Morbidly Obese One still doing his best to f*** everything up for everybody else...

Those who are interested in IDS' welfare reforms might remember that one of the flies in the ointment is that Council Tax Benefit is not being rolled into the Universal Credit (although that had originally been the plan).

The much vaunted 'maximum withdrawal rate' of 65% is a nonsense of course; if you're earning anywhere near enough to live on, your marginal rate is 76%. If Council Tax Benefit remains in its present from, the marginal rate goes up to 81%. Anyway, on with the show...

From Local Gov:

Council tax benefit is due to be cut by £480m by 2013 (1), with rules to be set by local authorities in the future, as part of the DCLG's on-going localism agenda (2).

If Mr Pickles wins the argument, universal credit could dovetail with other council tax benefit systems, potentially leaving some claimants still paying the theoretical 90% tax rate (3), which Mr Duncan Smith is seeking to abolish by guaranteeing workers £3.50 for every £10 they earn (4) ...

A spokesperson for the DCLG said: 'The Government remains committed to localising Council Tax Benefit from 2013-14 (5), and reducing its costs by 10 per cent (6). Full consultation on the system of local council tax rebate schemes will be undertaken in due course. This reform is part of the decentralisation agenda. It will create stronger incentives for councils to get people back into work (7) and so support the positive work incentives that will be introduced through the Government’s plans on Universal Credit.'(8)

1) Excellent. Let's scrap the benefit entirely and just reduce Council Tax in Bands A and B accordingly (most claimants live in Band A or Band B homes anyway). That simplifies things and reduces the high marginal rate problem.

2) Aka 'NIMBY Agenda'.

3) I don't think there will be a 90% tax/withdrawal rate, unless a local council decides to have a withdrawal rate of 50%. If the rules are unchanged, the rate will be around 81% (which to be fair is a tad better than the 100% rates that exist under current rules).

4) IDS is lying here, it would be correct to say 'guaranteeing £1.90 for every £10 they earn'.

5) Why? Any reason why? Council Tax is a national tax so why can't the rules on rebates be set nationally?

6) See my bullet 1).

7) Maybe so, but it will weaken incentives for people to 'get back into work' so is worse than self-defeating.

8) It won't 'support the positive work incentives', it will 'completely undermine' them you f***ing idiots.

What's everybody so scared of?

1. While the 'failed old parties' bandy about fairly similar manifestos, let's remind ourselves of the biggest immediate problem facing today's younger 'hard working families'.

They aren't just looking at the additional future publicly collected tax bill required to pay off the accumulated national debt which the current lot has run up, they also have to borrow and pay off an average of £160,000 or so to 'jump on the housing ladder', of which around half is a privately collected tax, in other words, the price of an average house in excess of the bricks and mortar value.

2. Having ploughed through Fred's new book on the way home, the most telling part is this (page 266):

Was I being paranoid?

One man knew the answer to that question: Matthew Taylor [New Labour's policy director for the 1997 General election, also charged with drawing up the manifesto for the 2005 General Election]. And, as it happens, he too was a speaker at the Warwick Economics Summit. We met in the hospitality room, and I told him about my 1997 alert to Blair, Brown, Darling, Mandelson and Campbell. Ten years, enough time for a government to prevent a house price boom that would otherwise peak in 2007, driving the economy into recession.

Taylor knew the inside of New Labour's policy-making process like no-one else. So I challenged him with a question: "What was the one policy that the government could not countenance?"

He replied without hesitation: "The Land Tax".

3. I have, on this blog and elsewhere, allowed myself to be bogged down into the finer points of land valuation, which is a secondary issue. With my simplification campaigner's hat on, here's what a Land Tax boils down to:

a) all the taxes on property occupation and ownership and wealth generally*, which could and should be replaced, amount to about £60 billion per annum.

b) There are about 4 million acres of privately-owned, developed land in the UK

So to replace the entire list below would require a tax of about £15,000 per acre or £3 per square yard per annum. So the Land Tax bill for an 'average' semi in an 'average' area would be £1,000 a year or something (slightly less than the current Council Tax bill plus TV licence fee).

