Collecting land rent without LVT

There are of course three main ways a government can collect land rent.

1. Just own land and buildings and rent them out. That way there is no need to differentiate between rental value of buildings and of the location. We have that with Crown Estates and Housing Associations (which are QUANGOs and ultimately part of the government) who rent out at or close to market value and council housing, which is supposed to be there for lower income people who can't afford lower market rents.

2. Replace other taxes with Land Value Tax.

3. Lend money to people wanting to buy land and buildings and collect the interest, which is mathematically similar to Land Value Tax. It is largely the private banks that do this, of course, but there is nothing to stop the government doing it.

Somebody asked me about 3. recently, and I did some workings for them. In a perfect world...

a) The goverment, which runs HM Land Registry would simply no longer register private mortgage charges. The same as I can't borrow money secured on my right to vote. That's not for sale. If banks want to make huge unsecured loans to people and just rank along with all other creditors in case of non-payment, there's nothing to stop them, but I doubt they would (see tweaks).

b) The government sets up its own mortgage bank as monopoly mortgage lender, which has easy to access to a bottomless pit of funds i.e. government bond issues.

c) The bank knows what monthly payments people can afford (local rents, mortgage payments for FTBs, there's no right or wrong answer, if it's too high, people won't pay it), and can work backwards from that to choose a suitable combination of income multiples, mortgage term, target house prices and interest rate.

Worked example, at today's prices with private banks: Our average borrowers buy a house for about 7.7 times their income, or £280,000. Knock off ten percent deposit, and prevailing interest of 2%, the monthly repayments would be £938 for 30 years.

The government chooses the following combination:
- Max loan-to-income four or twice joint income,
- Deposit minimum 10%, max 20% (see tweaks),
- Mortgage term 35 years (or however long borrowers have before state retirement age, also up to government to decide),
- Average house prices to level off at about £145,000 (four times income plus 10% deposit),
- The required interest rate, to get monthly repayments of £936 (same as now), would be 8%.

d) The government bank can borrow for about 1%, being backed by the UK government and mortgages which are secured on assets that can only go up in value (in line with wages). So in future, the government bank's profit (monthly repayments IN minus net selling price and interest paid (directly or indirectly) to the vendor OUT) is about £6,000 per year per average home.

e) There's no need to worry about Poor Widows In Mansions, they will have paid off the mortgage and will be left in peace (having pre-paid the land rent before retirement).

f) Once the system is up and running and all houses have been bought and sold, the bank's net profit would be - in theory - £100 billion a year (tricky to calculate, assume two-thirds of homes are subject to mortgages and one-third owned by mortgage-free pensioners).

g) Even if it's only half that, it's a handsome chunk of money, enough to replace Council Tax, SDLT, planning fees and so on with plenty left over.

That is the general idea. It needs some tweaks. Clearly, movers would have to be allowed to 'port' an existing government mortgage and existing equity. Apart from that, there shouldn't be any cash buyers. If you want to buy a house, you just HAVE TO take out a government mortgage for 80% of the purchase price.

When a house is inherited, the government bank would give the executors a deposit with itself for 80% of its value and grant an 80% mortgage under the same terms and conditions as any other buyer. If the heirs want to continue living there, great, they can spend the deposit on subsidising their monthly repayments (effectively cut them by half). Which is Inheritance Tax in all but name, so we can scrap IHT as well.

That's the beauty of LVT - reply to Doonhamer

Doonhamer left this comment on the subject of the Scottish government's auction of offhore wind turbine licences:

Yes, but what is the guaranteed price for all those expensive kWh?
And what do they get paid for NOT producing kWh when the wind is too strong?
And who pays for all the interconnecting copper?*
And who pays for the clean up when the rusting stumps and sea bottom concrete are no longer useful?*
And who pays for the fossil fuel back up when the wind speed is too low or too high?

No, I jest. I already know who will pay.

Let's assume the kWh price is 'too high' (which it almost certainly will be, to "kick start the Green Economy" and suchlike bullshit) and all the other costs are borne by consumers and taxpayers (who are largely the same people).

That means that the future profits will be correspondingly higher - but with a properly run auction (the English/Welsh method; not the Scottish method) that doesn't matter too much. Competing businesses will be willing to submit higher bids for the licences, so the government has more money available to pay all the costs and doesn't need to make consumers/taxpayers pay all over again via taxation.

The same general principle applies to all forms of Land Value Taxation. If the actions of government and society in general benefit particular areas or businesses, the beneficiaries pay the value back into the pot (which hopefully covers the direct costs with some left over to be spent on 'everybody') and those who don't benefit aren't forced to contribute via income tax etc.

* In an ideal world, the National Grid would still be state-owned, so it would have to bear these costs anyway, which it would more than recover by charging generators for transporting electricity. The generators should all be private, competing businesses. Fancy owning a power station? Raise some money, build one and hook it up to the Grid. The most efficient forms generators will win out, the inefficient ones go to the wall and society as a whole benefits.

Something else for LVT Man to sort out

Over in the USA, a head of steam is building up under Airbnb.

