Tuesday, 17 February 2015

Killer Arguments Against LVT, Not (353)

One of the top five KLNs of all time is that is would be very difficult and expensive to establish the site premium of each plot, and most land value taxers skirt round the issue (there are plenty of countries which do it simply and cheaply, noteably Chile of all places, but that's by the by).

Having thought about this a bit more, establishing the site premium (rental value/LVT bill) for each residential plot is actually very simple if you start at the right end and apply the 'divide and conquer' concept.

1) The correct way of calculating the site premium/ tax base for each plot is to look at the total £ rental value of each home/plot and deduct the real £ annual costs of maintaining the building = £ tax base. I have done this over and over and establish that by and large and in the grander scheme of things, for most homes, the rental value is between 3% and 3.5% of its current potential selling price (as at 2014-15). It's a bit of a short cut, but it will do.

(Nobody says you have to collect 100% of site premiums in LVT, so you can choose any number between 0.0% and 3.5%)

2) You split up the country into lots of smaller areas with a few thousand homes in each (such as a postcode sector) and you work out the total site premium for that area by e.g. looking at average selling prices as recorded by HM Land Registry and multiplying by anything up to 3.5%. You can do the whole country in a few minutes with a spreadsheet and pivot tables.

3) If such a smaller area consists entirely of very similar houses - all semi-detached or all medium sized terraced houses, for example - then all you have to do is divide the site premium for that area by the number of homes, they all get sent the same tax bill, no discussion and end of back chat.

4) Clearly, such homogeneous areas are few and far between. In most areas there will be a mix of all types of homes, from small high rise flats to large detached homes with massive gardens. So the valuer just has to ascribe a relative value to each home, starting in the middle with 1.0 'units' for a three-bed semi, down to 0.4 'units' for a high rise flat and up to 2.0 'units' for a detached house with a massive garden. There's no harm in having a national set of guidelines for this which will get honed over time.

5) The valuer then adds up the resulting number of 'units', divides the total tax base by that number to work out the tax per unit and then multiplies up again. So if the tax per unit in an area is £7,000 and medium sized flat counts as 0.6 units, the bill on that flat is £4,200.
We then get into the related topic of appeals...

6) The valuer publishes his initial list with ratings and tax bills for each plot/home and waits for the inevitable outcry with people moaning that their home is a only 0.8 units not 1.0 units because it's in the shadow of a motorway flyover or whatever. Some of these appeals will be justified and nodded through; others get turned down or put to some sort the popular vote: the gimmick is that the valuer doesn't particularly care.

7) Whatever happens, the total tax to be raised from that area is a fixed figure and gets divided by the number of units and multiplied up again, the total yield is the same.

To illustrate the point, let's imagine the total site premium is £24 million and the area consists of 3,000 very similar semi-detached homes, rated at 1.0 units each. The tax per unit is £24 million divided by 3,000 units = £8,000 per unit = £8,000 per semi-detached.

Everybody whines and moans and half of all houses are rerated down to 0.8 units, so now there are only 2,700 units in the area. Divide £24 million by 2,700 units = £8,889 per unit. The semis which still count as 1.0 units now pay the higher amount £8,889 and those which got downrated pay 0.8 x £8,889 = £7,111. Total tax collected is still £24 million.

8) So although every homeowner wants his own home(s) to be rerated downwards, nobody wants anybody else's to be rerated down, because the less they are paying, the more you are paying. So basically the valuer is a referee not a player and can let people bicker among themselves.

9) If people really can't agree, well then the local council just threatens to shut all its schools and hospitals, sack all its bin men and turn off the street lights. If that's what people want, let them have it. If people are selfish enough, they will end up with homes which are unsellable. If people are clever enough, they will use this as a bargaining chip to persuade the council to shut down a few white elephant projects and rein in excessive salaries etc. Who knows?

