The ever reliable Sobers went to the trouble of putting some figures on the number of people who might want to move if we replaced ALL taxes on wealth, income, profits etc with LVT. I think he double-counted, it would be 25%, not 45%, but hey, and he concluded with this:
... 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?
1. On a practical level, there is no urgent need to sell, as by definition, the LVT will be always rather less than the rental income you can get from that home, so even taking mortgage repayments and letting agent fees into account, each home (or at least, all but 1% which are in a terrible state of repair or have an extravagantly large garden in an expensive area) will still generate some net income for the owner. For the owner, it is then just a question of renting somewhere which he can afford out of the net rental profit from his old house, his earned income and his Citizen's Income.
2. Further, as matter of principle, the selling price of houses will never fall to 'a pittance', because LVT is only a tax on the rental value of the location; if the tax on a house were so high that it depressed the selling price to lower than the replacement cost/value of the bricks and mortar, then it is clearly too high; it would be as daft as having an income tax rate of more than 100%. The idea that LVT would so depress selling prices is no more an argument against LVT than the argument "If we had income tax, a government could increase the rate to more than 100%" is an argument against income tax. In either case, I'll assume that while the government is greedy it is not insane.
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But I accept that the 'transitional period' will be a bit icky, so, as a thought experiment - and not as a serious policy proposal - how about this for a short, sharp transition (glossing over the fact that these things all take time), all figures are annual figures.
Year One, Day One; Government replaces entire welfare system with a Citizen's Income (£1,800 for kids, £3,600 for working age adults and £7,200 for pensioners, let's say, which is well within current spending limits).
Day Two: Government abolishes ALL taxes (except petrol, booze and fags duty; a bank asset tax; income tax on public sector pensions and pension which have received tax relief 'on the way in'; and Business Rates), repeals all other tax legislation and destroys all historic tax records. This leads to a revenue shortfall of about £320 billion (workings here).
Day Three: Government tells people there will be one year's, tax free breathing space, but that starting in Year Two, full-on LVT will payable, which will raise that missing £320 billion, publishes the rates for each postcode sector and send every homeowner (or landlord) an assessment so that he knows what LVT will be payable. The LVT on the cheapest houses, smallest flats will be a one or two thousand pounds; the average will be about £12,000 per annum (so two thirds will be less than that); and tax on a house at the top of the ninth decile will be £24,000 (without any upper limit, but these lofty heights need not concern us).
Day Four: Government mentions, as an afterthought, that in Year Two, the universal Citizen's Pension will be doubled to £14,400 per year per pensioner.
People then have twelve months to plan their next move.
i. Half of all households will notice that the jump in their net pay, plus their household's Citizen's Income or Citizen's Pension, plus the fact that stuff in the shops is now much cheaper, is more than enough to cover the LVT on where they live and they come out ahead. (By and large, people's disposable income will double).
ii. Half of that half (i.e. a quarter of households) will realise that they'd be so far ahead of the game that they'd be able to afford to trade up, and will start saving up a bit of cash for the new furniture and perusing the 'homes for sale' and 'homes to let' pages, taking care to note what the LVT bill for that house will be if they intend to buy it. There are plenty of young couples who have delayed starting a family, who'll want to trade up from the flat they currently live in, and never underestimate people's urge to keep up with the Joneses!
iii. A quarter of households would be in a break even position and will come out plus/minus no better or worse off, are basically happy where they are, and these need not concern us further.
iv. A quarter of households will work out that it would be difficult for them to scrape the money together to pay the LVT, although a pensioner couple due to receive £28,800 a year between them would still have plenty of choice, and so they start looking to trade down.
Over the next couple of years, the up-sizers from group ii. will swap places with the down-sizers from group iv. Sure, that's about six or seven million households, but for young people this is no big deal, they'll just have to muck in a bit if their own parents or grandparents want to downsize (and why wouldn't they? Why would they want their potential inheritance to be swallowed up by LVT?).
So that's two or three million sales/purchases a year for two or three years, depending how quickly people respond, which is perfectly do-able; at the height of the house price bubble in 2007 there were nearly two million sales/purchases, so if removal men get used to working every day of the week and not just Fridays, it can be done.
Hey presto, problem solved. Apart from the one-off tax shortfall of £320 billion from not raising any taxes at all in the transitional period, that's only a fifth of the accumulated public sector debt which the Tories plan to have by the end of this Parliament.
Tuesday, 17 May 2011
Killer Arguments Against LVT, Not (133)
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15 comments:
Mark
£320 Billion is approx twice 2010 deficit (£160 billion I believe was mentioned) but from year 2 we are in balance from your numbers (I assume) so the markets would approve as George's current numbers quote deficit at £75 billion for 2014/15.
Hmmmm
Shiney, no, the £320 billion is a one-off additional tax shortfall, but seeing as the government intends to rack up about £500 billlion debt over the course of this parliament, to add to the £1,000 billion already in existence (not to mention £1,000 public sector pension liabilities) with absolutely nothing tp show for it, I don't suppose and extra £320 billion will make much difference.
Cutting government spending down to a sensible level is a different topic, but there are of course vested interests who are quite happy with the massive overspend... because they are the ones getting the money.
