I've done some more work on this and so have updated the original post, the main point was to show that establishing the 'site-only rental value' (aka 'site premium') of 99% of residential or commercial plots of land is relatively easy. While I was on the topic I have also calculated the potential LVT tax base. If LVT receipts are used to reduce other taxes, this will grow quite significantly (leading to a virtuous circle), but let's learn to walk before we can run..
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Further to point (2) of my earlier post, here is how I would envisage it working. The people from HM Land Registry have already done all this in a far more sophisticated fashion (and would fall about laughing if they read this post), it's just that the politicians have told them to keep quiet about it:
1. We split up the UK into smaller areas (there are about ten thousand local council wards or postcode sectors, so there are about 3,000 homes in each sector) and use the average three-bed semi detached houses in each sector as our reference point for that sector.
2. Proper LVT is based on the 'site premium' element of annual rental values, i.e. if two physically identical houses in two different areas rent for different amounts, the difference between the rents relates to the "location, location, location" and that is subject to LVT. All we need to do is decide what the zero base line is.
3. Data on rental values is harder to find (you can look up current asking prices on Rightmove and so on, but there is little official 'history') and not as well documented as selling prices, but there is a clear enough link between the two.
4. I was bored one weekend in May 2012 and set up a spreadsheet and typed in the recent average actual selling price of semi-detached houses in each of 2,780 inhabited postcode districts using the HM Land Registry data available via e.g. Rightmove (there are three or four postcode sectors per postcode district). I added a column for rental values (as at December 2012) and entered the current average rental asking price for a three-bed semi in every 100th district (sorted by value) plus a couple extra in the upper range and ended up with the following chart:
5. Excel's trendline has a gradient of 3%, it crosses the y-axis at £4,000 and the coefficient of correlation is 0.96. So if you know the current selling price, the rent you would expect to get = [selling price x 3%] plus [£4,000]. Anything over and above the £4,000 a year (to cover maintenance and return on cash invested in bricks and mortar) is the site premium, so we could also say that the site premium is 3% of the current selling price.
6. For example, from an area which is well into the top decile by value:
. £429,000 x 3% = £13,000 a year, against a gross rental value of £22,000 plus Council Tax, which leaves the landlord or owner with plenty of net income to cover running costs.
7. So to establish our total tax base, all we need to know is the total current value (at selling prices) of all housing in the UK and times it by 3%.
a) The figures quoted by Nationwide and Halifax of around £160,000 are misleading, the mathematical average is far higher than that at around £230,000, as Acadametrics explain. According to my spreadsheet, and assuming just under 100,000 homes in each postcode district, the average is about £250,000, but let's go with their lower figure.
b) 27 million homes x £230,000 = £6,210 billion total current value (selling prices), social housing is probably worth a bit less than privately owned, but by the same token, the government also has the income from the bricks and mortar, so I see little point in adjusting for that.
c) £6,210 billion x 3% = £186 billion potential tax base, to which we can add the £28 billion of the rental value which is already taken in Council Tax = £214 billion (a year).
d) For sure, this is going to have to be finessed a bit; all houses are not semis, so having established the site-premium for a semi in each sector (it would be £4,300 a year in the median sector), then we can call it 150% of that for a detached house with decent sized garden in the same sector, 125% for a detached bungalow; 80% of that for a terraced house; 60% of that for a large flat and 50% of that for a small flat (or a semi converted into two flats)*, or whatever the ratios are, and we can save ourselves a lot of hassle by putting homes into bands (like for Council Tax but narrower) and rounding everything down a bit, but hey ho, we'd then end up with a total site rental value of £200 billion a year.
8. So assessing the rental value of all but the most extraordinary or unusual homes is a doddle; we know the rental value of an average semi in that sector, and we then just assess all other homes as a proportion of that. The Valuation Office Agency already have records of all commercial land and buildings for Business Rates purposes, so that requires minor tweaks only.
Remember: it's only relative and not absolute values which matter. For example, if you are in a room with a dozen people all milling around and you have to guess how tall each one is in feet and inches, you'd struggle, but getting them to line up tallest on the left, shortest on the right is easy enough. If you are then told that the sixth and seventh people are 5'6" tall, you can easily guess how tall the others are.