If the tax is to be more proportional to actual land or property values, then round my way** it would be more like £10 per square yard per annum, and in town centres it would be much more - as much as £100 or £200 per square yard per annum in prime Central London*** (which is no more than what they currently pay in Business Rates). Conversely, the tax would only be £1 or £2 per square yard per annum for ex-council houses or industrial estates outside the South East (which is slightly less, on average, than they currently pay in Council Tax less Council Tax Benefit plus TV licence fee; or in Business Rates as the case may be).

Where we take it from there is another topic.

* From the Public Sector Finances Databank for 2009-10:
Council Tax £24.8 billion
Business rates £23.7 billion
Stamp duties £7.4 billion
Capital gains tax £2.5 billion
Inheritance tax £2.2 billion
Insurance Premium tax £2.3 billion
Then minus off Council Tax Benefit and agricultural land subsidies (about £3 billion each) and add on the TV licence fee (also about £3 billion).

** Where I live is probably in the highest quintile of areas by property value. If I multiply the area of my house by £10 per square yard, then that amounts to rather less than a quarter of the rent we pay every year, or about half of what our landlord currently has to pay in income tax on the rent, plus the Council Tax and TV licence fee we pay. So this all seems 'about right'.

*** So somebody living in a flat in Central London in a ten-storey block with no private garden or car park can divide the size of his flat by ten to work out his share of the Land Tax.

Citizen's Income & Housing Benefit

One common objection to replacing the entire Welfare State with a flat-rate Citizen's Income/Citizen's Pension system (i.e. every legally resident British citizen gets the sum of £x in cash every week, depending on age/disability, which would be non-contributory, non-taxable and non-means tested) is that the amount would have to be very high to be enough to cover housing costs, which would make it too expensive, a gripe shared, interestingly enough, by right-wingers and left-wingers, rather than my suggested starting figure of £70 per week for adults (£35 for kids, £140 for pensioners) which would cost a lot less than the current Welfare State.

That's missing the point. Housing and Council Tax benefit (total nominal outlay about £18 billion a year) can be neatly divided into two chunks;

Chunk 1) Two-thirds of that goes to social tenants, so it counts as an expense to the DWP, but counts as income for local authorities. So that's not really an expense at all. Rather than the over-complicated system whereby local councils have two departments to chase social tenants for rent and council tax and another two departments sort out Housing Benefit and Council Tax Benefit, which are savagely means-tested (withdrawn at a total of 85% of your post-tax income, which includes Tax Credits, natch), even in the absence of a CI-style scheme, it would be much better to scrap rent/council tax for social tenants and give them a PAYE code with a higher rate of tax. I calculate that a rate of about twenty per cent would be revenue-neutral.

We can then do a more honest appraisal of the true cost of social housing, as we can easily identify the extra PAYE collected by HMRC and councils/Housing Associations can identify their running costs. It appears that social housing runs at roughly break-even, or possibly a small surplus. With a reduction in means-testing from 85% to 20%, more social tenants are likely to work and hence the surplus would increase.

Chunk 2) One-third is paid to private landlords. This is anathema to me, of course, as it is a subsidy to private landlords. It would be far better for the state to scrap it forthwith and take that £6 billion a year, gear up a bit and use the money to build more housing for the 1.6 million families on council house waiting lists. Private rents would fall, of course so after a year or two, there'd be hardly anybody on the waiting lists and we'd have an extra million units of social housing. The average revenues would be more than enough to cover interest and running costs, so we've saved the taxpayer £6 billion a year, reduced rents for private tenants and kept a bit of a lid on house prices (which would go down if rents went down).

Quite what happens from here on in is a matter of conjecture of course - my view being that the private land market is so savagely rigged in favour of incumbents, for whom strict planning restrictions are a one-way bet (and an easy way for politicians to win votes), the state ought to just keep going. If the economy is growing at three per cent a year, why shouldn't the number of homes be increasing at three per cent a year (i.e. three quarters of a million homes)?

As long as private rents are significantly above twenty per cent of local incomes, there'll be demand for social housing, so we can just keep building it - a volume of 250,000 new units a year would be quite enough to give every young couple household the opportunity to move into a new home, for example*. And if more people are in state-owned housing, their average incomes would increase, so the tax rate could fall to maybe as low as ten per cent, which would in turn keep private rents and hence house prices down.

There, I've said it.