Pensioners' groups will, I'm sure, be overwhelmed by the generosity of your "doubling" of pensions to £14,400 a week ;-)
Wouldn't mind that, myself....
I would make so much money in the 12 month moratorium, and have so great an increase in future earnings that even though my house is relatively 'valuable' I'd easily be able to stay wheer I am.
(I assume that you will implementing your Bloggers cabinet reforms at the same time - shutting down the FSA for example?)
So, where do I sign?
I don't buy it, but I might be being thick.
If only 25% of the population would be worse off, where 50% are better off and we are keeping overall tax take the same, those that are going to be wrose off muct be being hammered. Either that or your figures just don't work.
FT, well spotted, I have amended.
L, sure, during the ensuing chaos, FSA will be scrapped, smoking allowed in pubs, traffic lights turned off etc. while nobody's looking.
CG, 25% worse off by [large amount], 25% the same, 25% better off [by small amount] and 25% better off by [quite large amount].
It's because while the distribution of incomes is skewed, the distribution of land ownership is twice as skewed; so losers will be (say) £10,000 a year worse off, small gainers will be £2,500 a year better off and big gainers will be £7,500 a year better off.
"25% worse off by [large amount], 25% the same, 25% better off [by small amount] and 25% better off by [quite large amount].
It's because while the distribution of incomes is skewed, the distribution of land ownership is twice as skewed; so losers will be (say) £10,000 a year worse off, small gainers will be £2,500 a year better off and big gainers will be £7,500 a year better off."
And thats where it all falls down IMO. Those who are big losers have a massive incentive to reduce their LVT. And the only way to do that is a) get more income (not so easy) or b) downsize their property.
Given that the winners will not want to become losers (or not big losers certainly), the losers houses will fall massively in value as they sell them for what they can get, and house prices in the middle and lower ends will be bid up by the sellers from above, wanting smaller (or cheaper) houses. Thus the LVT payable from the areas that are initially big losers will fall (as the value of the properties drop) and the LVT payable from the lower and middle sections will rise (as their prices are bid up relative to the top)
Thus after the whole thing has settled down I reckon 50% will be worse off by a bit, 25% level and 25% better off by a bit.
The burden of LVT on day one falls massively on one smallish section of society. Over time that burden will be spread back onto the remainder of society, in much the same way it is now. There is no free lunch.
S, half, half wrong, your conclusion is in fact correct, but only in a roundabout way:
"The burden of LVT on day one falls massively on one smallish section of society. Over time that burden will be spread back onto the remainder of society, in much the same way it is now. There is no free lunch."
The chances are, that (ignoring massive boost to economy from scrapping income taxes), in a few year's time, everybody's share of the tax bill will be much the same as it is now, with the big difference that those people with the highest incomes will end up in the biggest houses and paying the most tax.
So instead of earning a lot and paying a lot of tax and getting nothing in return, they get to live in the nicest houses. Sure, the tax will have the biggest (downward) impact on the biggest and nicest houses, but they are the ones that are currently most overvalued.
Never forget: people with lots of money spend it on nice things; a new car every year for £50,000; private education at £10,000 per child; £5,000 for a week's holiday in some far flung place etc.
What earthly reason is there to assume they won't be happy to pay £24,000+ a year for the privilege of living in the nicest houses, especially if they can buy those houses for somewhat less than they currently cost?
Though it would be far less popular for people who don't have any intention of working, I think a Pigovian subsidy on wages would be better, economically, than a citizen's income given to everyone above room temperature.
As a simple example, assume full-time work is 40 hours per week, 50 weeks per year, for a total of 2000 hours per year. Divide the amount you would set aside for a citizen's income per year by 2000, and pay that to every citizen for every hour work (up to 2000 hours per year).
You can then reduce the minimum wage by an equivalent amount, so the unemployed are more attractive to hire. Once they are on the employment ladder, they can gain skills and experience and earn more.
In US-centric terms, the current federal minimum wage is $7.25/hr. If you dropped the minimum wage to $3.65/hr, and had an equal amount as a wage subsidy, the minimum a person would get is $7.30 an hour, which is a nickel an hour better than they get now, and $3.65/hr would be a bargain for many companies (so much so that they would tend to bid up the wages to somewhere between $3.65 and $7.25/hr for basic entry-level workers, ones that they wouldn't even have looked at before the subsidy.)
One final math note: $3.65 * 2000 = $7300 per year (maximum). You may need to adjust this, depending on the size of the citizen's income.
Snarf: "You can then reduce the minimum wage by an equivalent amount, so the unemployed are more attractive to hire..."
Clearly, the NMW goes straight out of the window when I'm in charge. Whether the CI makes people more or less likely to work I do not know, but seeing as average tax/benefit withdrawal rate in the UK is about eighty per cent, a zero per cent tax rate must increase the incentive to work enormously. And linking it to hours worked is far too complicated.
'What earthly reason is there to assume they won't be happy to pay £24,000+ a year for the privilege of living in the nicest houses, especially if they can buy those houses for somewhat less than they currently cost?'
