I've posted this crude sketch before: there appears to be some sort of uneasy truce over Council Tax, but opponents thereof split into three groups who argue in favour of one of three obvious alternatives*: 
Out of naked self-interest, low earners like to argue in favour of 'local income tax' and high earners and one-person households like to argue in favour of a poll tax, fair enough, but let's look at how these would work in practice and the advantages and disadvantages of each.
Council Tax, and other taxes vaguely related to personal wealth or housing raise approx. £42 billion a year**, and the core, core functions of the state (Foreign Office, defence, immigration control, police, prisons, road maintenance, refuse collection and the fire brigade, maybe air traffic control and not much else) cost ball-park £80 billion a year (about five per cent of GDP).
So let's start by imagining we run a small-state government - that means no old-age pensions, NHS, no state education, and certainly no cash welfare etc - which costs £80 billion a year and half of that is raised with either a Poll Tax, Local Income Tax or Land Value Tax.
1) A Poll Tax works out at £1,000 per adult, and as we know full well, it's politically unpopular and there would be massive evasion by people simply not registering their addresses. The other downsides are that people are forced to contribute towards the costs of running the state without there being any correlation between the amount paid and the value of any benefits received - and if you imagine that somebody who owns a house in a run down area derives the same benefits from simply owning that patch of land as somebody else who owns a house in a genteel area overlooking the park, you are seriously deluded. Neither does it take into account 'ability to pay'. The upsides of a Poll Tax are that it is not a tax on income and therefore does not have dead weight costs.
2) A Local Income Tax on earned incomes would amount to a tax of about six or seven per per cent on earned incomes (wages or profits), this still requires a lot of admin and surveillance. The upsides are that it vaguely relates to 'ability to pay' and the dead weight cost of such a low income tax is probably less than one per cent of GDP.
3) A Land Value Tax raising £42 billion a year amounts to a tax of one per cent on the current market value of residential land and buildings at current market values, or about 40% of that part of the current rental value of UK housing which relates to the location value rather than the bricks and mortar (at such low rates, there is little practical difference between taxes on capital values or on rental values).
To my mind, an LVT has all the advantages of a Poll Tax or Local Income Tax without any of the disadvantages:
- there is far less hassle with collection, as the tax in on a fixed and immovable plot of land as registered with HM Land Registry (some houses are not registered, but we can operate on a 'use it or lose it' principle).
- the amount payable on any plot is independent of the number of people living there, so those who want to live in an area but have a low income can share a house or live in a small flat.
- the amount payable is proportional to the value of local services received rather than their cash cost. If your local council wants to waste money on [insert your pet hate here], then you don't pay for it.
- the amount payable is broadly proportional to your 'ability to pay', in the same way as the price you paid for your last car or your last [insert whatever you last spent money on here] related to your 'ability to pay'. if you think the tax demanded where you live is too high, you can move elsewhere (a smaller home round the corner, if you so wish) or take in a lodger etc.
- LVT has absolutely no dead weight costs whatsoever, and what little costs it imposes (cost of valuations and collection, the hassle faced by those who choose to down size) are more than outweighed by the benefits, i.e. more efficient use of land and buildings in urban areas (so less need for 'urban sprawl' etc).
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Clearly, we are not going to move to minimal government any time soon, I imagine at the very least that pensioners are very happy with getting £100 billion a year in pensions and probably as much again in the value of NHS treatment, social care etc. And today's earners who are chipping in to pay for this will in turn demand similar benefits when they are old and tired (I'll be grateful for every penny I get!), so let's up that £80 billion figure to £280 billion a year and look out how the three taxes would work if we had to raise the entire amount with any of them (in the real world, we will also have petrol, fags and booze duty plus other bits and pieces):
1) A poll tax raising £280 billion a year from working age adults works out at about £12,000 each a year, clearly unaffordable for many and a gift to the highest earners and largest land-owners, thus a political or administrative non-starter.
