This is a mathematical point rather than an economic one, but is a way of getting round the usual Home-Owner-ist or Faux Libertarian objection that it is better to tax incomes than to tax the rental value of land (using the contradictory arguments that 'LVT is an attack on wealth' but also that 'it doesn't take into account ability to pay'. If somebody is truly wealthy, he has no problem with paying, of course, so these arguments cancel out.)
Fair enough.
But it would actually be quite easy to have a system of taxing incomes that is tantamount to taxing the rental value of land by juggling personal allowances and tax rates and applying those to people's incomes via the PAYE system. Remember that the marginal tax rates which people pay on their incomes are wildly different, depending on their level of income and what kind of income it is, to wit (click to enlarge):
Further explanation here. Despite this, the economy manages to limp along somehow.
Under a full-on LVT system, the effective rate of tax on your first chunk of income is 100% and the rest is taxed at zero per cent - but remember that the Laffer-maximising income tax rate is is higher for low income people. So what we could do is just merge the following taxes into a Single Tax collected via PAYE (which covers most working age people, most of whom are also owner-occupiers) cap the maximum marginal tax rate at 60% (which is on the upward slope of the Laffer Curve for low income people) and get on with it:
PFSD forecast for 2011-12, in billions
Income tax - £157.6
Less Tax Credits - £(30.0) est.
National Insurance (primary and secondary) - £100.7
Council Tax less Council Tax Benefit - £21.1
Capital Gains Tax - £3.4
Inheritance Tax - £2.7
Stamp Duty Land Tax - £5.8
Stamp Duty on shares - £3.3
Insurance Premium Tax - £2.9
TV licence - £3.3
Total £270.6
We divide that by the current selling value of residential land and buildings of approx. £4,000 billion as a proxy for rental values (the Citizen's Income refunds the rental value of the bricks and mortar in most cases), which gives us an LVT rate of about 7% on current selling values. The main earner in each household is then given a PAYE code showing the annual LVT due, from which that household's Citizen's Income is deducted (£3,650 per adult, £1,825 for children, let's say).
So our married Dad with two kids in a typical semi-detached worth currently £180,000 gets a PAYE code showing his net bill of £3,050 (i.e. £180,000 x 7% = £12,060 minus total CI £10,950). If he earns £20,000 a year, his PAYE is calculated as 15.25% of his earnings which doesn't look too bad. If he earns £30,000, it's just over 10%; and if he only earns £10,000 then it's 30.5%, and so on.
The effective average rate of tax will be shown on his payslip for presentational reasons, but in practice the payroll lady will just deduct £254.17 a month and have done with it. IF the main earner earns enough to pay the full amount of tax due, then the second earner gets a PAYE code 'NT" which means no tax is due IF not, then see footnotes 1. or 6. below.
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So far, so good. We then get bogged down with marginal cases and exceptions.
1. Turning to Sobers' favourite hardship case, the 'hard working' couple nearing retirement, who've paid off the mortgage, have a modest lifestyle and who both work part time but happen to live in a house that's in the top ten per cent by value, say £350,000, they get a PAYE coding notice showing £17,200 due. As neither earns enough to pay this in full, the code is split between them and they each get given £8,600 code. This is where the cap comes in - if they earn £8,000 each, then the tax deducted is capped at (say) 60%, so their take-home pay is £3,200 each. If they are happy making do on £6,400 a year, then good luck to them.
They will cry foul of course, but they're still winners under the system - the young couple who just bought the house next door will be paying the £17,200 in full, expressed as 20% or 25% of their much higher joint income. If Sobers 'hard working' couple want more money, all they have to do is trade down into a flat costing half as much as their house. That gives them £175,000 free cash to play with, and the tax minus Citizen's Income due on the flat is only £5,000 a year, so they're saving £4,600 a year in tax as well.
Where it gets really icky is if Sobers' 'hard working' couple also own another home, whether that's rented out or a holiday home. In this case, it seems fairest to deny them the benefit of the 60% cap, they can't have it both ways; but what if the couple aren't married and one of them claims the main residence as his main residence and the other claims the holiday home as her main residence? Hmm.