To be clear, renting out spare rooms, attics, basements, and backyards in owner-occupied properties isn’t the problem. It’s when an investor outbids a family for a second property and turns it into a full-time Airbnb. Or worse, when a holiday rental company does so. Or worse, when a highly-leveraged hedge fund buys a swath of holiday rental companies. Or worse, when a sovereign wealth fund buys a portfolio of hedge funds. It’s why the average house will cost $10+ million within 50 years.

Of course, the last sentence is alarmist nonsense, but the problem is a real one. It's the same problem as the "second home" problem in the more scenic parts of the UK: the incomers have more money to spend and so push the prices up.

In the UK, there is an easy solution which is already being applied in the case of full-time holiday lets, but being applied backwards, as one comes to expect with anything to do with land in this country. If you have a property that is a full-time holiday let, you have to pay business rates on it. However, this is welcomed by most FHL owners, because business rates are much lower than Council Tax, often zero as they fall under small business rate relief.

If second homes were a different use class to main residences, the additional buying power of the second home owner or the FHL owner could be reflected in a higher rate of LVT, levelling up the playing field for local residents, whose buying power is set by local wages.

Even without LVT, the same technique could be used to impose higher business rates or council tax on houses owned by non-residents. Unfortunately, where there isn't a will, there is seldom a way.

Land Value Tax in action

From the BBC:

Leader Sir Ed Davey put forward his "sovereign green wealth fund" proposal at his party's spring conference. He said the government raised £9bn last month from auctions to build wind farms on the coasts of England and Wales.

Ignore the stuff about "sovereign green wealth fund"; what triggers a tax and what the government does with the proceeds are two entirely separate topics. If it's a good idea to tax the extraction and use of fossil fuels [and it is], then it's a good idea, however the proceeds are spent. If it's worth spending money on 'green' stuff, then it's worth spending, however the taxes are raised.

£9 billion is a lot of money but it's Land Value Tax. The operators subtract likely costs from likely income for the duration of the licence and pay most of the unearned surplus (the value of the location, which is really the value of the 'free' wind energy for which they pay a few pence per kWh, which is no different for paying for coal for an old-fashioned power station) in the auction.

If only they applied the same logic to onshore wind farms, instead of subsidising them, which are ultimately subsidies to large landowners (so negative LVT).
----------------------------
That's exactly the same as the £22.5 billion which Gordon Brown raised from the 3G auctions. Radio frequencies are 'land' in economic terms. Nobody created them and the government protects people's right to use certain frequencies to the exclusion of others. The users pay in accordingly.

From the previous link...

Sky's Ian King says the infamous 3G auction of 2000 that raked in more than £20bn killed investment in our mobile infrastructure.

This is complete nonsense. The bidders might well have overbid (underestimated costs or overestimated income) but once paid, it's a sunk cost and has no bearing on future investment.

Worst case, a bidder goes bankrupt and the liquidator sells their 3G licence at a lower price to a competitor, who has then paid the 'correct' lower amount and is not deterred from making the necessary investment. Mobile phone coverage in most parts of the UK is excellent and the consumer prices are very competitive IMHO, so clearly nothing bad happened. And the same applies to wind farms.
----------------------------
From The Blackpool Gazette:

The Crown Estate, which manages the Queen’s property and land [not strictly true, but many seem to believe it is], said it had auctioned off eight gigawatts of potential new offshore wind capacity to help the UK meet its demand for renewable electricity.

The deals are set to bag the Crown Estate around £879 million every year for the next decade, with a share going to Buckingham Palace. The Sovereign Grant, which funds the Queen and the monarchy’s official duties, is set at the beginning of each financial year and is currently equal to 25 per cent of the Crown Estate’s profits – allocated two years in arrears.

It's a shame about the £2.2 billion of taxpayers' money being fittered away like this, but hey.

Institute for Economic Affairs on top form

From the IEA:

* The UK could have a tax system that has a low negative effect on welfare and efficiency, with small compliance and administration costs; a system that is nondiscriminatory, avoids double taxation, and that is transparent and easy to understand.

* As such, we suggest that the TV Licence, Inheritance Tax, Stamp Duty Land Tax, the stamp duties on buying shares, the Apprenticeship Levy, Vehicle Excise Duty, Capital Gains Tax, the bank surcharge, and duties on alcohol, tobacco, and gambling, could be scrapped.

* Other property taxes such as Council Tax, the Community Infrastructure Levy, business rates and affordable housing and other s106 obligations, could be replaced with a single land value tax. Under this proposed system, disincentives for property improvements and housebuilding would be removed.

I would have added "the TV Licence, Inheritance Tax, Stamp Duty Land Tax... Capital Gains Tax" to the next list of truly wealth/land-related taxes to make it clear to Joe Public that LVT is a like-for-like swap. In more detail...

A land value tax

Our solution to the problems raised with the four previous taxes would be to create a land value tax system to provide a reliable source of income to local authorities, encourage development and reduce complexity in the tax system.

A single land value tax would tax the owners of property only on the value of the land itself. Buildings, improvements and land use would be of no concern to the tax system, avoiding the current disincentives for property improvements or housebuilding. Such a tax would also enable councils to receive part of the planning gain (the increase in the value of land when it is re-zoned for development, such as agricultural land being granted planning permission for housebuilding), giving local communities a major incentive to allow development.

I don't understand the insistence on LVT being a 'local tax' and hence inherently regressive, but it's an excellent start.

