Sunday, 16 March 2014

OK, forget Land Value Tax, Swiss "lump sum" taxation is the way forward.

For some reason we can't fathom, a lot of people go mental when you suggest raising revenue from the rental value of land rather than earned income, they always wail on about "hard working, hard pressed home owners being clobbered" etc.

There is a clever way of collecting LVT, which is what most Swiss cantons do with wealthy non-domiciles, aka lump sum taxation. What they do is take the rental value of the home you live in, times it by five and treat that as your total income for income tax purposes, you don't need to declare any of your actual income, you just pay tax on the notional amount.

Clearly, common sense tells us that the highest amount of tax you can get out of anybody is equivalent to the rental value of land they occupy; if you try and get more then people won't pay it and/or it will have a damaging effect on the economy. And basic maths tells us that the tax payable by these wealthy non-doms is pretty much equivalent to the rental value of their home.

As these people have loads of money and want to live somewhere nice, they will do so and pay large amounts of tax quite voluntarily; they still get a better deal than in most other countries. This demolishes the KLN that "wealthy people and high earners will avoid paying LVT by moving abroad/trading down into the smallest homes."

(The UK's system is much more primitive, the top few thousand non-domiciles resident in this country just have to pay £30,000 or £50,000 a year each, depending on how long they have lived here; but by and large, we can assume that it comes to much the same thing in £-s-d as just making them pay LVT on the rental value of where they live.)

Some cantons have been ignoring these simple rules and hiking the multiple from five to six, or increasing the income tax rate on the notional income, which has led to wealthy people moving to cantons with lower multiples or a lower tax rate or moving elsewhere (i.e. the UK).

The OECD hates the system of course, as do the Lefties because they think that the non-dom's are not paying enough; which is sort of true but only if you start from the wrong end: the correct analysis is actually that normal Swiss residents are paying too much .

But there's no reason why we can't do exactly the same in the UK.

Instead of taxing people on their actual income, you tax them on a similar amount of notional income. The site premium (that element of the rental value that relates purely to the location rather than the bricks and mortar) for UK housing is very easy to establish to within a reasonable margin of error, it's about 3% of current selling prices, which is a total of £200 billion for all UK dwellings.

By happy coincidence, UK income tax revenues are about £150 billion and Council Tax, SDLT, IHT, CGT and similar quasi-wealth taxes are nearly £50 billion, meaning we could replace the lot with a full charge on site premiums.

All this means is working backwards from the site premium and taxing each household on a notional income figure which produces the correct tax liability.

I've crunched the numbers and what we end up with is this (assumes single earner and one personal allowance, 2013/14 tax rates):

Value of home/Tax bill/Notional income
£100,000/£3,000/£24,440 (bottom decile)
£200,000/£6,000/£39,440 (median/average)
£300,000/£9,000/£47,945 (top quartile)
£400,000/£12,000/£55,445 (top decile)
£1,000,000/£30,000/£100,445 (top percentile)

As a reality check, according to the CML, the average house price and income for first time buyers are £173,000 and £42,000, for "home movers" they are £261,000 and £62,000.

With UK lump-sum taxation, their notional taxable income for homes of that value would be £35,000 and £45,000 respectively, so they'd be paying a few thousand less in tax each year and there would be no disincentive to earning more.

So this would genuinely help people "get on the property ladder" and reward "hard working households" by giving them a tax cut; and the harder people work and the more they earn, the lower is their effective average tax rate, which demolishes another couple of KLNs.

What's not to like?

For vacant homes, second homes and private rented housing, you can achieve exactly the same with a flat rate charge of the 3%, the figure we first thought of. If landlords want to agree with their tenants that the tenant will register to pay the same amount in 'income tax' as the landlord would have paid in the flat rate charge, well so be it, that's a private agreement and does not really affect the incidence of the tax.

But by doing so the landlord is cutting off his nose to spite his face; if he just pays the "vacant home charge" or "second home charge" then HMRC can politely turn a blind eye to the fact that he probably has some rental income, so there'd be no need for landlords to declare their rental income and pay tax on it etc, and tenants wouldn't have any income tax deducted from their wages. There will be a significant tax saving to be split between the two of them and the tax collected from a privately owned home will be exactly the same whether it is rented out or owner-occupied.


Pablo said...


Mark Wadsworth said...

P, yes, workings here.

Did you expect a higher or a lower figure?

Pablo said...

The site premium (that element of the rental value that relates purely to the location rather than the bricks and mortar) for UK housing is very easy to establish to within a reasonable margin of error, it's about 3% of current selling prices

Mark Wadsworth said...

P, is that a statement or a question? How much do you think the "site premium" is?

Pablo said...

Sorry, I was in a rush + misinterpreted what was being said. I was thinking that you were saying that site value is only 3% of selling price, which, of course, you weren't! :-)

Mark Wadsworth said...

P, no, for clarity: the annual rental value of the site premium is 3% of selling prices; clearly the land element of the price is about one-half to three-quarters of the selling price, just depending where the home is.