The Army Of Surveyor (updated)

I've done some more work on this and so have updated the original post, the main point was to show that establishing the 'site-only rental value' (aka 'site premium') of 99% of residential or commercial plots of land is relatively easy. While I was on the topic I have also calculated the potential LVT tax base. If LVT receipts are used to reduce other taxes, this will grow quite significantly (leading to a virtuous circle), but let's learn to walk before we can run..
---------------------------------
Further to point (2) of my earlier post, here is how I would envisage it working. The people from HM Land Registry have already done all this in a far more sophisticated fashion (and would fall about laughing if they read this post), it's just that the politicians have told them to keep quiet about it:

1. We split up the UK into smaller areas (there are about ten thousand local council wards or postcode sectors, so there are about 3,000 homes in each sector) and use the average three-bed semi detached houses in each sector as our reference point for that sector.

2. Proper LVT is based on the 'site premium' element of annual rental values, i.e. if two physically identical houses in two different areas rent for different amounts, the difference between the rents relates to the "location, location, location" and that is subject to LVT. All we need to do is decide what the zero base line is.

3. Data on rental values is harder to find (you can look up current asking prices on Rightmove and so on, but there is little official 'history') and not as well documented as selling prices, but there is a clear enough link between the two.

4. I was bored one weekend in May 2012 and set up a spreadsheet and typed in the recent average actual selling price of semi-detached houses in each of 2,780 inhabited postcode districts using the HM Land Registry data available via e.g. Rightmove (there are three or four postcode sectors per postcode district). I added a column for rental values (as at December 2012) and entered the current average rental asking price for a three-bed semi in every 100th district (sorted by value) plus a couple extra in the upper range and ended up with the following chart:

5. Excel's trendline has a gradient of 3%, it crosses the y-axis at £4,000 and the coefficient of correlation is 0.96. So if you know the current selling price, the rent you would expect to get = [selling price x 3%] plus [£4,000]. Anything over and above the £4,000 a year (to cover maintenance and return on cash invested in bricks and mortar) is the site premium, so we could also say that the site premium is 3% of the current selling price.

6. For example, from an area which is well into the top decile by value:
. £429,000 x 3% = £13,000 a year, against a gross rental value of £22,000 plus Council Tax, which leaves the landlord or owner with plenty of net income to cover running costs.

7. So to establish our total tax base, all we need to know is the total current value (at selling prices) of all housing in the UK and times it by 3%.

a) The figures quoted by Nationwide and Halifax of around £160,000 are misleading, the mathematical average is far higher than that at around £230,000, as Acadametrics explain. According to my spreadsheet, and assuming just under 100,000 homes in each postcode district, the average is about £250,000, but let's go with their lower figure.

b) 27 million homes x £230,000 = £6,210 billion total current value (selling prices), social housing is probably worth a bit less than privately owned, but by the same token, the government also has the income from the bricks and mortar, so I see little point in adjusting for that.

c) £6,210 billion x 3% = £186 billion potential tax base, to which we can add the £28 billion of the rental value which is already taken in Council Tax = £214 billion (a year).

d) For sure, this is going to have to be finessed a bit; all houses are not semis, so having established the site-premium for a semi in each sector (it would be £4,300 a year in the median sector), then we can call it 150% of that for a detached house with decent sized garden in the same sector, 125% for a detached bungalow; 80% of that for a terraced house; 60% of that for a large flat and 50% of that for a small flat (or a semi converted into two flats)*, or whatever the ratios are, and we can save ourselves a lot of hassle by putting homes into bands (like for Council Tax but narrower) and rounding everything down a bit, but hey ho, we'd then end up with a total site rental value of £200 billion a year.

8. So assessing the rental value of all but the most extraordinary or unusual homes is a doddle; we know the rental value of an average semi in that sector, and we then just assess all other homes as a proportion of that. The Valuation Office Agency already have records of all commercial land and buildings for Business Rates purposes, so that requires minor tweaks only.

Remember: it's only relative and not absolute values which matter. For example, if you are in a room with a dozen people all milling around and you have to guess how tall each one is in feet and inches, you'd struggle, but getting them to line up tallest on the left, shortest on the right is easy enough. If you are then told that the sixth and seventh people are 5'6" tall, you can easily guess how tall the others are.

9. It's then a question of which taxes we want to replace. "How about just cutting government spending?" shouts the crowd, well, we're currently running a deficit of over £100 billion a year, and getting that back to a surplus, assuming a constant tax take will be difficult enough, so let's not confuse the two issues.

If we just want to replace Council Tax (£28 billion a year), your new bill is 14% of the site rental value; if we want to replace C Tax and SDLT, your new bill is 19% of the site rental value; if we want to replace C Tax, SDLT and IHT, your new bill is 21% of the site rental value and so on.

10. Having got rid of existing land or wealth-related taxes borne by households (which raise about £50 billion a year), we'd still have £150 billion a year left over which we could collect (if we wished) in order to be able to get rid of the really bad taxes, so we could get rid of VAT (thus getting ourselves chucked out of the EU), get rid of higher rate income tax and make some headway into reducing National Insurance. There will be positive feedback from all this, so in a year or three, we'll be able to get rid of National Insurance as well, which boils the whole tax system down to two flat taxes: LVT and a flat 20% income tax (raising similar amounts each).

There, that wasn't difficult, was it?
----------------
* According to the 2001 Census, about 27% of homes are semi-detached, 25% are detached, 25% are terraced and 22% are flats, with 1% 'other'. So we could use standard 3-bed terraced houses as another reference point, and e.g. purpose built 2-bed flats as another one, and so on. And a weighted average of the relative values I suggested is about 100%, which means that semi-detached houses are a pretty good guide to total rental values.

More Hall-Rabuschka commonsense

1. From page 182 of their Flat tax - Q&A (the figures are historic but the principles are unchanged):

Q: You keep talking about broadening the tax base. What’s so important about this?