10) It is important to distinguish between reliefs which relate to a plot and those which relate to the individuals occupying it.

a) A majority of people in an area might see their vicar as the pillar of the community, and the vicarage as something for everybody's benefit. If they want to reduce the parish's cost of owning the vicarage they can agree to treat it as 0.1 or 0.0 units as a quasi-public building. So the bill for the vicarage is little or nothing and everybody else in the village has to pay a couple of quid more each year.

b) The same goes with listed buildings.  This is a financial and practical burden on the owner of the building and, in principle, of vague general benefit to 'everbody else', so if people want certain buildings to be preserved, the building is valued at a lower number of units. If only a minority are prepared to chip in, then the listing is cancelled and the owner can redevelop.

c) Or maybe there are certain 'pillars of the community' who live in rather grand houses and/or have little in the way of income i.e. Poor Widows In Mansions. A sensible system would simply give them the option to defer the tax until the next sale, but if a majority of 'everybody else' in the area agrees that she/her heirs should have to pay little or nothing, the grand house itself is still pencilled in as 2.0 units, but in a separate column in the spreadsheet, the Poor Widow gets a personal credit of 1.9 or whatever. But when she dies or leaves the area, the personal credit is cancelled and the next owner of the house is liable for the full 2.0 units' worth of tax.

d) The Homeys like pointing out that if people's income falls, then at least their tax bill goes down, which is a fair argument (and just about the only argument) in favour of income tax. So let's see them put their money where their mouth is:

A local council could agree a scheme whereby, for example, if the main earner in a household loses his or her job, he or she gets a personal credit of up to 1.0 units and a corresponding LVT reduction for the next six months; the exemption to be only used once every ten years. On average, a couple of percent of people will be involuntarily between jobs at any one time, so on average, 'everybody else' will be paying a couple of per cent more LVT as quasi- unemployment insurance.

That's fine by me, and if the terms of the scheme are sensible I would probably be happy to pay a couple of hundred quid more a year to be on the safe side.


Lola said...

(Note to self. I MUST learn how to use pivot tables.)

Ben Jamin' said...

In descending order of importance.

1.If we want a "tax" to be efficient it mustn't be a % of income/capital.

2.If we want it to be fair(to the payer) it must be attached to a freehold title not the individual.

3.If we want it to be fair to everyone else in the community, it must capture as must of the rental value of land as possible.

LVTers think point 3 is the most important, while I agree with MW that as long as we get 1&2 right we don't need to over complicate things for 3.

A 90% fair simple tax, is many times better than a 100% fair complex one.

Mark Wadsworth said...

L, it's fifteen minutes of trial and error and then you get it.

BJ, excellent list and agreed. Simple is good.

Bayard said...

"(it's the total value times 3% - 3.5%)."

Years ago a commercial landlord said that "the trade" worked on rents at 6%. Does that mean that between 42 and 50% of the rent is "actual cost". I would have thought it was much lower than that.

Ben Jamin' said...

@ B


Which gives me confidence that MW's 3.5% looks about right. If you divide it by the rental yield, you get the site only part out the other end.

So, central London = 3.5/4=87%


Mark Wadsworth said...

B, the 3 - 3.5% is specific to residential, commercial premises are a bit trickier because they are more varied and the rents are liable to Business Rates, which pushes down selling prices.

So commercial rental values are split three ways - tax, running costs and landlord net profit, unlike residential which is just running costs and landlord net profit.

So with commercial, the ratio of running costs to [landlord net profit plus running costs] is probably a bit higher than with residential.

Further, the 6% is just how they value buildings, using rent as a starting figure. They don't buy the building first and then try to charge 6% of that in rent.

Physiocrat said...

Why is it even necessary to think about selling prices at all? There is so much rental evidence on the property websites.

One of the things you will notice is that there is a "floor" to these rentals - for example, you will not find a three-bed semi to rent anywhere for less than around £500 pcm. As a first approximation, it could be assumed that the land value in these instances, which covers a substantial area of the scabbier parts of the UK, is zero.

This assumption also does away with the argument for homestead allowances and other complications - the allowance is built into the valuation on the basis that the land value is too small to measure or be worth collecting.