9. It's then a question of which taxes we want to replace. "How about just cutting government spending?" shouts the crowd, well, we're currently running a deficit of over £100 billion a year, and getting that back to a surplus, assuming a constant tax take will be difficult enough, so let's not confuse the two issues.
If we just want to replace Council Tax (£28 billion a year), your new bill is 14% of the site rental value; if we want to replace C Tax and SDLT, your new bill is 19% of the site rental value; if we want to replace C Tax, SDLT and IHT, your new bill is 21% of the site rental value and so on.
10. Having got rid of existing land or wealth-related taxes borne by households (which raise about £50 billion a year), we'd still have £150 billion a year left over which we could collect (if we wished) in order to be able to get rid of the really bad taxes, so we could get rid of VAT (thus getting ourselves chucked out of the EU), get rid of higher rate income tax and make some headway into reducing National Insurance. There will be positive feedback from all this, so in a year or three, we'll be able to get rid of National Insurance as well, which boils the whole tax system down to two flat taxes: LVT and a flat 20% income tax (raising similar amounts each).
There, that wasn't difficult, was it?
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* According to the 2001 Census, about 27% of homes are semi-detached, 25% are detached, 25% are terraced and 22% are flats, with 1% 'other'. So we could use standard 3-bed terraced houses as another reference point, and e.g. purpose built 2-bed flats as another one, and so on. And a weighted average of the relative values I suggested is about 100%, which means that semi-detached houses are a pretty good guide to total rental values.
Sunday, 30 December 2012
The Army Of Surveyor (updated)
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43 comments:
Um, if the total rental value of all the housing in the UK is £200bn/year, how can you raise the c.£700bn we are spending right now from LVT alone?
You'd have to tax the site rental value at considerably more than 100%. Yes I know there's commercial property to be taxed as well, but that is already taxed via business rates, so the net gain from introducing LVT and abolishing rates would be very little, possible negative.
S, very good question.
1. I didn't say replace £700 billion spending, I said replace a large chunk of existing taxes, which raise under £600 billion, hence the deficit, which is wildly out of control as I mentioned at para 9. If we returned spending back to pre-crisis levels and got rid of some of the waste, we'd be spending a lot less than £600 billion.
2. I'm assuming we leave 'duties' in the narrow sense (fuel, booze, fags, gambling, air passenger etc in place for now.
3. I'm also assuming that Business Rates and corporation tax continue, analogous to my proposed Domestic Rates and flat income tax, which currently raise £60 billion-odd.
4. And we'll increase the Bank Asset tax to £30 billion a year (those buggers aren't going to get away with just paying the same low taxes as the real economy).
5. So it's a question of jumping half-way there with a flat Domestic Rates and a Flat Income Tax, raising about £200 billion each.
6. With a growing economy, rental values will grow disproportionately, so for the next few years, we can knock down the flat tax rate by a few per cent and increase the Domestic Rates accordingly.
7. After five or ten years, we will find that the flat rate of income tax/corp tax is zero and that site only rental values are (say) twice as high as they are currently.
8. Hey presto, there's your answer :-)
You'd also be released from a large proportion of deadweight costs, so Government spending %gdp would fall. Again more positive feedback allowing other bad taxes to shrink.
Remaining in the EU means the VAT minimum must be 15%. There is no upper limit but 15% is the EU floor. I suppose you could extend the net of things covered by the reduced rate that applies to things such as home energy bills already.
BJ, as long as the likes of you or me are in charge, yes of course.
According to HM Treasury, the deadweight costs of our current tax system are about £150 billion a year; or alternatively, there are about two or three million people who would have jobs if we had much lower, flatter taxes. And then there's another £50 billion net to be gained from leaving the EU, etc.
But this is sort of off topic, so I'll shut up now.
RW, aha, yes of course but as ever, there's an easy answer to that.