Access to LVTC site blocked?

Here for general reference, an email reply from the people who run the LVTC site:

The "you have been blocked" message comes up when a visitor triggers the website's firewall by doing something untoward, e.g. repeatedly attempting to log in to the admin area.

You get three chances before you're blocked for a day, and if you're blocked three times you get permanently blocked by the firewall.

To block visitors the firewall uses their IP address. Unfortunately, because IP addresses are usually shared that does mean some genuine visitors will also get blocked. This appears to have happened [name].

I have cleared the block lists, so [name] will have access. If he doesn't please advise him to clear his browser history (the same thing will apply to anyone else).

Going forward, I've revised the firewall configuration and changed part of the warning message to say:

"Contact technical@landvaluetax.org with your IPv4 address (visit https://ip4.me) if you believe you were blocked in error."

"Silver bullet housing policy could make homeowners millions"

Lola emailed me a link to this regurgitation of the press release:

New modelling shows that the average homeowner who did take up the scheme could make hundreds of thousands, or even millions of pounds, depending on where they live – after building costs and costs of finance. One worked example in the paper shows how a post war cul de sac in Barnet could voluntarily decide to uplift. This would transform the 26 bungalows worth £14 million in total, to be given an additional £54 million in uplift, £10 million of which goes to the council, £44m of which goes to the homeowners (£1.7 million each).

Economist Sam Bowman tells Guido that the policy could solve the housing crisis by unusually making everyone a winner:

“This is the silver bullet that could solve the housing crisis – unlike almost all other proposals, this one works by enriching existing homeowners when they allow more homes to be built. The solution to this decades-long problem is to make it a win/win for people who own their own homes and people who want to. If the government goes ahead with these plans it could make Thatcher’s right-to-buy look like a drop in the ocean in terms of increasing homeownership in Britain.”

This superficially sounds like the grey market in air rights in Manhattan or some Home-Owner-Ist Ponzi scheme. So I followed the links to the actual proposal in order to see if it really was that dumb.

It isn't actually. What it boils down to is that under current rules, one person on a street puts in a planning application to significantly extend his home, and all his neighbours oppose it. Under their cunning plan, those on a street who want to extend come up with a planning application for the whole street which gives every owner the same right to extend, and they all take a vote. If a majority agrees, then everybody can extend up to the new maximum.

Those who are opposed will vote against. Those who aren't bothered either way have to make a calculation - being surrounded by larger/higher buildings depresses the current rental value of a home, but the automatic right to extend it by a certain amount increases its potential selling price. If it's a net uplift, then it makes sense to vote in favour and bank the uplift.

So actually it's quite a sensible suggestion. In theory, it pushes the balance towards densification rather than sprawl, which is believed to be A Good Thing. But clearly, it will make very little difference to anything. I can only see it taking off on streets where all homes are similar, so everybody's uplift is the same.

And as per usual, it just funnels money/value towards people in high value areas. In an average residential area with averagely spaced semi-detached houses worth £200,000, the ones with a third storey are worth (say) £50,000 more, but the third storey costs £50,000 to build. In an expensive area where an average semi-detached costs £600,000, the extra storey might increase the value by £150,000 for a build cost of £50,000, so that's a straight profit of £100,000 for just ticking the "yes" box.
-----------------------------------------------------
As ever, this is a job for Land-Value-Tax-Man.

For a start, existing buildings would be used more efficiently so there's less need for new construction.

Councils can also be more generous with the right to extend. Every time a home is extended (or improved), the average rental value of all homes in that area goes up ever so slightly, so everybody's LVT goes up slightly. The first ones to extend (or improve) are getting a good deal, because they are only paying for a small fraction of the extra rental value.

When enough people have extended (or improved), the last few who haven't might as well extend (or improve) as well (or sell on to somebody who will) to catch up - there is no point paying for something (i.e. the market value of planning permission i.e. the LVT bill as if they had done an extension or improved) which you aren't using.

This is a very gradual thing, but it sorts itself out in line with market forces. If it's a low demand area, few will extend so there's not much impact, LVT bills don't go up and not much gets extended. Even if the council in a low demand area gave everybody permission to extend by two-storeys, very few would bother - it would be cheaper to just move to a bigger house. In high value areas, it will be a more rapid race to the top.

Land Value Tax implementation - the easy way

Anytown District Council
1 High Street
Anytown AN1 1AA
xx January 202x

Mr & Mrs Smith
1 Acacia Avenue
Anytown AN2 4BQ

Dear Mr & Mrs Smith

Your Domestic Rates bill 202x-2y - property ref. XYZ1234
Following enactment of The Tax Simplification Act 202x, various taxes will be abolished and replaced with a single tax on land and buildings with effect 1 April 202x. The taxes which will be replaced include Council Tax, Stamp Duty Land Tax, Inheritance Tax and the TV licence fee (for full list see enclosed leaflet). These taxes were arbitrary; economically inefficient; prone to avoidance and evasion; and had high compliance and collection costs.

The new Domestic Rates will raise the same total revenues as the taxes it replaces in a fair and economically efficient way, with low collection and compliance costs. This will make budgeting and planning easier for government and households alike. Each household's share of the total taxes paid will be largely unchanged over the medium or longer term. Your local council's funding will be unaffected.

