Sunday, 6 January 2013

Killer Arguments Against LVT, Not (297) (updated)

In the previous instalment, I pointed out that the total tax (flat income tax plus LVT) payable by pensioners assuming a halfway-house tax system could be collected by deducting it from total pensions in payment.

Assuming no exemptions or relieving provisions whatsoever, the total tax withheld (£66 billion a year) would amount to just over a third of pensions in payment, which is (obviously) more than what pensioners currently pay (£42 billion a year, allegedly), £24 billion a year more, to be precise.

Of course totals and averages for all pensioner households are not the end of the story, because the Homeys always like to choose corner cases (The Poor Widow In A Mansion) and wail about "millions of hard working pensioners being forced out of their homes" etc.

So let's confront this thorny issue in a bit more detail and do some like-for-like comparisons:

1. Pension incomes by quartile from here; "Domestic Rates" bills (a one hundred per cent tax on "site premiums", which works out at about 3% of 2012 selling prices) are:

2. According to the Daily Mail, pensioners pay about £42 billion a year in tax, a mixture of regressive (Council Tax, VAT, TV licence) and progressive (income tax), and net incomes for the three main types of pensioners household are thus as follows (based on average overall tax rate 24% of gross income):

3. Now, assuming we want to be fiscally neutral and keep the total taxes paid by pensioner households the same (the idea behind LVT is certainly NOT to tax more, it is to tax differently), how about using up that potential extra £24 billion (from above) to give each of 8 million pensioner households a £3,000 a year flat discount/reduction from their Domestic Rates bills?

Assuming that there is no correlation between gross incomes and the rental value of the plots they live on (of course there is), here are the net incomes:

4. There are two kinds of comparison, a relative one showing the increases and decreases in net incomes for the various categories, and then an absolute one showing who would end up under the poverty line (single £100/week, couple £150/week) and would be "forced" to do something about it, for example: trade down, take in a lodger, ask their family or heirs to chip in, start spending their savings, agree a deferment/roll-up with the council etc.

5. Here's the changes in net income table:

6. Here's the same table as in 3. above with an absolute comparison, with those households now under the poverty threshold (based purely on current pension income) who might be "forced" to do something about it shaded grey:

This gets the number who would would be "forced" to do something down to about a sixth of all single pensioner households (600,000 or so pensioners). Most of those will probably ask their heirs to pay, dip into their savings or ask the council for a roll-up option etc - not a single one of them would be "forced" to actually trade down (even though there is now every incentive to do so).

Very few pensioner couples would be really negatively impacted, and over half of them would be better off (rather unsurprisingly).

19 comments:

Sobers said...

I'm struggling to make head or tail of those spreadsheets, but if I read it correct it seems to me that the poorest female single pensioners are the biggest losers, even after a £3K exemption. If that is right, then you need your head examined if you think thats a politically viable (or indeed even fair) change to the tax system.

Mark Wadsworth said...

S, do you mean that you (as a working age, higher earner) wouldn't take some of your £10,000 to £20,000 a year tax saving and help out your poor old Mum? What sort of heartless git are you?

tradingfinancials said...

Totally agree with lvt but would go even further and remove all transactions based taxes and keep inheritance, duty taxes and add lvt. I favour pure land value though and not any rental value which I think you are after - excuse if I'm wrong as only had a quick read.

Look at the likes of cayman and jersey who attract business through zero corporate taxes. It's all about comparative advantage. Again look at Ireland here vs Spain or France. If the uk applied zero tax to digital and financial businesses - Yes that means banks - than raise tax through the wealth that creates ie land values. But to get a license to do business in the uk you need to employ x number of people to ensure the operation is run well and for the benefit of all concerned not just the shareholders.

Woodsy42 said...

You know somethinmg Mark. I quite enjoy your blog, although I disagree with it much of the time the alternate viewpoint is often interesting.
Your use of the word 'homeys' however as a derogatory nickname for people who may have sacrificed a lot of leisure money to provide themselves with a home is equivalent to climate blogs that call anyone disagreeing with them deniers.
It's insulting, denigrating, arrogant and patronising.