1. So let's reduce VAT to 15% and every business dutifully works out its VAT bill as per usual and hands over the tax.
2. But when that same business is working out it's PAYE and corporation tax liabilities, it gets a full credit/deduction for one-third of the VAT it has already paid over, so the effective rate of VATis 10%.
3. In fact, there's no reason why we can't say, OK, businesses which are currently VAT exempt or zero rated pay 20% corporation tax and 20% PAYE; and businesses which are VAT-able just pay over the VAT and are completely exempt from PAYE and corporation tax.
"And we'll increase the Bank Asset tax to £30 billion a year (those buggers aren't going to get away with just paying the same low taxes as the real economy)."
Why have a bank asset tax? Why not tax interest (money rental) instead?
MW: do you think 2. would be legal under EU regs? or would they consider it "cheating" fast enough so they would make sure it wasn't?
Bayard: Then why should dividends be exempt, and why should bonds be exempt, and so on. I think the point about the BAT is because a bank can earn on the spread between deposits and loans even if it doesn't lend out anything, because it can place deposits in the central bank/do interbank lending, earning interests, while you can't. Add in the privilege of having govt insure the deposits, while you're not insured for the money you keep in your mattress.
B, because earning a 2% mark-up by lending out at 4% and taking deposits at 2% is a risk-free, hassle-free business and is akin to rental or monopoly income. By taxing it, you don't discourage it.
Conversely, if banks do their job properly and lend at higher interest rates to the productive economy, then their mark up is much higher BUT this is earned income - by doing so, they add to our productive capacity.
So with a 2% bank asset tax, the effective tax rate on rental income is 100% and the effective tax rate on lending to productive economy is 40% or 20% or 10% or whatever.
Kj, yes probably they would. What's the worse that can happen - they chuck us out?
"You would have to send inspectors out [to revalue every home in the UK"
Really, George? Like they did when they revalued Wales, eh? Except they didn't, of course, they simply sent an army of letters out asking you what the value of your house was as of April the 1st 2003 and invited you to guess. I dare say that someone had to check the replies to make sure people didn't claim their house had magically reduced in value over the last twenty years, but that was it. Anyway, George, where was said army when the whole exercise was done for the first time, or are you hoping that most people will have forgotten all about that, it being so long ago?
Kj, yes probably they would. What's the worse that can happen - they chuck us out?
Good luck, we can't even get chucked out of that fanclub of the EU that is the EEA. I think the VAT-floor is there as well. Haven't tried that hard though our pol's.
B, exactly. What or whom do we believe? Our own recollection of recent events or politicians' predictions of future events?
Kj, there's a working theory that it does not matter how badly you behave and how many EU rules you blithely ignore - they will not chuck you out.
As evidence I present: Greece.
MW: probably true, intuitively one would think that if you were a net liability, you'd be frozen out of the party eventually, Greece has been a net liability for some decades now hasn't it...
Kj, the whole thing is a mystery to me but there are thousands of examples of individual countries taking the piss out of the EU, but the EU doesn't care.
Basically, the EU just wants a big budget and the entire EU budget is spent on propaganda for the EU, so they don't mind "crises" like Greece because it enables them to increase their budget and spend yet more on showing how they are "tackling the crisis".
The UK is just about the only country which has never taken the piss, and it's time we started.
I thought Norway was in favour of the EEA, is Kj's view actually widely held?
Ohwell: Probably more widely held in the electorate than by pol's, but on the balance "we" are very much in favour of the EEA, yes. We probably take on more EU-regs than actual EU-countries without dissent. Export-heavy economy and all that.
MW: The UK is neither in the Schengen or the Euro, that's being a bit naughty.
Kj, that's true. Reminds me of the wonderful diagram of which countries are members of which areas.
As to 'export heavy', that's a separate issue. Even ignoring the oil and fish, small countries tend to be more import and export heavy than large ones. Basic logic dictates this and real life shows it to be true.
So when the EU sceptics say that "Norway and Switzerland export more to the EU than the UK does" that is not because there is something magical about being outside the EU. It is because NO and CH are much smaller countries.
Of course, the EU sceptics are right, but for the wrong reasons.