Valuation and assessment
Your property has been allocated to Band D (large terraced house or typical semi-detached house). According to data compiled by the Valuation Office Agency and HM Land Registry, the average gross rental value of all Band D homes in your assessment area (postcode sector AN2 4, see enclosed area plan) is £11,000 per annum. We have subtracted a general deduction of £4,000 for building and maintenance costs to arrive at a net rental value of £7,000 for Domestic Rates purposes. This is multiplied by the official rate of 25%, so your annual bill is £1,750. Please refer to the enclosed leaflet for details and worked examples.

Ways to pay
Please complete and return one of the enclosed forms within 30 days in the prepaid envelope provided:
* If you receive income subject to PAYE (salary or private pension), we recommend that you complete and return the attached 'PAYE details' form which will enable your employer or pension provider to deduct the amount due directly from your salary or pension in monthly instalments and pay it to HMRC.
* If you are not in receipt of a salary or a private pension and/or prefer to pay directly, please complete and return the enclosed 'Direct Debit' form.
* If you are over retirement age, you can apply for deferment using the enclosed 'Deferment' form.
* If you have suffered a recent change in circumstances and feel you are unable to pay (involuntary redundancy, divorce or death of a spouse), please complete and return the 'Hardship' form.

Failure to complete and return the appropriate form within 30 days may result in interest and penalties being charged.

Appeals
Please contact us within 30 days by completing and returning the enclosed 'Appeal' form in the prepaid envelope if any of the following apply:
* you are not the owner of the above property (please pass a copy of this letter to your landlord or other owner).
* your property has been converted to flats or you otherwise believe that it does not belong in Band D.
* you believe that there are other reasons why the net rental value of your property is significantly less than £7,000 per annum.

Please keep a copy of the form for your own records. An unsuccessful appeal may result in your property being allocated to a higher Band. If you submit an 'Appeal' form, you must still also complete and return one of the payment forms.

Finality
If we do not receive an 'Appeal' form within 30 days, you will be deemed to have accepted that your property has been allocated to the correct Band and that you accept the assessment. This will be binding on you and any future owners of the property.

Yours faithfully


Ms Henrietta George
Director, Council Finance Department

Land Value Tax in Baden-Württemberg

I took part in an online talk/discussion about the introduction of Land Value Tax in B-W on Saturday, led by one of the hardcore Georgists driving it.

The whole process was as slow and painful as you can imagine. They set up an official lobby group in 2012 and spent years getting various existing organisations on board. They explained to the hard left "Die Linke" party that this would reduce inequality; they explained to the Green Party that it is a tax on use of natural resources; they told the NIMBY and nature preservation groups that this would discourage urban sprawl; they told the tenants' organisation that their landlords would bear the tax; they told the construction industry that it would not be a tax on development etc.

The background is that Germany has a very low level Council Tax called 'Grundsteuer'. The average bill per home is less than £400 a year. It's so low, there's not even a monthly instalment option, you just get a bill and you pay it, like you pay the gas bill or your home insurance. It has all the flaws of Council Tax. It bears little relation to the land value; there is no regional variation in final bills (so it's regresssive); it's based on valuations that are fifty years out of date, which is actually irrelevant as each local council can set its own tax rate (as a pro mille figure); proceeds are collected and spent locally etc.

For some reason, the German Constitutional Court (who have a say in these matters - they got rid of Wealth Tax because housing was taxed at lower rates than proper wealth, why not just include housing at market value, the same as everything else?) had decided that Grundsteuer was unconstitutional (not clear why) and the Federal Government had to come up with a fiscally neutral alternative. They came up with a complete fudge of a law that said each State can make up its own rules on some sort of replacement tax on land and buildings. So the lobby group fought hard for eight years, contacting endless politicians and attending hearings at federal, state and local level.

Some states went Home-Owner-Ist and have a flat rate per dwelling (more or less). Bavaria completely missed the point and decided that the tax should be a fixed amount of a few cents for each square metre of interior floor area. Some States base the tax on the total value (which is a step in the right direction, but makes valuations trickier and discourages development). Only in one state did they make any headway - B-W will introduce a low level LVT, payable by the owner/landlord in 2025. B-W is a very wealthy state in the south-west corner (Porsche and Mercedes are based there), which bizarrely enough is run by a Green-Conservative coalition. It had been solid majority Conservative for decades before that. Nordrhein-Westfalen is still prevaricating and could go either way. 

Inevitably, there was the usual Home-Owner-Ist bleating, even though the effective rate will be less than 5% of the site premium. Poor Widows in Mansions and so on. Which is weird, because the annual tax on a mansion near Stuttgart will only go up from £600 to £1,000 or something. People in flats in the periphery will see their annual bills go down from £500 to £300.

The presenter admitted that taken in isolation, the whole exercise had been pretty pointless and replacing Grundsteuer with an LVT of 5% would have precious little effect on anything. But at least they had their foot in the door. He said that it would be great if they could bump up the LVT and reduce VAT in tandem. (He explained that VAT rates are set nationally, so I'm not sure why he picked on VAT as the next on the hitlist).

