Sunday, 8 November 2015

Killer Arguments Against LVT, Not (378)

I went to a Labour Land Campaign meeting last weekend to discuss "implementation".

If you want to skip the boring background to all this, click here.

Another member and I had, independently, drawn up a list of existing property/wealth taxes which could and should be replaced; added up total revenues R (about £80 bn); calculated the total amount of rental value of UK developed land and buildings which relates purely to the location premium L (about £240 bn); divided R by L and arrived at a figure of around 25% for residential and 50% for commercial.

The annual tax on the bottom two-thirds of homes would be the same as or less than their current Council Tax plus TV licence, assuming they don't claim Council Tax Benefit or its replacement. The LVT on commercial land in London would be higher and in most other places would be lower than their current Business Rates bill. That's them dealt with.

So far so good, then 'politics' got dragged into it, i.e. identifying the 'losers' i.e. those who would pay more on an annual basis, even though over a lifetime, getting rid of SDLT and IHT would largely even it out. Remember that SDLT is a very crude LVT paid in advance and IHT is a very crude LVT paid in arrears. Surely it is far better to get rid of those two taxes and ask people to pay-as-they-go?

One member present actually is a low-income pensioner whose home in London would now sell for around £1 million; we both had calculated that the LVT on such a house would be about £9,000 a year against a current Council Tax £1,500. We pointed out to him that all sensible LVT proposals include a deferment/roll-up option for such pensioners, the chances are that the deferred LVT payable when they die and the house is sold would be much the same as the comparable IHT and SDLT bills. Much less for those who die sooner, much more for those who live longer, it all averages out.

The next political objection was the diagonal opposite of the low-income pensioner in a high value home, namely, the aspiring young couple who had taken out a large mortgage to buy an expensive home and who were absolutely maxed out. My view is, they should have budgeted for an increase in interest rates of at least 1% or 2% and having to pay 0.9% LVT on the current selling price would only eat into that reserve, but was shouted down.

OK, Plan B, I said, for those borrowers whose LVT is significantly higher than their budgeted-for Council Tax, how about we just tell the banks to write off a corresponding part of the mortgage debt? Not good enough, came the reply. That would benefit people with large mortgages but not those with a small mortgage. At which stage I gave up on that line of reasoning.

So in the meantime, I have cooked up Plan C. That is simply to cap the interest rate on mortgages which were taken out prior to the introduction of LVT being announced.

Let's imagine our aspiring young couple has taken out a £900,000 mortgage to buy a £1 million home. (To justify that sort of mortgage, they must be earning around £180,000 a year between them, so they are not exactly starving, but hey…). A quick Google tells us that at the moment, they are probably paying 2.5% interest on their mortgage.

So for a 25 year mortgage, their annual repayments are currently £48,848 (=PMT(0.025,25,900000) and their Council Tax is £1,500, total £50,348.

If their LVT bill is £9,000, that leaves £41,348 to be spent on mortgage repayments, which would mean reducing the interest rate on their mortgage to 1.1%.

As far as I am concerned, we could cap the interest rate on all pre-existing mortgages at 1.1%. So nobody at the top end loses out, and people further down get a double win - their LVT is lower than what their Council Tax/TV licence was and they save a few quid in mortgage repayments.

The total annual 'loss' to the banks, i.e. land rent which they can no longer collect because the government is now collecting it would thus be be a surprisingly small £8 billion a year*. This is about the same as the pay and bonuses paid out to senior staff, or 0.1% of what they claim are their total assets; or 2% of their net assets, so nothing they can't afford.

No doubt somebody will think up an objection to Plan C, in which case, I will do a Plan D, and so on.

The only counter-objection I can think of is that banks will somehow game the system and charge more than 1.1% interest. In that case, the government just sets up a 'government mortgage bank' and offers people with pre-existing mortgages a remortgage at 1.1% interest. So the 'government mortgage bank' pays the banks the face value/amount outstanding of existing mortgages by creating more bank deposits with the Bank of England in exchange.

