Spotted by MBK in MoneyWeek:
Want growth? Scrap income tax and introduce a location tax.
The main point behind a land or location tax is that, in general, the price you pay for a property or piece of land (ie, the value the market gives it) is not about the land itself, but about where the land is. A house sitting on a piece of land might cost more or less the same to put up in Wales and London, and as a structure, be worth the same in both places.
But the house in London still sells for 20 times the one in Wales because of the wealth of activity around the land on which it sits. The community, the infrastructure, the buses, the airports, the schools, the hospitals, the ease of doing business – the price you pay for the land is a function of all these social rather than private goods. As Nick puts it, “the mud beneath our feet is only worth what it is because of what goes on around it”.
This suggests that the value of a piece of land should perhaps be divided into two. The first part should be the value of whatever sits on the land (its houses, sheds, factories and the like). The second should represent the value given it to by the surrounding civilisation (its 'location value')...
Bonus point for calling it "Location Value Tax" and not "Land Value Tax".
In the comments we get the usual lies and drivel of course:
Phil How do you value land though? And fairly keep the value up-to-date?
Look at selling prices and rent levels in each defined area, do a bit of judicious averaging and apportioning and Bob's your uncle.
... A substantial LVT would tend to encourage people to move away from 'high-value' areas to 'low value' areas - arguably a good idea, providing that building homes in green-field areas becomes easier. But perhaps businesses tend to start-up in 'high value' areas, because that's where the greatest density of customers are found, leading to excessive commuting.
High land prices/high rents have exactly the same effect; LVT does not add to rents and depresses the purchase price of land £ for £ by the amount of LVT levied. For these purposes, it doesn't even matter if you get the LVT 'wrong'.
rod I think the answer is 'no'. Income is actual money which can be taxed. If land generates money then that money can be taxed, if it does not then we would be taxing a notional value yet to be realised.
Land does not generate money, people do. And how do tenants generate the income to pay the rent? How do people generate the income to pay the mortgage? What income do they get from the land? Or are they paying for something entirely 'notional'? Analogy: if you have an apple tree in your back garden, and you pick the apples and eat them, are these 'notional' apples? No, they are very real apples. The fact that no cash changes hands is irrelevant. The benefit that you get from owning a plot is exactly the same as the benefit that a tenant or a recent purchaser gets.
Boris MacDonut Income Tax brings in £155 billion a year or 22% of Government revenues. To fill that hole would require a property tax close to 4% of value pa across the board based on total UK property values of around £4,500 billion. For Joe average in a house worth £190k that is £7,600 a year or roughly 80% more than he pays now.
The first part of the calculation is correct, the conclusion is a downright lie. Somebody who buys a £190,000 house with a 75%/three times salary mortgage is earning £47,500 and is therefore paying £9,010 in income tax (and as much again in National Insurance). And that's before deducting whatever personal allowance/Citizen's Income would be deducted from the LVT instead of the personal allowance offset against income tax.
Ellen Younger people starting out in life, without much parental assistance, often find they need to start in large cities like London... they have to go where the work is. Things are stacked enough against the young already and the proposed tax would be targeted at tenants as much as owner occupiers.
Again, correct facts, totally incorrect conclusion. Even if the tax were passed on in full, tenants would end up paying less tax than now, as they usually live in the smallest homes relative to their incomes. Plus, buying a home would be much cheaper, so they wouldn't need to remain tenants and they'd be able to move onto the land vacated by those refuseniks who Phil reckons will be 'encouraged' to move away from the areas where the jobs for young people are.
bingo Seems a bit unfair on poor people who live in areas that get gentrified. Not only do the bookies and boozers disappear, to be replaced by organic delis and gastropubs, they have to pay more tax too.
The total rental value of land in any country is fairly fixed; for every area that becomes gentrified, another becomes slumified so there'll always be somewhere for those people to go who don't want to take advantage of the new jobs in "organic delis and gastropubs". In any event, shifting to LVT while retaining welfare will hugely benefit the vast majority of poor people living in areas which do no become gentrified.
Romford Dave More tinkering aimed at punishing the wealthy, sucking in the middle classes as these schemes always do, squeezing ever more money into the already bulging coffers of the treasury for clueless politicians to waste on another vote grubbing idea. If you're serious about growth then tax cuts at the lower end of the income scale are one of the best forms of stimulus. Raising the tax threshold benefits those who do.
Lies and polemic from some idiot who didn't read the article. She said she'd like them to replace income tax with LVT; overall, this would be a net tax cut for most people at "the lower end of the income scale", and with income tax gone, there'd be more employment opportunities - work is the best route out of poverty, isn't it?
JAW Taxing land value is a seductively attractive idea, especially if coupled with the abolition of so many taxes which have a little understood effect of suppressing wealth creation eg income tax, business rates, corporation tax, etc. Yes, it would result in spectacular growth... but perhaps at an initial profound social cost?
Those who own or occupy land (both commercial and residential) in the newly designated high value areas of cities and towns etc and who do not use the advantage of their location to produce much wealth, ie the non-productive poor, incompetent and failing companies, charities, low income institutions etc, would be forced to relinquish the land (and the property on it) and move to cheaper areas, even zero rated areas.