A: Tax rates are high today because the tax base is so narrow. Personal income in the United States is about $5 trillion. A raft of exclusions reduces this number to about $3.6 trillion in adjusted gross income and $2.4 trillion in taxable income. A lower rate on all or most personal income would collect the same amount of money as a much higher rate on taxable income.

The same situation applies to business income. Much of this income escapes taxation because it does not fall into the net of taxable income. Altogether, less than half the national income is subject to income taxation, which means that relatively high rates of tax are required to collect enough money to run the government. The only way to enjoy the economic benefits of low tax rates and achieve real simplification is to broaden the tax base to all national income.

2. The main tax break they rail against in the USA is the tax deduction for mortgage interest, they explain on page 164 that removing the tax break is not a big deal, firstly interest rates would come down and secondly, people would be paying a lower rate of tax on a larger amount of income. The point of all this is not just making tax returns simpler, it is reducing the marginal rate - because it is the marginal rate on earned income which does most of the economic damage, and not the total tax burden (yes, there are good kinds and bad kinds of government spending, where the least bad is universal benefits).

3. Conversely, this is why campaigning for tax simplification is doomed to failure - politicians love buying people off with tax breaks, and voters imagine that this is a costless exercise. Far from it, one man's tax break is another man's tax burden, and by and large they all cancel out. So people complain about the large amounts of tax paid on some of their income, but are glad that the rest of their income is exempt (or worse, refuse to accept that their tax-exempt income is income in the first place); they fail to realise that the reason the they have to pay so much tax on some of their income is because the rest of their income is exempt.

The other insurmountable problems include things like people believing these fairy tales that the basic rate of tax is 20%, that there is a National Insurance fund which 'goes towards my pension' and/or that VAT (also 20%) is a tax on 'consumption'. Not true, they are all taxes on income (your spending is somebody else's income) which average out at a rate of 50%.

4. The main explicit tax breaks in the UK are for pensions savings (tax relief for mortgage interest was phased out a decade ago). There is also the tax-free personal allowance/lower earnings threshold is another kind of tax break. HM Revenue & Customs treat these as tax reducers or tax expenditures, and publish figures for how much higher revenues would be if these tax breaks were scrapped and the now-taxable income taxed at the same rates as everything else (approx. £45 billion and £90 billion respectively)

5. There is an implicit tax break for owner-occupation because non-cash rental income was exempted from tax under Schedule A nearly fifty years ago. HMRC still publish a figure for what they think they could collect in Capital Gains Tax if main residences were not exempt (£13 billion), which is strange, because main residences were never liable to CGT, but of course they no longer publish a figure for the value of the exemption of non-cash rental income. So let's estimate non-cash rental income at £220 billion (total value of owner-occupied housing £4,400 x 5%).

6. The list goes on, and then we have the Welfare State, which counts as proper cash expenditure; pensions £122 billion and working age welfare £110 billion in 2011 (from the excellent ukpublicspending.co.uk website).

But is the Welfare State really any different from all the other tax breaks? It's all just redistribution, some downwards (the Welfare State), some fairly downwards but not quite to the bottom (the tax-free personal allowance), some sideways and some upwards (tax breaks for pensions, tax exemption of non-cash rental income etc), which surely all cancel each other out?

7. To summarise the impact of all this in very round figures, total forecast tax revenues for 2012-13 (excluding duties) are pencilled in at about £500 billion and the average marginal tax rate (taking income tax, NIC, VAT, corporation tax and Tax Credits withdrawal into account) is about 50%, so therefore the total tax base must be about £1,000 billion.

We can then broaden the tax base as follows:
- Tax breaks for pensions (contributions, ongoing income and the lower rate for pensions in payment) £100 billion
- The tax free personal allowance £210 billion (30 million taxpayers @ £7,000 each)
- Non-cash rental income from owner-occupied housing £220 billion
Giving us a enlarged tax base of £1,530.

If we wanted to raise £500 billion from a much broader tax base of £1,530, we could replace the entire tax system (including all the odds and sods like Council Tax, Stamp Duty etc) with a flat rate on incomes/corporate profits of 33%, which looks a lot better than the 50% imposed at present. But a lot worse than the fairy tale income tax rate of 20% which most people think they are paying. The only wiggle room I can see here is that people don't realise that Employer's National Insurance Contributions are largely borne by employees. Er's NIC averages out at 8% of wages paid out, so we could shift to flat Er's NIC of 8% and a flat tax on employment income of 25%, people might go for that, I suppose.

8. Working age welfare costing £110 could be made less downwardly redistributive as well, by taking that £110 billion and dishing it out equally between 40 million working age adults and giving each of them £50 in cash every week (or knocking it off their income tax bill).

The Hall–Rabushka flat tax proposal

1. This morning, Francis in the comments asked: "Mark, what do you think of the Hall–Rabushka flat tax proposal? Basically a flat-rate tax on income but not applying to savings/investments?" Having now read up on H-R's actual proposals and the handy Q&A, I can report that this is not what they said at all.

2. The gimmick is that interest would not count as taxable income in the recipient's hands for the simple reason that it will no longer be counted as an allowable expense to the payer. Clearly, there is no need for a tax on dividend income as such, as these are paid out of post-corporation tax profits, and the flat corporation tax rate would be the same as the flat income tax rate. So what they propose for interest is exactly the same - the interest is not an allowable deduction, so it is paid out of post-corporation tax profits and there is clearly no need to levy income tax on the recipient.

3. More importantly, under US tax rules as they stood (they might have changed since), homeowners could claim mortgage interest as a deduction from income (see page 163). Under H-R, there would be no such deduction - this is very sensible indeed, because having such a deduction merely pushes up house prices and hence land prices, and by disallowing the expense, they broaden the tax base and hence allow a lower overall flat income tax rate.

4. H-R also say that they would allow businesses to deduct the full cost of plant and machinery in the first year, instead of only allowing depreciation (or capital allowances, as in the UK). That also seems fair enough, because by and large the manufacturer of plant and machinery has to pay tax on the profits made from the sale in the year of sale, so this would be tax neutral. Actually this is not particularly radical, because once a business has got going, its cash outlay on new plant and machinery each year is +/- equal to its annual depreciation charge (or capital allowance entitlement), and they also suggest that businesses would no longer be allowed to claim depreciation for existing plant and machinery.