I pointed out that the next tax to replace must be Grunderwerbsteuer, which is like Stamp Duty. It is a State-level tax (like SDLT in England and Northern Ireland; LBTT in Scotland and LTT in Wales). Each State can set its own flat rate (between 4% and 6.5%, no tiered rates as in the UK) and keeps its own revenues. That's pretty steep, and total revenues are slightly more than the total revenues from Grundsteuer (EUR 16 billion against EUR 13 billion). He agreed, and agreed that this would help get the construction industry on board, but that tax didn't appear to be next on his 'to replace' list (and wasn't up for debate anyway).

That's all really. It reinforced my view that the only way to persuade a government to replace taxes with LVT is via the ballot box. It doesn't matter if 95% of people hate the idea (rightly or wrongly) or simply don't understand the point. If you can get 5% of people voting for a Georgist party, the Big Two will adjust their policies to claw those votes back again. Which is another reason for a Georgist party to be doggedly centrist/apolitical. If it positions itself as hard left, the Tories won't care how many votes it gets; if it positions itself as neoliberal, the Labour party won't care.

Poor Widows In Mansions, part the manieth.

From The Daily Mail:

[UK Finance Minister] Rishi Sunak rejected a proposal for an emergency wealth tax to recover the staggering £280billion the Government has spent so far on the coronavirus pandemic. The Chancellor was presented with plans for a one-off levy on those with assets of more than £500,000, or £1 million for a couple, including their family home and pension(1).

But Mr Sunak has told allies that he has ruled out the suggestion because he believes it would be 'un-Conservative' and go against the party's aspirational values(2). However, he is still considering proposals to raise tens of billions from the better-off by sharply hiking capital gains tax.(3)

The Wealth Tax Commission(4) last month proposed a 5 per cent levy on housing, pension, business, equity and savings wealth that it forecast would raise £260billion. The tax would apply to every UK resident with assets of £500,000 or more and would include homes excluding mortgage debt.

About one in six adults – 8.2million people – would be liable, but the tax would largely fall on older generations who have paid off more of their mortgages and built up larger pension pots. Almost 40 per would be aged over 65, while just 6 per cent would be between 35 and 44 years old. The Commission recommended households pay the levy at a rate of 1 per cent a year for five years.

It estimated up to 10 per cent of those affected would be 'asset-rich, cash poor' and not have the ready money to pay for it. For those people, it suggested smaller payments for a longer period. (5)

1) Hooray for taxes on land and buildings, especially if they replace existing stupid taxes on land and buildings, such as Council Tax, SDLT and Inheritance Tax. Taxing pension funds is stupid because they are heavily subsidised. It it far better to simply reduce or phase out the subsidies. Taxing the value of 'business, equity... wealth' is even more stupid. If you want more tax from businesses, just reduce corporate subsidies, and if still necessary, hike the corporation tax rate. Taxing cash savings is even stupider; a proper tax on land and buildings (i.e. LVT) ignores mortgage debt and is levied on the gross rental value of the plot. So as a quid pro quo, cash savings shouldn't be taxed either, or it's heads-we-win, tails-you-lose.

2) 'Un-Conservative' just means 'won't go down well with voters'. The Conservatives are the political party with no principles whatsoever apart from staying in power as long as possible. The same applies to 'aspirational values', which is meaningless. With a full on-LVT and lower taxes on earnings and business output (which are real taxes on 'aspirational values'), people would still 'aspire' to earn more and buy a nicer house (or a nicer car or nicer holidays, or more savings, whatever, that's the whole point of earning more). And those who earn more would end up in the nicer houses and pay the LVT voluntarily.

3) This is pure tokenism. Capital Gains Tax in the UK raises about £7 billion a year, about 1% of all tax receipts (from memory - it's fairly small numbers). CGT was never intended to raise much revenue, it is basically an anti-avoidance measure to deter people from reclassifying heavily taxed earnings or profits as 'capital gains' (which were not taxed at all until 1965). The revenue-maximising CGT rate appears to be about 15% and we are already past that point on the Laffer Curve. So it is nigh impossible to raise significant extra money from CGT.

4) Wealth Tax Commission is an initiative of think-tank the Institute for Fiscal Studies. They are well-respected and influential but nothing official. Their numbers and estimates are almost certainly correct.

5) Also known as 'the roll-up and pay on later sale or death option', just to knock that KLN on the head.

They own land! Give them money!

Spotted by TBH in This Is Money:

Second home owners who have registered their properties as businesses are set to land an £85million windfall from the Government's small business grant scheme.

Experts said the loophole allows the owners of second homes – many of which are registered in Devon, Cornwall, the Lake District and in seaside towns such as Scarborough – to register them as businesses as long as they 'make them available' to let for 140 days of the year* and take bookings for at least half of those days.

The practice, known as 'flipping', allows the property owners to pay business rates instead of council tax. It also means they are eligible for the Government's small business rates relief scheme, which means all but the largest properties pay little or no tax.

Owners are now also poised to collect a share – around £1,300 each – of £2.2billion support for small businesses closed due to coronavirus restrictions. According to commercial property adviser Altus Group, there are more than 62,000 properties in England which are classified as holiday homes and have been flipped** to become 'commercial' premises for tax purposes.

It is not the first time that the owners of second homes have benefited from Government handouts during the coronavirus crisis...