JAW says that as if it were A Bad Thing. How is any of that A Bad Thing? And LVT is not "seductively attractive", it is quite counter-intuitive for our brain washed masses. It's stealth taxes like VAT or NIC which are "seductively attractive" to voters and politicians alike.
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I love the idea that living in an area that suddenly becomes more desirable could be a bad thing!
BE, yup, nicer neighbours, more job opportunities etc, it must be awful.
God know's how people who rent manage to miracle up enough income to pay for the location value of their home!
M, that is one of those mysteries, isn't it?
The Homey mantra is "My land does not generate any cash income" which is quite correct, it doesn't. But then they happily expect tenants and FTB's to somehow rustle up the cash to rent or buy somewhere. What the Homeys refuse to accept that they have (or at least had) the same, if not better, job opportunities as the tenants and FTB's.
Seems a bit unfair on poor people who live in areas that get gentrified. Not only do the bookies and boozers disappear, to be replaced by organic delis and gastropubs, they have to pay more tax too.
The horrors, what's next in line for punishing the little man, well manicured streets and not being assaulted? Class warfare it's what it is.
I'm trying to convince my employer to provide part of my remuneration in the form of rent free living. It's not cash so it can't be taxed!
"LVT ... depresses the purchase price of land £ for £ by the amount of LVT levied."
Here we go again...
First, says who?
Secondly, what does it mean? How do you depress the value of land £ for £ by the amount of LVT levied when LVT is levied every year? In the case of the £190,000 property attracting £7,600 LVTpa, does this mean the market price of the land will drop £7,600 every year? If not, why not, if so, why?
Thirdly, why should it depress market value at all when, as you claim, LVT will be a substitute for income tax and other taxes thereby allowing the land owner to pay the tax out of income which used to be taxed but is now not taxed. So, his income goes up £7,600 and he then pays the same amount through LVT rather than other taxes. I can't see how that should influence market prices at all.
Kj, funny sort of class warfare.
M, for the benefit of people reading this, we ought to remind them that rent-free accommodation provided by your employer is very much taxed.
TFB,
"First, says who?"
Is it not widely accepted in Home-Owner-Ist circles that interest rate increases -> lower prices and interest rate cuts -> higher prices?
"Secondly, what does it mean?"
See first answer. If the tax on a house is £7,600 and people have limited budgets (oh... they do) then the amount they are prepared to spend on the mortgage or rent net of tax goes down by £7,600. You can make your own estimate of that on the selling price (There is psychology involved as well as maths).
"Thirdly, why should it depress market value at all when, as you claim, LVT will be a substitute for income tax?"
Fair point, but please can we compare like-with-like.?
- If we cut income tax without having LVT, then house prices will just go up even higher than they are now. So it helps banks and landowners but not tenants.
- If we swap income tax for LVT on a £ for £ basis, then it is a fair assumption is that house prices will stay much the same as now.
- If we had LVT as well as income tax, then prices would come down relative to now.
So what is the reasonable position to take for somebody who would like to get rid of income tax and NIC and VAT so on, but doesn't want house prices to go any further?
I'm happy to campaign against income tax and NIC and VAT but I don't see why I should campaign for bankers and landowners to get even richer.
MW I know benefits in kind are taxed as income, just being facetious :-)
Since the status quo benefits the banks, and bank-bashing seems very popular at the moment, you should start a meme that anyone against LVT is for the banks.
M, you know that and I know you know that, but other people might not realise it.
J, good point. The Homeys have a complete disconnect here, most of them don't like banks (for taking big bonuses and paying such measly interest on deposits) but at the same time, they are mad keen for the banks to lend silly sums of money to young people to try and keep the house price bubble going.
Mark, sorry to ask you to explain something you've probably explained many times before, but:
How would the LVT rate for a single property be calculated? I don't think it's possible, because of the socialist calculation problem: you don't know how much the land is worth without prices, which disappear as soon as you try to tax it.
Say there's a house which has just sold for £1,000,000. Its rebuild cost is £400,000: we know this from the building insurance. Therefore the sale price of £1m includes £400k of buildings price and £600k of land price.
The rate of return/rent/interest rate is 5%, or £50k/year. Therefore, of this, 3% is for the land and 2% for the building. I.e. £30k/year for the land and £20k/year for the building.
The govt decides to institute an LVT of 100%. They want to capture 100% of the land rent, but none of the building rent.
So their tax needs to collect £30k from this property. However, if the government collects all the rent from the land value, the government effectively owns the land. The sale price of the house falls to the value of the building, which is all the owner is left owning. So the sale price is now £400k.
Someone who wants to live in the house themselves still needs £1m to pay for it: they spend £400k buying the building from the owner, and invest the remaining £600k in the stock market to raise the £30k/year to pay the government.
So to get £30k/year from a property valued at £400k, the govt needs a land tax of 7.5%. (You've previously described 8% as "full-on LVT".)
