Killer Arguments Against LVT, Not (193)

I've not done one of these for a fortnight, so to round off the working week, let's look at the three KLNs advanced in an otherwise reasonably balanced article from MoneyWeek of July 2011:

• A new tax on property would destroy confidence (1) in the fragile housing market and accelerate the decline in home ownership in Britain (2)

• People buy homes out of taxed income. So unless income tax were abolished, a land tax amounts to double taxation and is inherently unfair.(3)

• Proponents of land taxes hugely underestimate the difficulty of assessing the market value of all unsold land in the country. Without agreed values the tax cannot be levied. (4)

1) How can you destroy confidence in bricks and mortar? We all have to live somewhere, and houses are splendid things to keep yourself and your possessions warm, dry and safe; somewhere to entertain friends etc.

2) LVT would reverse the recent trend of ever-concentrating land ownership (it's not the physical land that matters; it's the land rents. UK banks collect about a third of all land rents, and these banks are run by a few hundred top people. It doesn't get more concentrated than that). There's only so much land to go round, and if people have to pay for something, they'll only occupy what they need rather than grabbing as much as possible, and so there is more land left over for everybody else.

Having the widest possible spread of owner-occupation is A Good Thing, and everybody pays lip service to it, but what does it mean in practice? If there are 27 million physical homes and 27 million households, the optimum is for every household to own exactly one home. If anybody owns more than one home, then he is reducing the level of owner-occupation (and the same applies to farmland). Greater minds than his, i.e. the American founding fathers, were big fans of LVT for exactly this reason.

3) See below.

4) Stuff and nonsense, doing rough and ready valuations, quite sufficient for tax purposes would be a doddle.
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3) I can't remember whether I've done this 'double taxation' canard before. Plenty of people, sympathisers and opponents alike say that LVT would be double taxation (and taxation of incomes isn't? You spend post tax money, the recipient pays tax on it again, etc etc.) and/or that politicians would just collect it in addition to existing taxes instead of reducing them.

So, as a thought experiment (not a serious policy proposal as the administration would be a nightmare), how about this:

We leave the existing tax system, with all its horrors, exactly as it is, frozen in aspic with no changes at all, and introduce in parallel, LVT (or enhanced Council Tax/Business Rates, whatever) sufficient to raise (say) £250 billion per annum (equivalent to about half of current tax receipts; or about 4% of current selling prices) and collect every last penny BUT BUT BUT we give every household a full credit for every penny LVT paid against their other tax bills.

a. So, for example, an average couple on £40,000 gross income in a £180,000 home have to pay £7,200 LVT to the local council. The local council offsets £1,400 against the Council Tax and they then have a credit of £5,800 to offset against PAYE, so whoever is the higher earner gets his PAYE reduced by £483 a month and his net pay goes up accordingly, if both partners earn £20,000, then they can split the credit 50/50, and so on. Three-quarters of households and 99% of businesses would be in this position, there would be no extra tax to pay.

b. The Poor Widow In A Million Pound Mansion gets an annual tax bill of £40,000, knock off the Council Tax she would have had to pay anyway, and she has a credit of £38,000. All she has to do is tout round her children or likely heirs and find a few people with spare capacity to buy the tax credits from her. So if her son earns £100,000 and has a net tax bill of £24,000 (PAYE minus his own LVT) then he can give her £24,000 cash, the tax credits are transferred to him and his PAYE is now reduced to zero. In exchange he inherits half the house.

c. In round figures, if we bung households and businesses together, we establish that the total value of land/buildings is £6,250 billion, total incomes/profits are £1,000 billion and total taxes are £500 billion (overall average tax rate 50%). So the mean property-value-to-income ratio (PVTIR) is 6.25 and the median is lower than that at 5. Absolute figures are irrelevant here; if your house is worth £500,000 and you earn £250,000 your PVTIR is 2, if your house is worth £100,000 and your income is £10,000, your PVTIR is 10.

d. In the same vein, we establish that people's current tax bills, expressed as a percentage of what their house is worth could be anywhere between 25% (for those with a low PVTIR of 2) and 1% (for those with a PVTIR of fifty), with a mean of 8% (where PVTIR = 6.25) and a median of 10% (where PVTIR = 5).

That means that (say) only a quarter of households would be in any way affected by a 4% full-credit LVT, and most of those would be able to sort it out by going out and getting a bloody job, working longer hours, getting their heirs to pay, sub-letting a room or two, down sizing etc.

e. Then the next year, we up that 4% to 5%, a few more people adjust (trading up, trading down, getting a job etc), then to 6%, then to 7% and finally to 8% (full-on LVT). Sooner or later, we'd reach an equilibrium where for most households, their tax bill, under current rules, would even out at something close to 8% of (today's) value of where they are living (in five years' time), so receipts from other taxes, after LVT credit would be negligible.

f. At that stage, we can quietly, and without fanfare, abolish all the other taxes, and very few people would notice the difference; people would either be a bit better off (those who stick it out with a low PVTIR) or no worse off (those with a higher PVTIR).

g. If son-and-heir from example b. is cold blooded enough, he will go to his Poor Widowed Mother and tell her that her LVT credits no longer have value to him, as there are no other taxes against which to offset them, and that his payments to her will cease forthwith. Well, that's his decision, isn't it? If he could afford the payments up to now, then why would he stop, he still wants to inherit half the house, doesn't he?
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We can do exactly the same thing, but the other way round, with a Citizen's Income, i.e. paying people their Citizen's Income, but deducting that from benefits they already receive, until one day the whole tax/welfare system is boiled down to one single net payment per household per month; either your CI entitlement is higher than your LVT bill and you receive a cash payment; or it's less and you make a cash payment. For most households, it would be "not very much" going in either direction, i.e. less than £100 a week either way.