Monday, 7 April 2014

Killer Arguments Against LVT, Not (322)

Some Homeys get hysterical and say that introducing LVT would be "massive redistribution" and accuse you of being a Commie or something.

Well no, that's utter nonsense. There are other Homeys who argue that the "wealthy" would get off lightly and that the "hard-working homeowner" would be clobbered. It's all hysterical nonsense devoid of factual basis.

All mainstream LVT supporters (apart from, admittedly, a few Fifth Columnists) agree that LVT would and should be a replacement tax, and for the sake of this discussion, we can assume that government spending/total tax revenues are kept pretty much constant, it is just a shift in who pays for it.

(It would be nice if the UK government pulled its finger out and got rid of all the waste and theft in the system, which must be about 20% - 25% of total spending, i.e. get spending back down to 35% - 40% of GDP, with which we managed quite happily until The Financial Crisis, which they used as an excuse to massively ramp up spending on their nearest and dearest, The Fog of War and all that, but that is also a separate topic. Suffice to say that government spending in the UK is not particularly redistributive downwards.)

Everybody has their own personal list of most-hated taxes (for many people, LVT is at the top of that list, of course), but the ideal candidates for replacement are existing taxes on land, buildings and wealth generally. Some of these are 'regressive' (Council Tax, the biggest chunk, and the TV licence fee) and some of which are 'progressive' (SDLT, CGT, IHT); and some are just a plain nuisance (Insurance Premium Tax, s106 agreements).

(Let's put Business Rates to one side for now).

Taken individually, all these taxes are 'unfair' in the emotional sense and downright stupid in the economic sense, but taken together, the 'unfairness' evens out (i.e. people in average homes pay nearly 1% of its value every year in Council Tax/TV licence but pay very little in SDLT and nothing in IHT - people in expensive homes pay bugger all as a percentage in Council Tax/TV licence but get smashed with up to 40% IHT once a generation). So once you net that off, what you are left with is a whole load of stupidity.

If you replaced the whole lot of them with a flat tax on site-premium rental values, the 'unfairness' would even out, and by and large, there would be relatively few identifiable 'winners' or 'losers' from the change. But that'd be a good first step in the right direction, one good tax replaces a shed load of bad taxes on a fiscally neutral basis.

(As it happens, the rate would average out at about 0.7% per annum on current selling prices, which is not uncoincidentally how Domestic Rates in Northern Ireland were recalculated back in 2005, or the rate chosen for the Annual Tax on Enveloped Dwellings introduced last year),

If we're somewhat more radical than this and start replacing or reducing the Big Three taxes - income tax (approx. £150 billion a year); VAT (approx. £100 bn a year) and National Insurance (also approx. £100 billion a year) it would be perfectly feasible to do it such a way that there are relatively few identifiable winners or losers.

(VAT is the worst and most economically damaging tax, but it is neither particularly progressive nor regressive; it just makes everybody poorer all the way up and down the income scale; puts the most businesses out of business and creates the most unemployment. The National Minimum Wage might be daft, but its impact, to the extent it can even be measured, is a tiny fraction of that, far better to reduce means-testing, but I digress. But the EU insists of a minimum standard rate of 15%, so there's not much we can do there, even if the pol's wanted to, which they don't. Ditto Employer's National Insurance.)

Higher rate income tax is clearly 'progressive' and Employees' National Insurance is clearly 'regressive'. They both raise similar amounts of revenue and higher rate tax kicks in where Employee's NIC tails off, so we could, for the sake of this discussion, get rid of both at a total static revenue loss of about £90 billion. Factor in a bit of Laffer Effect and you'd need to increase the LVT rate from approx. 0.7% to approx. 2% of current selling prices to be fiscally neutral.

So to the extent this would result in any "redistribution", it is merely from the 'land wealthy' to the 'income wealthy' or from 'rent collectors' back to 'rent generators' (which we LVT-ers refer to as predistribution), in the same way as tobacco duty is redistribution from smokers to non-smokers (to the tune of about £200 a year to each non-smoker!).