5. Skimming through, they also say there is no need for taxing fringe benefits (company car etc) because the expenses would be disallowed at employer level (page 179); there is no need for capital gains tax on shares, as these are claims on post-tax income (page 165); they would get rid of capital gains tax on owner-occupied housing as a quid pro quo for losing the mortgage interest deduction (page 165); get rid of the deduction for charitable donations (page 157) and get rid of inheritance tax (page 190) and so on and so forth.
------------------------------------------
6. All this seems very sensible, but then they misapply their own principles to come up with a truly insane proposal (page 179):

Q: How are individuals taxed on their rental activities? Is rental income part of wages or business income? Would individuals have to file both business and individual tax forms if they had both kinds of income?

A: Renting is definitely a business activity and would require a business tax form. Rental receipts are taxed as business income, but purchase of rental property qualifies for a first-year write-off.

7. Owner-occupiers would not be entitled to the first-year write-off of course (and no capital gains tax on a sale), so there is a complete mismatch which could be merrily abused as follows:

a) Instead of buying a house for $200,000 (with a rental value of say $10,000 a year), the cunning owner-occupier would invest $200,000 into an existing (profitable) company, buy the house and the company would claim a $38,000 tax rebate (sticking with their rate of 19%). If he already owns the house, then he can sell it to his own company for $200,000+ instead of paying himself a salary (thus banking the $200,000 tax free).

b) Sure, the future rental income would also be taxable at 19%, but who's to say what the rental value really is? If the owner-occupier pays rent of only $5,000, this is like an "interest free loan from the government" (to quote Tom Cruise's character in The Firm) of $38,000, which is repayable in instalments of $950 a year ($5,000 x 19%).

c) The value of the $38,000 up-front rebate is clearly $38,000 and the net present value of the annual tax payments of ¢950 is (say) $19,000 (discounted to infinity at 5%, with nothing payable at all if the house is left empty). The net balance of $19,000 would merely push up house prices i.e. land prices accordingly (thus undoing everything they just achieved by disallowing mortgage interest as a tax deduction).

d) If and when you came to sell the house, you would simply sell the whole company (so no capital gains tax) or the company would sell the house to a company owned by the next occupier who pulls the same scam (i.e. the interest-free loan gets rolled over).

8. H-R completely overlook the possibility or impact of such shenanigans with their own Q&A (page 166)

Q: Doesn’t the flat tax encourage speculation in land by granting first-year write-off for land purchases?

A: The sellers of land have to count their proceeds as taxable income; this offsets the deduction granted to the purchaser. Prices of undeveloped residential land may rise a little, but with a 19 percent tax rate, the effect should be small. Land transactions are included in the flat tax because it is difficult to separate the value of land from the value of the buildings on it.

Difficult to separate the value? Haven't we heard this somewhere before?

Firstly it isn't difficult, and secondly there is absolutely no need to extend the favourable tax treatment for purchases of plant and machinery (which depreciates fairly quickly and has to be replaced; and where the seller of the machinery is liable to tax on the amount received) to bricks and mortar (which depreciate so slowly as to be effectively permanent, and where the seller as like as not would be an owner-occupier and who sells his house tax free).

9. If the aim is to disallow private expenditure (in the same way as the employer can't claim the cost of fringe benefits) and to broaden the overall tax base (thus requiring a lower overall flat tax rate to raise the same amount of revenue), then surely the only sane solution is to treat landlords and owner-occupiers exactly the same and to go for symmetry:

- no tax deduction for the purchase price or amortisation, and no capital gains tax on a sale;

- no deduction for mortgage interest or repair costs;

- the rental value of the house to be included in taxable income of the owner, whether rent is received or not (any cash rent received up to the official rental value would be tax-free), so it makes no difference if you are an owner-occupier, a landlord or you own a vacant building (or else people would be able to get the $38,000 tax deduction by buying a vacant home through a company and then realising the gains tax free by selling the shares in the company).

- if your employer provides you with accommodation, then either he owns it and is taxed on the rental value (but no tax on employee - there would be no tax on fringe benefits, see 5. above); or your employer rents it on your behalf, then either we allow the rental income as an expense (which goes against the general rule) or he can avoid a double charge by adding a corresponding amount to your cash salary and then paying the rent out of your new higher net salary and netting off the two.

10. Even better of course would be to tax the rental value of land at higher rates and all other income (i.e. all earned income) at lower rates or not at all, but hey. To be entirely fair to H-R, they do mention the topic on page 165: "We believe that taxing housing is properly ceded to local governments under our federal system. Local property taxes capture part of the value of the services of a house.".

That looks like a severe case of "chickening out" to me. If they are going to draw up a blue print for radical tax reform, why not at least suggest that the only tax which local governments can levy is a tax on rental values (and abolish state or city income or sales taxes)? For example, they do go as far as to say (page 168):

Q: What about such other taxes as state, county, excise, and sales taxes? What would happen to them under the flat tax?

A: Although we would prefer that other units of government besides the federal government switch to taxes based on the same principle as the flat tax, we have limited our proposal to federal action. The only important implication of our proposal for other federal taxes is the elimination of the deduction for state and local income taxes and property taxes under the federal income tax (the deduction for state and local sales taxes was eliminated in 1987).

If you ask the wrong question, you'll never get the right answer (2)

UKIP's press office asked me if I could respond to HM Treasury's Consultation Document on merging income tax and Employee's National Insurance. I set aside last Sunday afternoon for a bit of fun with numbers, but didn't get very far: the document itself kicks off with this (click to enlarge):
I duly responded as follows:

Dear Sirs

Your Table 1.A suggest that you are not taking the matter at all seriously:

Against 'Entitlements provided' you state that Employee's National Insurance gives 'Entitlement to contributory benefits, such as state pension; also helps fund the NHS'.

