I'm sure we're all familiar with the Poor Widow Bogey, see also "LVT doesn't relate to ability to pay"; "LVT would be paid out of taxed income"; "I've paid for my house out of taxed income"; "LVT is a dry tax"; or the supposedly rhetorical question "How can you collect tax from an asset which doesn't [currently] generate cash income?".
OK, let's answer that question by looking at some actual hard facts and applying common sense.
Let's imagine our half-way house tax system, which could be implemented fairly quickly, where there are only two taxes, which would each raise about £200 - £220 billion a year:
1. LVT on current site-premium rental values (about 3% of the current selling price of UK land and buildings, farmers would be paying about £16/acre/year) in place of Council Tax, Business Rates, SDLT, IHT, CGT, Insurance Premium Tax and TV licence fee, and
2. A flat income/corporation tax of 20% (with no VAT, NIC or higher rate income tax on top).
(Over the next few years, income tax would be phased out and the overall site-premium, and hence LVT receipts, would increase accordingly, that's the easy bit, it's getting started which is trickier).
And let's imagine there are no exemptions or discounts for pensioners whatsoever (local councils can all make up their own systems, we'll see which ones work least-badly). Instead of starting with hardship/corner cases like Poor Widows In Mansions, let's look at The Big Picture:
3. Seven million pensioner households (about 4 million couples and 3 million single, i.e. widowed) own about a quarter of UK homes, so the total LVT to be collected would be about £50 billion a year.
4. Total pre-tax cash pensioner income is about £174 billion a year (£94 billion state pensions and Pensions Credit; £30 billion in public sector pensions and £50 billion in private or employer pensions).
5. The total tax currently clawed back from pensioners is £42 billion, according to The Daily Mail, or £6,000 per pensioner household.
6. The Daily Mail helpfully adds that "average pensioner [household] income is £20,130 a year", and Ros Altman reckons that "Median incomes of pensioners are around £15,000 per year".
What the Lord giveth, the Lord taketh away.
7. My counter-question is thus: "Is it beyond the wit of mankind to simply deduct LVT from pensions in payment, in the same way as income tax is withheld from pensions in payment?" To which the answer is, no, of course not.
8. So the £80 billion in non-state pensions is subject to the flat 20% income tax (as at present) and the £50 billion gets withheld from the net figure of £188 billion. So by and large, there would be a 100% collection rate.
9. For example, our average pensioner household with gross income of £20,000 would get £14,000 state pension paid gross and £4,800 net public sector or private pension and have an average LVT bill of £7,500, ending up with £11,300 a year to live on. Our median pensioner household with £15,000 total income minus a few quid income tax and a median LVT bill of £5,000 would end up with just under £10,000 a year to live on (which sounds like plenty to me).
10. So in the absence of exemptions and discounts, pensioner households would be paying more in tax overall (potentially £66 billion)than under current rules (£42 billion), but that is inevitable, there's still nothing to stop them trading down, taking in a lodger, getting their potential heirs to pay and so on.
11. Of course, our proverbial Poor Widow In A Mansion who receives only Pensions Credit would have a net cash income from the government of precisely £nil* and there would be an annual shortfall which would have to be rolled up and collected from sales proceeds when she dies, and sometimes the shortfall would be more than the selling price of the house, but so what? These cases will be few and far between, tuppence ha'penny in the grander scheme of things.
* No doubt her children and grandchildren will be happy to chip in a couple of thousand pounds a year each to see her right.
For more detailed workings, based on quartiles rather than totals or averages, see the next instalment of this gripping series.
It's a crowded field
3 hours ago
19 comments:
Ah, I've been waiting for the Poor Widow to make an appearance.
I was talking to my rabidly Homeownerist, (literally) Poor Widow mother over Christmas because there was an article about taxing expensive homes owned by foreign companies (the stamp duty avoiding ones). I thought she might launch into a scathing attack on mansion taxes but what she actually said was more interesting. She said she realised that housing probably needed to be taxed more heavily in the longer term but what she thought would be unfair would be if significantly higher taxes on expensive homes were brought in too quickly for people like her to adjust.
I know it's only one person but I wonder if attitudes to "land" taxation aren't softening a bit?
Bring them in slowly, give Poor Widows Stranded In Mansions a chance to downsize or whatever and you might defeat the biggest opponents of the system.
BE
BE, that is most interesting.
Now, I fully agree with the notion that that "we have to look after the old folk" and that the bulk of this is always going to be via the tax/old age pension system, but this only goes so far.
If some pensioners want extras (like living in a mansion, having carers come to their house, go on long cruises every year) then either they or their heirs are going to have to pay for it.
So to put it bluntly, it'll be up to you to negotiate with her about whether you use some of your tax saving to pay for her to stay living where she is, or persuade her to trade down in your mutual best interest, or whether you simply turn your back on her and leave her to fend for herself.
Indeed. But if the transition was over several years (which in practice it would be anyway because it's not as if a complete switch is ever going to appear in a winning election manifesto) then it would just become part of the retirement planning routine.