* Sure, the state is not particularly good at running housing - they're rubbish at evicting nuisance tenants, for example, but there's nothing to stop them sub-contracting that to private or mutual organisations with a profit motive; and sure, there will be more and less desirable housing, which can be allocated by charging a premium for the nicer homes, which again will help reduce the marginal tax rate and so on. That's all details, and different areas will try different things until we work out in practice what's best.

How can you have a debate if people won't listen?

Mike Schofield of Isitfair wrote an article on the iniquities of Council Tax over at ConHome last week.

Heartened by the blurb on the front page:

"Markets don’t do what politicians want them to. That’s because markets are human. They reflect the interactions between millions of human beings. Indeed, they are the interactions between human beings...",

I posted as follows...

"C[ouncil] T[ax] only pays towards a quarter or so of local government spending, and accounts for about 4% of total tax revenues. I get more upset by the tens of thousands that Mrs W & I have to pay in income tax/National Insurance and VAT than the £2,400 we pay in CT, which, as we are tenants, merely serves to depress the rent that we have to pay. In other words, if they scrapped CT and had local income tax instead ... then our landlady could hike the rent by £2,400 and we'd pay even more [than that in extra] income tax. So for tenants this would be a double whammy, and for landlords is would be a God-send ...

"I recently moved from a Labour controlled council to a Conservative council area in a similar sized house and the council tax bill is £2,400 as opposed to £1,400. Which is fine by me, actually, because the lower council tax boosted the value of the home I sold and depresses the amount of rent we have to pay."

To which Mike Schofield responded "Mark Wadsworth - You amaze me! You are happy to pay £2,400 a year - out of income that has already been taxed at least once!"

Which bit didn't he understand? Can somebody help me here?

Social housing and Housing Benefit

Most proposed Citizen's Income schemes shy away from including Housing Benefit in the suggested flat-rate CBI, because while it would be perfectly affordable to extend the entitlement to low-rate benefits of £60 or so a week (such as Income Support, Jobseekers Allowance and Incapacity Benefit - currently claimed by around 5.3 million adults) to an additional two or three million adults on low- or no incomes, such as married mums and students, provided the worst excesses of the welfare system (e.g. Tax Credits) were scaled back or scrapped, increasing taxes to pay for an additional £82 per week for all households in Housing Benefit/Council Tax Benefit would be totally counter-productive (£68 plus £14, see previous link).

Opponents of Citizen's Basic Income-type schemes see this as an Achilles' Heel. Not so ...

As ever, it helps to look at the bigger picture: 82% of Housing Benefit claimants are in social housing (over 4 million households), so the amount paid out is a meaningless figure - this is merely different branches of government shuffling money round between themselves. We could achieve the same net transfer/subsidy without all the admin, fraud and hassle by simply reducing social rents*. There are only 750,000 households renting privately claiming Housing Benefit. As this is a subsidy to land ownership, it ought to be phased out anyway, or as a stop-gap, be replaced with 'Workfare' jobs paying a similar amount.

Looking at the even bigger picture, if we moved to proper Land Value Taxation, the LVT bill for households in smaller homes would drop anyway (compared to their current Council Tax/TV licence); LVT would be payable by the landlord/owner, not the occupier, so for tenants it would be absorbed into overall rent levels. As overall rent levels are set by market forces, these would by definition be 'affordable', so there would be no need for 'Land Value Tax-Benefit'. If you want to help the poor, it is always better to increase the tax-free personal allowance rather than to subsidise one particular item of expenditure (or taking the extreme view, to provide council housing at all).

Going further than that, I am in favour, as far as possible, of replacing taxation with user charges, preferably set locally so that everybody can decide whether they are getting value for money. And what are rents from social housing if not user charges? Further, don't forget that receipts from rents of social housing are currently earmarked and ring-fenced, so councils don't benefit if they manage to increase their rental income past a certain point! Surely, councils should be allowed to keep all the rents they collect, which will go in the same pot as locally collected Land Value Tax and other user charges?

And finally, Housing Associations are publicly funded, so they compete unfairly with private providers, and they are subject to fewer constraints than local councils. Their assets should be either sold off to private sector or brought back under local authority control.

* Or even better, setting rents in the social sector as a flat percentage of a household's income. Those with no income would pay the same as now, i.e. nothing; those on low incomes would have slightly lower net housing costs, but not face the ridiculous marginal withdrawal rate of 95.5% that results from means-testing of Housing/Council Tax Benefit; and those on high incomes (who shouldn't be in social housing anyway) will pay more so they are more likely to move into private renting or home-ownership. Trebles all round!

