Wednesday, 8 October 2014

Killer Arguments Against LVT. Not (340)

Here's a heroic diagonal comparison from The Telegraph:

Labour's mansion tax could leave pensioners facing death taxes worth almost half the value of their property, an analysis by Treasury aides has found...

It's not the pensioners facing the tax bill, it is their heirs.

An analysis by a Treasury aide found that a family home bought in London 30 years ago for £220,000 is now worth £2 million.

That's a handsome unearned windfall capital gain of about £1,600,000 after inflation. And a £220,000 house 30 years ago was a bloody expensive house even then.

The aide said that if Labour bases its mansion tax on Mr Osborne's [Annual Tax on Enveloped Dwellings] scheme, the home would face an annual levy of £15,400, costing a total of £308,000 if deferred for 20 years.

Well don't defer it then!

The mansion tax bill would be on top of a £560,000 inheritance tax, leaving families with an effective death tax rate worth 43 per cent of the value of their property...

Maths mistake: assuming the accrued Mansion Tax is an allowable deduction and rates and allowances don't change, the IHT would be £416,800, but never mind.

Logic mistake: it's not a death tax. It's a lifetime tax. The longer you live, the more it gets.

Logic mistake: what's to stop the parents inviting their heirs to pay the tax for them, I'm sure you can have a binding contract, so a sole heir chips in £15,400 a year for a more or less guaranteed return of £1,460,000 (£2 million less IHT). That's an IRR of 8%, handsome. I'd be happy to pay it; the IRR would be much more if the pensioners die earlier.

And let's do a proper like-for-like comparison: What if our cunning pensioners had been earning a load of income which they forgot to declare for income tax (a quasi deferment option)? The income tax (plus penalties and interest) is due whenever HMRC catch up with them, if they are still alive, then that is income tax, if HMRC have to collect it out of the estate, it is still income tax. That does not turn income tax into a 'death tax'.

Warming to my theme, what happens if somebody had had £1,600,000 in earned but undeclared income over the last 30 years and HMRC caught up with them just before they die, what would the tax bill on that be? Pretty much 100% once you take interest and penalties into account.

What if somebody has been putting £50,000 a year to one side out of fair and square earned income, all subject to PAYE, over the last 30 years, total £1,500,000? How much tax and NIC would he have paid/borne? Something like half that, £750,000?

"Mansion tax is catastrophic and deeply out of tough and will hit voters in parts of the country where Labour needs to make an impact. It sends a very clear signal that we are anti-aspirational and will hit people who are asset rich and cash poor."

What do we aspire to? Making massive windfall gains at everybody else's expense.

So, starting from today, if the government gave people a choice:

a) We can keep house prices low and stable, or

b) We can drive up the price of your house by 400% over the next 30 years but as a quid pro quo we will start charging you a tax of 0.8% of the final value in 30 years' time,

I'd vote for A (I have children, FFS) but I am sure that many people would vote for B. They still end up a lot better off. And who's to say that the Telegraph's Poor Widows wouldn't have voted for it 30 years ago?
UPDATE, re Ben Jamin's comment.

Those calculations above just look at the effective rate of tax on the unearned capital gain (about 30% - 40%, depending on assumptions) which is not excessive.

This still leaves the annual site-only rental value of about £50,000 a year entirely untaxed. Think about it, if a young couple moves to London and rents, what can they get for £15,400 a year? Not much, is what. Everybody expects them to cough up out of their hard-earned and highly taxed wages with nothing to show at the end of it.


Ben Jamin' said...

And, how much rent have they saved over 50 years?

The rent isn't "free". It value has always to be created and sustained by something/someone.

Of course people will say they paid their rent when they bought their house.

This is bollocks. They have bought an exchangeable licence that allows them to enjoy the land rent free.

It's the only reason Land has a selling price.

The Stigler said...

By any measurement, it won't affect Labour's chances, and will do them a lot of good.

Winning an election means winning places like Worcester, Swindon, Northampton. The voters of Bolsover and Kensington don't matter - the former will vote Labour in large enough numbers, the latter will never vote Labour.

And those places have very few £2m homes. According to Rightmove, within 5 miles of Swindon there is one with an "offers over £1.95m", so, right, one voter.

It's why it's a brilliant policy for Labour - loads of money for the exchequer, no effect on economic growth, very little effect on marginal seats.

DBC Reed said...

Re: "aspiration".Many years ago there was something of a revolution in Philosophy when Ordinary Language Philosophers après JL Austin started saying its pointless debating what,for instance, "freedom" is; the word is seldom used on its own; it's generally used with prepositions hence one is "free to" do something or there is a "freedom from" something .The same applies to "aspiration": one aspires to something. In my experience of Parents Evenings listening to parents of 16year olds they aspire to their children doing jobs that will support a dirty great mortgage."Aspiration" is a Homeownerist code word IMO.

mombers said...

Where do they get the £15400 figure from?
Also, no mention of the many more people who are cash rich, asset poor, who are being absolutely shafted and prevented from ever becoming asset rich.

Ben Jamin' said...

Perhaps we should campaign to change the name "freehold title owner" to "freelunch title owners"?

So, it's nice and clear what's it actually means.

Mark Wadsworth said...

BJ, good point I have updated.

TS, probably.

DBC, agreed. "Aspiration" is the ultimate Homey justification for anything they want.

M, Balls said he would extend the Mansion Tax Lite (or ATED, which has been successfully trialled on dodgy foreigners over the past two years) to all homes. The ATED charge in £2 to £5 million band is £15,400 a year.

BJ, yes, but they PAID for their land out of TAXED INCOME. Allegedly.

Fact is, all payments to private individuals for use of land are white collar crime. The fact that somebody has been both a victim of white collar crime in the distant past and wishes to be a perpetrator thereof now and forever more is neither here nor there as far as I am concerned.

Ben Jamin' said...


As I pointed out above, as land has no cost of production, if they had "paid" for it's value, it's selling price would be zero.

All they've done is buy the right to a perpetual free lunch. One they can sell on to the next freelunch title holder.

Mark Wadsworth said...

BJ, their payment for land can be broken down into

a) payment for cost of land = £zero and

b) ransom payment (not just in the estate agent jargon sense, but in a very real sense of blackmail and extortion) of the rest of it = all of it.

The Homeys just want to be able to extort money out of the next sucker down the line, and so on ad infinitum.