Excellent work by Fairer Share

From The Sun:

RISHI Sunak is facing calls to scrap council tax and stamp duty. Households would pay a single property levy under the plan backed by nearly 100,000 people.

The change would benefit residents in the Chancellor’s Richmond, North Yorks, constituency by £650 a year, research by WPI Economics found. Charity Fairer Share, which came up with the plan, said one in four adults regularly borrowed to pay council tax...

The article is light on detail even though the suggestion is very simple. Unsually for The Sun, it is not totally negative. Inevitably, most of the comments are. For more details go to Fairer Share. Which is a community interest company and not a charity AFAIAA.

Another petition worth signing

Over at fairershare.org.uk.

They've even got a calculator on their website showing how much Proportional Property Tax you would pay each year and compares that with how much Council Tax and SDLT (which it would replace) you currently pay.

They annualise the SDLT by assuming people buy and sell every twenty years. So they divide the SDLT you'd have to pay if you sold your home and bought another one of similar value by twenty. They also knock 10% off the likely market value before applying the annual percentage of 0.48% (to reduce the number of appeals) and say that the owner would pay the tax, not the occupant.

All sensible stuff and great minds think alike. (I wish they'd thrown in the TV licence fee and Inheritance Tax as well, but hey).
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The LVT purists insist that an ideal tax is set at a percentage of the site premium (the location element of gross rental values) and not as a percentage of selling prices.

On an intellectual level, this is correct, but at the low level proposed by FairerShare, it doesn't make any difference. The maths is very interesting here and it tends to sort itself out:

i. The selling price-to-gross rent multiple for housing in cheap areas is much lower than the selling price-to-gross rent multiple of housing in expensive areas.

ii. The fraction of the gross rent that relates to location is much lower in cheap areas than in expensive areas.

iii. Therefore, a tax based on selling prices is much the same as a tax based on the location value element of the gross rent.
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Their Killer Arguments, Not section is also very good. Comprehensive but concise.

My few milliseconds of fame

Via Steve, via Robin, from Thursday's Evening Standard business pages:

It's a very positive article, but what's impressive is how they managed to introduce at least three basic, simple errors into such a short article:

1. Council Tax was on the list of taxes to be replaced, not Business Rates.
2. 0.9% x £250,000 doth not equal £1,800.
3. The "rich" would not pay significantly more or less than they do now with a 0.9% progressive property tax, they would pay more in annual tax but save just as much from the abolition of irregular and one-off taxes SDLT, CGT or IHT.

"3 reasons why so many people are moving to Texas"

Dave H emailed in this from the BBC:
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2. It's cheaper

Once employed, it's hugely important that your pay cheque goes as far as possible, says Kotkin.

"New York, LA and the [San Francisco] Bay Area are too expensive for most people to live, but Houston has the highest 'effective' pay cheque in the country... The ratio of the median home price to median annual household income in Houston is only 2.9. In San Francisco, it's 6.7. In New York, San Francisco and LA, if you're blue-collar you will be renting forever and struggling to make ends meet. But people in Texas have a better shot at getting some of the things associated with middle-class life."

3. Homes

Land is cheaper than elsewhere and the process of land acquisition very efficient, says Dr Ali Anari, research economist at the Real Estate Center at Texas A&M University.

"From the time of getting a building permit right through to the construction of homes, Texas is much quicker than other states. There is an abundant supply of land and fewer regulations and more friendly government, generally a much better business attitude here than other states."

This flexibility, plus strict lending rules, helped to shield the state from the recent housing market crash.

4. Low tax

Texas is one of only seven states where residents pay no personal state income tax, says Kay Bell, contributing tax editor at Bankrate and Texan native.

The state has a disproportionate take from property taxes, which has become a big complaint among homeowners, she adds. But overall, only five states had a lower individual tax burden than Texas, according to Tax Foundation research.
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Simple, isn't it?

Reduce taxes on earnings and collect taxes from the rental value of land instead and wonderful things happen, even if you don't really understand the mechanism. Texas residential property taxes aren't even that high in absolute terms. According to the Home-Owner-Ists at the self-same Tax Foundation, Texas is third worst (i.e. third best) in terms of the annual tax rate divided by house prices at 1.81%.

But that is on a very low base - in Houston, Texas, the median home buyer is paying 1.81% tax on a house costing 2.9 times his earnings (i.e. not much more than actual build cost) = 5.2% of earnings. In San Fransisco, the typical property tax is only 1.2%, but that's on a house costing 6.7 times your earnings = 8%.

Surely, anybody who is sane would rather have a small mortgage and pay 5% of his income in tax than saddle himself with a huge great mortgage and pay 8%?

"Two thirds back mansion tax on £1m homes"

This article in The Metro cheered me up:

Although such a levy has been ruled out by both David Cameron and chancellor George Osborne, their Liberal Democrat partners are all for it – as are 57 per cent of those questioned in the Harris Interactive poll for Metro.

The same number would support higher levels of tax on foreign-owned second homes, while 45 per cent back the idea of an increased levy on empty properties. Some 70 per cent of those polled would back fines of £100,000 for tax dodgers who own properties worth more than £1million.