Alcohol, licensing and sensible taxes

With all this blah-di-blah about the UK's fine and ancient tradition of binge drinking, let's look at some numbers:

1. Total alcohol duties are around £8 billion a year* (table C4), with as much again for VAT. That's £16,000 million.

2. There are about 60,000 pubs in the UK, paying an average of £300 for a licence to serve alcohol. That makes £18 million, i.e. bugger all compared to alcohol duties and VAT. The forms are ridiculously long and complicated, of course.

3. There are basically three places where you can drink - at home (which causes no bother to anybody), on the streets (which is up to local councils to allow or forbid under local by-laws**) or in the pub (which causes little bother in itself, it's outside the pub and on the way home where things can turn nasty - violence, vandalism and drink driving etc).

4. The turnover of all UK pubs is about £15 bn, or 60,000 x £250,000 a year. The VAT on that is somewhere over £2 bn, or £40,000 per pub.

5. Good taxes are more like user charges, and help balance the interests of different parties, in this case, publicans, drinkers and local residents.

6. So why not scrap VAT on alcohol - whether sold in the shop or in the pub - and fundamentally reform existing licensing laws? We should allow local councils to auction off the licences for market value instead! If an average pub no longer has to pay £40,000 in VAT, it can happily bid at least half that much for a licence - maybe much more - and stay in business. For people who drink at home, causing no bother to the general public, booze gets cheaper, of course.

7. For every additional hour opening time in the evening (which is what causes the perceived problems) a higher rate would emerge, via the auction process. So the pubs that shut at 11 o'clock end up paying (say) £20,000, those that shut at midnight end up paying (say) £30,000 a year, and so on. The local council can use that extra £5 million income (average 200 pubs x average £25,000 licence) to pay a bit of overtime to policemen to sort out the troublemakers, catch the drink drivers and to ambulance crews to get people to A&E; as well as clearing up the broken glass and other minor acts of vandalism***.

8. We then also have a simple and fair way of measuring and dealing with the 'external costs' of binge drinking. Local councils can say exactly what the licence income is and have a pretty good idea of the direct costs.

9. And of course, from a libertarian-but-considerate-smoker's point of view, local councils should also be allowed to auction off a restricted number of smoking licences, say one for every four pubs in the area. If that increases a pub's takings by one-third, they'd be worth at least £10,000 a year****, so that's another half a million quid for the local council for sweeping up cigarette butts and so on.

* That £8 bn is considerably more than the cost to the NHS of £3 bn for alcohol related injuries and illnesses.

** The same general principles could be applied to supermarkets and off-licences of course - if a local council is happy to allow drinking in the street, it can auction off 'off-licences' to local shops.

*** Let's say four hours a night overtime for 50 additional police officers/medics x £50 per man/woman hour x 365 nights a year = £3.7 million a year, with £1.3 million left over for clearing up broken glass and so on.

**** Average turnover per pub £250,000 x one-third = £80,000, on which gross margin 20% = £16,000

"Tories target long-term jobless"

The Tories are stumbling blindly in vaguely the right direction.

As regular readers may know, I am all in favour of chucking all non-housing related benefits into a pot and dishing it out as flat-rate, non-means tested, non-contributory universal benefits. Children would get £34 a week and pensioners a flat £138 a week (or £117 plus State Second Pension). Legally resident working age adults (regardless of income or marital status) would be able to choose between a "Citizen's Income" of about £60 (but no tax-free personal allowance) or a higher tax-free personal allowance of £9,000-plus.

This would all be broadly fiscally neutral and would remove the poverty trap as recently highlighted by Migrationwatch, thus getting rid of all the discentives to work, marriage, studying or saving.

This leaves us with Housing & Council Tax Benefit, of course, which average around £90 per claimant household. This could easily be replaced by Workfare schemes, run by local councils paying £90 per week tax-free. Which puts paid to Peter Hain MP's rather pathetic objection that "...the Tory plans were hugely costly and would not work".

Orange Face goes on to say "If you divert people into mandatory community activities they don't get a job at the end of it ... the way to get people back into work was through new skills and training".

This is complete crap: for many low level jobs, about the only skills required are turning up on time and being there. Which would be new skills for a lot of people currently languishing on benefits.