Let's speed things up by doing two at a time, they tend to cancel out:
# 131, from The Guardian (this one was slightly tongue in cheek, hence the speech marks): One problem with a tax of this nature is that it 'punishes' pensioners who happen to live in a house for many years that goes up in value 'through no fault of their own'. You can't sell 5% of your house each year to pay the tax. The tax would force old people out of their homes. That may be a good thing but it doesn't play well on television.
#132, from the Adam Smith Institute Blog: ...it would effectively be like having a never-ending mortgage or renting forever - currently most mortgages are 25 years long, and then your living costs decrease as you approach and enter retirement...
Yes, it would be like a never ending mortgage, it would be like a variable rate, interest-only, non-repayable and non-recourse mortgage taken out to pay for the land element when you buy a home. It's like these shared ownership schemes, but instead of ownership being split vertically (e.g. you own 25% of the buildings and 25% of the land), the ownership is split horizontally; you own 100% of the buildings (subject to a normal mortgage) and you own 0% of the land (or own it subject to aforementioned non-repayable mortgage).
So instead of worrying about capital repayments (on the land element) or a 'repayment vehicle', your monthly repayments are correspondingly lower and you can divert the monthly cash saving into paying off the mortgage on the buildings element and/or saving up for a pension to pay the rent/interest. By and large, the two will net off.
So that's young people sorted. Anybody over the age of 45 or so has had their chance to buy a cheap house (any time before 2000, let's say, and could have paid off the mortgage by now) and so, compared to today's First Time Buyer, they have plenty of spare income to save up for a pension.
Then we return to the eternal thorny problem of The Poor Widow In A Mansion who is asked to pay 'rent'*, but let's not forget that 'rentier' can mean either 'pensioner' or 'landlord'. What is an old age pension if not a form of rental income? The government collects income tax etc from working age people and gives it to older people, so people who live off rental income will be paying some of it back. AFAICS, there is no natural law that says that old age pensions have to be funded out of income tax and can't be funded out of LVT.
The first Killer Argument #131 is even easier, LVT is a tax on the annual rental value, not the capital value. On a street of identical houses, your tax bill is the same whether you bought it last week for £160,000; bought it at the peak of the market in 2008 for £200,000; or bought it half a century ago for £2,000. There is no concept of retrospectively taxing capital gains.
Even if you based the tax on selling prices rather than rental values, then absolute changes in prices do not matter, only relative prices. So if all house prices doubled (or halved) from one year to the next, then the tax bill on each individual house would be exactly the same.
And if half of all houses went up by 10% and the other half by 40%, the tax base goes up by 25% on average, so the headline rate comes down by 20% (to keep revenues constant) and so the people in the houses which 'only' increased by 10% would be paying 12% LESS in tax, and those whose house went up by 40% would be paying 12% MORE in tax (not 40% more).
* In practice, I would cop out and have exemptions, discounts, rebates, roll-up option. The purist view is make 'em pay full whack but double the old age pension.
Monday, 16 May 2011
Killer Arguments Against LVT, Not (131, 132)
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11 comments:
"The Poor Widow In A Mansion"
Now you aren't being strictly honest here now are you?
Its isn't poor widows in mansions, but poor widows (or widowers) in houses that cost more than seven times their income. Which given that the average house price is £150K-ish, means that any single pensioner with an income of under £22K-ish is in trouble. Coupled with the fact that pensioners tend to be in slightly more expensive than average houses (having bought years ago and stayed put), that's a lot of not particularly rich people who will lose out under LVT.
Not surprisingly you don't seem to emphasise the fact that the majority of pensioners would either have to up sticks to avoid their high LVT or roll up their LVT until their death, which would effectively mean 100% taxation on the value of their house, given one of a couple will probably survive 20+ years from retirement.
I've said it before, LVT would create a weird situation where poorer folk suffer nearly 100% IHT (as their house is their largest asset) whereas richer ones (who have plenty of other assets apart from houses) pay 0%.
S, yes, I am well aware of all that,. May I refer you to my footnote:
"* In practice, I would cop out and have exemptions, discounts, rebates, roll-up option. The purist view is make 'em pay full whack but double the old age pension."?
I am sure you would agree that if OAPs were exempted from LVT entirely, no accrual, no roll up, no IHT nothing, that the system would still stack up mathematically (i.e. only working age people and businesses pay LVT).
And I accept that most single pensioners have pension income of considerably less than £22,000 a year, I'm guessing the median is maybe £10,000 a year, so simply barging in and charging them full whack is clearly a non-starter.
However, it must also be clear that the system still stacks up mathematically, if you charge pensioners LVT (at whatever rate, 0.1%, 1%, 10%, anything) and put all that money into a separate pot and then dish out that pot as additional pension income.
By definition, pensioners in expensive houses would then be subsidising the pensions of those in smaller houses.
If handled intelligently, this would even out the phenomenon you refer to - that scrapping IHT would benefit people with a £1m house and £4m in other investments more than somebody in a £100,000 house and no savings - as the amount the wealthy pensioner saves on the £4m investments would be lost on the £1m house; and the amount that the pensioner loses on the £100,000 house would be compensated for by the higher pension he receives, partly-paid by the pensioner in the £1m house.