A Lib Dem spokesman said: "It’s good to hear that people support a mansion tax. Liberal Democrats have long favoured a mansion tax and it is something we will continue to campaign for, in government and at the next general election."

The poll of 1,164 over-16s living on mainland Britain was conducted online by Harris Interactive between September 25 and October 1.

Jospeh Rowntree Foundation takes tentative first steps...

From their report summary:

Volatility has plagued the UK housing market for four decades. The JRF Housing Market Taskforce identified ways to create a more sustainable housing market. This paper presents a progress report, and highlights key priorities for the Government.

Key points

The Government should*:

• Conduct a revaluation of property for Council Tax purposes with a view to gradually transforming it into a national land and property value tax, following full modelling to identify difficulties and to inform its design.

• Ensure the Financial Policy Committee has the power to introduce mortgage credit controls, and that the housing market as a whole is monitored as a threat to wider economic stability.

• Monitor the FSA’s new mortgage rules to ensure they do not unnecessarily exclude low risk borrowers from the housing market, collecting the necessary data to do this and formally reviewing the rules after three years.

• Introduce a more effective safety net for home-owners that shares responsibility fairly between home-owners, lenders and government.

• Switch the emphasis of housing subsidies away from a reliance on Housing Benefit towards housing supply, as part of a new model for financing new affordable housing.

Three out of five ain't bad.

* Yes I know we can ignore arguments based on "should", but firstly I'm quoting and secondly this is their recommendations based on facts, evidence and so on.

Killer Arguments Against LVT, Not (233)

Spotted by Richard Henley Davis in the Irish Independent:

The last refuge of battered middle-class Ireland is under fire.

Calm down, then. What is all the fuss about? Your family home is being threatened. The Government has appointed the noble army of taxmen as the enforcers.

Like all Home-Owner-Ists, the writer mounts several arguments, none of which has much merit and which cancel each other out:

None of that softly softly local government enforcement stuff that floundered in the case of the household charges debacle. This time it is the jackboot method. The taxman can cut off the family home tax at source. You will never have to send it to them because it will be snatched from your pay packet. They will do it this way because they know you cannot afford to pay the tax.

Righty-ho, they hope that the tax will raise a paltry €500 million, i.e. €110 per resident, or the equivalent of about one or two per cent on income tax (i.e. like increasing the basic rate of income tax from 20% to 21% or 22%), the bulk of which is deducted directly from your wages. Would there have been the same hysteria if they'd done that? I guess not.

Welcome to back-to-front economics.

The case for a property tax back in 2007 was stronger. At the time the residential property market was in a frenzy. House prices were out of control. The Fianna Fail government refused to hose the flames. Instead, it fanned them.

Bertie Ahern's government and the FG/Labour opposition flirted with the mad idea of reducing stamp duty on houses, allowing property prices to go berserk. Instead of introducing a property tax to cool the market and to raise revenue, Taoiseach Ahern and finance minister Cowen let the market rip -- encouraging developers, bankers and buyers to push prices to lunatic levels. A property tax then could have helped to prevent a crash later.

Instead we had our crash.

FF were in charge in 2007, and the Irish were presumably whooping to the rafters about all the lovely 'capital gains' they'd made. If anybody had proposed such a tax at the time, there would have been howls of outrage about people being denied these lovely unearned windfall 'capital gains' in future. And now the government is FG/Labour and they are doing, belatedly, what should have been done years ago? So what. Better late than never.

Today, the bombed-out market needs nurturing. Last week the Central Statistics Office (CSO) released figures showing that property prices had fallen by 56 per cent in Dublin and by 50 per cent elsewhere in the country since the 2007 peak.

And what do the FG/ Labour boys propose to do to remedy the slump in the fortunes of family homeowners?

You guessed it. At a time when all barriers to house ownership should be removed, when the case for the abolition of stamp duty is strong, they have opted to suffocate the dying invalid. A moribund property market is being locked into the mortuary.

So in Ireland 2007 a Fianna Fail/Green government threw petrol on a blazing housing inferno. Then in Ireland 2012 a Fine Gael/Labour Government nukes the ashes -- just in case there is any sign of a few emerging embers. Back-to-front economics rule okay?

Why does it need nurturing? The FF government did a decade of 'nurturing' and see where it got them. It drove the house price lending bubble, they made a maniac decision to guarantee the Irish banks, the banks duly went pop and now taxes have to be increased to pay for it all. Faced with a choice of stifling the economy even further with higher income tax, or 'nuking the ashes' and taking a small step to try and dampen such bubbles in future, what makes more sense?

The Government is making a serious mistake.

No it's not.

The Irish property market is not a normal asset class. It is skewed badly. It is perverse, irrational, dysfunctional, inconsistent.

Correct, that's what happens when a boom turns to bust. These booms come along every 18 years and the earlier you start heading off the next one, the better.

It is impossible to value a house in present conditions when activity is at an abysmal level.

Bollocks. Rental values are fairly stable and relative values are easy to establish.

Some families own their houses outright, while their neighbours are in negative equity.

So? Relevance? That's like saying that an alcoholic shouldn't pay booze duty because he's deeply in debt. Or is he trying to say that the responsible middle class drinker who has one glass of wine after a meal shouldn't pay booze duty but the alcoholic should? What's his f-ing point?

