Killer Arguments Against LVT, Not (152)

Once more unto the breach, dear friends:

Pier Carlo Padoan, chief economist of the OECD, says George’s Osborne’s cuts are “appropriate,” but the Chancellor must do much more to stimulate Britain’s economy. Mr Padoan argues he should... abolish council tax and stamp duty in favour of “a property tax based on market values.” Instead of HM Revenue & Customs taxing property via stamp duty land tax (SDLT); inheritance tax (IHT); and – in the case of second homes – capital gains tax (CGT); annual liabilities would be calculated, based on estimations of house prices.

Leading accountants described the proposals, to be set out in the August edition of Prospect magazine, as “revolutionary” (1) and predicted they would hit house prices and prove extremely unpopular. Pensioners (2) and even tenants (3) would suffer higher costs under a property tax, accountants predict. (4) But Mr Padoan argues that his reforms would “dampen fluctuations in house prices” and are essential to put the British economy on a more stable long-term footing...

Helen Demuth, tax director at accountants Smith & Williamson, said: “Currently occupiers pay council tax but the owners would presumably pay property value tax. They would no doubt pass this on by higher rents which might, or might not, be equivalent to the tenants’ savings on council tax. (5)"

1) No it's not revolutionary at all, this used to be how the UK government raised the bulk of its revenues, this is what Adam Smith said was the most easily justifiable and least damaging tax and we still have it in the UK in the form of Business Rates and Domestic Rates in Northern Ireland.

2) Poor Widow Bogey. Do these people not realise that we have a cunning system in place to enable older people who can't earn a living to be able to afford food, clothing and so on? It's called 'old age pensions'. If we had LVT, would it be so difficult to think up a system of exemptions, discounts, deferments or simply a higher state pension (in which case pensioners in large, expensive houses would end up subsidising pensioners in smaller, cheaper housing)?

3) They are playing the Double Bogey - you always have to either contrast people at opposite ends of the scale - the Undeserving Rich in a small house with the Deserving Pensioner in a large one; or choose people at opposite ends of the scale, an old non-working person who is an owner-occupier and a young working person who is a tenant and then claim that the tax would have an equal effect on both, even when quite clearly it wouldn't; that's like claiming that claiming that a tax on bacon would hit Christians and Jewish people alike.

4) I work among accountants, and they are all too close to the coal face to see the bigger picture.

a) Let's imagine we scrapped the TV licence of £146 per year and just increased every Council Tax bill by £146 (or whatever slightly smaller figure would be required - taking into account that a lot of people don't pay it). Would that hit tenants? Nope.

b) Let's imagine that they scrapped Council Tax Benefit (CTB), which is largely paid to people in Band A and Band B homes and simply reduced Council Tax in those bands by a quarter so that those who previously benefited from CTB pay more and those who didn't pay less. Would that affect rent levels? Nope.

c) Let's imagine they allowed people to pay SDLT in small annual instalments spread over an average ownership period of twenty years, so instead of paying between 1% and 5% when you buy a home, you pay between 0.05% and 0.1% of the price each year. Would that mean that landlords had to put up rents? Nope.

d) You can insure against Inheritance Tax liabilities. Insurance companies just work out how much and when the bill will be and set the premium such that the net present value of the recurring payments is roughly the same as the net present value of the bill. Would a landlord who has taken out such insurance have to charge a higher rent? Nope, that was his decision - if he thought it was going to be more expensive, he wouldn't do it.

e) You can't insure against Capital Gains Tax liabilities because they are too hard to predict, but you could 'self-insure' by putting aside a small percentage of the value of the house, so that when you come to sell it, you know you'll have enough to pay the tax so that you can keep the entire selling price. Would a cautious landlord who saves up for the tax charge more than one who doesn't? Nope.

f) Finally, let's imagine that landlords pay the Council Tax instead of the tenant as a matter of administrative convenience. Would this make tenants better or worse off? Nope.

We could put a) to f) on a statutory basis and adjust the Council Tax bill up or down accordingly. Would these be regressive or progressive to house prices?

a) would be regressive, the Council Tax bill on small flats would go up by 20% and on expensive houses it would go up by 5%,

b) would be neither nor.

c) and d) would be progressive, They would add a much larger annual amount to the Council Tax bill of more expensive homes.

e) Would be mildly progressive. On rented homes it would be neither nor, but on second homes, it would tend to hit wealthier people who own them.

f) Landlords would put up the rent by the amount of the Council Tax which they now pay, and the tenant can afford to pay the extra rent out of the money he saves (this would improve collection rates from 97% to 99% and reduce collection costs, hooray).

By the time you've ground the numbers, you'd realise that the regressivity and progressivity (if those are actual words) would cancel out and that the new Council Tax merged with TV licence, CTB, SDLT, IHT and CGT works out at a pretty flat percentage of the potential selling price of each home. None of these individual steps would affect rents (and hence tenants) in isolation, and there is absolutely no reason to assume that they would affect rents (and hence tenants) when taken together. Worst case, they act like a higher interest rate - does anybody seriously claim that landlords increase rents when interest rates go up and drop them when interest rates go down?

5) Aha! At least this woman is clued up enough to realise that for some houses the annual bill will increases slightly and for others it will fall (the lifetime bill won't change much at all, that's the whole point). A flat tax which merges Council Tax, TV licence, SDLT, IHT and CGT (and a few other bits and pieces) would actually work out lower for Band A and B homes than Council Tax at present, so if she is prepared to argue (incorrectly) that tenants of larger houses (who by definition are wealthier) would end up worse off (which they wouldn't), then she must also be arguing that lower paid tenants who are not currently claiming CTB would be better off (which they wouldn't be either, to be fair).

So don't play the "We have to look after wealthy people [landowners] or else the poor people [tenants] will end up paying more" card with me, because even by their own flawed logic, lower paid tenants would end up better off (a worthy aim in itself, even though this measure, taken in isolation, wouldn't achieve it).

So there.