From yesterday's FT:
In an article published on July 6 we said that Harry Hyams, developer of Centre Point, had intentionally kept the building empty to boost its value against potential rent. We accept this allegation is false and without foundation. We apologise to Mr Hyams for any distress and embarrassment caused. We have also agreed to pay his legal costs.
Wow, this'll be news to a lot of the members of the Labour Land Campaign!
From the BBC:
American troops are not to be banned from smoking in war zones, the US Defence Department says.
The decision comes despite a recent study which recommended the US military should be tobacco-free. Pentagon spokesman, Geoff Morrell, said US troops were already making enough sacrifices in Iraq and Afghanistan.
I can picture it vividly: a smartly uniformed commanding officer knocks on the door of a typical American suburban house at sunrise. Mr & Mrs Average American open door with terrified expressions on their faces.
CO: "Mr & Mrs Average American, I'm afraid it's about your son, Joe... he's got a bit of nasty cough."
I hereby invite you to "send a message" to Martin Dockrell of fakecharity and all-round bansturbators ASH, by clicking on the Google search results here and then clicking on the link to Dick Puddlecote's article, which is currently number three, but hopefully we can budge it up to number two or even the top spot.
UPDATE 12:54, he's still stuck at number three, please keep clicking.
The responses to last week's Fun Online Poll were as follows:
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Which tax do you think is more damaging to the UK economy?
Outright winner, with 80% of the votes: A tax on the gross margins of half of businesses, before deducting salaries, which raises £80 bn p.a.
Distant runner up, with 20% of the votes: A tax on the net profits of all businesses, after deducting all expenses, which raises £40 bn p.a.
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In case you're wondering what on Earth I was talking about, the 'tax on gross margins' is Value Added Tax, which the politicians and less-well-informed commentators palm off as a 'consumption tax' (thus glossing over the fact that one man's consumption is another man's production) but which is, mathematically and economically, either a tax on turnover or a tax on gross margins (depending on how you argue it).
In real life, on £100 of gross margin, the business pays £13.04 VAT (£100 x 15/115). Let's assume it pays out eighty percent of the remaining gross margin as salaries (under The Pareto Rule Of Thumb), so it keeps £17.39 net profit, on which it pays another £4.87 in corporation tax (£86.96 x 28% corporation tax), which gives us roughly the ratio four-to-one which we observe in real life.
It seems to me to be blindingly obvious that the £13.04 VAT payment* must hurt a VAT-registered businesses a lot more than the £4.87 corporation tax payment, bearing in mind that in bad times, it still has to pay the VAT but pays no corporation tax at all (possibly even gets a refund).
Non-VATable businesses on the other hand (primarily banks and residential construction companies) just pay £5.60 corporation tax on £100 gross margin before salaries, and that's the end of that. So not only does VAT contribute to a relatively high tax burden (A Bad Thing in and of itself), it also encourages investment in banking and residential construction (i.e. land speculation) rather than in properly wealth-creating activities (yet another Bad Thing). The least we can hope for is a level playing field, i.e. scrap VAT (once we've left the EU) and just let all businesses pay corporation tax at the same flat rate (the lower the better, that's a different topic).
* Sure, you could argue that the VAT burden is shared between employer and employee, in which employees of a VAT-registered business have an overall tax rate of 46.8%, once you net out VAT, Employer's NIC, Employee's NIC and PAYE/income tax, in which case VAT is a tax on and a barrier to full employment, one's as bad as t'other as far as I am concerned.
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This week's Fun Online Poll - "Which style of swimming did you learn first?"
Vote here or use the widget in the sidebar.
Which may seem a tad off-the-wall, it's just that I can remember that when I was a lad we started off by learning one particular type of stroke, but nowadays if you take your kids to swimming lessons, they teach them a completely different one. I was just wondering whether my experience was unusual or whether this is just a sign of the times.
From yesterday's FT:
The core of the problem, the unavoidable truth, is that our economic system is laden with debt, about triple the amount relative to gross domestic product that we had in the 1980s. This does not sit well with globalisation. Our view is that government policies worldwide are causing more instability rather than curing the trouble in the system. The only solution is the immediate, forcible and systematic conversion of debt to equity...
He's come to much the same conclusion as I have, for slightly different reasons, but it's all good stuff nonetheless.
