Killer Arguments Against LVT, Not (155)

One of the sneakier objections is that it is "unfair" to levy tax on a home which has been paid for out of post-tax income, i.e. that it's "double taxation'*, which ignores the point that income tax is morally wrong: you cannot use the fact that wrong has been done in the past to continue inflicting that on future generations. Two wrongs don't make a right, and all that.

So, as a Thought Experiment (and not a serious policy proposal), and ignoring welfare and pensions, how about adapting the Swiss Lump Sum taxation system, where you pay tax on the lower of a) your actual income and b) your notional income of five times the rental value of the home you live in?

Let's say, for sake of argument that there are two ways of raising £330 billion a year in tax - either a flat tax of 30% on all cash income (no exemptions, no higher or lower rates, no VAT or National Insurance) or a flat annual Land Value Tax, which would work out at approx. 8% on the current value of land and buildings (residential or commercial, let's ignore farms) of £4,125 billion. Let's ignore personal allowances as this would be dealt with via the Citizen's Income side of things (and this makes the maths a bit trickier**).

The gimmick would be that you get a full credit for any LVT paid against your income tax bill, so each household pays the higher of [30% x gross income] and [8% x current home value]. So let's say your household has the average earned income of £40,000 gross and your income tax is thus £12,000 a year (before deducting Citizen's Income**).

If you live in a £100,000 house/flat, your LVT bill is £8,000, and you get a full credit for this against income tax, which is duly knocked down to £4,000 (total bill £12,000). If you live in a £150,000 house, the LVT bill is £12,000 and your income tax bill is reduced to £zero. If you live in a £200,000 house, the LVT bill would be £16,000, so again, your income tax bill is reduced to £zero and the marginal cost (i.e. the relevant costs for decision making purposes) of living in that larger house is only £4,000 a year (and not £16,000 a year!).

The optimum position for any household would be to occupy a house which is worth (at current prices) just under four times the household's gross earnings; if you live in a smaller house, there's no further income tax reduction (income tax can't be reduced to a negative figure) and if you live in a larger house, there is an incremental extra cost.

In the fullness of time, we'd observe that nearly everybody would be living in a house which is worth approx. four times their earned income, at which stage we can just abolish income tax without any significant fall in revenues and without anybody noticing (apart from the few with a very low house price-to-income ratio, who'd save a few bob).
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* Which illustrates what rampant hypocrites the Homeys are, as their favourite tax is VAT - if that's not double taxation of incomes, then I don't know what is.

** You'd get the Citizen's Income anyway, whatever your living arrangements, so this has little impact on decision making. Regular readers may remember that my rule of thumb is, on a static basis and ignoring dynamic effects, that if your home is currently worth more than seven times your current gross income, you'd be worse off under LVT and if it's worth six times or less you'll be better off. It's the Citizen's Income which makes up the difference between "four times" and "six or seven times".