On a slightly different note, have you even considered the effect on the housing market?
If (say) on day 1 of LVT's new dawn, there are 20% of households who are significant losers, most of those will immediately be looking to sell. There are approx 22m houses/flats in the UK, and in 2007 (at height of the property boom) 1.9m properties changed hands, so a bit less than 10% of the housing stock.
So if one assumes there is a natural turnover of say 5% due to deaths, divorces, mortgage repossessions, job moves etc, and up to 20% on top of that want to sell to avoid LVT, then by definition you need another 20% to sell their house to buy the first 20%. So for everyone to be able to get rid of their LVT liability (as you tell us they can by downsizing) it necessary for up to 45% of the housing stock to change hands in one year.
That's not going to happen. So what do you do to people who have their house on the market but can't sell it, but don't have the income to pay the LVT? Bankrupt them and sell their house for a pittance and throw them on the street?
S, that's a transitional issue, which is why we start by replacing Council Tax, IHT etc. with a 1% flat annual tax (like in Northern Ireland), and see what happens. Then next year, nudge up the rate to 2% and reduce VAT from 20% to 5% (or whatever).
And yes, let's assume that approx. 25% of people will want to trade down during the transitional period, and let's say that transitional period is very short, five years, that's still only an extra 5% a year who otherwise might not have moved, plus your 5% for death, divorce etc.
But remember that the people buying will be the same people as would have bought anyway (there are approx. two million in each annual cohort), most of whom marry and most of whom then buy or rent a home, i.e. a million new purchasers a year, plus the higher earners who are happy to trade up (never underestimate people's desire to keep up with the Joneses!).
Somehow we survived the housing shortages and upheavals after WW2, didn't we? The adjustment to LVT (at whatever level, I doubt we'd ever get past 2%, let's say) is going to be a lot less dramatic than that, isn't it?
So the transition to LVT is on a par with the dislocation to society caused by WW2? Not really a selling point is it?
And you didn't answer my point about people who can't sell their house, but still have a LVT liability they can't pay.
S: "So the transition to LVT is on a par with the dislocation to society caused by WW2? Not really a selling point is it?"
That was my point, I would say more that it's a 'dislocation' on a par with transaction levels seen in 2006 or 2007.
"And you didn't answer my point about people who can't sell their house, but still have a LVT liability they can't pay."
Does that need answering?
Apply commonsense: if you set the price right, you can sell any house within a few weeks. If the house is in an area which is so awful that you can't give it away, then by definition, the LVT will be pennies.
In any event, the LVT will be (again, by definition) a lot less than the rental income from that home would be, so there's no pressing need to actually sell it (if you want to hang on to it for sentimental reasons). You can just get tenants in, which is usually a matter of days, not weeks, turns you a nice little profit and you rent or buy somewhere smaller or cheaper.
And like I said, any transitional period for pensioners would have to be much longer, more like ten or twenty years. Details, details.
then by definition you need another 20% to sell their house to buy the first 20%.
Don't forget there are a bunch of potential FTBs currently prevented from entering the market, who will, by definiton, have gained greatly from the other tax removals, and will be in a position to take up a signifcant portion of those dwellings.
(I think this is the step I missed in my post, MW. Darn these dynamic systems! :) )
It's absolutely true that LVT would cause a fair bit of change, but that's not sufficient reason to reject it. People will always maximise their opportunities under any system and any change to that system will, by definition, temporarily disadvantage those who most gained from it, it's simple logic. That however, is not an argument against anything in particular but against change itself.
The current system is a distortion that takes wealth from workers and investors and gives it to landowners. By definition, changing that means some sort of detriment to landowners. But not changing it also causes people to lose out, but because that's what happens right now, we assume that it's alright. That's crazy. The fact that society still functions with this ridiculous distortion should be sufficient proof that it will function without it.
I've said it before, LVT would create a weird situation where poorer folk suffer nearly 100% IHT (as their house is their largest asset) whereas richer ones (who have plenty of other assets apart from houses) pay 0%.
The real poorer folks don't have a house at all, they still rent. In any case, the gains made by their children from not paying other taxes will, I suspect, far outweigh any inheritance they may or may not receive.
F: "The real poorer folks don't have a house at all, they still rent. In any case, the gains made by their children from not paying other taxes will, I suspect, far outweigh any inheritance they may or may not receive."
Yes of course, but you are applying logic to the situation, and other people simply refuse to recognise all this.
I, for one, would be more keen to be one of the additional people trading property if stamp duty was abolished.
DNAse, that'll happen on Day One of the transition; Council Tax, IHT, SDLT, CGT, TV licence, IPT, VAT on domestic fuel, all scrapped and replaced with 1% annual charge.
"You can't sell 5% of your house each year to pay the tax" That's a straightforward lie, because that is exactly what you can do right now. And when LVT comes in I might well set up a business providing exactly that service - for a profit naturally.
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