You know as well as I do that Employee's NIC raises less than £50 bn a year, but the state pension costs about £70 billion a year and the NHS costs over £100 billion a year. So there's a bit of a mismatch there.

Not only that, but Iain Duncan Smith proposed - quite rightly in our view as this was a key part of UKIP's Pensions Manifesto for the 2010 General Election - that the contributory principle for the state pension should be scrapped and the state pension and Pensions Credit be merged into a flat rate Citizen's Pension.

As to the substantive question 1, we agree wholeheartedly that there is no difference in principle or in practice between income tax and National Insurance, and that the two should be merged into a flat-rate tax on all incomes as soon as possible.

Regards [etc]

"The UKIP manifesto continues to be the government's motherlode"

Gawain Towler has beaten me to it. To cut a long story, they are thinking about merging income tax and National Insurance into a single tax.

All together now for a bit of special pleading: "But what about pensioners with savings income?"

Answer: it's the interest rate that matters, not the tax rate. Ignoring inflation, is is better to be paid 6% interest and pay 40% tax, or is it better to be paid 0.5% interest and pay 20% tax?

Alternative answer: they can just leave the tax deducted from interest* at a flat 20%, that's administratively the easiest thing in the world.

* Or indeed pensions in payment, to answer Dearieme's question.

Effective income tax rates in the UK (2011-12)

To update my post of March 2010, subject to a few simplifying assumptions, here's an overview of how the main rates of tax on income, output and profits interact.

There are three income tax rates (20%, 40% and 50%); three main rates of Employee's/self-employed National Insurance (8%, 12% and 2%); one main rate of Employer's National Insurance (13.8%); one Tax Credit withdrawal rate (41%); and a mainstream corporation tax rate of 27% (I've ignored small company rate 20% or marginal rate of 28.75%) and VAT (which is either nil or 1/6 of turnover).

Thanks to the Lib-Cons continuing Labour's fine work, the simple average of all those marginal rates is up from 48% last year to 52% next year. Yes chaps, that's more than half the value of your output. There are plenty more marginal income tax rates, a few even higher, some of them lower, but this should help give an overall picture (click to enlarge):Yet again, hands up anybody who thinks it would be more honest, not to say less economically damaging, to have a single, flat rate of income tax?

Obviously, the lower the rate the better, that's a different topic, but the revenue lost (and boost to the economy caused) by reducing the more punitive rates will always be less (and worth more) than the revenue gained (and drag on the economy) caused (and imposed) by increasing the lower rates, so the single flat rate required to replace all those (ignoring LVT for now) would be a lot lower than 52%.

UKIP's Flat Tax policy

We never got round to updating our original flat tax policy of 2006, so here is my personal summary of what it looks like and why:

1. The first step is to work out the tax-free personal allowance.

a) The simple approach is to work out how much somebody can earn working full time on the National Minimum Wage of £5.93 per hour from October 2010. 52 weeks x 37.5 hours x £5.93 = £11,563.50 (assuming holiday days are paid, as is currently the law).

b) Another approach is to assume that everybody who qualifies has a straight choice between i) claiming the personal allowance and ii) claiming the non-taxable, non means tested 'Basic Cash Benefit' but foregoing the personal allowance. UKIP would set the BCB at the same rate as Income Support/Jobseeker's Allowance etc, which is currently £64.30 per week. So the personal allowance would have to be such so that the value of the personal allowance is the same or slightly higher than the value of the BCB. £10,785.81 x 31% divided by 52 = £64.30, so the personal allowance can't be lower than this.

c) A higher personal allowance allows us to scrap Working Tax Credits (which merely give back some of the tax and/or compensate people for having their out-of-work benefits withdrawn). Benefit withdrawal would be dealt with via the normal PAYE system (see b) ii) above). There is a cut off point at about £10,000 a year, at which stage a single person pays £20 a week in PAYE and can claim £20 a week in Working Tax Credits which seems like madness to me.

So £11,500 looks like a good place to start
---------------------------------
2. Next, we need the rate.

a) Let's ignore taxes that are legally borne by the employer (Employer's NIC - which UKIP would phase out and VAT) and just look at income tax, Working Tax Credits withdrawal, Employer's NIC and Class 4 NIC for the self-employed, as well as more specialised bits like the extra 9% for student loan repayments or the 30% band for pensioners who are losing the age-related personal allowance. This gives us a whole range of tax rates between 20% (for bank interest) and 70% (for people claiming Working Tax Credits).

b) The rate paid by most people on most of their income - i.e. basic rate employees - is 31%, i.e. 20% basic rate income tax plus 11% Employee's NIC, which is just heavily disguised income tax. It is yet more madness to have 'contributory benefits' (under which people who earn more pay extra tax but get extra benefits if they lose their job) and 'means-testing' at the same time (under which people who have more savings or some earnings get less benefits than those who don't ). The two more or less cancel out, so let's be honest and just have a flat rate of income tax and flat rate benefits.

31% looks like a good place to start (and there are even worse taxes than income tax, like VAT or Employer's National Insurance, so I'd phase those out next before I go back to looking at income tax).

c) NB Obviously, old age pensions would continue to be taxed at 20% as at present, but as a quid pro quo, they would also have to pay 40% higher rate tax, which would no longer apply to current income.

d) There are some sources of income currently taxed at less than 31%, such as self-employment income (30% income tax plus Class 4), and bank interest or rental income (20%). The self-employed would win more with the higher personal allowance than they lose on the extra 1% tax of course and people who happen to only have rental income or bank interest income up to just below the current higher rate threshold may end up a few £100 worse off, but such is life. The main determinant of interest income is the gross amount of interest, not the tax rate, i.e. you'd rather have 69% of 5% interest than 80% or 100% of 2% interest.
---------------------------------
3. What will the impact on tax revenues be?

a) The Laffer Curve says that if you cut the tax rate on a particular source of income from 70% to 31%, the tax take would not go down by 39/70, it would go down by maybe a quarter or a fifth or it might even be fiscally neutral or revenue positive - for example, for millions of people working just over the 16 or 30 hours a week to qualify for Working Tax Credits have no incentive to work longer hours - most of them are on £10 an hour or less, so they only keep a £2 or £3 net for every extra hour worked. Under UKIP's system, they'd keep between £4 and £7, so they'd work more, they'd be better off and they'd pay more tax.

b) Conversely, the Laffer Curve says that if you increase the tax rate on a source of income that is taxed at a rate well below the revenue maximising rate, it is always revenue positive, so increasing the rate on interest or rental income from 20% to 31% would increase revenues by nearly half.