In my particular instance, mother dearest seems to be getting interested in converting some capital into spending money in one way or another so she may downsize of her own accord.
BE
I agree with "roll up", but everyone should still contribute at least the current value of CT.
As you say, with a 100% LVT the eventual selling price of a London home would be dramatically cut, so by the time our PWIM kicks the bucket her LVT liabilities could far exceed the final selling price.
Of course after twenty years or so the whole PWIM argument ceases to be of any relevance, as people would have had enough time to to plan for their retirement. House prices would have fallen and stabilised, people should have been able to build a nest egg from lower taxes/mortgages.
Might it not be a good idea for the YYP Government to have some sort of compulsory LVT retirement fund? For instance your LVT bill plus 10%. This could be paid into a genuine fund, so when people retire they could either use it to stay in the family home and pay the existing LVT, or downsize and cash it in.
One more observation, most KLN's are really about the difficulties of the transition. Once LVT has had time to bed in over twenty years, these KLN's simply don't apply. I think it's always worth point that out to the critics before any discussion.
That's YPP of course not the YYP ;)
Although I must admit the Young Yodellers Party have some pretty interesting policies themselves.
BE, BJ, yes, it's the transition that's the tricky bit.
"Might it not be a good idea for the YPP Government to have some sort of compulsory LVT retirement fund? For instance your LVT bill plus 10%."
That's another transitional thing which we can make up as we go along. But why set up a separate fund? That's a recipe for disaster. The government already has such a fund, it's called "index linked gilts" and it's up to everybody to make his own saving decisions.
Or local councils could have a scheme where a couple pays a lump sum on retirement and that covers the LVT on their house for the rest of their lives.
"by the time our PWIM kicks the bucket her LVT liabilities could far exceed the final selling price."
Yes of course, but this is a small percentage of a small percentage of that potential £50 billion a year.
Worst case, on average, 300,000 widows or widowers die each year, let's assume houses are worth on average £100,000 and that is all eaten up by rolled up LVT, that's still annual receipts of £30 billion a year from selling off the houses again, so a shortfall of £20 billion, less than a tenth of the original targeted revenues of £200 - £220 billion.
Or local councils could have a scheme where a couple pays a lump sum on retirement and that covers the LVT on their house for the rest of their lives.
Or if a pensioner does not have the lump sum cash, offer up the residual value of the house, "counsellising" it. You'd then have a life tenancy for no rent, maybe except a small payment for maintenance. These houses can then be offered up for rent/sale after the owners pass away, and these houses could make for good calibrators for valuation as well.
Perhaps the shortage of real live PWIMs is due to the realisation by the PWIMs themselves and their heirs that if they don't downsize, the value of the mansion is likely to be swallowed up in care costs when they get old and poggly, whereas a timely distribution of the inheritance can result in the state picking up the bill.
"councillising" that is
Kj, yes, that thought had occurred to me as well. Maybe some local councils will end up doing this, on terms to be negotiated, who knows?
B, yes, good point, there are plenty of people who do this.
B: another problem with means-testing isn't it?
If you just think about ALL taxes as a form of rent for living in the UK, then LVT is just an in yer face 'rent for living in the UK' tax - AS LONG AS LVT REPLACES ALL OTHER TAXES. At the moment a pensioner on £15,000 per annum is actually living on £7,500, the other £7,500 goes in tax - assuming that Cost of Government Day is at the end of June, i.e. the State costs us 50% of GDP.
I completely fail to understand just why anti-LVT'eers can't see this.
Kj, means-testing is shit. Either everybody gets a benefit or nobody does, let's not pick and choose.
L, yes, tax, rent and mortgage interest are all much the same thing. The only difference is who collects/benefits from the payments.
Lola wrote:
If you just think about ALL taxes as a form of rent for living in the UK
That is a great way of looking at it which hadn't occurred to me before. Thanks!
The problem with that view-point is that it is incredibly depressing. The civilised countries effectively have a "rent" cartel. There are none which have significantly lower tax or obligations burdens.
So if I feel like I am not getting particularly good value for my UK "rent" I can't really upsticks.
VE
BE, why is it depressing? That's the way things are. If you want to move somewhere with a really low income tax rate, they'll stiff you on the rent.
Our big choice is, do we want that rent to end up in private pockets and then have to pay income tax on top, or do we want that rent to go into the general pot, each take our share and not pay income tax. That is, mathematically, the best deal which you can get.
And of course under LVT you can "up sticks": you can halve your tax bill by taking in a lodger or sharing with your girlfriend, or by moving somewhere smaller/cheaper.
No I meant internationally. If I think the tax burden in the UK is far too high I can move to Germany, where it is just as high, or to Australia where it is just as high, or to the US where it is just as high.
There's no international tax competition really.
BE
BE - see Laffer Curve?
But, you could move to Monaco which has low taxes - but massive rents/housing costs....
BE, it's perfectly possible to move to some third-world country where you pay f-all in taxes, but get f-all in services. It's really not reasonable to expect to find a country where you pay little and get lots, as everyone else will be wanting to go there too and there will either be a very restricitive immigration policy or very high land rents.
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