The two categories overlap to a large extent (most low earners live in small, cheap homes; most high earners live in nice big homes) so it is certainly not upwards or downwards redistribution, it would be sideways redistribution - the much eulogised "hard-working homeowner" would truly be better off and those who are currently hoping to inherit big time and then retire on the proceeds would have to become "hard-working homeowners" themselves - to the extent that this concept even exists.

Here endeth.


Kj said...

As always, bravo.
I was thinking about it, how simplie it is to do this with all the taxes people nag about and hate, like stamp duty and iht, and apply it to land values as a percentage of selling prices, and show people how little it would be, to sweeten the deal of sorts, since the immediate high figures in those taxes should rally more fury than a smallish property tax.
Alas, the sneakiness of the PAYE-deducted taxes and VAT has the upper hand. Our govt just abolished IHT from '14, lowered wealth taxes slightly and the standard rate of income tax with 1 percent. Good measures in themselves, and you'd expect them to follow suit with what every economic adviser from the OECD to the central bank head is saying to do something about property. Maybe something slightly non-radical like tapering off the universal interest deduction, or making the voluntary council property tax mandatory and equalise it. Ofcourse not. This was financed largely by an increase in (employee) NI. Overall yet another Homey victory. F... me.

mombers said...

@KJ which country do you live in?

@MW why are Business Rates anti-business?

Kj said...

Norway mombers.

Kj said...

The northern irish rates are a stroke of genious in it's simplicity, barring a few minor issues. One thing though, you wrote about it here, and wrote that they have running costs at 0,6% of collected revenues. The correct percentage is actually 6% (60 mn out of 1 bn). That's quite on the high-side. Why? They've only done a revaluation back in 2005.

Mark Wadsworth said...

Kj, no, I've clarified the post a bit.

Actual irreducible running costs = 0.6% (pretty good)

Annual write offs appear to be 3%, which is not brilliant but not that bad compared to other taxes.

Also - amount undeclared and evaded = precisely zero, which is much better than other taxes.

Kj said...

But 60 million is 6% out of 1 bn still isn't it? :)

Mark Wadsworth said...

Kj, no, £53 million was not new arrears all arising in one year, that was accumulated arrears from several years which were finally written off as irrecoverable.

New arrears each year seems to be about £33 billion - see workings in the post.

NI Domestic Rates suffers the design flaw that it is legally payable by occupant and not the owner, so if tenant moves out without paying, it is difficult to collect.

Mark Wadsworth said...

@ Mombers, Business Rates are not anti-business in themselves (the nearest thing we have to LVT), but they are incentive for land to be used for housing instead of for business; for buildings to be left derelict not used; and for buildings not to be improved.

Or I could delete that bit, if you think? I was in two minds about it.

Kj said...

MW: I'm talking running costs only, ignore arrears. You say they (running costs) are 60m, the report says so too, and bugger me if 60m isn't 6% of 1 bn.

Mark Wadsworth said...

Kj, well spotted.

I re-read the LPS annual report and net operating costs are £36 million.

LPS other main job is running the land registry, and it spends £25 million on that as a separate exercise, and it gets £25 million in registration and search fees each year, so that breaks even (as it should do).

So assuming everything else relates to the valuation/collection side that's about 3.5% of tax due, or £40 per home per year.

But that £40 per home per year is fixed, it would still be £40 a year if the tax were five times as much.

And the compliance costs for the taxpayer are zero, you just pay what they ask for.

Kj said...

Now we are on the same page. Yes, it's probably going to be a slightly higher fixed cost per property if more frequent revaluation, maybe 50 quid per property for revaluation (wasn't that the estimated cost of CT revaluation?), and a further 20-30 for collection and admin when you scale up from NI, but if you are collecting 10-15K per property, which are LVT figures, then you are below the 1% treshold.

Mark Wadsworth said...

@ M, I've taken out the bit about Business Rates, let's pretend that "business" and "household" are two separate worlds and just look at the latter.