Thursday, 19 September 2013

OK, here's a plan everybody can understand

Prompted by Ben W, and bearing in mind political considerations i.e. the fact that people consider income tax to be a worse tax than VAT or NIC and pensioners do pay some income tax but little or nothing in the way of VAT or NIC, how about this for a tax shift:

1. Reintroduce Domestic Rates/Land Value Tax at 100%-ish of site premiums (i.e. rental value minus running costs and amortisation of improvements) = would raise £200 billion (this means approx. 3.5% on current selling prices).

With this extra money, we do the following (approx. static revenue "cost"/tax cut in parentheses):

2. Get rid of the usual list - Council Tax/Council Tax Benefit (£20 billion net) and all the other crappy little ones: Stamp Duty Land Tax, Stamp Duty (on shares etc), Inheritance Tax, Capital Gains Tax, Insurance Premium Tax and the TV licence fee (total £52 billion).

3. Increase the personal allowance for income tax to £50,000 per annum (£89 billion), so only the top tenth or earners pay income tax (i.e. at flat 40%).

4. Reduce standard rate of VAT from 20% to 15%. The EU won't allow you to have a lower standard rate than this, which is unfortunate (£19 billion after adjusting for corporation tax).

5. Replace Employer's Class 1 and 1A NIC (currently 0%/13.8%) with a flat 5% on all wages with no lower threshold (£19 billion after adjusting for corporation tax).

6. Replace Employee's Class 1 (0%/12%/2%), self-employed Class 4 NIC (0%/9%/2%) and Class 2 (£2.50 per week) with a flat 5% on all earnings up to £50,000 with no lower threshold (£19 billion).

So doing the monthly PAYE calculations will be a doddle, it's just be 10% of the total wage bill, half deducted from headline wages and the rest "paid" by the employer.

7. I've cross referenced it all to HMRC's tables 1.5, 1.6, 3.4 etc available from here. I won't bore you with the workings, but it all stacks up - and that is ignoring all the dynamic benefits that would flow (higher employment, more profitable businesses, much better GDP growth etc, which is the whole point of the exercise).

8. Doing the valuations is easy, it's barely trickier than the revaluations for Council Tax which would - by the Morbidly Obese One's own admission - cost less than £10 per home as a one-off cost.

9. Clearly, the biggest winners would be young families who have recently bought a home (they have the smallest homes relative to their incomes i.e. they have the largest income relative to the value of their homes), on the whole they would be £5,000 - £10,000 a year better off.

10. Most people in the middle will break even. The "hard working" will benefit, the "not so hard working" won't. Tenants will tend to win out slightly and landlords will tend to lose out. Parents with working adult children at home will be laughing, the children can pay the Domestic Rates for them instead of rent and they all live effectively tax free.

11. That just leaves us with Poor Widows In Mansions.

a. Pensioners' main residences are about one-fifth of all housing by value, so their potential bill is around £40 billion a year.

b. Total pensioner income in the UK is at least £165 billion a year (State pensions and Pensions Credit £92 billion, private/funded/employer pensions £72 billion, plus bits and pieces).

c. Seeing as nearly all of this would now be income tax free (only one or two per cent of pensioners have income over £50,000), £40 billion in Domestic Rates doesn't seem unaffordable, does it?

d. Fact is, pensioners currently pay £13 billion in income tax and about £14 billion in Council Tax and all the crappy little ones listed in para 1. So in theory, their total tax bill under this system would not actually be much higher (£40 billion instead of £27 billion).

e. As a compromise, we could cap their Domestic Rates payments at 12% of their income or something, and allow them to roll up and defer the rest.. 12% x £170 billion = £20 billion. So pensioners would pay £20 billion annually, slightly less tax than at present, and the other half would be collected on future death/sale (instead of the heirs having to pay Inheritance Tax/Stamp Duty Land Tax).
To keep things simple and reduce distortions further, we can do the same for companies/commercial land.

Company/business profits would increase by about £50 billion, of which £10 billion would go in additional corporation tax at 20% (currently), bringing on-shore corp tax receipts to about £40 billion a year. Business Rates (pretty close to LVT) are currently just under £30 billion a year, so total tax paid would be £70 billion.

Higher rents/rental values would soak up (say) half of the additional company profits. So we can replace existing Business Rates (a low tax on total rental values) with new LVT-style Business Rates (a 100% tax on the location value only), which would bring in (say) £50 billion and we can halve corporation tax to 10% (same as two layers on NI on wages) which would bring in £20, total revenues stay constant at £70 billion.



Lola said...

It'll be something else Clegg says no to...

Lola said...

Replacing IHT with 'deferred LVT' sound brilliant. It would encourage people to invest in production rather than houses. Wouldn't it? It may also encourage them to downsize earlier and have the same effect.

This gets better every way you look at it.

Mark Wadsworth said...

L, thanks and exactly.

You want your kids to get everything? Then trade down and pay little in tax.

You want to enjoy your own money yourself? Then do what you like with it, spend it, spend it on a big house. That's up to everybody to decide for himself.

James Higham said...

Increase the personal allowance for income tax to £70,000 per annum (£90 billion), so only the top four or five percent would pay income tax.

Thereby driving them offshore and overseas.

Mark Wadsworth said...

JH, well there's the thing.

Levying 30% income tax on the top few per cent is only an interim measure until we phase out income tax entirely.

But it's still less than 40%/45%, and all the evidence show that while high income tax rates can to some extent "drive them offshore and overseas", high land rents or taxes on land have no such effect.

See e.g. Switzerland, or indeed Manhattan, where the property tax on tip-top apartments is $100,000 per year.

If anything they drive low earners to cheaper areas in the same country and draw in high earners from abroad.

Further, in crude practical terms, if a banker or football player or BBC executive or whoever takes a salary in excess of £70,000, that can be taxed at source anyway, it does not matter whether he commutes in from Surrey or from the Channel Islands.

So he might as well commute in from Surrey - whatever LVT he pays here (but wouldn't have to pay in the Channel Islands) pushes down the cost of the house he lives in.