And should the couple who have paid off their mortgage be liable for the tax while their neighbour is granted a waiver?

Nope. A proper LVT would be indifferent to such matters. Giving a waiver for the indebted would be to indirectly subsidise debt, which is what get them into this mess.

The family two doors down may have a lower income than either. Should they be granted a waiver? Should the elderly be given waivers?

The low income family, nope. If you want to give Poor Widows In Mansions an exemption, deferment option, discount or a higher state pension, feel free to do so.

Should those who have bought the same house paying 9 per cent stamp duty -- a property tax -- in the boom years be made to pay another property tax today?

WTF does that have to do with it? Stamp Duty is borne by the vendor, if you paid 9% Stamp Duty then the price was 9% lower than it otherwise would have been, not an issue.

Did they borrow money to pay the original stamp duty to the government?

Irrelevant. If people over-stretch themselves well, some of they might fall on their faces. That's what's called 'taking responsibility for your own actions'.

Many of the victims of the reckless bank lending in the property boom are likely to be hit on the double, now emerging as victims of the bust when their devalued asset suddenly becomes a taxable liability.

True, the bankers always win out; in the boom years they get the bonuses, in the bad years they get the bail outs, and it's always the hard working people (in the old-fashioned sense of going out to work or running a business for a living rather than the modern sense of 'is a home owner') who get shafted. But, given our (unfortunate) starting point, what's worse - making hard working people, who perhaps didn't over-stretch themselves pay more income tax, or making the over-stretched land speculators pay more property tax? It was ultimately the latter's fault, so they'll end up paying. Seems fair enough to me.

And so on, blah blah, hard working hard pressed middle class Poor Widows In Mansions whose main and hard earned asset bought out of taxed income is now under siege from an army of surveyors yada yaya etc etc.

Earnings, property taxes, house prices and foreclosures in New York state

While Googling around, I stumbled across the American version of the Taxpayers' Alliance, who call themselves the Tax Foundation. They've put together some detailed data on the above topic, which they published under the heading New Census Data Shows Where Property Taxes Hit Homeowners Hardest. Inevitably, they seem to quite like sales taxes.

The figures for median property tax bills, house prices and incomes by state are here and by county are here.

Their use of the word "hits" suggests that property taxes make homeowners (taking current and future homeowners as a group; transfers between the two net off to nothing) worse off. The point is that actually they don't. Another useful resource is Realtytrac, which gives us county-by-county figures for the number of foreclosures.

Taking New York state, the figures for the thirty-six counties for which data is available give us the following charts. I've given the coefficient of correlation in parentheses at the top of each chart:

1. Housing is a normal good. Unsurprisingly, house prices in areas with high wages is higher. That's mainly because of Ricardo's Law (high wages push up house prices) and also because high earners have more money to spend, so they can buy nicer houses or houses in 'nicer' areas:

2. Ricardo's law is the main factor. Higher earners have more money to spend, so you'd expect them to spend their extra net income on all sorts of stuff - cars, schools, holidays, housing. You wouldn't expect them to spend their entire extra income on higher housing costs.

But median households do. If you knock off 40% for income tax etc from median earnings and then deduct the cost of renting or buying ([median house price x 6%] + property tax) from that, median household net income for recent arrivals/purchasers is completely flat. That net income of about $24,000 is what median households need to spend on the 'basic minimum' and its only the surplus which goes into rent.

Which is what you'd expect: a median person can't make himself wealthier by moving to an area where he can expect higher earnings for doing the same job; he has to pay over that extra as an 'entry fee' to the landlord/vendor:

3. We can work that backwards. If you take the post-tax median income for each county and knock off the 'basic minimum' of $24,000, that gives you the amount which the median household is prepared to spend on rent/mortgage + property tax. So if you then deduct the property tax and multiply the result by 17 (i.e. discount it backwards at 6%), you get an expected median house price, which is a very good guide to actual median house prices:


4. So we know that property taxes push down house prices; for every $1 tax, the house price is $17 lower than it otherwise would be. Homeowners aren't "hit" by this tax at all; the seller's loss is the buyer's gain.

Further, it is quite clear that higher property taxes lead to more rational decision making by potential home buyers;
- they are less likely to be blinded by offers of interest- or repayment-free initial periods;
- land prices are less inflated so lower mortgages means that households are less affected by interest rate increases;
- a high property tax (median $9,044 in Nassau County) certainly focuses the attention.

As this money goes into county coffers, and government spending (good, bad or indifferent) is a large part of the economy (whether we like it or not), stable tax revenues mean that the local economy is less prone to economic downturns. If taxes are only raised on incomes, down swings become immediately self-reinforcing, but as households have clearly budgeted for the property tax, it's the next layer of spending after the 'basic minimum', revenues from such a tax are barely affected by a fall in 'above the line' incomes.

So we'd expect there to be a negative correlation between LVT levels and e.g. foreclosures. We can work out the implied Land Value Tax rate (property tax divided by total rental value minus $4,000 annual buildings maintenance costs) and then plot foreclosure rates against it.