This otherwise uninspiring-looking tree/shrub type thingy, in the garden of the house we've been renting since early June 2008, did absolutely nothing at all until recently, when it suddenly sprouted large orange lumps, which look and taste remarkably like slightly unripe peaches. Or possibly apricots. Add that to the foxes digging deep holes to shelter from the heat, and there can be only be one conclusion...
Sobers, in the comments to the previous post:
This sums up my gut opposition to LVT. The taxation of a notional capital gain 'seems' unfair (1), however much you can justify it by rational economic analysis using terms such as 'Ricardian' and 'notional rents'. Something only has value when it is sold (2). Everything before that is conjecture. When a buyer parts with hard cash, then a value has been set, and its fair to tax capital gains, if any. Valuation of property is very subjective - it comes down to the opinion of the valuer. I don't want to be taxed on someone's opinion (3).
If LVT were based on the last actual sale of a property, then I would have more sympathy (4, 5, 6). It would still exert downward pressure on prices as people would be loath to bid more for a house knowing the LVT would be higher too. If you stay put in one place, you would only be taxed on the capital you have put into the house, not any notional gains made since. There would also not need to be a complex bureaucracy of valuation, just the existing Land Registry of sales, which would define the value for LVT purposes (7).
(1) All taxation 'seems' unfair to whomever has to pay it, that's not the point, it's a question of finding the tax with the lowest deadweight costs and the most consequential benefits (dampening property price bubbles etc), and even more than that, moving away from stealth taxes (VAT, Employer's National Insurance) and towards "in-your-face" taxes (to ensure that people are aware of how much they are actually paying).
(2) Wot? Are you saying that your house and farmland has no value because you do not intend to sell it? BTW, remember that farmland wouldn't be liable to LVT for reasons explained by Adam Smith way back when.
(3) Nope. Most housing in the UK is fairly standardised, and all we need to know is relative values. If you bought a standard 20th century 3-bed semi on an estate thirty years ago for £20,000 and other very similar houses on the estate have sold for £200,000 in the last year, it's pretty safe to say that your house is worth closer to £200,000 than £20,000., yes? And even if your property is unusual, then it's also fairly safe to say that its value will move in line with other properties in the area, which is what HM Land Registry already do with their monthly house price indices (it's called 'repeat sales regression'). Is it better to be roughly right or precisely wrong?
(4) OK, as I said at the end of the previous post "Y'see, it's helpful to look at both sides of the equation."
As we know, wages and house prices grow roughly in line with economic growth, i.e. about 2 or 3% faster than inflation. In my last post I was focussing on the typical pensioner, so let's keep going with that example. Now, as we know, pensioners like to see their taxpayer-funded state pension indexed up with earnings (which seems perfectly fair to me), so the ratio of LVT-to-pension would, in the long run stay stable.
If your argument is correct, then the corollary must be that your state pension entitlement is frozen at the date of retirement as well, seeing as that is the point at which you stop 'contributing' (i.e. paying for the pensions of the previous generation). So somebody who retired fifteen years ago in an average house worth (then) £60,000 would only pay £600 LVT (or whatever average council tax was back then) rather than £1,500 LVT being 1% of the property's current market value, but obviously his or her basic state pension would also be frozen at £2,995 a year, rather than £4,953 as it is now (I don't have the figures for SERPS/S2P to hand).
Times that extra £1,998 by two for a married couple, and that's an extra £3,996 per annum they're getting, all paid by today's generation of workers/taxpayers, including the under-forties who are struggling to pay ridiculously high mortgages. So by all means, save yourself a few hundred quid LVT and forego a few thousand quid state pension.
Or have I missed something?
(5) The system you suggest is what they have in California. The knock on effect of this is that people who have lived in a property for a long time are paying a subsidised rate compared to their new neighbours, and they have every incentive to stay where they are, rather than trade down and free up capital in retirement or move somewhere closer to their adult children, which in many cases might be the rational thing to do.
(6) Closer to home, what if Mr A bought a new-build flat three years ago for £246,995 and signed up to LVT of £2,470 a year, but other flats in the block are now selling for only £120,000. Does it not seem 'fair' to reduce his LVT bill to £1,200 as well, or should he really go through the rigmarole of selling up, realising the loss and then buying it back again?