Kj, for clarity:
When they say "Norway and Switzerland export more to the EU than the UK does" what they mean is "Norway and Switzerland export more to the EU per capita than the UK does".
Clearly, the UK exports a lot more in total to the EU than those countries. But the phrase "per capita" is usually missed off the headline to the newspaper article.
MW: funny, I just reviewed that diagram to remind myself where everyone was.
So when the EU sceptics say that "Norway and Switzerland export more to the EU than the UK does" that is not because there is something magical about being outside the EU. It is because NO and CH are much smaller countries.
Yeah I know all that, but you have to agree it's still probably true that these countries will be more careful with being uppity within a trade-agreement than the larger countries? On that note, CH is outside the EEA, and if I understand it correctly, it's because they wanted to protect Ag even more than the others, and the CH-model is where all the primary-industry groups here want us to copy. CH is also exempt from VAT-compliance, and could abolish VAT if they felt like it, we can't.
Kj: "you have to agree it's still probably true that these [small] countries will be more careful with being uppity within a trade-agreement than the larger countries?"
Please do not ask such difficult questions if you know the answer.
Greece = small country, takes the piss.
CH, NO = small countries, do what they want.
France, Italy, Germany = large countries, take the piss.
It is easier for me if you just tell me the answer!
fair enough, it's not that obvious to me either.
CH: having lots of guns and shady deposits: do what they want.
NO: huge rentier economy, slightly lazy and shy of conflict: does just enough what it wants without causing a scene.
Greece: who knows: takes the piss.
"4. Data on rental values is harder to find and not as well documented as selling prices, but there is a clear enough link between the two i.e. as a rough guide,"
Asking prices and asking rentals are easy to find as a start. Here the two are even put together by postcode and property type in London to indicate yield.
http://www.londonpropertywatch.co.uk/average_rental_yield.html
Kj, yup, and the UK has similarities with all three.
OTOH, brilliant, thanks
"So assessing the rental value of all but the most extraordinary or unusual homes is a doddle"
Even the most extraordinary or unusual homes aren't that difficult. Estate agents manage to assess their rental value if asked to let them.
Bit late in my reponse - but my view is that the whole point of LVT is that among other things we get entirely rid of all taxes on income. Please?
L, of course.
I was just explaining how we could leap frog half way there, which means getting rid of the most damaging taxes on output/employment (VAT and NIC) first.
Once we've got that far, we can just reduce the flat income tax rate a few per cent each year.
It appears highly likely that the rental value of land will increase by most of the tax cut, so rental values and LVT receipts would go up accordingly.
B, yes, agreed, but while it is easy to do automated valuations of most residential land, there are some odd buildings where you'd have to go and visit them and have a proper negotiation, like converted light houses or whatever.
MW wrote "I was just explaining how we could leap frog half way there".
Absolutely. Another halfway step that I'd like to see would be the re-introduction of MIRAS but with a twist. Give a credit against property tax payments instead of mortgage payments. Sort of PTIRAS instead. This would fit in with the Homeownerist agenda of raising property values, so it should be politically acceptable to all parties likely to gain power in the immediate future.
However the advantage from the LVT point of view is that it would also make it much easier for future governments to increase property taxes as it would automatically give a credit against income tax.
D, exactly and for sure.
I covered that, see Georgism without Land Value Tax.
The maths was probably a bit off, but I stand by the principle.
Derek: plus it moots the "Google and rich folks living in a small apartments wouldn't pay anything"-fallacy. Have a flat income-tax, net it off with LVT payable, subtract CI and voila, you got your tax percentage on PAYE, or a check in the mail if you're in the clear.
Kj, that's a good thought experiment. You would end up paying the higher of (tax rate x income) and (tax rate x land value).
So if you already pay £x in income tax, there's no disincentive to living in a house where the LVT is also £x. There is no incentive to trade down, and you increase your total tax bill if you trade up.
So low earners in expensive houses can reduce their tax bill by trading down, and high earners in cheap houses won't increase their tax bill by trading up.
After a few years, we'd find that everybody is living in a house where the value is directly proportional to income.
