Valuation Office Agency: Private Rental Market Statistics (England only)

I discovered something new this week at the VOA website.

You can download their spreadsheet for average rents. If you take Tab 2.5 for 3-bed homes, which is primarily semi-detached and terraced houses, which we can take as our basic unit of housing; multiply average monthly rents in 324 local authority districts by 12; add on £22 billion for existing annual taxes on housing (Council Tax and TV licence fee); and finally knock off £4,000 a year per home for running costs/depreciation of bricks and mortar; you end up with a site premium (total rental value less actual running costs) of £162 billion for the approx. 22 million homes in England.

Gross that up for Wales, Scotland and Northern Ireland and you end up with a nice round £200 billion.

You could make
- lots of little downward adjustments to that figure (the average figure for England is skewed upwards by eye-watering rents in Inner London so average rents in the other three countries will be lower); and
- lots of little upwards adjustments (using averages for large areas with approx. 70,000 homes in each understates the total site premium: an area with an average rental value of exactly £4,000 does not have a total site premium of £nil, because half the homes in that area will have a total rental value of more than £4,000 and will thus have some site premium)…
but by and large, my estimate of "about £200 billion" for the total site premium of UK residential land seems about right, and if it isn't now, it will be within a year or two.
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On an even more arcane note, I've had debates with three or four different people who agree with the general principle of replacing the big bad taxes on earnings and output (VAT, National Insurance, higher rate income tax etc) as well as existing "property taxes" (council tax, business rates, IHT, SDLT and so on) with a tax on current site premiums for residential and commercial sites.

But their point of disagreement is that this would disproportionately increase business profits and hence the rental value of commercial sites. What they are really concerned about is that in political terms, the best kind of tax is one which somebody else pays, so instead of pencilling in £200 billion for residential and £40 billion for commercial, I should be pencilling in a lower figure for the former and a higher one for the latter.

Well, first of all, I have to admit that we'll never know until we try.

1) One counter-argument to their logic is that taxes on business are ultimately nearly all borne by individuals i.e. households anyway, so most of the tax reduction would increase household incomes (pre-housing costs).

If we got rid of e.g. VAT and National Insurance, it seems highly unlikely to me that all of this would just feed through into higher business rents. For that to happen, gross wages would have to fall by the amount of NIC currently being deducted, and instead of the VAT reduction being split five ways between lower prices-more output-higher wages-higher profits-higher rents, it would all have to go into higher rents collected by the landlord as rent or higher "profits" recorded by owner-occupier businesses.

2) The other counter-argument is that there is no hard and fast difference between commercial and residential land. It's the same land just being put to different uses. With a massive reduction in taxes on actual business activity, the number of businesses, the amount of business being done and the number of people being employed would go up, so some land currently used for residential or not being used at all would end up being used for business activity; whether that's flats above High Street shops being used as offices or people starting a business from home is nigh impossible to measure anyway and certainly impossible to forecast.

Assuming that all sites were being put to their optimum use (ha!) that means that the extra rental value of these re-zoned areas would not be substantially higher than the rental value of adjoining residential land.

In your face!

I'm delighted to report that 95% of people prefer in-your-face taxes to stealth taxes, thanks to everybody who took part.

Like many things with tax and economics, this is counter-intuitive, but as Lola explains in the comments to the poll:

Price is a signal. Clarity for state revenue gathering reveals this signal. That's why lefties do stealth taxes. If it was clearly revealed just how much of what you earn and spend went on The State, the taxpayer would not put up with it. In particular I loathe PAYE. No employee reads anything but the bottom line. If employees were paid gross and required to remit their own monthly income tax payment you can bet your bottom dollar rates would go down pretty damn' quickly.

While PAYE, and Employer's NIC in particular, are stealth taxes in that sense, at least people are vaguely aware of the rates and can look up how much is deducted from their pay, it strikes me that the stealthiest tax of all is VAT, which as I never tire of saying, raises twice as much as corporation tax from only half the economy. The myth that this is a tax on 'consumption' needs firmly debunking - it is a tax on turnover of certain types of business.

If VAT really were a tax on consumption then 'consumers' (the very people who are best placed to decide what gets produced) ought to realise that they pay four times as much in VAT as they do in Council Tax, which, being an in-your-face tax is probably the most hated tax relative to the amount is raises, which in the context of this debate seems to be A Good Thing.
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Anyway, seconds out, round two -what's the 'fairest' kind of tax? Vote here or use the widget in the sidebar.

Much ado about nothing

From yesterday's FT:

The legal move marks the opening salvo of the Revenue’s effort to extend its crackdown on evasion to all the 500 foreign banks and building societies with a UK presence. It expects to raise £500m over the next four years by prompting holders of undisclosed accounts to come forward... The move follows similar legal sweeps in 2006 and 2007, which forced five British high street banks to disclose details of secret offshore accounts. That crackdown, accompanied by the offer of a partial amnesty, recovered about £400m in unpaid taxes at a cost to the exchequer of just £6.5m.