Let's imagine everybody did this. It would be like more QE. Instead of the BoE paying banks 0.5% interest on £300 bn, the BoE would be paying banks 0.5% interest on £1,300 bn. But seeing as the government bank is charging the ultimate borrowers 1.1% interest, that looks like a nice little earner for the government, and faced with this sort of threat, I think that banks will toe the line and cap interest rates at 1.1%.

* Total outstanding owner-occupier purchase mortgages excl. 'equity withdrawal' slightly less than £1,000 billion, average interest rate 2.5% and duration remaining approx. 15 years.
=PMT(0.025,15,1000)=£81 billion a year cash coming in.
=PMT(0.011,15, 1000)=£73 billion a year cash coming in.


Demetrius said...

Good luck, at least you are trying to think your way through the morass. This is a classic area of policy where there are no "right" decisions only those that are least wrong, or at least hoped to be. This is because one way or another there have to be losers and it will hurt. And this is because for decades the politicians have shirked making decisions and making it up as they went along to placate the voters.

Mark Wadsworth said...

D, thanks. The key is to replace as many taxes as possible to even out the winners and losers. The more taxes you replace - regressive and progressive ones - the smaller is anybody's net gain or loss.

I just had another objection to Plan C on Facebook: "Oh but you will trigger another banking crisis!"

I'm not sure what part of this people don't understand:

"The total annual 'loss' to the banks, i.e. land rent which they can no longer collect because the government is now collecting it would thus be be a surprisingly small £8 billion a year. This is about the same as the pay and bonuses paid out to senior staff, or 0.1% of what they claim are their total assets; or 2% of their net assets, so nothing they can't afford."

Lola said...

I do not agree with capping interest rates like that. How about just use the companion tax to LVT, a bank asset tax, and pay the over-mortgaged a tapering subsidy over 5 years? Overall you're (we're?) going to have to introduce LVT/CI/BAT over time anyway and five years is about right.

Mark Wadsworth said...

L, I do not really agree either, there are better ways of doing it, but it comes to much the same thing* and more importantly, it is much easier to explain or understand and has more "political traction".

* When it comes to monopolies, if you can't bust them, you can deal with them with either a) a super-tax and redistribution/tax cuts elsewhere or b) with price caps. Winners and losers.

Bayard said...

"No doubt somebody will think up an objection to Plan C,"

Yes, no government would never do anything that is so detrimental to such a large and powerful political interest.

Unknown said...

Surely the best solution would be to simply phase the tax in gradually over a period of some years - giving people some chance to adjust. At least 5 years, better 10, and 20/25 better still. Of course NPV style calculations would "net-in" the new price straight away but still as you say if people are really maxed out then that was risky anyhoo and perhaps that's just the breaks. Or maybe do a roll-up on those folks with a CGT at sale time.

Random said...

"what barrier to entry maintains the rent, do we think?"
The Town and Country Planning Act 1947 (and its successors) of course...
Says commentator "George Carty"

Bayard said...

R, nope, the existence of the need for planning permission makes land cheaper, not more expensive. Without PP, all land would be worth what building land is now worth, i.e. its full location value.

Mark Wadsworth said...

B, the banks are not particularly powerful, they are dependent on the largesse of the state and they can't threaten to leave or close down because we'd be better off without them. Plus they are easy targets for politicians.

SV, yes lots of people talk about phasing in and transitions, but a Parliament only runs 5 years and you can't trust the next lot.

So the point is to replace the existing crude taxes on land and wealth* completely, and in the spirit of fiscal neutrality work out the required LVT rate. The next government might well be Homeys again who merrily reduce the LVT rate, but would not go to the bother of reintroducing the old crude taxes.

* At an absolute bare minimum: Council Tax, Business Rates, SDLT, IHT.

R, where is that from?

B, agreed.