There is a clear negative correlation between the two: the five counties with the highest foreclosure rates have very low implied LVT rates. Three of the four counties with implied LVT rates of 100% have negligible foreclosure rates. The coefficient of correlation is only -0.51 which is not particularly high, but better than nothing:

5. As we have seen from Chart 1, land rents are a kind of privately collected tax, being 100% of post-tax median income minus a "basic minimum" annual household spending of $24,000. In other words, relative to incomes, rents are highly progressive. As property taxes in most US states are proportional to home values, what this means is that property taxes are also inherently very progressive to incomes: in counties with median earnings $50,000 median property taxes are about ¢2,000 (4% of income); and in the three areas with median earnings of $100,000, property taxes are $9,000 (9% of income).

So that deals with the "Killer Argument Against LVT, Not" that higher earners would flee areas with high LVT. Simple fact is, they don't. Part of what they are prepared to pay for is being in a 'nice' area, i.e. an area with lots of other high earners - the higher property tax filters out lower earners.

We observe the same effect with private schools: although the children are no cleverer than at state schools and the teachers not better, it's only keen/pushy parents who send their children to private schools, so their children will work harder/behave better, leading to a virtuous circle; those schools then get a good reputation, so the next cohort of parents are prepared to pay extra to send their children there etc. So what the other parents are paying for is to send their children to private school with your children and vice versa:

Outbreak of common sense in Ireland, sort of.

Spotted by Khards at HPC in The Independent:

THE Government is considering a 'super property tax' for owners of large, expensive homes. Under the proposals, the rate of tax levied would rise with the value of the property, the Irish Independent has learned.

Similar to income tax, the property tax rate would go up in bands linked to the value of the house. That means owners of such houses would pay a higher percentage rate of tax due to its greater value. This 'super tax' would help the Government to sell the property tax to the public as homeowners would clearly see the rich paying more.

So far so good. Here come the "sort of" bits...

It will spark concern among those who already stretched themselves to buy a relatively expensive property, and have already paid stamp duty.

Nonsense. People shouldn't have stretched themselves in the first place; slapping them with a one per cent (?) progressive property tax is no worse than a 1% hike in interest rates; and the Stamp Duty was borne by the vendor anyway, it gets knocked off the purchase price, not added to it.

The Government is moving away from a site-value tax because it would throw up anomalies. For example, two houses -- one rundown and one modern -- on the same-sized site would have the same property tax bill.

That's the point of site-value rating. Why should the person who can afford to buy a house and allow it to fall derelict get a tax break? What would you rather have next to you - a run down house or one in good condition? Presumably the latter. Further, it is simpler just valuing the site/the value of the planning permission as it is the same for each house and requires no internal inspections.

In urban areas, houses on the same road tend to be more uniform -- with the site and the house being, more or less, the same size and value. But in rural areas there are often houses of different sizes and values built side-by-side.

Fair points, which is why site value rating is much easier for urban areas. Farm houses will always be a bit fiddly, again why it's easier to just value the sites.

Although the site-value tax is favoured by economists, the Government is finding it difficult to identify a country in Europe where it is used effectively.

So what? Somebody has to go first, in for a penny in for a pound. The closest comparison is of course Domestic Rates in Northern Ireland which is a flat 0.7% per annum of the value of a home as at 1 January 2005, capped at the first £400,000 (so the maximum bill is about £2,800 a year).

The Irish version is better; instead of expensive houses having their tax bills being capped, they pay more. This actually makes it a bit closer to proper LVT - a flat rate LVT would almost certainly be a higher percentage of high value homes than of low value ones because a larger part of the value of high value homes is the location value. Clever stuff.

There are some splendid KLN's in the comments, hard working families, generations of family memories, a tax on the prudent blah blah. I liked this man's style though:

Irish In NJ: Why is this newsworthy? We pay huge property taxes in the US. It's simply part of owning a house. More than 25% of my monthly payment is towards property tax... it pays for my local schools, the street cleaning, the garbage pick up etc... the bigger the house, the more the land, the more you pay. Simple. Ireland likes to adopt most things implemented in the US... taxes should be no different.

Ooh la la!

The Telegraph wails:

British owners of holiday homes in France are to be hit with punitive tax rises under plans announced by the new Socialist government.

Approximately 200,000 Britons own second homes in areas such as the Dordogne and other parts of France, particularly those serviced by budget airlines. Now, however, holiday home owners find themselves in the sights of President François Hollande as he seeks to tax the better-off to reduce France's large budget deficit.

On Wednesday (July 4th), the French government announced it was to increase taxes on foreign-owned second homes. Tax on rental income would rise from 20 per cent to 35.5 per cent, and capital gains tax on property sales would rise from 19 per cent to 34.5 per cent. The extra in each case is being labelled a "social charge".

And how "punitive" are these taxes, pray tell? As per usual, the Daily Mail is slightly more informative:

The new property charges will apply to all home owners - foreigners and French expats - who live abroad and do not pay their taxes in France. From July 1, they will be liable for a 15.5 per cent tax on income from renting their property, and 15.5 per cent on any profits made from selling it.

Hardly "punitive", is it? It's less than you'd pay on an equivalent home/income if it were in the UK.