OK, that makes an average take of about £100 million a year, which sounds like a lot but represents about, er, 0.02% of all UK government revenues. I don't condone tax evasion as such, but I find it a bit difficult to get excited about it in absolute terms. To the extent that we have to tax incomes at all, it does seem fairer to make everybody pay the same flat rate, rather than the honest paying a slightly higher rate than would otherwise be necessary, but isn't it more important to have a system that doesn't encourage tax evasion in the first place?
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Step One is to reduce income tax rates as far as possible to reduce the temptation, of course. The above article refers to tax on interest income. This only works if a UK bank pays interest to an offshore subsidiary (and obtains a full tax deduction) and the offshore subsidiary then credits that interest to its UK-based depositors tax-free, so...

Step Two is to have withholding taxes on the interest that banks pay to offshore subsidiaries (and don't forget that this is a requirement for payments to most tax-havens anyway), or even better*, by disallowing interest payments as an allowable expense for UK businesses or banks and making the corresponding interest income (whether paid to a bank, to individuals or to another company) tax-free.

This is exactly what happens when a UK company pays a dividend out of post-tax profits to a basic rate taxpayer or to another UK company - there is no additional income/corporation tax liability on the recipient** because that income has already suffered corporation tax. On Planet Wadsworth, there will be a single flat tax rate on all corporate or personal income, so by definition there will be no higher rate tax on dividend income or a 'marginal' corporation tax rate*** that is any higher than that.

For sure, there will still be people who keep money offshore (for slightly more sinister reasons), but we could go one better and subject that to income tax as well (to the extent we can track it down), so the effective rate on such income would be nearly twice as high as if they had kept it in the UK in the first place.

That's that fixed. Next.
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* Under various double tax treaties and EU rules, the UK can't deduct withholding tax from interest paid to most non-tax haven countries, so it's a question of either re-negotiating hundreds of treaties or just amending UK domestic law. While I'm on the topic, we could also do away with this nonsense that interest on UK gilts is paid gross but still liable to tax at the year end - why not just pay a slightly lower rate and make it tax-free?

** Unless the recipient is entitled to an age-related allowance which is reduced pro rata if the recipient's total income goes above a certain level.

*** With companies, although the dividend itself is tax-free, it can increase the marginal rate of corporation tax from 20% to 30%, slightly more than the large companies' rate of 28%.

Why politicians love Value Added Tax (VAT)

1) It's a tax on "consumption"; and consumption is A Bad Thing, as opposed to taxes on "production" which is A Good Thing. This completely ignores the fact that in a largely service based economy, one man's consumption is another man's production. Funnily enough, the right-wingers are more guilty of perpetrating this lie than the lefties. As it happens, VAT is mildly regressive - people on low incomes pay a higher fraction of their income on VAT than those on higher incomes.

2) It's an EU requirement, so we can't do anything about it. Apart from reducing our standard rate from 17.5% to 15%, the minimum standard rate required by the EU. Funny how nobody mentions that.

3) VAT receipts are relatively stable; in times of economic downturn, people spend more than their incomes - even if people's incomes and business profits are falling, the government can still rake in the tax. The flipside is, VAT sends more businesses to the wall during a recession than would otherwise be the case (they have to pay it, even if they are making losses). And VAT receipts are about three times as high as receipts from Council Tax, without the protests or the hassle.

4) Voters and businessmen don't understand it! People don't inspect their sales receipts closely and think 'Shit! I just paid £200 for a new hi-fi for £200 - £30 of that went straight to the taxman'. Similarly, VAT-registered businesses that make VAT-able supplies to the general public are conned into thinking 'We don't pay VAT - we just add it to our selling price and the customer pays it." These chaps need a lesson in the difference between the legal and economic incidence of a tax. See page 95 of this for explanation.

5) Of course, some businesses are zero-rated or exempt, so they don't care. Some VAT-registered businesses make supplies to other VAT-registered businesses and think that it doesn't affect them. Which mathematically it doesn't, but just you wait until your customer (who makes VAT-able supplies to the end consumer) goes bankrupt ... Or they're beneath the registration threshold and make damn' sure they stay there (see STB in the comments for details).

6) "VAT is a simple tax". Yeah, right.

7) VAT raises about twice as much as corporation tax, once you strip out the additional 20% corporation tax paid by North Sea oil & gas companies. The LibLabConsensus are happy to wrangle over whether the large companies corporation tax rate should be 28% (down from 30% last year) or 25% (proposal 18 on page 142, this whole report was far too radical for George 'Twat' Osborne, of course).