At that stage, we quietly drop the "income tax" part of the calculation.
MW: exactly, and everyone loves a tax credit, so it can be sold as "govt is paying you to live somewhere" :)
Kj, the Homeys will hate it on principle. They go mental as soon as you mention LVT, they do not care whether you are talking about 0.001% LVT or full on 100% LVT, it is all the same to them.
But the "full credit for LVT against the income tax you pay, so that your income tax is reduced by £1 for every £1 LVT you pay" is a good thought experiment to show that e.g. high earners would not all rush abroad or buy themselves very small houses - instead, they would buy themselves BIGGER houses.
Kj wrote, "everyone loves a tax credit".
That was the thinking, Kj. It's the first of the five politically acceptable steps to LVT which I thought up as an attempt to get "from here to there". Each of them is supposed to be so obviously neutral or beneficial to the majority of voters that it would be difficult to argue against them.
I may have mentioned them here before but for the record they are:
1. Introduce an Income Tax credit for any Council Tax paid during the year for every UK resident. So for every pound of Council Tax you pay, you pay one pound less in Income Tax.
2. Do the same for UBR and Income Tax/Corporation Tax for any citizen running a UK business or any company registered within the UK.
3. Replace Council tax with UBR for everyone
4. Replace HMG's current Social Security and Pensions system and income tax personal allowances with a cash payment for each UK resident of 80% of the UBR take divided evenly between all eligible residents.
5. Abolish all taxes other than UBR, increasing the UBR to compensate for the loss of revenue.
Just a rough draft which could probably be improved and definitely not the only possible route (our esteemed host has also come up with some good ideas) but it's important to try and devise strategies like this if we're to have any chance of seeing LVT implemented soon.
That's so true, Mark. Whatever you do don't mention the war, sorry, I mean LVT! You'll notice it doesn't come up at all in my five steps.
"For sure, this is going to have to be finessed a bit;"
Why not do it like it was done for the Council Tax? Do it all roughly then invite individual householders to appeal if they think they have been wrongly banded. There is the information at HM Land Registry and it would be easy enough for them to go to an surveyor and get a rental value. I had to do this for Council Tax (because the previous owner of my house had fraudulently inflated its value in order to borrow more money against it) and it was pretty simple.
B, for sure, there will be a simplified system for appeals as well:
1. By all means, haggle for a lower and more exact site premium value, but in return, you lose your Citizen's Dividend.
2. People will have to support their appeal with details of five plots with similar planning permission in the same defined area which have (allegedly) a higher rental value but have been allocated to a lower band. So appeals might result in other plots being bumped up by a band.
"but in return, you lose your Citizen's Dividend"
Not sure I follow that. Is it not every taxpayer's right to ensure they pay the correct amount of tax without being penalised for the attaempt?
B, the LVT is never going to be 100% correct for the simple reason that there are different ways of calculating the site premium. The CD is therefore also not 100% correct because it is a balancing figure divided by population and a rough and ready return to each household of the median amount of LVT, like a personal allowance.
So if you want to pay hyper-accurate LVT amount you can whistle for your rough and ready CD rebate.
Your system works very easily for residential property. How would you envisage it for commercial property?
A bit more tricky I'd have thought?
BJ, commercial is a bit trickier because there are different categories, e.g. city centre shops, city centre offices and out of town retail and industrial estates.
But the same compare and contrast operation works just as well here, e.g. most industrial units are just giant aluminium sheds which are relatively cheap to build.So we find the marginal zero base line ones of each type and then just take the difference.
The good news is that the VOA already hold almost infinite detail on commercial land and buildings, seeing as valuing the plot is easier than valuing the whole building, it should be a doddle for them.
And in urban areas, there is no hard geographical boundary between residential and commercial. So if a high street has a mix of houses, offices, shops with flats above, flats and car parks, there's no reason why the rates shouldn't be pretty much the same on each similar sized plot.
Excellent thread.
And it illustrates another reason why LVT is a Good Thing - it's an in yer face tax, governments will find it bloody difficult to increase taxes.
No wonder there's resistance to its introduction...
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