2) An income tax raising £280 billion a year works out at (let's say) a flat 40% income tax, the dead weight costs of which are about 16% of potential GDP, using my fag packet estimate that dead weight costs are the tax rate squared). So that means high collection costs, unemployment etc, so we then need more welfare spending, more policing, which bumps up the required revenues even further and so on. This seems to be the option favoured by most western governments, it's bad for the highest earners but good for land-owners.
3) A Land Value Tax of about 7% on the current market value of all land and buildings (residential or commercial), which we can bump up to 8% if we wish to exempt the primary residences of pensioners entirely. It's difficult to express this as a percentage of site-only rental values as the calculation is highly circular (LVT depresses selling prices but scrapping income tax pushes up rental values).
To me that seems perfectly workable, if you can only afford £500 a year, then buy a house in a cheap area and share it with a couple of other adults, like people do when they leave home for the first time, if you want to live in a grand house, you'll pay tens of thousands a year, but at least you are getting something for your money (unlike with income tax, local or otherwise).
Clearly I've missed something important, because most people seem to vastly prefer option 2) with a shed load of stealth taxes on top) to option 3). So what have I missed?
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* There are of course two other proposals, a wealth tax (usually proposed by people arguing against it or by more deluded left wingers) and a local sales tax as proposed by my own party, which are so left-field as not to warrant further discussion.
** HM Treasury forecast for 2011-12:
Council Tax - £26.1 billion
Council Tax Benefit - £(4.8) billion
Stamp duty land tax - £5.8 billion
Capital gains tax - £3.4 billion
Stamp duty on shares - £3.3 billion
TV Licence fee £3.1 billion
Insurance premium tax - £2.9 billion
Inheritance tax - £2.7 billion
Forbidden Bible Verses — Genesis 43:24-34
4 hours ago
16 comments:
Surely the best argument against (local) poll tax and (local) income tax are that they are completely redundant given the current system.
Rather than have a poll tax, simply lower the income tax threshold and cut unemployment benefit (possibly other benefits) by the equivalent amount.
Rather than have a local income tax, simply increase existing income tax and up the grants to local authorities based on the amount of income tax collected therein.
But by all means have a LVT because at the moment too much of land value goes to private hands.
DNA: "Rather than have a poll tax, simply lower the income tax threshold and cut unemployment benefit (possibly other benefits) by the equivalent amount."
Exactly. I'm completely onside with those who say the personal allowance for income tax should be higher, the weird thing is that a lot of the same people think that a Poll Tax is a good thing, which makes a mockery of it.
"Rather than have a local income tax, simply increase existing income tax and up the grants to local authorities based on the amount of income tax collected therein."
Agreed, on an administrative level, this would be the way to do it. But what is the most 'local' of all local incomes? Why land rental values, whether in cash or in kind.
But what is the most 'local' of all local incomes? Why land rental values, whether in cash or in kind.
I like the idea of localities competing with each other based on infrastructure provision and tax-rates. Clearly allowing local authorities to keep business rates and council tax is a good thing. But it needs to be a higher proportion of total tax take to make a difference. At the moment regional development initiatives consist of cutting modest rates to nothing. But of course no central government is going to put its money (tax revenue) where its mouth is as far as localism is concerned.
"So what have I missed?"
PAYE makes income tax invisible, because it is borne by the employer. What people see is their take-home pay. They may say "I'm on £75K a year", but all their financial calculations are based on earning £3,200 a month or whatever, which is their take-home pay. As they say, "what you've never had, you don't miss".
LVT is an "in your face" tax, 'nuff said.
DNA: "I like the idea of localities competing with each other based on infrastructure provision and tax-rates."
Me too. Call me naive, but I see it like two landlords who own neighbouring flats competing. Landlord A replaces the carpets and redecorates between tenants which costs him £x00 per month, Landlord B doesn't. As long as Landlord A can charge £x00 plus £y per month extra in rent, then those carpets and refurb's are worth it, else not.
B: "LVT is an "in your face" tax, 'nuff said."