Therefore, the overall fall in income tax revenues would be nowhere near as much as the static calculation suggests (about £35 billion per annum). We can then reduce the fall in revenue by a further £9 billion from 3c) and another £15 billion from 4).

c) There are six million people on the official public sector payroll, paid headline salaries averaging £25,000 (let's say), giving us an annual salary bill of £180 billion. UKIP's flat tax proposals would make most employees between five and ten per cent better off, so another quick win would be to cut public sector salaries by five per cent on Day One, this saves another £9 billion without making any of them worse off (and most would still be a few £100 or £1,000 a year better off).
---------------------------------
4. Politics - isn't this just a 'rich giveaway'?

a) In UKIP's pensions paper we said that tax relief for pension contributions would be restricted to the first £10,000 of contributions per year, which is still at a level which only a small minority can afford. The generosity of tax relief for pension contributions for very high earners has since been restricted by fair means or foul (mainly foul), but until recently it was the case that half the value of all pensions tax breaks went to the top ten per cent of earners. So that gets the cost down by another £10 bilion or so, along with all the other rubbish like film tax breaks, EIS, VCT and so on.

b) It is, to my mind, better for our Exchequer to collect 31% of something than 50% of nothing.

Any realistic calculation of the impact of the 50% super-high income tax rate is at best fiscally neutral - the extra £2 or £3 billion in revenue (yes, that's all we are talking about) is wiped out by people moving abroad, not coming here in the first place or getting involved in ever more convoluted tax planning.

Ergo reducing the 50% rate to the old top rate of 40% doesn't 'cost' much revenue and reducing it further to 31% would mean that even fewer high income people leave; more would come here (31% would be one of the lowest top rates in the world - not forgetting that other countries with superficially low rates have 'National Insurance' or similar on top and have double taxation of dividend income). So for every £1 static loss there's a 50p increase from other factors, so this reduces the overall static cost by another £5 billion a year or something.
---------------------------------
5. Bank bashing

All the other parties are gung-ho in favour of some form of super-tax on banks or bankers bonuses. Before we even think about introducing such a tax, let's get the banks to repay the £300 billion in taxpayer funded loans they have received and which are due for repayment in the next couple of years.
---------------------------------
6. The merits of simplification

I am, if nothing else, a simplification campaigner. Having a flat rate of tax solves a myriad of other problems:

a) No more arguing about who is self-employed and who is an employee, so no need for IR 35 rules.

b) Only the self-employed and people with rental income would have to do income tax returns (not employees).

c) Life would be easier for payroll departments, it's all one flat rate of tax (OK, there'd be a 19% surcharge for people in social housing instead of making them pay rent and Council tax and then claiming Housing Benefit and Council Tax benefit, so they get a K-code and their total tax rate is 50%).

d) There'd be no need to do income splitting to make optimum use of husband's and wives' personal allowances and basic rate bands, and no need for anti-avoidance legislation whereby HMRC unpicks all these arrangements and works out which allocation gives the highest tax bill.

e) Husbands and wives who still have to submit tax returns would be able to go for joint taxation if they wish and pool their personal allowances. If their total income is less than 2 x £11,500, then whoever earns less than £11,500 might prefer to waive the personal allowance and claim the BCB instead, it all comes to much the same thing.

f) Having one flat rate of tax on cash or near-cash income fits in with my other (personal) campaign, which is to roll all property-related taxes (the big ones like Council Tax and Business Rates which raise over £20 billion per year each, as well as the little ones like capital gains tax, stamp duty, stamp duty land tax, inheritance tax, TV licence fee, VAT on domestic fuel, insurance premium tax which raise about £3 billion a year each) into a flat annual tax on land values.

Carrying out the two reforms together would significantly reduce the number of people who think that they have lost out on the property tax side (actually, nobody loses out from the property tax reform, but perceptions are important, however misguided).

Reader's Letter Of The Day

From yesterday's Metro:

As National Insurance is, er, a tax on income, why doesn't one of the political parties pledge to simplify things by ditching it and levying a slightly higher rate of income tax instead?

Simon Beasley, West Midlands.

Why? To maintain the pretence that National Insurance is not a tax. As it happens, one of the parties proposes being honest about it and merging the two, namely this lot, who also propose phasing out Employer's NIC.

Effective income tax rates in the UK (April 2010)

11 January 2011: For updated version showing rates for 2011-12, click here.
-------------------------------------------------
Just to keep things updated, subject to a few simplifying assumptions, here's an overview of how the main rates of tax on income or production interact. There are three income tax rates (20%, 40% and 50%); three rates of National Insurance (8%, 11% and 1%); two Tax Credit withdrawal rates (39% and 7%); a mainstream corporation tax rate of 28% (I've ignored small company 21% or marginal rate of 29.75%) and VAT (which is zero or 7/47 of turnover).

There are plenty more marginal income tax rates, a few even higher, some of them lower, but this should help give an overall picture (click to enlarge):Hands up anybody who thinks it would be more honest, not to say less economically damaging, to have a single, flat rate of income tax? Obviously, the lower the better, that's a different topic.

Yes, that's exactly what I'm saying.

Ian Bennett left the following comment on Another silly objection to universal benefits:

Are you really claiming that "29 million employees (claiming the personal allowance)" are benefitting from redistribution because part of their gross wage is not taxed? That someone earning, say, £20,000 is effectively receiving money from someone earning £100,000 in the form of a higher allowance than would be the case if the higher earner paid less tax?