* The official name for this is "Furnished Holiday Lets" and is a set of insane (and fiddly) tax reliefs for second home owners.

** No doubt many of them will be flipped back from Business Rates to Council Tax when the Business Rates exemption ends  - Council Tax is usually much lower. I wonder if they will ever publish that statistic.

"Rishi Sunak to reform anti-Northern spending bias"

From the BBC:

Part of what will change is the Treasury's Green Book - a set of rules it uses to determine the value generated by government schemes. It will mean - as the first portions of £600bn in planned public investment are delivered - the process of ranking transport, energy, schools or hospital investment will be widened beyond a narrow definition of benefit compared to cost.

Those calculations, the Treasury now acknowledges, have inherently favoured the government investing continuously in the South East of England and London. That's because the values of economic return are influenced by existing high property prices in those regions. For example, a transport link between London and Reading would always have ranked as better value for money for the taxpayer than linking two northern cities.

I'm reading between the lines a bit here, but I assume what they mean is that if spending £X billion on better transport links increases economic activity in an area by Y per cent, then it is better to spend it in a densely populated = high wage = high land price area.

On a national level, that makes sense. It would be pointless spending umpteen billion on bridges connecting sparsely populated Scottish islands.

The real issue is not where the money is spent, the issue is who benefits from the spending. Under current rules, it is mainly people who own homes or business premises in the South East, so a double slap in the face for people and businesses in other areas, who have to pay their share of the cost via taxation. Or indeed tenants in the South East who end up paying more tax and higher rents.

If LVT were a major source of revenue, then money would still be spent on whatever things in whatever areas where the extra LVT exceeds the cost, but instead of all the benefits going to landowners there, everybody in every area of the country would benefit because that surplus LVT would be used to reduce taxes on output and earnings for everybody. Like people who pay £100 for a front row seat subsidising people in the back row who only have to pay £10. If the theatre charged a flat £50 on a first-come first-served basis, they'd only fill half their seats and the back rows would be empty.

Tax incidence

from Yahoo Finance:

[The SDLT holiday] will reduce many buyers’ tax bills. The chancellor said the changes meant almost nine in 10 buyers will pay no stamp duty land tax (SDLT) at all on transactions.

Treasury analysis suggests buyers would save £4,500 on the average property purchase, though analysis by estate agent Barrow and Forester indicated lower savings of £2,465 in England. But the reforms are mainly intended to drive additional sales in the property market, as a significant part of Britain’s economy...

UK housebuilders’ share prices have been rising all week after the plans were first reported over the weekend, with shares in Persimmon (PSN.L) up almost 10% since last Friday.... Several experts warned the temporary nature of the measures mean the tax cuts may have unintended consequences, however.

Observers pointed out transactions and prices may spike as buyers rush to complete before the holiday expires next March, followed by a sudden drop. In the short term, buyers may save money on stamp duty, but if tax cuts start pushing up demand they may face higher asking prices.

SDLT is, taken in isolation, a dreadful tax, but it is a bit like a lump-sum LVT paid in advance, so not the worst tax. (The same goes for Inheritance Tax - it is like a lump-sum LVT paid in arrears. Same goes for Council Tax - it is like a very low level LVT-cum-Poll Tax payable annually. Between them SDLT and IHT raise 50% as much as Council Tax, so why they don't just merge those two into an enhanced Council Tax is an enduring mystery to me.)

But the fact that the share prices of major Tory party donors land bankers home builders have risen so sharply is a bit of a clue that the 'observers' are correct - the SDLT cut will benefit sellers rather than buyers, even though it is the buyer who legally has to pay it.

By how much would UK tax receipts fall if VAT were scrapped outright?

Physiocrat, here, is very radical on this:

VAT costs and losses

1) Admin - not very much as the costs are transferred to business.
2) Churning - VAT is part of the price index to which pensions, benefits and public sector pay are linked. This makes it a major government cost in its own right.
3) Abstraction from other taxable revenue streams.
4) Welfare costs arising from deadweight losses.
5) Tax revenue losses due to deadweight losses (separate from abstraction).

My piece on the LVTC web site needs to be re-worked with better calculations. I would not be surprised if, because of the above, the Exchequer is out of pocket due to VAT.

I think he's overselling it. We exchanged emails this afternoon, and my summary is this, FWIW. Total VAT receipts are about £130 billion a year in the UK. What happens if we scrap it (which we can now do, post-Brexit) and make no other changes to the tax system?

1) Admin costs

Government HMRC admin costs are supposedly around 1% = £1 bn, double that for 'carousel fraud' etc = £2 bn.

Number of VAT registered businesses (two million) x extra work each quarter adding the extra info to the accounting system and doing the quarterly VAT return (ten hours) x average hourly cost of employing a bookkeeper £50 (wages, NIC, desk space) or lost value of small business owners' time when they could be actually producing something = £4 billion a year. Smallish number, so let's include it with dead weight costs at 5) below.

2) Churning

I'm not sure I agree that "VAT is part of the price index to which pensions, benefits and public sector pay are linked". VAT has little impact on end prices, Phys countered that "End prices would go down if all these people were not handed government money to pay VAT with!" which is true. I'm still not sure what the net impact on government spending would be.

3) Abstraction from other taxable revenue streams

This is the biggest and easiest number.