Kj said...

W42: It's the insistence that people are to spend as much money as they can paying previous owners/landlords/banks for housing that makes a Homey.

Mark Wadsworth said...

TF, fair enough.

W42: "people who may have sacrificed a lot of leisure money to provide themselves with a home"

Well, that includes most tenants, doesn't it?

And anybody who bought a house more than ten or fifteen years ago will have paid a LOT LESS in mortgage payments than somebody who has been renting for the last ten or fifteen years. And I know that because I did buy a house fourteen years ago and even though I paid off the mortgage over 11 years, it was still a lot cheaper than renting.

And as Kj suggests, why do the Homeys think that it is A Good Thing for house prices and rents to be so high? It's not A Good Thing, it's A Bad Thing.

And why do the Homeys love high taxes on earned income? Because that is need to prop up house prices (thus being a double whammy on the next generation).

Bayard said...

"Your use of the word 'homeys' however as a derogatory nickname for people who may have sacrificed a lot of leisure money to provide themselves with a home"

W42, I cannot agree that people's actions excuse then from their opinions. If someone has "sacrificed a lot of leisure money to provide themselves with a home", but calls black people "niggers" and thinks that Hitler was right to send all the Jews to the gas chambers, should you not call them a racist? Similarly if someone has "sacrificed a lot of leisure money to provide themselves with a home" but thinks that house prices should be forced to continue to rise, regardless of the economic consequences and that tenants are some sort of lower class scum, then why is it wrong to call them a "homeownerist" or "homey" for short.

Mark Wadsworth said...

B, ta for back up.

"Home-Owner-Ism" is my derogatory term for the delusion that high house prices make us richer; that private rent collection adds to national wealth*; that all taxes should be collected from output, employment and profits; that tenants are somehow scum* etc.

That does not in any imply, I and have made it clear often enough, that just because somebody owns their own home that they are Home-Owner-Ists.

* This is tantamount to looking down on drug addicts while admiring the free-market nous of drug dealers.

Kj said...

It's not derogatory. Only in a very strange world, where one is storing "wealth" through ownership of land, where preserving people's right to receive services paid for by taxes on other people's labour is considered of upmost importance, where old people that you can't be bothered to help yourself is held hostage for the cause of preserving a system of land being held for hostage - is this derogatory. Oh...

Mark Wadsworth said...

Kj, nice one!

What would be great fun is instead of taxing husbands and wives together, entire families were taxed together.

So the LVT payable by the Poor Widow In A Mansion is divided up between her children and added to their tax bills.

If she doesn't have children or her children refuse to pay, then she can "councilise" her mansion, problem solved.

Bayard said...

Mark, perhaps it's time you did a post on what Homeownerism is and isn't, who benefits (in reality, not just in their own mind) and thus who are the prime suspects for its propagation, and who loses out, who are the footsoldiers, who are the generals and who are the "human shield" etc.etc.

Woodsy42 said...

""Home-Owner-Ism" is my derogatory term for the delusion that high house prices make us richer; that ...scum* etc."

I doubt there are many people who believe those things Mark.
But here is the dilemma - Of course a home owner who invests in a house rather than renting, and especially if done while prices are lower, becomes personally relatively richer than someone who spent their money on rent. It adds to personal wealth.
This is true of many investments, you could buy gold instead.
But your language suggest it is wrong to take advantage of that fact, I would say only a fool would not do so if they could.
I quite agree it has little to do with national wealth except perhaps marginally in that private money is being invested in the UK rather than being spent outside it (on foreign investments or leisure or imports).
My accusation is that you have a tendency to apply your word Homey to denigrate anyone who thinks buying a house is a worthwhile personal investment. In reality everyone is a homey, we all want one and need one! It's not something to be ashamed of or that should be denigrated.
Your word fails to acknowledge that a home (as opposed to a property portfolio) is not primarily a financial investment, it saves rent, increases family security, and provides freedom for turning a generic house into a home. I would still want my own home even if renting were cheaper. Just as I like my (old) car rather than renting one, I know it, it's comfortable, I owe nobody.
And Bayard, it has bugger all to do with nazis or racists. Although it's interesting that you should need to introduce Godwin's law into the discussion. To me, to slip that quickly, just demonstrates that your basic viewpoint is emotional rather than logical, and hence uses loaded language - but that's what I originally complained about.