And how high would the tax have to be before it became unattractive to buy a holiday home in France? Answer: it doesn't matter - the higher the better because the purchase price will fall in equal and opposite measure, it all cancels out. If the tax were £10,000 a year, you'd be able to buy such a house for next to nothing and so have no initial outlay, no mortgage, no risk and every incentive to maximise your rental income (which of course genuinely puts money into the local economy). If the worst comes to the worst, you just abandon it; and if the tax is reduced again you make a nice windfall gain.

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.
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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).

Irish Property Tax Fun

The first article from July 2011 is about Ireland's first attempt at a property tax, which was to be a flat €100 per household, i.e. rather less than the TV licence fee in the UK (i.e. a kind of Poll Tax) and which didn't go down too well in certain quarters.

The second article from December 2011 explains that the Irish government has binned this idea, and will have something more similar to Domestic Rates in Northern Ireland (which is a tax of about 0.7% per annum on each house's selling price as at 1 January 2005), albeit only a quarter as high (the average bill will be €312.50). The list of exemptions is so long as to be meaningless and to partly defeat the object:

It is likely that the 400,000 households currently due to get exemptions from the household charge will also be exempted from the property tax. They include those renting houses from local authorities or private landlords and those living in 1,300 ghost estates. And the 18,000 people who are getting Mortgage Interest Supplement from the state to help them pay their mortgages will not be liable."
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But what cheered me up was this bit from the first article:

The minister for the environment says the tax is an interim measure, set at the lowest possible level, and will hold for just two years when... some other form of property tax is introduced. But this is predicated on systems being in place to make that possible ... a register of house sale prices and the introduction of postcodes in Ireland, which [ Limerick University economist Stephen] Kinsella describes as "the absolute bedrock" of a fair property tax.

Either he's been reading my 'blog or great minds think alike. As I've always said, doing the valuations is a doddle, as HM Land Registry has all this information and it is already all computerised and readily useable. Information on selling prices (which we can use as a proxy for rental values, see iv) is also publicly available, and is available at Rightmove (and probably plenty of other places, but theirs works quickest out of the ones I've tried).

For simplicity, let's assume that we replace just about all taxes (except duties and income tax on a narrow class of payments from the government, such as civil service pensions, PFI stuff etc) with LVT. And no doubt HM Land Registry/The Valuation Office would be able to do these workings in a couple of hours, if they haven't done them already...

i. Rightmove allows you to search by postcode district (e.g. NW3), postcode sector (e.g. NW3 5) or postcode unit (NW3 5TY). All things considered, I think it is best to use postcode sectors with a couple of thousand dwellings - that's small enough to give accurate relative values and big enough to have a representative sample of recent sales.

ii. It will tell you the average prices paid for flats, terraced, semi-detached and detached dwellings. I prefer using semi-detached houses, because these are the most homogeneous in size and style across the country.

iii. It will tell you the average price paid over the last 1, 2, 5 or 7 years, it doesn't really matter which one you choose as long as you are consistent - it is only relative and not absolute values that matter. For example, the average price paid for a semi in my sector over the last seven years is £427,000 and over the last year it's £486,000. If the tax in my sector turns out to be £30,000 for an average semi (i.e. £75 per square yard), whether we express the tax as 7.0% of the former or 6.2% of the latter comes to exactly the same thing*.

iv. Purist LVT is on the site only rental value excluding buildings. HM Land Registry know exactly what the size of the plots were on which the average semi-detached houses stand, so in my area, the £30,000 mentioned above can be seen as a tax of (say) £75 per square yard per year (so small houses on smaller plots automatically pay less than large houses on larger plots,and an average house on a 400 sq yd plot pays £30,000). But before we divide by plot sizes, we can fairly easily convert selling prices to rental values of the whole house (including the buildings) by multiplying the selling prices by a percentage.

v. As Sobers has pointed out often enough, it's not enough to apply the same flat % rate to all houses, because the gross rental yield on selling prices of expensive houses in expensive areas tends to be lower than for cheaper houses in cheaper areas. This is because of four further factors:

- Council Tax, which is more or less flat on all houses, so tends to push down rental yields on houses in cheap areas.
- Housing Benefit, which sets a floor on rents in cheaper areas, so tends to push them up
- The costs of maintenance, insurance and depreciation of houses (which has to come out of gross rents after council tax) are much the same wherever the house is (tends to level out gross rents by setting a floor under rents in cheaper areas - if the gross rent doesn't even cover these costs, the house will be abandoned).
Let's assume these effects cancel out.
- Finally, landlords apply a lower discount rate to the location element of the rent than to the bricks+mortar element, because the former tends to increase but the latter depreciates. So the more expensive the area, the larger the 'location element' and the higher the selling price relative to gross rent (and hence the lower the yield relative to selling price).

vi. We can sweep all these up when converting gross rental value to site-only rental value to a single net adjustment, which boils down to either
- deducting a large figure (i.e. rebuild cost/value) from the purchase price before applying the final percentage, or
- by applying the percentage to the selling price and then deducting a smaller figure (the maintenance, depreciation costs) from the result.