"Benefitting from redistribution" means "getting more of other people's money than is taken from you"

Let's imagine we had a referendum on whether to have:
a) A flat income tax of 20% and no personal allowance
b) A flat income tax of 30 % and a personal allowance of £10,000
and in either case, the total tax revenues would be the same and the associated government expenditure would benefit all income groups equally (remembering that you have to look at the spending side as well, and not just the way in which money is raised).

It's not actually clear to me: does Ian Bennett oppose redistribution out of principle (remembering that the state pension is very much redistribution - so politically this would be a bit of a hard sell), in which case he would vote for (a)? Or does he think that a higher personal allowance combined with a higher rate of income tax is not redistribution, and thus he might as well vote for (b)?

On Planet Innumerate (assuming that they also opposed redistribution), everybody who earns or expects to earn more than £10,000 would vote for (a).

However, on Planet Wadsworth, where people have access to calculators and backs of envelopes, and vote out of enlightened self-interest, anybody who earns or expects to earn less than £30,000 would vote for (b); and everybody who expects to earn more than £30,000 for the foreseeable future would vote for (a).

On a philosophical level, it is not clear cut whether you call (b) more redistributive than (a).

On a mathematical level, is pretty clear cut that (b) is more redistributive than (a). Ergo, for a given total tax revenue, a higher personal allowance is redistributive.

Well duh...

From the CityAM:

Myners: 50pc tax rate won't raise much

THE government has "significantly reduced" the level of revenue it expects to generate from the new 50p income tax band, City minister Lord Myners admitted yesterday. In a tacit recognition that high earners will find ways to evade the higher rate of tax, Lord Myners said he was doubtful the Treasury would haul in the £1.1bn estimated for 2010 or the £2.5bn earmarked for 2011.

"We have made adjustments for the behavioural consequences of the new higher rate of taxation and have accordingly significantly reduced the anticipated tax take," he said during a Parliamentary debate. "But we still believe it will be beneficial."

The City minister's comments confirm warnings by the Institute for Fiscal Studies and accountants that the government's calculations of the amount an increased levy on people earning more than £150,000 will yield are inaccurate. Financial advisers say many of the two per cent of the population falling into the category will find ways to dodge the 50 per cent rate – either by pumping up this year's pay, storing up part of next year's salary in a company account or leaving the country.

Lord Myners said Labour's commitment to the 50p rate was not "ideological". It would be lowered as soon as economically possible, he added.

Even if they are right, and the 50p rate will raise £1bn or £2bn more from higher earners (a pittance compared to the £178bn projected budget deficit), it's still one heck of a gamble - the whole exercise may be well be revenue-negative in the medium term, seeing as a lot of high earners who move abroad might not come back; and those who were thinking of coming to the UK might be put off it even for years after the 50p rate has been scrapped again; and for every high earner, there is the associated coterie of receptionists, PR people, admin staff, butlers and chauffeurs, all off the dole queue, paying PAYE and spending their money in the shops etc.

Norman Tebbit doesn't get out much

Doing his merry best to keep the LibLabCon cartel going, he has this to say:

"... only one party leader seems to have grasped that, if you construct a system where unskilled people are worse off by taking a job than by staying on welfare, they remain trapped in poverty – and that is Nick Clegg... the two main parties are unwilling to bite on the bullet and commit themseves to raising the income tax threshold from £6,475 to something like £10,000 or £12,000."

Sure, on a few issues, the Lib Dems are right - such as doubling the tax free personal allowance. They recently ditched their eminently sensible policy of replacing the hodge-podge of old age benefits with a Citizen's Pension; but to be fair, they also ditched their crass vote-buying policy of scrapping tuition fees (preferring to suggest they'd be phased out over six years), but hey.

Luckily, the first commenter says what I would have said if I could be arsed to register and leave a comment:

SoftMicro on Jan 13th, 2010 at 11:57 am: May I quote the UKIP website, from their policies in brief page? “We will take 4.5 million people out of tax with a simple Flat Tax (with National Insurance) starting at £10,000.” If you look at their other policies there, they are very compatible with what most grass-roots Tories want (as opposed to what the LibDems and the Vichy Elite at the top of the Tory party want). This is why the Telegraph blogs are full of ex-Tory voters saying they will be voting UKIP – and therefore why Cameron’s lead is only about half what it should be.

PS, we've re-worked the figures, the suggested personal allowance of £10,000 from 2006 is now more like £11,500, and the flat tax policy is really four-policies-in-one; increase the personal allowance; scrap higher rate tax; radical simplification (in particular getting rid of tax-breaks that only benefit higher rate taxpayers in the first place); and making the tax system mesh with the welfare system. All a bit complicated for the likes of Norman Tebbit.

Lord Pearson hits the ground running ...

From The Daily Express:

... We are also deeply sceptical of the new religion of man-made global warming. It’s the focus group favourite. It is also the most catastrophic misuse of dubiously collated statistics yet unleashed upon the world. That climate changes is not in doubt. That we must conserve, protect and care for our environment is a must.

But to pillage the public purse and come over as moral superiors takes a special talent and establishment talent at that. As always with science the jury is out. UKIP takes the scientific method seriously. Then there is the issue of tax.

All parts of the Lib Lab Con are planning yet more tax rises for after the election. We beg to differ. This summer the Chancellor of the Exchequer charged the taxpayer to employ an accountant to sort out his own taxes that he didn’t understand. When you have a taxation system that taxes those on the minimum wage it’s time for change. No tax system should be too complicated for us to understand.

To that end UKIP proposes a flat tax system, a near doubling of the personal allowance and an end to the fiction that national insurance is different from income tax. All will gain but those who gain most proportionally will be those who work hard for modest pay.

On education I believe in parental choice and rigorous academic standards. I support the creation of new grammar schools so that bright children from modest backgrounds can fulfil their academic potential. Such an opportunity should not be the sole preserve of children of the wealthy as is increasingly the case.

The family in a council estate deserves the chance to have the best education that this country has to offer, not to be condemned to accept what the local council deems they must have. Parents in the state sector should have taxpayer-funded vouchers so the onus is on schools to compete for pupils and not the other way round...