8) If the government f***s things up and we have inflation, or even if they just print money and we have inflation, then prices go up, so VAT receipts go up as well.

9) Banking is exempt from VAT; new housing is zero-rated and sales of second-hand homes are exempt from VAT, so if politicians fancy blowing a credit/asset price bubble, the tax system makes this all the easier.

10) If the government f***s up and our currency plummets, then great. Fewer people go abroad on holiday, but the UK is cheaper as a tourist destination, so overall VAT receipts (on hotels, restaurants, musicals etc) go up. This also feeds through into inflation, see point 8).

See also "Ten reasons why VAT is the worst tax".

BTW, this rant does not just apply to Value Added Tax, it applies to all Sales Taxes or Turnover Taxes, local, general or otherwise, unless the proceeds are clearly earmarked for and matched with spending on external costs, e.g. if petrol duty revenues are spent on roads and public transport, then fine. If tobacco duties are spent on cancer research, then great. And so on.

"Publisher deserts UK tax regime"

"UK publishing and events firm United Business Media has proposed creating a new parent company based in Ireland, where taxes are lower than in Britain. The 90-year old firm, which owns trade titles Property Week and The Publican, said it reflects that 85% of its profits now come from abroad."

It's the "85% of its profits now come from abroad" that is the key to all this. Remember that it makes no difference to your overseas tax bill where the holding company is located. The relevant bit is how those profits are taxed when the overseas subsidiaries pay up a dividend to the holding company.

The UK and Ireland are the only major countries in Europe which tax overseas dividends in full*. The UK gives a credit for overseas corporation tax already paid, so extra tax is due if the holding company receives dividends from countries with an effective rate less than 28%. The same applies in Ireland, of course, but they only pay further corporation tax if the overseas subsidiary pays corporation tax of less than 12.5%, which is very few countries indeed.

Lord Forsyth's Tax Reform Commission reckoned that moving to the European system, whereby overseas dividends are either 100% exempt (or 95% exempt in some countries) would cost less than £1 billion**, i.e. chickenfeed in the grander scheme of things.

* See AGN European Parent Companies Survey.

** See Proposal 20, page 143. Also interesting is Figure 23 on page 75.

"US to send out $100bn in rebates"

Just how stupid is George W Bush?

You only get positive dynamic or Laffer effects if you cut tax rates going forward, in particular sales taxes or payroll taxes. Merely sending people money just leads to inflation and/or if they are paid for by increasing government debt, this just increases the future tax burden in an equal and opposite manner to the original boost (Ricardian Equivalence*).

* The theory is disputed, but it makes sense to me.

Shire Pharmaceuticals relocates to Ireland

Here is a good summary. Before the right-wingers start yapping on about Ireland's 12.5% corporation rate, and before the Socialists start dreaming up ever more regulations, let me explain why the other changes in the MW manifesto are far more important:

The most recent figures available from Shire show it paid £8.8m in UK taxes in 2006, of which £4.2m was corporation tax.

1. The balance of tax it paid would be largely Employer's National Insurance, which will be scrapped, with a minimal overall cost to the Exchequer, but a huge boost to UK plc and employment figures.

2. Income from foreign subsidiaries will be exempt from tax, instead of being taxable in full with a corresponding credit for most of the corporation tax paid overseas. Loss to Exchequer after double-tax relief, maybe £1 bn or so, as Lord Forsyth's commission calculated back in 2006. As a quid pro quo, any spurious payments for interest payments, management charges or patent royalties to overseas subsidiaries will be disallowed for corporation tax.

3. Shire's UK source income would of course still be subject to UK corporation tax under either current rules or the MW manifesto. If it has a legitimate Irish business, then of course that will pay 12.5% over there, but a UK based holding company would pay no further UK corporation tax on dividends therefrom.

4. And VAT will be phased out anyway (once I've dragged us out of the EU), as it is the tax that distorts the economy most. This is far more important than reducing income/corporation tax rates.

5. The rule for short-term residents will be as in other European countries, for example, for the first five years, seconded employees will be taxed on UK salary only.

6. Stamp Duty on share transactions will be scrapped (as in most other European countries), static cost £4 bn, dynamic cost much less than that - we'd stop losing business to e.g. Dublin.

7. Capital Gains Tax on share sales will be scrapped (revenues £2 bn or so), as would, to be fair, R&D tax credits (cost £2 bn or so), but the cut in Employer's National Insurance on scientists' salaries will compensate for that*. Net overall cost to the Exchequer - minimal.

That's that fixed. Next problem.

* Scientist's salary £100,000. Employer's NIC around £12,000. R&D tax credit for large company is worth 25% x 30% x £112,000 = £8,400. Net cost of that scientist £103,600. Under MW manifesto, net cost £100,000.