Killer Arguments Against LVT, Not (240)

Mr G at HPC:

I am not dismissing the case for LVT but I am still of the opinion that the political elite will simply use it as another means of shafting the majority instead of a means of fairer taxation.

True, but that's just a question of voting for proper pro-LVT party which intends to reduce the total tax burden to its barest minimum, i.e. to only levy taxes on state-protected wealth transfers, so the only publicly collected taxes are taxes on those taxes which are currently collected privately, primarily land rents but also certain specific categories of state-protected monopoly income (patents, airport landing slots, radio frequency etc).

We don't need to re-invent the wheel each time, as Switzerland has a perfectly good working model for such a "tax cap" or "lump sum taxation" based on the rental value of land you occupy:

Non-working foreigners resident in Switzerland may choose to pay a "lump-sum tax" instead of the normal income tax. The tax, which is generally much lower than the normal income tax, is nominally levied on the taxpayer's living expenses, but in practice (which varies from canton to canton), it is common to use the quintuple of the rent paid by the taxpayer as a basis for the lump-sum taxation. This option contributes to Switzerland's status as a tax haven, and has induced many wealthy foreigners to live in Switzerland."

So if wealthy foreigner chooses to live in a house with a rental value of CHF 50,000 a year, his notional income is CHF 250,000 and he pays tax at the normal rates (between 30% and 40%) on that, so he pays CHF 75,000 - CHF 100,000 a year, end of discussion. It matters not whether that foreigner actually earns CHF 1 million or CHF 10 million a year.

There's no reason why any country couldn't do this for everybody, it would be an administrative nightmare, but just as a thought experiment:

a) Each business works out how much PAYE, VAT, corporation tax, Business Rates it would have to pay and compares this with a "lump sum" of (say) double its Business Rates bill (Business Rates being pretty close to LVT) with a full refund of input-VAT incurred. Ninety-nine per cent of businesses would prefer to pay double Business Rates (which would be about ten or twenty per cent of its normal tax bill, that's just a fact) and pay out salaries gross and retain all profits tax-free.

b) Then each employee has the choice of having full PAYE deducted from his salary, or to pay whatever the notional LVT would be on his home. Clearly, low paid people in expensive houses will prefer to just have PAYE deducted, but for most people, the LVT amount would be far less, that's basic maths.

e.g. a couple earns £20,000 each and owns an 'average' house currently worth £200,000 on which the notional LVT is 7% x £200,000 = £14,000 minus two personal allowances of £3,500 each = £7,000. The compare this with two lots of PAYE of £3,868, meaning that they will have to ask their employer to also pay £1,727 in Employer's NIC, who will respond by giving such people lower pay rises in future; and such non-LVT payers will also have to pay normal Council Tax.

c) Tenants own no land, so their notional LVT bill is quite clearly £ nil and they will just be paid gross. No doubt landlords will bump up their rents accordingly, but the landlord will have to pay the tax instead. Or he can quote a lower net rent and agree with the tenants that they pay the LVT, that does not affect the economic incidence of the tax.

d) The Homeys will then counter that "everybody will scramble to sell his house and rent a house with the lowest rental value" which is nonsense of course. That's like saying "If second hand Vauxhalls were cheaper than new Mercedes cars, then all rich people would stop buying Mercedes cars and buy second hand Vauxhalls instead".

e) I can't be bothered to do the calculations for the change in the amount of tax collected, but over time we would observe that people choose to live in houses on which the tax bill is slightly lower than their current PAYE + Council Tax bill. This is exactly the same as observing that housing is a normal good; the mortgage which first time buyers apply for is a fairly fixed multiple of their incomes at any one time, so people are quite voluntarily paying privately collected tax (mortgage repayments) which are a fairly fixed proportion of their net income (about thirty per cent), even though they could reduce this by buying somewhere smaller or in a less desirable area. There's no reason to assume that this will change, just because of the fact that mortgage payments are much lower and the publicly collected tax thereon is higher, especially if people have a lot more pre-tax income to splash around.

f) Hey presto, over the years, paying LVT will become the "new normal" and then all that remains is to sneakily bump up the income tax rate towards 100%, which will affect fewer and fewer people as most people's tax liability will be capped anyway.