PAYE (income tax plus two layers of NIC) on average worker = 40%. Higher rate employees PAYE = 49%. Corporation tax is 19%. If profits are paid out as dividends to individuals, there's a bit more income tax on that. VAT cuts into business rents, which are taxed at about 40% via Business Rates. The overall average rate is (say) 33%, so one-third x £130 billion would come back in anyway = £43 billion, assuming no change at all to selling prices and output in real terms (goods and services supplied, hours worked etc).

5) Tax revenue losses due to deadweight losses (separate from abstraction) and 4) Welfare costs arising from deadweight losses

Let's say scrapping VAT boosts the economy and trade by 5% in real terms (low guess - it depends what assumptions you make about price elasticity of supply and demand). Total current tax revenues from economic activity (PAYE income tax and NIC, corporation tax, bank levy, Business Rates etc) about £430 billion a year. 5% of that = £21 billion.

There are about thirty million employees. Let's say that number also goes up by 5% and 1.5 million who are currently un- or underemployed get a part-time job, longer hours, full time jobs. Average unemployment benefit, housing benefit etc (say) £10,000 per person per year = £15 billion saving.

Summary

HRMC would lose £130 billion of VAT receipts.

HMRC would save £2 bn admin costs and fraud; get £43 bn more from other taxes anyway (static basis); get another £21 bn from other taxes from losing deadweight costs (dynamic effect); and the DWP would save £15 bn a year in welfare payments, total £81 billion.

That means that the UK government would only lose about £50 billion a year if it scrapped VAT outright.

For convenience and to make this politically sellable, we can play along with the myth that consumers/households pay the VAT.

£130 billion divided by 29 million households = £4,500 per household on average. If we claw back the £50 bn shortfall from total housing values (pre-lockdown) of over £7 trillion, it would require a progressive property tax of about 0.7% on selling prices (or for the purists, a 25% Land Value Tax on residential site premiums) = £1,750 on average.

The average household is £2,750 a year better off. What's not to like?

'Never kill a job, mate. Never kill a job'

These words were spoken, through a just alight dog end stuck to his bottom lip,  by a labourer in a potato merchant to a friend of mine who was his foreman and was trying to hurry him up in loading the lorries.  The message is don't work too hard or fast or the job will go.

But what really kills jobs?

We all know that jobs are a cost of production, not a benefit hence the costlier you make it to employ somebody the less jobs there will be.

Which brings me on to this (which I have just re-discovered):



It seems to me that the other takeaway from Fred's analysis is that by taxing labour not land you kill production which in turn kills jobs.  Or rather the killing of jobs kills production.

Of course it gets worse.  The value of money arises from production.  Fiat money is what it says it is. Its value does not arise from production.  So without production (and yes that would include house building) money must eventually have no value.

So on top of reducing production we now have money printing to save production...

It's not going to end well is it.

Unless we change course...

Good news from Australia...

From The Daily Mail:

The Victorian Government is reportedly considering scrapping stamp duty in favour of annual land tax payments. Often considered a growth-killer by economists, [stamp duty] is paid to Australian state governments when a home-buyer purchases a property.

But with a huge decline in the housing market, Premier Daniel Andrews is examining new ways to stimulate the state's real estate sector. While the price of the tax varies in different states and cities, in Melbourne where the median residential home is $819,611, the cost of stamp duty is $46,383.36, according to Core Logic data.

But since the coronavirus crisis began the state's property market has plummeted, leaving a massive hole in their annual $6billion cash cow... Even before the coronavirus derailed the property sector a report by the Productivity Commission in 2019 urged Scott Morrison to ditch the 'inefficient' tax in favour of an annual homeowners' tax.

"Shifting from stamp duties to a broad-based property tax could leave New South Wales up to $5 billion a year better off, while also improving housing affordability," the report said.

"Stamp duties are among the most inefficient and inequitable taxes available to the states and territories. In contrast, property taxes – which are levied on the value of property holdings – are the most efficient taxes available to the states and territories."

Fingers crossed!

That's the second time this week...

.. that City AM publishes an article which mentions LVT in a positive light:

First Homes is a flawed solution to three very different problems

Stamp duty land tax also gums up the market, making people reluctant to sell even when their homes are no longer suitable for them. Like anything in life, when there is a lot of demand for a good that’s in short supply, the cost goes up... Stamp duty should also be scrapped and replaced with a land value tax to increase the rate of house moving.

Sadiq Khan’s rent control pledge is a minefield of unintended consequences:

If any current or future mayor really wants to reduce rents in London, they could do two things: bang the heads of local authority planning departments together to encourage more planning permission, and lobby Westminster to allow local authorities to receive more of the income from development.

A land value tax, for example, would mean any increase in land value when planning permission is issued would be retained locally, incentivising the issue of more permits.

Wonders never cease.

"My advice for Rishi Sunak: superforecasters won’t make your Budget better"

Stephen King, HSBC's Senior Economic Adviser gloriously misses the point in yesterday's Evening Standard:

Rishi Sunak, the Chancellor of the Exchequer, is presenting his first Budget on March 11.  To do so, he'll need some vaguely credible economic forecasts. Without them, the fiscal arithmetic is no more than guesswork. In the bad old days, chancellors simply looked at themselves in the mirror and came up with numbers that best suited their political purposes.  