But now we have a problem. How does the govt figure out what the land is worth? As soon as they start taxing it, they reduce the sale price. There is no way to figure out what the land is worth if the sale-price is equal to the building price. This holds even if they aren't trying to capture all the land rent, just part of it. As soon as they institute a tax at all, it becomes impossible to determine how much the land is valued at.
Assessment by a local valuer strikes me as fundamentally incapable of figuring out what the land is worth, because of the absence of prices.
You can't just say "everywhere will be taxed at 7.5%", because that's inefficient: in some areas land will be a greater proportion of the total free-market sale price than other places.
My best guess is that you could say the govt should simply increase the tax on some property until the sale-price falls to the rebuild cost. Is that right?
(P.S.
1. Would the govt be sensible to capture 100% of the land rent? Or should they try to capture only a part of it, say 80%, since the landowner does go to some effort to get a tenant for the land?
2. Elsewhere you've considered the idea of taxing based on the area in general. I don't think this works because land value can vary so much within a small
3. What would your opinion be on the government, having acquired effective ownership of all land through a LVT, deciding to sell those income streams?
)
James, thank you for laying out your questions so clearly.
My ball park figure of 8% relates to current values, i.e. to raise £300 billion a year tax from land and buildings worth £5,000 billion, once you've exempted pensioners, the tax is then about 8%.
This is not a very scientific way of doing things as you have explained, but it only seems fair to give people a rough idea. For the reasons you explain, the 8% is NOT the "forever" tax rate applied to the buildings element alone.
There are lots of different ways of apportioning the total tax take required to different areas, all of which come to the same thing in the end. Trickiest of all is factoring in how land rents will rise when other taxes are scrapped - the most reasonable assumption seems to be £1 for £1, but we do not know.
"My best guess is that you could say the govt should simply increase the tax on some property until the sale-price falls to the rebuild cost. Is that right?"
Correct. As long as land and buildings sell for more than the rebuild cost, we know the tax is less than 100% and that's fine. It's a question of starting somewhere, however rough and ready and then adjusting the rates so that similar houses sell for similar prices everywhere in the UK.
Your numbered questions:
1. 80% will do me just fine, for the reasons explained below.
2. Land values don't vary very much in a small geographic area (like a postcode sector or council ward), I have checked all this out, but so what if they do? Nobody said that the government's role is to value every single plot to two decimal places, this is a tax raising thing.
So if true values vary +/- 20% around the average in a small area and all have the same tax rate in £/sq yard applied and the rate collects 80% of the average rental value, some lucky site owners will only be paying 60% LVT and other less lucky ones will be paying 100%.
The chances are that those paying 100% aren't using their site efficiently, and this will all come out in the wash.
3. When a government "sells income streams" that is the same as borrowing against future tax revenues, which is what governments have always done.
I'm a fiscal conservative myself and don't like deficits or government debts in general, but there's nothing inherently worse about borrowing against future LVT revenues than future income tax revenues.
PS, you CANNOT say that "the government has acquired ownership of the land", the government does NOT own the land any more than a mortgage bank owns the land of a mortgage borrower, all the government does is collect a large chunk of the location rent (in the same way as mortgage banks currently collect location rent via mortgage interest). And the government has to spend the money how we tell it to spend the money.
There are also actal rental values in most locations that can be used for assessment purposes.
"PS, you CANNOT say that "the government has acquired ownership of the land,"
because the government already owns the land. You may think you own the land, you don't, you own a freehold title, which is a tenancy (or holding) free of any rent or other duties to the landowner (the state). All the government is doing is starting to charge for these tenancies.
In theory, LVT should depress the price of land by the capitalised amount of the tax actually payable ie around 20 times. However, if other taxes are cut at the same time, there is an effect in the opposite direction.
LVT is the collection as public revenue of a share of the actual or impute rental income stream from the land. Most land, measured by value, is rented and its rental stream flows to the landowner so is an actual revenue that can be taxed.
There is however, a 92-year old woman somewhere who is living in a dilapidated old house that she owns, in an area that has become valuable. The Daily Mail will dig her out and send a reporter to make a story to put on its front page and people will say poor old dear we can't have that can we?
James, see also what Kj says!
Kj, good answer, I wish I'd said that.
B, yes, but that line of argument gives the Homeys the excuse to start wailing about unfair variation of contract terms.
Phys: "LVT is the collection as public revenue of a share of the actual or imputed rental income stream from the land."
It's not 'imputed' rental income, it is very real rental income. If you have an apple tree in your back garden, those are not 'imputed' apples, they are real apples. If your employer pays for your accommodation, that is not 'imputed' accommodation, it is real accommodation and is taxed just like cash salary.
"Most land, measured by value, is rented and its rental stream flows to the landowner"
I don't think that's true, but it would be fair to say that about half of UK land rents are collected by landlords or banks.
As to Poor Widows in Mansions, I'm starting to think that the Homeys are overcooking this one, sooner or later there will come a stage at which young people lose all sympathy with them and ask why on earth they should be forced to commute long distances or overpay for sub-standard housing merely so that a few pensioners (or their heirs) can bank massive capital gains at said young people's expense.
James, I did a post to illustrate this point with a diagram here.
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