Killer arguments against LVT, not (24)

Richard Teather (who did a fairly decent 'flat tax' manifesto in 2005) did a 'think-piece' over at the Adam Smith Institute explaining why reintroducing Schedule A taxation, to broaden the income tax base and hence enable the income tax rate to be reduced, would be a good idea. Interestingly, this proposal was already in Patrick Minford's flat tax proposal of 2006.

Arguments against were invited today.

martinwc2 chimed in with the inevitable...

Surely the main argument against a tax on homes is that cash is demanded when there is no underlying cash flow? E.g. income tax arises upon cash income, even with capital gains tax, it falls due after a realisation. With houses, cash is extorted and funds must be taken from elsewhere. It's utterly irresponsible to force house sales to meet tax or force borrowing, especially when values fall as well as rise..."

Richard Teather replied rather nimbly with this:

As I said, we already tax people where there is no cashflow. We tax employees on non-cash benefits (company cars, private healthcare, etc.). A property tax is very similar - the company car saves you the expense of buying your own; home ownership saves you the expense of rent. There are other examples already in our tax system of taxing non-cash income, but the "benefit in kind" tax on employees is the main one.

I gave a more detailed reply:

@ Martinwc2. You are advancing what Winston Churchill and Henry George dismissed as the "Poor Widow Bogey" over a century ago.

There are four stages to the home-onwership life-cycle. Even if the property tax were an additional tax (I'd like to see any new property tax replace Council Tax, Stamp Duty and Inheritance Tax as a start, for example, and then use it to reduce income tax rates by broadening the base), then ...

1. People saving up a deposit to buy their first home. Any property tax acts like a higher interest rate, so prices would adjust downwards and their total cost of purchasing is fixed as a certain fraction of their net income. So they can obviously afford it.

2. First time buyers, who have a mortgage debt approx equal to the value of what they have bought. As they ought to have budgeted with a possible increase in interest rates of a few per cent (depending how pessimistic they are) the sensible ones will be able to afford a 1% or 2% charge on capital values, as it's no worse than a 1% or 2% interest rate hike. This would be easily affordable if such high tax rates reduced income tax by an equal and opposite amount.

3. People who have paid off or nearly paid off their mortgage, who thus have lower mortgage repayments than those in category 2, and hence can also easily afford it (esp. if income tax rates reduced).

4. Retired people. They could simply 'roll up' the tax to be repaid on death (which is why I would always recommend getting rid of IHT as a quid pro quo - IHT only raises £3 billion, about as much as the TV licence fee, but is a particularly spiteful tax in its own right).

Now, let's try and invent a system that treats all asset classes the same. Ideally, people save up some cash to live on in retirement (as well as paying off mortgage). If they are cautious, they only spend the interest element, so on death, the nominal value of the cash = the nominal value when they first retired.

Similarly, as the long run trend in house prices is to increase in line with wages growth (about 2% faster than RPI), as long as the annual tax is less than 4% of the nominal value of the house (a very, very high rate indeed!), the nominal value of the house minus rolled up tax [on death] would still be no less than its nominal value on retirement (taking a long run average sort of view). So the annual rental value is not actually taxed at all - this is earned and consumed while you are still alive - much like interest income (glossing over the fact that interest income is and should be taxed if we are to have the broadest tax base and hence the lowest overall rate).

More Citizen's Income queries:

Matthew in the comments here said:

The problems I foresee are two. First is that people's needs just aren't very similar, and some people will just need more and as Sobers says that immediately brings back form filling, inspectors, admin, etc (1). Also regional differences will present problems with no housing benefit - of course people can move away from London (2), and aggregate housing costs will decline a bit, and it will encourage them to get jobs etc, but these things will either be slow or limited in their effect. I'd probably keep a type of housing benefit (3).

The major problem though is political acceptability. The headlines about people getting something for nothing, families with 10 children (4) spending it all on fags, blah, blah. And of course anyone who earns more than about £17,500 will get (net) nothing after taxes, and it that will be extremely transparent, won't help "Assault on middle classes". (5)

Of course this will mostly be nonsense, but that doesn't stop anything. Which means the only real chance it ever has of being implemented is the first term of a landslide government. Nothing in 1997, I fear 2010 is the last chance then until about 2023. (6)

(1) Then get a job, just like anybody else. The CI payments continue whether you are working or not and there is no means-testing, so there is no disincentive to take on a job, however low-paid or short-term.

(2) I don't believe in London weightings, it just adds fuel to the fire and ultimately makes life more expensive for people who live in London, so requiring an even higher London weighting ...

(3) Most Housing Benefit claimants are in social housing, so that can be dealt with by scrapping rents/Council Tax for social tenants and giving them a PAYE code with a [twenty per cent] higher rate of tax; the extra PAYE then gets reallocated to the local councils in which social tenants live.

And to hell with Housing Benefit for the minority of claimants who live in private rented accommodation, which is not only a subsidy to property ownership but a massive incentive for fraud and distortions - it's far cheaper to build more social housing (which is a break-even at worst) than to pay Housing Benefit to private landlords.

(4) I'd restrict Child Benefit to the first three children per mother.

(5) As Ed says: "Would the transparency of this system not be an advantage in selling the idea to the middle classes? Plus the fact that they will benefit most if the current income tax+NI is replaced by a flat rate 30% income tax."

(6) Let's pencil in 2023, then, shall we?

Bayard asked: "CI is just an extension of Child Benefit. How much Child Benefit fraud is there?"

Answer: next to nothing. The amount paid out is ever so slightly less than you would expect by multiplying the number of children by the legal entitlement. And the administration costs are barely measurable as it is nearly all paid directly into bank accounts.

A very useful summary of our welfare system

The Centre for Policy Studies have published a handy summary of the way our welfare system is designed and why it doesn't 'work'. Before we slag off 'scroungers', I find it very helpful to look at why the system enables and encourages it. Blame the system, not those who appear to be abusing it, is my motto.