2. We can apply the same principle to The Poor Widow In A Mansion, with the proviso that the tax deducted has to leave her with a bare minimum weekly income of £x.
3. The principles will need modifying a bit for people in social housing, because that's quite different identifiable groups, i.e. single mums; pensioners; people with jobs; illegally sub-let homes; asylum seekers etc, that's the topic of another post, where one answer is "Just sell it all off to institutional investors" and another is "Deduct a flat 60% from their income" etc.
4. About half of households (in average or below average cost housing) will be entitled to more in CI than is due in LVT (HMRC will hopefully be clever enough to root out couples who live in a one-bedrooom flat but claim to have seven children), so they get the surplus of their LVT bill minus CI payment paid out in cash an NT tax code.
5. The same goes for private tenants. They get their CI paid out in cash and an NT tax code, which will double their disposable income. Landlords will therefore be able to adjust rents upwards to soak up some or most of this, as it will be their responsibility to pay the LVT.
6. Some income isn't subject to PAYE, but most of what isn't is declared via Self-Assessment. If you earn a reasonable whack and don't want to fill in a Self-Assessment tax return, then you just pay the LVT in monthly instalments like a gentleman and you get left in peace, and if want to claim an LVT reduction for low income, well it's up to you to fill in the forms. In fact, we could make every household where somebody has benefitted from the 60% cap at any time during the year fill in a joint Self-Assessment tax return and give details of all their income and savings (so there'd be no need for a parallel system of means-testing).
7. Clearly, a lot of people will be paying less than the full LVT, so such a tax system would not raise the full £270 billion (gross of Citizen's Income), but hey, how we make up the shortfall is a separate topic. Maybe we could have a minimum income tax rate of 10%, so if our Mum and Dad from the first worked example earn £40,000 between them, they get £3,050 'Single Tax' deducted and another £950 deducted, which would be labelled as "extra tax to enable low income people to stay in houses which they wouldn't possibly be able to afford on their current incomes" or something.
Was it all worth it?
1 hour ago
12 comments:
Three points:
1. What about VAT?
2. Aren't you talking about a rental value tax, as opposed to a land value tax? (If the tax is based on the selling price, then the same house on a larger plot will only be worth a very small amount extra).
3. Your point 7; wouldn't the "LVT" rate be set to cover this in the first place?
B
1. This is a maths post just to illustrate the concept of "Georgism without LVT". We could bung in half of VAT as well and up the rate to 8% if you wanted. The other half of VAT is borne by 'businesses' rather than 'households' (a highly artificial distinction at the best of times, but we can adjust Business Rates upwards to replace corp tax and that part of VAT).
2. The tax would in practice be on site-only rental value, but that's an unfamiliar concept to most people, so % of current selling prices will do as a rough and ready guide.
3. No, because this system would collect rather less than £270 billion because a lot of people, i.e. most pensioners and anybody with a house-price-to-income ratio of more than about ten would be underpaying.
4. Really? Also, what if not all the children are living with them?
Part of the attraction of LVT is that we can do away with all the self-assessment rubbish and just use the council tax infrastructure to levy it.
I suppose "means-testing" is fine, you need to do it for student loans etc. Btw, how would you deal with student loan repayments if we moved to LVT?
Will the "site-only rental value" drop if the landlords can't afford the LVT?
4. If the children are grown up and moved out, they'll claim the CI on their own behalf. Remember: fraud and error with Child Benefit is barely measurable, because it's nice and simple.
Whether it is better to collect the whole thing via Council Tax system or the PAYE system is a thorny topic.
"how would you deal with student loan repayments if we moved to LVT?"
The same as we did until the late 1990s - you just pay a fixed small amount every month until it is paid off.
"Will the "site-only rental value" drop if the landlords can't afford the LVT?"