You're having a laugh aren't you? According to your own figures for the Swindon area, my house would have a LVT of £30-40Kish (depending on how you define my garden). My parents house (a big old farmhouse) would have LVT of about £120K if memory serves. Other houses in their village would have LVT bills of £70-100K. And this is a small village on the outskirts of Swindon for Gods sake, not the Cotswolds, Surrey or Cheshire.
No-one other than super rich bankers, CEOs and footballers could afford LVTs like that. To be paying £120K in tax you'd have to be earning £250K at least. People who earn that already live in nice houses, they aren't going to want to move. So who exactly is going to be able to afford these places, even with their £3.5K CI?
Your trouble is that you have based your calculations on house prices as they are now, which bear no resemblance to how they would be under LVT. Ergo all the calculations about winners and losers will be out by a massive factor, as the introduction of LVT would result in a massive value shift. Thus the basis for where the tax burden would fall is entirely wrong. By taxing high property values so hard you destroy those values immediately. The revenue then has to be replaced from everyone else, thereby creating lots more losers.
Incidentally if you have just bought a big house on a mortgage and LVT destroys up to 50% of its value, and you need to sell because you can't pay the mortgage and the massive LVT bill, what happens then? Are all people in such a position bankrupted? Wouldn't do the banking system much good either at the moment - the last thing they need is more bad property debts.
One of the beneficial side effects of a Citizen's Income is that it makes Minimum Wage legislation irrelevant and acts as a wage subsidy. There is no need to target the CI specifically at people who are employed by others (as Snarfangel seems to be suggesting). In fact doing so would discriminate against the self-employed as well as complicating things unnecessarily.
It probably wouldn't even save money since the money saved on not paying the unemployed and unemployable would be eaten up by the bureacracy needed to check that they really were involuntarily unemployed or unemployable. Just look at the current system to see how expensive that gets.
The universal CI proposal as it stands would act as an indirect subsidy to employers, a direct subsidy to the self-employed and a Social Security measure for the unemployed/unemployable. And all for the price of a minor change in tax legislation.
S: "You're having a laugh aren't you?"
Nope. We've covered all this before.
My calculations for land values round your way were based on average price of a semi detached (£230,000) and assumed 500 sq yard garden, and the lowest rate was in SN2 5.. at £18/sq yd and the highest was in SN6 8.. at £36/sq yard.
Of course, when these rates are calculated properly using actual plot sizes, it may turn out that all semis are like yours with > 1,000 sq yards plot, in which case that rate will approx. halve in £ terms.
"My parents house (a big old farmhouse) would have LVT of about £120K if memory serves."
I've no idea where that house is, how big the plot is, or whether it is indeed farmland or not, if they don't want to pay the tax, then sell off the land to the farmer next door, keep a garden you can afford and Bob's your. Or divide it into four and stick a house on each.
"Your trouble is that you have based your calculations on house prices as they are now, which bear no resemblance to how they would be under LVT."
Nope, the rates have NOTHING to do with house prices in ABSOLUTE terms, and you know that perfectly well.
It is based - ultimately - on rental values. Therefore, if ALL house prices in the whole of the UK were to double from one year to the next, the 8% rate required to raise the £300 billion would fall to a 4% rate. Or if all prices were to halve, the rate would be 16% and the tax on each house stays exactly the same.
"Incidentally if you have just bought a big house on a mortgage and LVT destroys up to 50% of its value..."
Let's do the maths again, shall we?
Expensive house costs (say) £300,000, to buy it with big mortgage of 4 x salary, you need to be earning £60,000, in which case he is paying, directly or indirectly about £25,000 in taxes (income tax, NIC, VAT, corp tax, council tax etc).
So his £25,000 current taxes disappear and instead he ends paying approx 8% x £300,000 = £24,000 in LVT. What's the problem? Why would the house price halve? Why is this man suddenly bankrupted? His mortgage wouldn't cost a penny more than it did before.
And finally, I don't like the expression 'destroying value'. Capital land values are like a financial asset, and you can't have a financial asset without a financial liability, the two always net off to precisely nil.
What really gives land its rental value is the presence of other people, businesses, roads, schools, a nice view etc, all of which will be ENTIRELY UNAFFECTED by LVT.
And, even if LVT did reduce house prices by half (which it wouldn't), how is that worse than taking away half people's income in taxes? Do the income taxes not 'destroy just as much value'?
D, agreed, keep it simple.
Interestingly, you can argue a CI is an indirect subsidy to low paid jobs.
But you can also argue that it sets some sort of floor under wages. If you have not a penny in social security, and the only job offered paid £1 per hour, and you would otherwise starve, then you would take it. If you are getting £70 a week anyway, then you are not quire so desperate, and you might refuse to work for anything less than £2 per hour.
So chances are, the two effects net off and the CI has NO effect on wages (up or down) whatsoever.
Sobers, I should add, the £230,000 was the average in SN6 8.. In SN2 5.., the average is £90,000, so I smoothed it a bit.
If you like, we can say sod this postcode sector by postcode sector and just have £24/sq yard for the whole of Swindon, on the assumption that the houses in the cheaper areas are only cheaper because their gardens are much smaller - which is fine by me because that makes the calculations much easier.
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