Hence the cunning plan to net off LVT and CI and if there is a shortfall, to collect the net amount via people's PAYE codes.
If there is a 7% tax on land-building, and say you live on some weathered spot in cumbria, where land value would be neglible, that would mean pretty much up to 5-6% extra interest rate on construction, I think that's a bit unfair, rather do the extra mile of calculating land values shouldn't we?
Speaking of marginal cases, I was thinking of a piece on www.landvaluetax.org on local vs. national LVT here the other day. Seeing I would like to have a national CI, I'd want as much LVT as possible go from the local level through the national level and back to a CI. How do you envision the sharing of rent between local and national government? I am thinking of an arbitrary flat percentage, but if that was the case, some rural areas wouldn't have enough to even cover basic services. Maybe a minimum deductible before the rest is sent on, or they could cover the shortfall by taxing the buildings-element, or maybe even tap the CI?
Anon, yes, doing the land values is easier, but land values = planning permission. A farm in Cumbria with two farmhouses will be worth twice as much as a same sized farm with one farm house.
As to local/national, I'd say that councils have to pass on (say) 80% of what they could collect (i.e. they don't need to collect 100% if they don't want to, but it comes out of the council's budget), and that councils get a per capita top-up of a few hundred quid as well. Or maybe councils would be able to keep a slightly larger share (30%) of LVT which they collect from commercial premises so that there is no perverse incentive to rezone business stuff to residential.
And what wasn't used in the budget would be doled back out on a per capita basis to the council populace, as an incentive to reduce spending and collect what they can.
So, what are the stages in getting it implemented? You've put the case, now what is the game plan?
Anon, if the rateable value is £100million, it's up to the council whether it collects £80 million and spends nothing or whether it collects £100 million, spends nothing and gives every resident an extra £1,000 each (or whatever).
JH, the most modest step forward would be to get rid of a few jealousy surcharges (IHT, 50p tax, SDLT and so on) and have a council tax rebanding all the way up to Band Z, so that little flat in Burnley pays £100 a year and massive penthouse overlooking Hyde Park pays £10,000 a year, it can't be rocket science.
One of the sneakiest aspects of the council tax is that, if no new bands are added at the top end, house price inflation gradually changes it from a property tax into a poll tax. But it happens so stealthily that people aren't aware of it.
Of course there haven't been any revaluations in England since 1991 or in Scotland since two (?) years ago but that too introduces problems since it unfairly overcharges owners of housing built after the freeze in valuations.
That's why, if we are going to stick with it, there should be annual revaluations and the regular introduction of new top-end bands.
D, agreed, but the Homeys have their propaganda in place to justify this:
You just need on basic myth, such as "Council Tax pays for local services". From this you can draw the incorrect conclusion "In fact it only pays for refuse collection and street sweeping. My council tax has doubled in the last ten/fifteen years, even though they don't empty the bins as often. Therefore council tax is too high. If the council officers didn't pay themselves so much money they wouldn't need to increase it at all."
In your treasury forecast numbers, could you add how much is taken out of our private pensions each year in dividend tax? £8bn or something?
Anon, not a single penny is taken out of private pensions in dividend tax, that is a complete myth.
The fact is, if we are going to look at pensions and tax, the net amount of tax break/subsidy going in is about £40 billion, which adds about 10p to the overall income tax/NIC burden - and the entire tax break/subsidy is creamed off by pensions 'industry' in fees, commissions, charges and all-round underperformance.
The whole thing will be scrapped when we move to a flat income tax.
Ah sorry, it's just that Brown removed a dividend tax credit in 1997, not that he created a dividend tax. I can see that a flat income tax would be simpler, especially if people could then afford to get their pension contributions up.
Anon, the best summary on that whole pensions thing is by John Band.
But pensions tax breaks are futile anyway, not only is it swallowed up by the pensions 'industry' it also means that the tax rate on everything else goes up. Such massive tax breaks make things WORSE.
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