vii. The big unknown is of course what will happen to the rental value of land when all other taxes are scrapped. We'd need to raise (say) £300 billion a year from LVT but the notional site-only rental value of all UK land at the moment is only (say) £150 billion a year. The gimmick here is that a large part of the cuts in taxes on earnings, output and profits of (say) £300 billion will flow straight through into higher rental values. Let's ignore Citizen's Income for now, because this is not an increase in total cash welfare payments/tax reliefs, it's just spreading out existing cash welfare payments/tax reliefs more evenly. So if two-thirds those income tax cuts go into higher rental values, that still gives us a tax base of £350 billion a year, so with an LVT rate of 85% we are all sorted.
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* Let's assume that £30,000 a year is pretty close to the average tax paid by all the households living in semi-detached houses in my sector - less than what recent purchasers or tenants are currently paying/bearing and more than what semi-retired people who bought their houses decades ago are currently paying/bearing.

For recent purchasers, the calculation is thus: one working adult buys a £486,000 house with a 20% deposit and a mortgage of four times income. Gross income is £97,000 on which income tax and Er's NIC is £34,000, Er's NIC is £12,000, VAT is approx. 7% of gross income = £7,000, plus £3,000 for council tax, TV licence, insurance premium tax etc etc = £56,000. If there are two working adults with equal wages, the corresponding figures are 2 x £13,500; 2 x £5,500, £7,000 and £3,000 = £48,000.

Other couples might be paying next to nothing, so the average is (say) £24,000. If we knock off the £7,000-odd Citizen's Income which each couple will be getting from the £30,000 LVT they will be paying, this gives us a tax bill of £23,000 a year, only everybody pays the same or similar.

Continuing the workings for my hypothetical two-earner recent-purchaser couple, after mortgage repayments of £20,000 a year, they have £29,000 disposable income for fun stuff like food, clothing, utility bills, Tube tickets etc. So just to keep our minds active, let's work backwards from that £29,000 figure to see how high your income would have to be to be able to buy in my sector once LVT came in and still have the same living standards.

£29,000's worth of goods and services today will be reduced by the £7,000 VAT = £22,000, house prices and mortgage repayments will be halved to £10,000, plus LVT £30,000 minus £7,000 Citizen's Income, so in future, a couple with earned income of £55,000 would be able to buy, so instead of my sector only being affordable for the top 1% or 2% of households, it would now be affordable for the top 5% or even 10%.

Poor Widows out in force

From the BBC:

One of those who cannot afford to pay the [property] tax is 87-year-old Katerina Leta. She lives with her grandson, Tasos Dimitriadies, a mature student in a small apartment in north Athens. The property has been in their family for generations (1) but without a single income between them, they are dependent on relatives for most of their expenses...

He says he cannot afford it and won't borrow the money because he is angry there is no exemption for people in his position."They are asking us to pay a tax that we paid when we bought the house and the constructor paid when he built the house," (2) he tells the BBC World Service...

In cafes and tavernas, talk of the tax seeps into almost every conversation and many refer to it as the "haratsi", a name for the hated levy imposed on them under the Ottoman occupation. Mayor Iraklis Gotzis is encouraging his constituents not to pay the tax Even the union representing electricity workers at state run company DEI has called on its members to boycott the tax, describing it as "barbaric"...(3)

The Greek government further alienated itself when Deputy Prime Minister Theodoros Pangalos, part of the government that devised the tax, told Mega TV channel that he could not afford to pay the €7,500 (£6,250, $9,785) bill for the many properties he owned... (4)

And new Prime Minister Lucas Papademos decided earlier this month that the levy would not be withdrawn at the end of the year because it was "absolutely necessary to ensure that public finances did not stray from the targets set". But he did offer some concessions, promising to seek a fairer way of excluding those unable to pay the tax, which ranges between €0.50 and €20 per square meter depending on the location of the property...

With a mother who has cancer and a son who is a full-time student living at home, Dimitra Koutsis struggles to make ends meet on her meagre pension. Unable to afford the tax, she has been given another fortnight to pay up.

"I am hoping that something will change, that they will see that this is madness," she says, "My mother has cancer and she needs to be comfortable. We even keep her medicines in the fridge so I don't know how we would manage. (5) It is pure blackmail, that is what it is. (6) Next we will be finding taxes on our water bills and who knows where it will end."

Greece's highest court is considering whether the threat of withdrawing people's power supply is unconstitutional, but so far the measure seems to have been effective. The government says it has already collected 80% of the first wave of property taxes (7).

1) What relevance does that have to anything? Is he suggesting that only arrivistes should pay it? This attitude has been drummed into the British, that the longer land has been occupied by the same family, the worthier the family is. Why? It just means they could never be bothered to do anything apart from collect rent.

2) Well obviously he didn't. That's like saying "I don't want to pay my car tax because the manufacturer paid corporation tax".

3) Ooooh! An adjective! "Barbaric"! Well that proves it then, doesn't it?

4) So it's not huge amounts of money, is it? And if he can't afford to pay for them all, then he can sell a few.

5) Wow! What a sob story. Mrs Koutsis is an even Poorer Widow than Mrs Leta!

