Wednesday, 14 August 2013

"What about people with mortgages? Would they be able to claim a reduction in their Land Value Tax bills?"

... is a question which I have been asked by LVT sympathisers, as well as Homeys who phrase it rather more aggressively, as per usual, they start bleating about the poor hard working first time buyers having to pay double the amount to buy a house etc, even though the whole point of Home-Owner-Ism is to make it as expensive as possible to buy (or indeed rent) a house.

The answer is simple: "Of course not. Firstly because banks would just push up interest rates to soak up the value of the tax break and secondly because people with the biggest mortgages will be saving the most in tax anyway. Simples."

Who has the biggest mortgages, relative to their income? First time buyers. So let's look at the actual impact in £-s-d instead of Homey fantasy numbers.

i) We take "average" first time buyer figures from the Council of Mortgage Lenders:
Salary £42,000 a year.
Cost of house £173,000
Mortgage £138,000
Annual mortgage repayments £8,000


ii) Let's keep it simple and replace the following annual taxes with LVT (or Domestic Rates or whatever you want to call it), 2013-14 estimated revenues from the last PSFD we can track down:

Income tax - £152 bn
Employee's NIC - £53 bn
Council Tax - £27 ban


iii) Those are not necessarily the worst taxes or the taxes I'd choose to replace first, but at least they are reasonably in-your-face taxes and everybody can easily work out how much they pay.

For good measure, let's get rid of Council Tax Benefit (£6 billion) and Housing Benefit (£20 billion) as well and make social tenants pay LVT instead of headline council rents (about £16 billion).

So we'd need to collect £222 billion in LVT to be fiscally neutral.

iv) The total value of privately owned housing in the UK is - allegedly - just over £6,000 billion, and let's stick on £400 billion for social housing (4 million units at £100,000 each).

£222 billion divided by £6,400 billion = 3.5%

v) So what happens to our "average" first time buyer's tax bill?

Under current rules, £10,700 PAYE (income tax and Employee's NIC) is deducted from his salary, and he pays (say) £1,500 in Council Tax = £12,200.

How much would he pay in LVT/Domestic Rates? £173,000 x 3.5% = £6,000.

Oh... I see, he'd be paying £6,200 a year less in tax, or £120 a week.

vi) Or maybe it's a first time buyer couple who earn £21,000 a year each. Under current rules, they get £3,900 each deducted in PAYE and pay £1,500 Council Tax, total £9,300. So their saving would "only" be £3,300 a year, or £60 a week. Still worth having.

vii) And "average" social rents would come out about the same as now - £70 a week (£100,000 x 3.5% divided by 52). They'd quite possibly be £300 a week in social housing in the poshest parts of London, but such is life - the social rent for a flat in Wales would only be £25 a week, you pays your money and takes your choice.
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There, none of these calculations are particularly difficult, are they?

Common sense tells us that first time buyers should have done their calculations and only taken out a mortgage which they'd be able to afford if interest rates went up a few per cent (I accept that a lot didn't, but that is not relevant here).

And common sense tells us that if the people with the biggest mortgage repayments ought can afford to pay the mortgage and the tax even without a massive tax cut, then so can nearly everybody else who doesn't have a big mortgage especially as these people will be getting a massive tax cut as well.

I do wonder - purely rhetorically - of course, whether any of these shit-for-brain crocodile-teat-shedding Homeys have ever done these calculations - in which case they are either shit at maths or lying about the results, or whether they just say stuff in order to waste my time (and yours).

4 comments:

Bayard said...

"Of course not. Firstly because banks would just push up interest rates to soak up the value of the tax break"

Actually, I think it would go the other way. Banks would lend more: they are interested in your income after taxes, which would be greater if you got a tax break on your mortgage. Thus the value of the tax break would be soaked up in higher land prices, as it was with MIRAS.

Mark Wadsworth said...

B, yes, for new borrowers/purchasers that is what would happen.

I was thinking about people who have already bought and already have a mortgage and do not intend to move. They are a captive audience and the bank can merrily charge them a smidge more interst.

We know for a fact that interest rates on ISA accounts are about 20% lower than on taxable accounts, that is what I was using as an example.

Bayard said...

Aha, so win-win for the banks: more lending and higher interest rates. If LVT ever comes in, MIRAS will ride again. It will, of course, only be for the benefit of the hard-pressed homeowners.

Mark Wadsworth said...

B, MIRAS is one of many direct subsidies to land prices. LVT is a tax on land values. They are opposites.

I don't know why you think that having LVT would mean that MIRAS would come back in. What the landowners and bankers want is MIRAS (or FLS or Help To Sell or SMI or whatever) but without LVT. And they are winning anyway.