(7) What "complex bureaucracy of valuation"? All we need is "the existing Land Registry of sales, which would define the value for LVT purposes". Give or take ten per cent they can easily say what each house is worth (and if you're not happy with that margin of error, let's just round all their values down by 10% and apply a 1.1% tax rate instead of 1%), and what about the "complex bureaucracies" that we'd no longer need, who currently administer and collect council tax, council tax benefit, Stamp Duty Land Tax, inheritance tax, capital gains tax, the TV licence fee, VAT on domestic fuel, insurance premium tax and all the other crap that LVT could and should replace?
And if we're basing arguments on 'fairness', how fair are all the other taxes in that list? It's a bizarre mixture of Poll Taxes and jealousy surcharges, if you ask me. Wouldn't a flat tax on [a reasonable estimate] of property values be a tad 'fairer'?
The Fat Bigot, opposing LVT, came up with this:
I don't look on home-ownership as the "ultimate goal" whatever that means. But I do see it as a way that I can have somewhere to live without: (i) having to bear a continuing cost simply for being based within these four walls and (ii) the cost of housing me being a financial burden to anyone else...
Now, my memory isn't what it was, but TFB reminds me a lot of another fellow 'blogger who once cheerfully admitted that he had bought a three-storey townhouse in the early 1990s and carved out an sold a basement flat ten years later for the same amount as he originally paid for the whole house, so in an indirect way, said fellow 'blogger is being housed at a much younger person's expense but I digress...
The more stridently you argue your case, the more it seems apparent to me that your version of LVT is akin to an amalgam of council tax and an annual capital gains tax on a purely notional capital gain. By the time someone sells that gain could disappear yet the house owner will have been forced to pay as though it represented a financial benefit to him.
That, I think, is my strongest objection to your version of LVT. It is based on the premise: "you have made a gain, therefore you will be taxed on it", yet no gain is made until the asset is liquidated. If and when the asset is liquidated, truth will supersede hypothesis and whether there really has been a gain will be proved. Until that time everything is a paper exercise in officially estimated notional gains and losses.
OK, let's imagine a simple world without any taxes at all, zero inflation, low interest rates and no taxpayer-funded old age pensions. Our mythical pensioner has saved up for old age, and on retirement he owns an average house worth £150,000 and also has £150,000 in cash savings. He lives in the house and spends all the interest he earns, leaving the entire capital value of the house and £150,000 to his heirs.
As we know, we do have taxes and pensions. The tax on the interest is a reasonable 0% or 20% (depending whether it's in an ISA or falls below his personal allowance); we have council tax and the TV licence fee that cost him close to £1,500 a year, i.e. 1% of the value of his home (which is why I've long said we ought to replace all property-related taxes with a flat tax of 1% on property values, which we shall consider to be a rough approximation of Land Value Tax for the purposes of this discussion) and he is collecting a taxpayer-funded pension of £6,500 a year (or whatever the Pensions Credit level is).
Our hero is paying (say) 20% income tax on typical interest income of 5%, so each year, he's paying 1% on the capital value of his savings and 1% on the capital value of his house. So the interest income he can spend (assuming he wants to leave £150,000 cash to his heirs) is depressed slightly. But the value of his house is increasing at a long run average of 2.7% faster than inflation (because property prices rise in line with earnings in the long run), so the real value of the cash he has left over stays flat but the real value of his house tends to increase.
Meanwhile somewhere else, we have a pensioner who owns a house worth £300,000 and has no cash savings. He'll cheerfully collect the £6,500 taxpayer funded pension and pay no income tax (as he has no taxable income). Why is it wrong for him to being put on par with the first pensioner, and asking him to pay 1% of the value of his house in tax every year as well?
There'd be no point in asking the pensioner to pay this in cash every year, of course, that would just drive him into the arms of some scuzzy 'equity release' company, but the deal would be, the tax gets rolled up and repaid by the heirs when they inherit. Because of the maths, the real value of what they inherit, after inflation, would still be considerably more than £300,000 because the 1% tax only collects a third of the otherwise tax-free gain, and not one single penny of the annual use value.
If the pensioner in the more expensive house doesn't like it, he can always trade down into a £150,000 property, save £1,500 a year in tax and have some interest income to spend as well (isn't people-saving-to-be-able-to-support-themselves-in-retirement supposed to be A Good Thing?). The second pensioner is still streets ahead, in tax terms, as the house probably cost him about £30,000 thirty years ago; while the first pensioner has built up his £150,000 savings out of post-tax income.
Y'see, it's helpful to look at both sides of the equation.