It's titled Benefit Simplification (hat tip - John Page at the Benefit Fraud 'blog), and although Appendix 3 makes some useful suggestions, it doesn't IMHO go far enough. If we really want to simplify things, the way forward is to roll all welfare payments (including old age pensions), subsidies, tax breaks (including the tax free personal allowance and tax-breaks for pensions saving) and other forms of redistribution, such as 'free' State education and 'free' NHS care into one single, age-related universal, non-means tested, non-taxable Citizen's Income payment together with education and health vouchers; preferably combined with two flat rates of tax - one on incomes and one on land/property values (and no other sneaky taxes like VAT, the income tax that dare not speak its name, and no poll taxes or jealousy surcharges).

Having established what is fiscally neutral, we can then have a good old-fashioned argument as to how high the payments should be*, but seeing as the payments are the same for everybody, what the argument is then really about is how high the taxes** should be to fund them, and in turn, what the balance should be between taxes on incomes and on land/property values***.

* I'd always choose "something that costs ten or twenty per cent less than what we are doing now".

** Our main problems are the quangocracy and public sector pensions, that between them cost nearly as much as the welfare state, that's the spending that I'd cut first.

*** I'd choose "less tax on incomes and more tax on property values" but I know a lot of people disagree.

VAT - truly a shit tax

Simple logic tells us that VAT is not a tax on 'consumption' (as if that were a bad thing), but either a tax on business turnover or a tax on gross margins (depending on how you argue it). Suffice to say, like Hal 9000, if you try to build some sort of coherent strategy on something that is basically a lie, bits will keep dropping off and you have to invent new lies to patch over the missing bits.

Approaching five billion missing bits, it would appear.

FFS, if they haven't worked out how to make VAT 'work', even on a purely administrative level after thirty-six years (even ignoring the economic damage, which is more difficult to measure), can't they just do the decent thing and scrap it and increase corporation tax to fifty per cent* (or whatever rate we'd need to make up the difference). Which is roughly what employees suffer, if you factor in Employer's and Employees' NIC and Tax Credits withdrawal at the 'second withdrawal rate'.

There'd be a complete outcry, of course, if the government announced that they were abandoning their favourite stealth taxes - VAT and National Insurance - and having a flat tax rate on all income of fifty per cent, but at least it would be honest.

Ah ... right.

* Fag packet time, based on round figures from memory, valid as at a year ago - corporation tax receipts (excl. North Sea surcharge) £30 bn on pre-tax profits of £140 bn, VAT receipts £80 bn. Gross profits, pre-VAT = £220 bn, so required rate = (£80 + £30 bn)/£220 bn = 50%.

It's so nice to hear the leader of the UK's second biggest party* say this

From an interview in The Grauniad:

He stresses that Ukip and the BNP couldn't be more different – Ukip are libertarian and would legalise pretty much everything, the BNP are a hang 'em and flog 'em party. A vote for Ukip, he says, is a vote for flat income tax (and no tax for those earning less than the minimum wage averaged over a year), grammar schools, smoking, small government, and of course two fat fingers to Europe.

Amen to that!

* Based on votes cast at last week's EU elections.
----------------------------------
As a separate issue, following some guidelines or other, the article includes the obligatory sentences:

People are expected to embrace the party as a protest vote, but the protest is likely to have nothing to do with Europe – it will be about perceived corruption in the three main parties. And one final irony – Ukip have potentially the dodgiest financial record of all; of its 12 MEPS one, former policeman Tom Wise, has been charged with money laundering and false accounting, while another, Ashley Mote, elected for Ukip in 2004 before becoming an independent, was jailed for benefit fraud in 2007.

See also today's FT:

Ukip's apparent increase in support on the back of the expenses scandal comes in spite of difficulties over its own record on probity. Mr Farage recently admitted legitimately taking £2m of expenses and allowances in spite of his anti-Brussels stance. One Ukip MEP, Ashley Mote, was expelled and jailed for benefits fraud while another, Tom Wise, has denied charges of false accounting relating to EU expenses.

More or less identical, eh?

Jesus H F**k. Is it obligatory for every article about the Labour Party, the Tories or the Lib Dems to mention every rumour or scandal that any MP or councillor has ever been involved in, and if not, why not? UKIP have never denied that they messed up badly with their MEP candidate selection procedures in 2004, but hey, they sorted it out, tightened up procedures (MEP candidates are now selected by party members on basis of one-member-one-vote), and moved on.

Moving swiftly on ...

The results of Part 2 are as follows:

What is the 'fairest' kind of tax?
Poll taxes (poor people pay a higher rate) - 10%
Flat taxes (everybody pays the same rate) - 80%
Jealousy surcharges (rich people pay a higher rate) - 10%

The votes for 'poll taxes' and 'jealousy surcharges' cancel each other out and the clear winner is 'flat taxes'. "Flat taxes on what?" is the next question - vote here or use the widget in the sidebar.
------------------------
I'll skip the obvious question, how much the government should be taxing and spending, because we've done that.

Two more rounds to go after this, thanks to everybody who takes part.

Right wing hypocrisy

There has been much wailing about the proposed 50% income tax rate, and I fully agree that we should not be increasing tax rates on production and incomes - the MW manifesto is to roll VAT, National Insurance, Income Tax and corporation tax into a single flat rate tax, the lower the rate the better, of course, but the 'flatness' is just as important as the lowness.

But let's not forget that the 50% rate will only affect the top one or two per cent of earners. The fact that the bottom TWENTY per cent of earners face effective tax rates of at least 70% (i.e. 31% basic rate income tax/Employer's NIC and 39% Tax Credits withdrawal) is seldom mentioned.

I'm guessing that subjecting five or six million people to a tax rate of 70% is a much bigger drag on the economy (or indeed impediment to social mobility) than subjecting a couple of hundred thousand high earners to a tax rate of 50%, which is why the MW manifesto is to reduce the withdrawal rate of benefits to the same rate as the flat tax rate that applies to everybody else.

Just sayin', is all.