6) No it's not blackmail, it's a tax and you have to pay it. It's funny how she's quite happy to collect her "meagre pension", pick up the drugs for her poor sick mother or send her son to a subsidised university, all of which are paid out of taxes levied on other people.

7) 80% is pretty impressive by Greek standards, which is yet another argument in favour of such taxes.

Via Drewster at HPC

Nick Robinson on tax avoidance

Taken from part 2 of his series, as broadcast on Tuesday:

Sensible Comment Of The Day

There's the usual outpouring of gibberish (both left- and right-wing) in the comments to the Daily Mail article about the Mansion Tax, but this one (currently fifth-worst rated, unsurprisingly enough) makes perfect sense to me:

By my calculations, from speaking to work mates we all pay approximately 1% of our property values annually in council tax ie £2,000 on a £200,000 house, this formula obviously only works until you reach the top band of council tax and from then on you no longer pay the proportional 1% rate and the percentage decreases as the house value increases.

My view is the 1% rate should extend to all properties as the wealthy can't use accountants to hide houses and everyone gets to pay the same rate (don't want to hear any nonsense about widowed poor old ladies living in ten million pound houses). Dan, Petersfield, 20/8/2011 11:57

Correct.

And that extra 1% on higher values homes would raise enough money to get rid of the stupid taxes on land & buildings (Stamp Duty Land Tax, Inheritance Tax, capital gains tax, all of which happen to be Jealousy Surcharges) as well as a stupid Poll Tax (the TV licence fee). I really, genuinely don't understand why people have a problem with the idea.

Killer Arguments Against LVT, Not (154)

From today's FT:

“If we do get rid of the 50p [income tax] rate we need to make sure there is something else levied on higher rate payers. Lib Dems think there should be a new way of taxing wealth,” one senior Lib Dem aide said. Talk of lowering the top rate of tax has triggered a dispute within the coalition, with Danny Alexander, the chief secretary to the Treasury, saying advocates of the move were “living in cloud cuckoo land”. (1)

But the Lib Dems expect it will happen, and are concentrating on coming up with replacement taxes that would raise extra revenue and win the support of voters, among whom the 50p rate is popular.(2) Mr Cable has long favoured the option of a “mansion tax”, levied on the sale of high-value homes, although others inside and outside the party have called it overly-complicated and unworkable...(3)

David Laws, the former chief secretary to the Treasury, and one of Mr Clegg’s closest political allies, is opposed to all these forms of wealth tax (4), saying they amount to double taxation after income tax has already been raised. (5)

1) Why? We managed perfectly well with a top income tax rate of 40p until a year ago, and according to HMRC estimates, it only raises about £1 billion. According to others, the top rate of 50p is past the top of the Laffer Curve and reduces overall revenues.

2) Have we really sunk this low? The 50p top tax rate on wealth creation is 'popular' but such is our reverence for 'people in big houses' that a tax on rent seeking and unearned wealth wouldn't be?

3) No it wouldn't be, not compared to the hyper-complexity of the current tax system, or the complexity of the 50p top tax rate alone (which requires a whole raft of anti-avoidance provisions to make it anywhere near enforceable), if anything it would be as simple as, or simpler than Business Rates in the UK or Domestic Rates in Northern Ireland. And given that any tax on residential land and buildings could and should replace other taxes, it would lead to a massive reduction in the overall complexity and unworkability of the tax system - the more taxes you replace, the easier it gets (including politically easier, as there'll be a minimum of people who'd lose out on Day One).

I sketched out a possible system for taxing residential land and buildings which ended up being published on Labour Left (of all places). If you want to get rid of the 50p top tax rate as well, or even the £30,000 non-dom levy, you just have to increase the target receipts from £42.5 billion per annum to £43.5 billion, hooray, yet more fiddly little taxes and jealousy surcharges out of the window.

4) A tax on the rental value of land is not a tax on wealth, it's a user charge. In the same way as a tax on petrol is not a tax on the wealth tied up in your car (VAT is), it's a tax on road use.

5) So if you pay 50% income tax, that's OK, but if you were to pay 40% income tax and approx. 5% of your income in LVT, that's double taxation, is it? Since when does "paying less tax" amount to double taxation?

Killer Arguments Against LVT, Not (102)

In response to the Lib Dems' vague mutterings about scrapping the 50% top income tax rate and having a Mansion Tax instead, the avidly Home-Owner-Ist Evening Standard gives us a splendid rent-a-quote from the avidly Home-Owner-Ist Tory MP Mark Field:

Mark Field, Tory MP for the Cities of London and Westminster, backed the Chancellor's attempt to close loopholes but added: "Any further meddling with council tax banding would be both unworkable and unpopular."

Quite how stupid is this man? The use of the word "further" would suggest that there already had been some "tinkering". As it happens, there have been absolutely no changes to Council Tax bands since they were introduced twenty years ago, 99% of all homes are in exactly the same band as they have always been (barring those which had extensions built, and even then, the new band only takes effect when the house is sold). And rebanding or revaluing all homes would be an administrative doddle, seeing as of how everything is computerised nowadays.