Gordon Brown kept changing his forecasts to prove there could be "no more boom and bust", singularly failing to spot the looming global financial crisis.

In the late Eighties, Nigel Lawson persuaded himself that Britain was about to embark on a prolonged period of faster growth and lower inflation, conveniently ignoring the housing boom that led to the early-Nineties recession.

He goes on to dismiss the whole idea of forecasts - either they are wrong; politically unpalatable; or they are self-fulfilling prophecies.

And that's ultimately the problem with economic forecasting, particularly in the public realm. Some things just aren't forecast for the simple reason that, until they actually happen, it's easier to pretend otherwise.

In May 2008, midway between the failures of Northern Rock and Lehman Brothers, the Bank of England apparently regarded the risk of recession as very low — in hindsight a seemingly ridiculous conclusion.

Does he not even bother to read what he has written and look for the most basic patterns - to wit house price bubble and credit bubble => house price crash and credit crunch => recession? he gives two recent examples of exactly that. That's all you have to look out for.

To make matters even easier, these crashes happen every 18 years or so (he mentions 1990 and 2008, next one due 2025 or 2026).

The Chancellor has a choice - press on with Home-Owner-Ism and worry about the mess later, or take active steps to dampen leveraged land price speculation.

He can re-adopt 20th Century Georgism Lite (mortgage caps, rent caps etc) or he could do the decent thing and replace as many taxes as possible with Land Value Tax.

That's the spirit! (fixing the High Street)

Emailed in by Lola from Ipswich Star:

The Edinburgh Woollen Mill, in Buttermarket, Ipswich, looks set to be the latest national brand exiting the town.

Large signs have appeared in the store's windows which state: "This store is closing down - all stock must go". owever, the store's message is somewhat contradicted by a much smaller sign underneath which reads: "Subject to landlord negotiation". This is a tactic The Edinburgh Woollen Mill has employed before and used at dozens of stores across the country.

Earlier this year similar signs appeared in the windows of Peacocks fashion store, in Carr Street. But despite having the signs up for most of the year the store, which is owned by The Edinburgh Woollen Mill, still seems to be going strong.

It appears the signs are introduced as a result of annual negotiations of new leases in a bid to strike a better rent deal with landlords.

Retailers are gradually cottoning on to this tactic, in the medium term, it will work, hopefully.

LVT (as opposed to Business Rates) would give landlords the required kick up the arse and accelerate the process. LVT on any high street would be based on average rents being actually paid by normal tenant businesses. For charity shops (which are arbitraging the 80% Business Rates reduction for charities) and vacant premises, each landlord would be asked how much rent they are holding out for (assuming the premises were rented to a normal business) and would pay LVT based on that amount. If they pitch too high, they will be overpaying LVT; if they lowball, then the council can ensure that the premises are actually rented out for that amount and a local business gets its foot in the door.

The theoretical optimum rent (and hence optimum LVT receipts) on any high street is the highest figure that landlords can demand before shops start falling vacant, which leads to a downward spiral. In the real world, the optimum is "a bit less than that".

LVT will encourage landlords to find that optimum:
- LVT will tend to push rents down a bit. A rational landlord is indifferent between a) charging £40/sq ft rent and paying £30/sq ft LVT and b) charging £35/sq t rent and paying £25/sq ft LVT, either way, the landlord nets £10/sq ft.
- LVT will also push rents up a bit. If all other landlords are charging £35/sq ft, fixing the LVT on all shops at £25/sq ft, clearly a minority of landlords will go for £36 or £37, while still only paying the £25 LVT and thus netting £11 or £12.

But so what? If rents fall below that theoretical optimum, at least there will be shops and jobs in the area; the council's loss is local business' gain, and not local landlords' gain.

Presumably, there are some High Streets where the maximum rent that can be demanded is less than it costs to maintain the buildings, these areas are beyond the margin and are very difficult to revive. Reducing other taxes (in particular VAT) would revive at least some of them, which is all part of the plan (LVT could largely replace VAT).

Yeah! Go Lib Dems!

Jo Swinson doesn't seem to grasp the logic behind LVT, she's mis-selling it, but good stuff nonetheless from The Daily Mail:

Ms Swinson told delegates:

"The Liberal Democrats are committed to supporting small businesses who are the engine of our economy. That's why the Liberal Democrats would scrap business rates and replace them with a commercial landowner levy. It will shift the burden from the tenant to the landlord so that we can breathe new life into our high streets... It is time for clear action that will give proper help to our small businesses."

Ripping up business rates was mooted by the party in August 2018 by the then leader Vince Cable in a report called Taxing Land, Not Investment. It made clear the levy would be paid by owners, not tenants, and that 'non-residential stamp duty should be scrapped to improve the efficiency of the commercial property market.

Ms Swinson added: "Let's remember what the issues are that we're trying to solve here - businesses on the high street have been struggling for many years now and they find the business rates can be a crippling cost and this is at a time when they're already having to deal with footfall falling, competition from online competitors where they aren't having to pay the same type of rates.

"So I think this is an important change, and clearly it being borne by landlords - some of that may well be passed on but we also recognise it will not all be - and this will provide a significant boost for businesses."