Monday 3 June 2019

Introducing LVT by stealth

I love LVT and I love maths, so here goes...

First, write down what you know.

1. Let's get rid of the four biggest and most egregious taxes on housing/wealth: Council Tax (regressive) net of rebates annual revenues £25 bn; SDLT (progressive) £10 bn; Inheritance Tax (hyper progressive unless you are really rich) £5 bn and the TV licence fee (hyper regressive) £4 bn.

2. And let's get rid of Employer's NIC, a tax on jobs, annual revenues (say) £86 bn (60% of total NIC revenues £143 bn -  I've never found an official split between Employee's and Employer's).

3. To be fiscally neutral and replace those five taxes, a residential LVT would need to raise £130 bn a year. This would require an LVT of 65% of total annual site premiums, or for the uninitiated, about 1.8% of current selling prices.

4. Politically, this will only way this will fly is if you minimise the numbers of losers and maximise the number of winners which is how the buggers get away with hiking tobacco duty each year, because only one-fifth of adults even notice.
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Let's start in the middle (and work outwards) with a recent first time buyer couple in an average/median value home, both employees on an average/median wage of £25,000 a year, who bought a house with a 20% deposit (or who have 'built up £50,000 equity' since they bought) and a 4 x joint income mortgage, so their house is worth £250,000.

At present, their P60 looks like this (courtesy of Listentotaxman.com):
+ Salary £25,000
- Income tax £2,498
- Employee's NIC £1,964
= Net £20,538

What they don't know is that their employers have each had to chip in £2,259 Employer's NIC. In truth, their gross wages are £27,259 each and they pay £6,721 tax each.

What they do know is that they have to pay about £1,100 in Council Tax and the TV licence fee out of their net income.
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Next year the LVT on their home will be £4,500 (£250,000 x 1.8%), which will be collected via PAYE, half each (the same as any coded out benefit, Student Loan repayments etc) and their P60s will look like this:

+ Salary £25,000
+ Employer's LVT contribution £2,259
- LVT £2,250
- Income tax £2,498
- Employee's NIC £1,964
= Net £20,547

So no real difference there, except they no longer have to pay the £1,100 Council Tax and TV licence fee. So they will be modest winners and will wonder what all the excitement was about.

HMRC won't care whether they tax they collect is called 'Employer's NIC' or 'Employer's LVT contribution' or 'LVT', it all goes in the same pot and can be dished out again as old age pensions or as block grants to local authorities (to make up for council tax). Those councils with high council tax get the same high amount; those with low council tax get the same low amount.

Employers won't care either for the same reason. Cost to them is the same.
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It is easy to find 'hardship cases' where people will pay more than now:
- Poor Widows in Mansions (who get the 'defer and pay on death' option);
- the self-employed who pay  much about one-third as much in National Insurance (tough, they now get the same state pension rights so there is no policy justification for this);
- private landlords. Super tough, they should have seen it coming.

It is just as easy to find a huge group of people who will pay a lot less - tenants (and young adults who still live with their parents), who out-number all the Poor Widows in Mansion and the self-employed in electoral terms, if they can be bothered to register to vote and actually vote.

They will see the lines 'Gross salary' and 'Employer's LVT contribution' with no deduction for 'LVT', so that's like a 9% pay rise,  well worth registering and voting for.
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Then the government just has to keep going...

If LVT goes up from 65% to 100% that means a £70 bn reduction in other taxes; such as reducing the rate of VAT from 20% to 5% or so (and getting rid of a load of dumb exemptions and the zero rating for new housing). The maths gets a bit more complicated here because of the circularity, but it's all do-able, I'll plan the next step once we've got going.

7 comments:

Abdur Rawat said...

What rate would be levied on council house / social housing tenants and what would their p60 look like?

Mark Wadsworth said...

AR, the LVT is paid by the freeholder/landlord, not the tenant. Councils might increase rents a bit.

John said...

How would councils increase 'rents a bit' if Georgists are always arguing that private landlords would be unable to pass LVT on to their customers?

Sobers said...

Your calculations will work as long as you assume that everyone lives in a house their current income can afford the 80% mortgage on. Then income will be largely in proportion to house value and the amount they lose in LVT will be offset by the amount gained from tax cuts.

However many people live in houses that they couldn't afford to buy on their current income, and not just the widows in mansions you always decry as a straw man. I can think of several people in my own social circle and family who are not that wealthy, certainly not in income terms, well below the average income, and live in houses that they could not afford to buy today. Mainly because they have either received small inheritances they have put into property, they bought houses cheaply many years ago when house prices in that area were relatively lower, or they bought their council house at a considerable discount, or have paid off their mortgage and downsized their jobs to match their outgoings. So they are not 'rich' by any stretch of the imagination, yet they would be clobbered by an LVT. Mainly because they have managed to build up some capital, which is located in their houses.

Thus they are exactly the one who will scupper any LVT - politically speaking its not a pure balance between winners and losers that determines which side wins, its how many winners actually side with the losers, because they feel its unfair whats happening to them. Hence why tobacco taxes are politically fine, because the winners don't care a jot about smokers, they just think 'If you don't like the price of fags, don't buy them, and you won't pay the tax'. Whereas if significant numbers of ordinary people with below average incomes are hit by LVT, then many more people will vote against it, even though they might be winner themselves, because they consider it unfair on someone else. I would be a massive winner under your proposals above, even taking into account the fact I'm self employed (as which incidentally we get less rights - no sick pay, no holiday pay, no employment rights, so you can sod right off telling me I get the same as an PAYE employee for less NI contributions), yet I would vote against it, because I know too many people far worse of than me who would be hit by it.

There is also the fact that losers count far higher in political pressure than winners, and in our FPTP voting system, coupled with the (at the moment anyway) 2-3 party system, any party who proposes a change that creates more than a very small amount of overall losers will almost certainly not win an election, as their opponents will undoubtedly oppose an unpopular tax, the loss of votes will prove fatal, as swing seats can be altered by a fairly small % swing. The history of the poll tax shows that tax changes that create significant numbers of losers, regardless of whether they are balanced by equal (or indeed greater) numbers of winners are political kryptonite to the party proposing them.

Mark Wadsworth said...

John. Rents are set by tenants net incomes. LVT on landlord does not affect their net incomes. Reducing taces on wages increases them.

S, that's some primo Homey bleating. Socialism for land speculators, funded by tenants. Brilliant. Shows just how unfair the system is.

Lola said...

There's another reason why no one in 'power' like LVT, Well two reasons. One, it's an in yer face tax. No stealth. And two, once all taxes are off incomes, there is no need to report ones income. 'They' hate the thought of that. And corollary of that is increased liberty for me and you - if you're quite happy as a tenant The State (ex UBI) will have no way of controlling you.

Bayard said...

Lola, also there's another reason, the rich will pay more, the poor less and guess which group has the majority of political power.