The LVT will by definition always be a lot less than the full rental value of the building (unless it is derelict etc), so landlords will always be able to afford it (unless they are geared to the hilt, in which case, tough). The site only rental value is entirely independent of the tax rate levied on it.
which covers most working age people, most of whom are also owner-occupiers
Many of whom are going to be unemployed come the crash which almost all pundits now are pointing to.
JH, mass unemployment is largely a result of the Home-Owner-Ist system whereby output and production is taxed highly and land values are subsidised, leading to 'the credit cycle' i.e. recessions.
"3. No, because this system would collect rather less than £270 billion because a lot of people, i.e. most pensioners and anybody with a house-price-to-income ratio of more than about ten would be underpaying."
Yes, but if you upped the rate of LVT in the first place, then it would stand to collect rather more than £270 billion, but by the time all the special exemptions had been allowed for, it would be bang on the button.
Another argument is that £270billion isn't what the government needs to keep the country going, it's the maximum it thinks it can extort from the taxpayers without there being riot, revolution or the men in grey suits having a quiet word in the gov't's collective shell-like, so if it didn't get the full £270bn, it would soon learn to live without the shortfall.
B, that's another way of doing it.
Don't forget that half of what the gov't currently spends is not really government spending at all, it's transfer payments (on top of spending on core functions and money taken by the kleptocracy).
So the £270 billion is a bit of a red herring because the illustration here assumes that LVT and Citizen's Income are netted off at source
The net amount of cash paid by people with big houses/low CI to the government would be less than £100 billion; and the amount of money received by people with small house/high CI would also be less than £100 billion.
Mark, am I right in thinking that if you assume that taxation is like rent and it's level is set by the ability of the taxpayer to pay tax, in a Ricardian fashion (which I believe it is, by and large), then if the government can get away with collecting £400bn? in taxation at the moment, it can collect £400bn + the cost of CI under your system, because the CI is netted off at source and thus doesn't affect the ability to pay?
"In this case, it seems fairest to deny them the benefit of the 60% cap, they can't have it both ways;"
Yes, just have a rule that second homes always pay full LVT, just like at present second homes are liable to CGT. It would probably be politically expedient to have a reduced rate on empty homes for the first six months, like with council tax at present.
"but what if the couple aren't married and one of them claims the main residence as his main residence and the other claims the holiday home as her main residence? Hmm."
Follow the example of our Honourable members of course. Actually, I doubt that the amount of money involved is enough to interest anyone other than The Envious.
B, clearly, to the extent that taxes are dished out again as transfer payments (welfare, pensions, CI, whatever), there is a very soft upper limit on what the govt can raise as the calculation of 'ability to pay' is circular.
The questions are:
1. Out of £700 bn that the government spends, how much is transfer payments? You could argue "all of it" (except for money sent abroad to EU, Third World Aid, interest payments), because even the most useless quangocrat or greediest kleptocrat spends most of his income in the UK.
2. But in terms of "bang for buck", the taxpayer benefits far more from universal welfare payments than he does from spending on quangocracy and kleptocracy, because those quangocrats and kleptocrats could be doing something more worthwhile or for a lower cost.
3. As long as governments persist on taxing output and incomes, the Laffer Curve sets a clear upper limit, because they are killing the goose that lays the golden eggs and depressing potential output by [average tax rate ^ 2], i.e. the overall marginal tax rate on income is about 50% so GDP is running at 50% x 50% = 25% lower than it would be in the absence of such taxes.
4. You don't get much Laffer Effect with LVT, provided the money is dished out again as CI. The upper limit is then set merely by people's marginal preference between 'living in a big house' or 'having a nice car' or 'sending their kids to private school'.
You guys are so timid. There will be no losers with an lvt. Defending it with exemptions compromises and compensations shows weakness and lack of confidence, dare I say you dont even really believe it yourselves.
Infinite evidence. Intellectual masturbation.
Why not use your abundant intellect on a political strategy to change the minds of the people? On the only grounds you avoid. Moral.
RS, this was a maths post, if you've spotted a mistake in the calculations, please tell me.
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