Council Tax, Poll Tax, Local Income Tax and Land Value Tax

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