Monday 22 March 2010

Killer arguments against LVT, not (31)

Yesterday, I outlined the system of Domestic Rates in Northern Ireland, which is a property value tax of 0.78% per annum (i.e. not a million miles from Land Value Tax).

I suggested that instead of capping the value to which the rate is applied at £400,000 (which benefits people in larger houses) while retaining the jealousy surcharges Stamp Duty Land Tax and Inheritance Tax (which hurt people who buy or sell larger houses, or who have a large house, or indeed a small house but lots of other assets), it would be much simpler and better to simultaneously scrap the £400,000 cap and scrap the jealousy surcharges (let's assume that this would be more or less fiscally neutral for the sake of this discussion).

Once you think along these lines, it would be quite easy to get rid of all the other wealth/property related nuisance taxes like Capital Gains Tax, the TV licence fee, Insurance Premium Tax and VAT on domestic energy bills as well - each of these raises around £2.5 across the UK, so to replace the lot would involve hiking the tax rate by about 0.25%, in other words, you could get rid of the lot and increase Domestic Rates to 1% per annum. This would reduce collection costs and reduce distortions, while improving collection rates (it's difficult to evade property value taxes, although they are quite easy to avoid - you just move somewhere smaller or cheaper or take in a lodger and split the bill two ways).

Dearieme duly trotted out the time-honoured objection:

"[this would enable us to] shut down the departments at HMRC dealing with SDLT and IHT": you naif, starry-eyed optimist, you.

Others have raised this as well, the idea if a system of property value tax were in place, the government would just keep increasing the rate and increasing the rate, but without replacing or reducing other taxes. This notion is, frankly, complete and utter nonsense, neither in theory nor in practice (it has not happened in Northern Ireland, or in Taiwan or on Sark or anywhere else that has property value taxes, has it?). I responded thusly:

D, that's the beauty of property taxes. Apart from being the economically least damaging taxes, they are the very opposite of stealth taxes; people know what they are paying and object violently (but irrationally) to every penny (unlike true stealth taxes like VAT or National Insurance, which are economically very damaging but people don't seem to care). So the only way a government could push through a £1 increase in property taxes is by demonstrably cutting other taxes by at least £2.

No doubt somebody will come along and say "The government wastes so much money, they should just cut the waste and cut other taxes by £2 but without increasing property taxes by £1", to which I reply "Nope. Of course wasteful expenditure should be cut, but if there's £2 to spare, we would still do better by cutting taxes on economic output by £3 and increasing property taxes by £1" and I'd keep going until either wasteful spending has been reduced to £nil or taxes on economic output have been reduced to £nil.

11 comments:

Anonymous said...

You're not allowed to remove VAT on domestic energy bills under EU rules.

Just thought I'd mention it.

Mark Wadsworth said...

AC, of course, this is one of those many cases where a sensible policy has to be prefaced with "Once we've left the EU..."

sobers said...

I think dearieme has a good point I'm afraid. Can you give me any examples of the State abolishing any long term taxation systems or methods? I can only think of new ones being invented. VAT, Insurance tax, air passenger duty, one off windfall taxes on banks/oil companies. All have come in in my lifetime (40 years), and I expect many more that I can't remember. Plus a myriad of increased rates/lowered allowances/altered rules on all the existing taxes.

If you think the State will voluntarily give up revenue streams (and abolish entire departments of civil servants) you are in cloud cuckoo land. They would just take your LVT tax and add it on to the existing system (and invent a huge bureaucracy to administer it).

Mark Wadsworth said...

S: "Can you give me any examples of the State abolishing any long term taxation systems or methods?"

Poll tax, selective employment tax, higher rate tax of about 100% in the 1970s, sales tax (precursor of VAT), dog licence, Stamp Duty on everything except shares and land/buildings, going further back, Window Tax, salt tax.

But history shows that it is far more common for property taxes to be scrapped (Domestic Rates, Schedule A etc), because they are a quick win for politicians who like to bask in the faux glory of the ensuing rise in house prices.

"They would just take your LVT tax and add it on to the existing system (and invent a huge bureaucracy to administer it)."

So? Just because something might be done badly is no reason to rule out the possibility that it might be done well - as a matter of fact it would require very few people to deal with, as HM Land Reg already has all the necessary info and we already have council tax collection system.

If your logic is correct there is no point ever campaigning for anything, not even leaving the EU.

Ed said...

You're not allowed to remove VAT on domestic energy bills under EU rules.

Yes, that's what the rules say. Out of curiosity, what would actually happen if we broke the rule and did remove the VAT?

Mark Wadsworth said...

Ed, good question, nobody's got the nerve to do it and find out.

sobers said...

Poll tax wasn't the abolition of a tax, as it was replaced by council tax. Selective employment tax predates me I'm afraid, so I can't comment. Sales tax was replaced by VAT, whether immediately I don't know. Dog licences I'll give you, but they were hardly a huge part of the system. Stamp duty may have been reduced in scope but has certainly not been abolished entirely.

As for window & salt tax, I'm referring to modern day governance, since the socialists took over in 1945. Since then its been one way traffic - higher govt spending, more and more taxes on everything.

I repeat - if you think the system as it is set up will ever reduce itself in size and/or complexity voluntarily you are sadly mistaken. There are too many vested interests now in the status quo.

The only way the system will be reformed is if there is a catastrophic financial failure, and the govt literally runs out of money, and cannot pay its bills, even in its own debauched currency. Then there would have to be a forced reform. Until then it will continue to get bigger and bigger, consuming more and more of the national production.

Whether the point of collapse is reached in my lifetime is moot - I would like to see it, but fear I may not.

Mark Wadsworth said...

S, "Poll tax wasn't the abolition of a tax, as it was replaced by council tax. Selective employment tax predates me I'm afraid, so I can't comment. Sales tax was replaced by VAT.."

OK, I grant you, these taxes were replaced by other vaguely similar taxes, so what? That is all I am recommending, replacing and simplifying. The taxes that really need to be scrapped without replacement are VAT and Employer's NIC.

bayard said...

"Ed, good question, nobody's got the nerve to do it and find out."

I don't think it's a matter of nerve, it's a matter of will. The EU is far too hand as a whipping boy for unpopular measures: "We don't want to do it but the EU says we must" or "We'd love to do it but the EU says no". Defy the EU once on anything and the whole facade will collapse.

James Higham said...

Nowt wrong with optimism if it's based on something concrete.

Joshua Vincent said...

Well, here in the States, which has a property tax system similar to Northern Ireland, several cities have actually reduced or eliminated (replaced really) other taxes, especially our poll tax, called a per capita tax.

Allentown, PA, of the Billy Joel song, brought in LVT with the express proviso of freezing direct taxes on business at their 1996 levels, thus rendering them relics.

Philadelphia is currently considering use of LVT (or property tax, that is not yet sorted out) as a replacement for Local Income Tax and some business taxes.
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