids off if they get a bad report from teacher.
So if parents are prepared to pay £10,000 a year per kid to keep their kids away from the hoi polloi for six hours a day, how is it in any way unfair to charge and extra £4,000 a year LVT to guarantee the whole family can spend the other 24 hours a day away from the hoi polloi? If the taxman doesn't get it, then the vendor, the mortgage lender or the landlord will.
Hang on, back in a previous post's comments you said this:
"Aaargh! I keep telling you that is not how it will work. We average out ALL land and building selling prices to arrive at some sort of rate for each postcode sector (about 3,000 addresses), let's say £40 per square yard. "
So are you saying that a postcode sector has 3000 addresses in it? That seems a large number. Which could easily contain areas of wildly differing house prices.
And I don't see what point you're making regarding 'nice ' areas and school fees - my point is this:
If a postcode sector has two distinct areas of housing in it, one poor, one well-to-do, the LVT payable will be the same on a similar sized house in both the rough and the well off areas. The person who can afford only a house in a rough area (presumably therefore they are not wealthy) will pay the same LVT as a person in the well off area, who is likely to be wealthier, as they can afford a much higher priced house.
Thus my point is that the poor will pay 'more' LVT than the rich, because your LVT is based on the square footage of their house plot, not the sale value.
LVT will never fly if there is perceived unfairness. If someone can look a few streets away and see someone who pays less LVT, despite their house being worth the same or even more, then you won't ever be able to sell it to them as a concept.
Land Value Tax should do what it says on the tin - taxes the value of land. A house in Location A worth £100K pays the same LVT as a house worth £100k in location B (the next street or hundreds of miles away). Once you start averaging values, and calculating LVT on plot sizes, anomalies will creep in and it'll be no good you saying 'But the overall package is far better than what we've got'. People REALLY don't like paying more than their neighbours.
S: "So are you saying that a postcode sector has 3000 addresses in it?"
I am. That is what the Royal Mail website tells me and I have no reason to dispute it (anything between 1,000 and 5,000). Maybe it would be appropriate to divide up larger postcode sectors (I'm crunching those SN3 numbers as we type).
Or if there is a certain minimum number of people in an identifiable part of a postcode sector who want to 'secede' and form their own sub-sector for valuation purposes, then they can do so.
"LVT will never fly if there is perceived unfairness."
Holy crap! Do you realise that if you chuck income tax, Tax Credits, National Insurance, corporation tax and VAT into a pot, the overall tax rate on 'income' is anywhere between 0% and 70%? It's not even 'progressive or 'regressive', it is more or less entirely random. Is that 'fair'?
"the poor will pay 'more' LVT than the rich"
Have you turned into a Guardian reader overnight? Firstly, as a matter of fact they won't (because most poor people live in cheaper areas), secondly, the flat rate CI will more or less wipe out the LVT bill for the people in the cheapest quarter of homes.
It may be that there are a few low income people in high value areas, but we are back to the Poor Widow Bogey again - using a few low income people who happen to live in expensive areas to shield the Dukes of Westminsters of this world and maintain a punitive tax system that depresses GDP by a quarter below what it would be under LVT/CI.
If a policy benefits ninety per cent of poor people at the expense of ten per cent of poor people, what do I care? That's what 'redistribution' is all about.
"People REALLY don't like paying more than their neighbours."
99 out of a 100 people will pay exactly the same as their neighbours - unless the line between two postcode sectors runs between two houses on the same side of the road.
Its not actual fairness that people take into account, its perceived fairness. People don't know what someone 3 streets away earns, but they do know how much their house is worth, and how big their garden is. And they'll do the maths. Property prices aren't the favourite subject for dinner parties for nothing you know!
And no I haven't become a Guardian reader overnight, I'm just pointing out what others will say. And even this hard right, Ayn Rand loving, old libertarian rather baulks at asking poorer people in a rough area to pay the same amount of tax as someone in a well-to-do one.
"If a policy benefits ninety per cent of poor people at the expense of ten per cent of poor people, what do I care? That's what 'redistribution' is all about."
Thats not good politics I'm afraid. Its one thing to have losers who are well off, to have losers who are poor is politically unacceptable.
S, I'll deal with the hard facts and maths tomorrow (having downloaded the last 1,000 sales of homes in SN3 and divided them into six postcode sectors and averaged them etc etc).
As to this: "Its one thing to have losers who are well off, to have losers who are poor is politically unacceptable."
I care little for politics, and what I see I don't like. So IDS can cut their benefits and make them sweep streets, and that's OK? We can have a tax system that creates unemployment and a welfare system that entrenches it, and that's OK? But not ask low income people who happen, by quirk of history, to live in a posh area to pay a bit more in tax? Or go and get a bloody job if they want to stay living there?
Even if these changes to the tax and welfare system which I am proposing will not only benefit nine-in-ten low earners (on a static basis), but once the system has bedded in will ensure that we have nigh on full employment, and there will be simply fewer 'poor' people to worry about?
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