And along comes the sort of thoughtless individual who votes for people like Mark Field:

I bought my property 12 years ago in Wandsworth when I got married. Both my wife and I owned flats that we sold when we bought our present home for £340k we have a 140k mortgage

Through no fault of our own the property is valued at £1m we cannot move as our kids have grown up here and go to school in the area. They have their friends here. My wife who is a nurse and I work close by. We could not afford £5,000 pa mansion tax.

Jesus, where do you start?

a. Under the Lib Dems' original Mansion Tax proposals, the tax would only apply to the value in excess of £1 million, later amended to £2 million, so this man's tax bill would be precisely zero.

b. A house worth £340,000 twelve years ago was pretty much in the top one or two per cent by value, and like most houses in London, it's trebled in value since, so it's no good him pleading poverty. This chap has made a £660,000 unearned windfall gain and he's complaining about how unfair life has been?

c. "Through no fault of his own"?? These NIMBYs and Home-Owner-Ists fight and fight in order to keep house prices as high as possible and afterwards they disclaim all responsibility?

d. I've checked Rightmove, there are plenty of 4-bed houses in Wandsworth for around the £300,000 mark, so this family would have plenty of spare change if they downsized a bit because they couldn't afford the non-existent tax bill. And sure, their commute time might be a bit longer. Well tough, join the real world.

The very next comment up goes one better:

£2m in London does not buy a mansion. Terraced houses in some boroughs go for close to that. This would be a great way to force anybody, but the super-rich out of parts of London.

You don't get much for £2 million in Mayfair or Kensington & Chelsea, that much is true (but you can get plenty for a quarter as much a bit further out), but these areas are already occupied by the "super-rich". For sure, there'll be a few people who bought decades ago who might be earning much (like the previous commenter), but to whom will these people eventually be selling their houses? To the "super-rich" of course, but that's different, innit?

OECD talkin' sense

From FT Adviser:

OECD economists speaking at the launch of the OECD's report, Housing and the Economy: Policies for the Renovation, said the abolition of stamp duty would reduce barriers to entry in the housing market. Asa Johansson, OECD economist, said stamp duty should be replaced with an increased council tax where part of the funds went to local councils and part to the Treasury.

She said: "I think stamp duty should be removed and replaced with a property tax based on the value on the house. It adds on costs for people entering the market."

Ms Johansson proposed replacing stamp duty with a yearly tax, similar to council tax but with part of the funds going to the council and part to the Treasury. She acknowledged such a tax would have the most impact on those home owners who are asset rich and cash poor but said a revised taxation system would be fairer as it would not penalise those who engaged in property transactions.

The OECD also urged the government to tax vacant land to incentivise owners to develop the land and build property on it.

Dan Andrews, OECD economist said: "The current property tax base should be updated to better reflect market values. This would provide more incentives to use vacant land which could help alleviate some of the supply side problems in the UK housing market."

Spotted by Jack C at HPC.

Lying Home-Owner-Ist Shit Of The Day

From The Daily Mail:

What Vince said... and his real message

By Edward Heathcoat Amory

What he said: '(I want) to shift the tax base to property and land which cannot run away and represent, in Britain, an extreme concentration of wealth. I personally regret that Mansion Tax did not make it into the Coalition Agreement.'

What he meant: When I proposed the deeply unpopular Mansion Tax plan (which would hurt pensioners more than City speculators) before the election, I was forced to water it down. Now I can mention it without getting into trouble, because everyone knows that the Tories would never let me do it.

Vince is a politician like any other. Why would he deliberately propose something that would be 'unpopular'? It was Home-Owner-Ist propaganda like this that made it unpopular, not the underlying logic.

And why would it "hurt" pensioners? Commonsense tells us that if we are to replace income tax, VAT with Land Value Tax or a Progressive Property Tax, we'd have to exempt pensioners (or give them massive discounts or deferment or something or other) to have the faintest hope of making it stick. But City speculators, the whipping boys du jour, would lose out three fold:

1. They probably live in million pound houses. And I suspect that there are a lot more City speculators (and Russian oligarchs, Arab oil barons, Chinese Party functionaries etc) in million pound houses in the UK than there are pensioners.

2. They make money from lending other people money to buy million pound houses. Or they are estate agents who make money by selling people million pound houses.

3. They can't avoid the tax in any meaningful way.

What's not to like?

As an aside, if these 'City speculators' are thinking of buggering off to Switzerland, don't forget that Switzerland also has a number of different property taxes, which amount to something vaguely similar to Vince's proposed Mansion Tax. It's the stupid 50% super tax that's the killer (which raises £3 billion a year, allegedly) and swapping this for a Mansion Tax (which Vince expected would raise a paltry £1 billion or something) seems like a no-brainer to me.

Spotted by DBC Reed

Buried away in Uncle Vince's speech between the fudge, soundbites and dogwhistling was this:

It will be said that in a world of internationally mobile capital and people it is counterproductive to tax personal income and corporate profit to uncompetitive levels. That is right.

But a progressive alternative is to shift the tax base to property and land which cannot run away and represent, in Britain, an extreme concentration of wealth. I personally regret that mansion tax did not make it into the Coalition Agreement but in a coalition we have to compromise. But we can and should maintain our distinctive and progressive tax policies for the future.