Mark Wadsworth said...

W42: "you have a tendency to apply your word Homey to denigrate anyone who thinks buying a house is a worthwhile personal investment"

That is quite simply not true. I have never denigrated anybody who prefers to own rather than rent (provided they are doing it for the right reasons). The term "Homey" applies to people who churn out all this propaganda, for example:

"a home (as opposed to a property portfolio) is not primarily a financial investment, it saves rent, increases family security, and provides freedom"

I could just as well point out that...

"going out and earning an honest living (as opposed to relying on state benefits or a cushy quango job) is not primarily a financial investment, it creates wealth, increases family security, and provides freedom"

Given that rental values depend entirely on a functioning society, but dragging yourself out of bed every morning and going to work entails a lot of personal effort, why is it such a terrible idea to tax rental values rather than earned income?

Further: " In reality everyone is a homey, we all want one and need one!"

The first part is untrue, by definition and the second part is quite correct. The Home-Owner-Ists hold two contradictory beliefs:

a) rising house prices and restricted supply is A Good Thing

b) a wide spread of home ownership is A Good Thing.

You can't have 'em both, can you? I am all in favour of (b) which is why I am against (a).

Lola said...

W42

But here is the dilemma - Of course a home owner who invests in a house rather than renting, and especially if done while prices are lower, becomes personally relatively richer than someone who spent their money on rent. It adds to personal wealth.

Er, no.

Having doen the sums inumerable times it actually works out roughly the same to rent and save as opposed to buying. The rent for the house is roughly equivalent to the rent of the money to buy the house. This difference is capital repayment component. If that is saved / inveted into real assets (say a global equity tracker fund) over the same 25 years as the typical mortagge, at the end of 25 years you will have a fund large enough to oay enopugh interest to pay the rent for the house anyway. People have been using mortgages as a sort of forced saving, and trading on the gearing up of their deposit.

tradingfinancials said...

i pay £24k rent on a £600k property. thats a yield to the landlord of 4%. however id only pay £300k for the house so it should really be 8%. still not a great return after costs. and certainly no better than stocks/bonds.

PC

tradingfinancials said...

i pay £24k rent on a £600k property. thats a yield to the landlord of 4%. however id only pay £300k for the house so it should really be 8%. still not a great return after costs. and certainly no better than stocks/bonds.

PC

tradingfinancials said...

i pay £24k rent on a £600k property. thats a yield to the landlord of 4%. however id only pay £300k for the house so it should really be 8%. still not a great return after costs. and certainly no better than stocks/bonds.

so it depends where you live.

PC

Mark Wadsworth said...

PC, you're paying £6,000 or so for the cost/value of the house (rebuild cost/value £150k?) and the other £18,000 is for the location rent (pure profit).

For some reason, landlords apply a very low discount rate of 3% to the pure profit element, so the price for the whole house ends up at £600,000.

(those figures are very similar to what I'm paying. Spooky, huh?)

Bayard said...

W42, why did I know you would say that? Instead of addressing the point that someone's actions and their opinions are two entirely separate things, you say that it is invalid, simply because I mentioned Hitler. (BTW that's not what Godwin's Law states.)

"Of course a home owner who invests in a house rather than renting, and especially if done while prices are lower, becomes personally relatively richer than someone who spent their money on rent."

This is true only if house prices are rising faster than average wages, which in the long term they don't. In the 25 year life of an mortgage, you can expect at least one property crash, which can completely wipe out your "investment". The denial of this economic fact is one of the things that distinguishes a Homeownerist from a homeowner. However, since land and property are lightly taxed since it goes up and down in value in a fairly predictable fashoin and since we all have to live somewhere, it's a pretty good bet as somewhere to put any spare cash, but like with all these things, you need to know when to sell, and, more importantly, be able to sell. It's the difficulty of taking profits before the crash that makes it a poor investment.