Friday, 22 February 2013

Nick Clegg learns a few valuable lessons

From The Independent:

Older people affected by the Liberal Democrats’ proposed “mansion tax” could have payments deferred until after death if they are unwilling to pay up during their retirement, Nick Clegg has suggested.

Good. That's always KLN #1 and you need an answer to that. The roll-up deferment option is not perfect solution, but it's the least imperfect.

... the caller explained that his home in the up-market St John’s Wood had “sky-rocketed” in value since he bought it.

He said: “I earn a reasonable salary. I do not earn as much as Mr Clegg but I’m happy with what I earn, but no way could I afford to buy a house now for anything like £5m." He said he would face a £30,000 annual payment under the tax, which he could not afford and which would take his total tax rate to 78 per cent. “My only option would be to sell the house my family and I have lived in for 20 years and withdraw my children from school,” he told the Deputy Prime Minister.

Mr Clegg agreed that John would indeed be better off if he moved out. He said: “I’m obviously not urging you on selling your home but if you were, as your children get older and so on, to decide to sell your home, you would be millions of pounds better off... That’s one thing which I don’t know whether you’re prepared to do anyway.”

John retorted: “It’s my home and I have to move out of the area.”

That's a tricky one, politically, there are infinite variations on the retort and Clegg appears to have gone for a middle of the road one.

The more extreme retort would be: "For fuck's sake, man, any couple on above-median wages is paying £30,000 a year in various taxes (check the figures here), and what do they get for it? The privilege of spending half their net income on the mortgage on a semi-detached somewhere; you pay £30,000 a year and get to live in 'desirable' St Johns Wood."

Or possibly, if you've had time to check on Rightmove: "For fuck's sake, man, you can get a perfectly decent 4-bed house in St Johns Wood for less than £2 million, there's no need for your children to change schools - by the way, you'll get into trouble with the authorities if you just withdraw your children from school, as a good parent I hope you know that - and that still leaves you with a handsome cash lump sum of well over £2 million. And you're complaining?"

Or possibly: "For fuck's sake, you Home-Owner-Ist. It's your kind who have engineered things so that a whole generation is priced out of the area in which they grew up. Do you imagine that your children will be able to afford to buy in the same street as they grew up?"

But politicians get into trouble if they say things like that. I don't think they're allowed to say "For fuck's sake."

The other valuable lesson to learn here is that people hate transitions. Quite realistically, if they did introduce a Mansion Tax, people like "John" would end up moving. If the rate is nudged up in future, people like "John" will be complaining all over again, that they are now cruelly forced to trade down to a humble £1 million home in the less desirable part of St Johns Wood etc.

So actually, it is better to go for broke and start with a fairly full-on LVT (which on a £5 million house would be £100,000 a year or more) and make it clear that over the next five or ten years, all other taxes are going to be phased out and the LVT rate bumped up accordingly. "John" has to do his sums carefully, the same as every tenant or mortgage borrower, and trade down to whatever frees up enough cash to enable him to pay [a large chunk of] the LVT on his next house for the rest of his working life and he is, politically, out of the picture.

So for example, if we knew that in five or ten year's time LVT would be (say) about 6% of what houses sell for now, "John" could settle for a £1 million home, spend £2 million on an annuity to pay the LVT for the rest of his life and still have £2 million play money.


A K Haart said...

I'm biased, but in John's position I'd sell up and head North with a huge sack of cash.

I'd send the kids to a private school, buy a beautiful stone cottage in Derbyshire and still have wads of cash left.

EdS said...

Man complains he can't afford to live in St John's Wood... Now where did I leave the worlds smallest violin.

Graeme said...

mmm...would you believe any governement that said it would cut other taxes? In my memory, the only Chancellor who ever cut taxes or abolished taxes was Lawson....and that is a distant memory now.

john b said...

John here should take out a second mortgage to pay the mansion tax.

Current mortgage interest rates are about 2.2% if you've got sizeable equity, which he does.

So if he takes out a 25-year loan that releases GBP750,000 cash now (25 years of mansion tax), then at the end of the period, he'll have a GBP1.3m charge on the property (ie he'll still have well over GBP3m of equity at the end of the period, so if he still wants to live in the mansion when the kids have left home then he can repeat the process).

In practice, you'd probably want to release the money annually, or buy an annuity with it, or some such thing - but the economic substance will be approximately the same.

If he objects to that, then it's got bugger all to do with upheavals or the concept of a house-as-a-home, and everything to do with wanting to keep his unearned financial windfall.

mombers said...

If somebody today with 600k wants to live in a similar house, they need to have sufficient income to pay 144k of mortgage a year. The disconnect between effort and reward is a joke. We live in a luck based economy, not a merit based one.

Bayard said...

Didn't anyone point out what a daft idea having an arbitrary £2M starting point was? or point out that the "Mansion Tax" is just the council tax on steroids?

The trouble is that asset taxes are only on the agenda because the pols have nothing else left to tax, so the chances are that we will end up with some form of land tax, but it will be on top of everything else as the pols consistently shirk the job of getting to grips with government spending.

Mark Wadsworth said...

AKH, most of us would do so.

EdS, I don't think there is one small enough.

G, yes but people keep voting for high spending governments.

JB, my thoughts exactly.

M, only is it "luck" or are such people merely unintended beneficiaries of a totally rigged system?

B, yes, you made that point that the Tories are forcing the Lib Dems to suggest the worst possible kind of LVT and then making it look ridiculous - the same as AV. And Labour are dyed in the wool Homeys, they have chosen "Mansion Tax" deliberately.

mombers said...

M, yup the system is rigged so that a select few and their heirs are made winners by the government at everyone else's expense

. said...

This is all a result of the abolition of the inflation/interest rate tax, which was phased out in the 1980s and 1990s.


Lola said...

Sooner or later someone (me?) is going to seriously lose his or her temper with the majority of collective numpties in Parliament and their fellow traveler Satraps in the State bureaucracies. It won't end well for them.

Mark Wadsworth said...

BE, negative interest rates are but the tip of the Homey subsidy iceberg.

L, well, I hope I'm there to watch.

Bayard said...

Just discovered why the Mansion Tax applies to houses worth more than £2M - £2M is 20K more than the value of Ed Miliband's house in London.