Saturday, 11 September 2010

Break Even Point Fun

I've bashed out a spreadsheet, showing the impact of adopting the tax system which I outlined here, whereby all existing taxes on income, profits, output or wealth would be replaced with a flat annual tax of 8% on averaged out land/property values (whether residential or commercial, using current market values or a CPI adjusted average for the last five years), with complete exemptions for pensioner households with only one property - not a mere deferment or discount - and agricultural land (to save silly arguments, you know who you are).

This makes deciding whether you would be better or worse off much simpler: you just divide the current value of your house (and any second homes you own in the UK) by your household's gross income, if this ratio is above the line then you would be worse off (on a static basis, assuming no change in behaviour and ignoring the corresponding boost to the economy), if it is below the line, you would be better off.
For example, for a couple with one working partner the break-even point is seven, so if his/her gross salary/wages are £30,000 and the house they live in is currently worth less than £210,000, they'd be better off; and if it's worth more than £210,000 they'd be worse off. If they end up worse off, they have a choice: grin and bear it; trade down; sublet a room; the currently working partner can try and earn more; or the non-working partner can look for a job.

Similarly, the break even point for a single adult is six-and-a-half. So if the flats in a block are worth £130,000 and are mainly occupied by single adults, those who earn £20,000 or more would be better off and those who earn less than £20,000 would be worse off. If a boyfriend or girlfriend moves in, then great - they can share the rent/share the mortgage/share the LVT bill.


i. The total tax revenues I suggested of £465 billion are as near as damn it to total tax revenues actually collected for 2009-10 according to the Public Sector Finances Databank (Tab C4, available here). IMHO, the fact that the government is running up massive deficits should be addressed by getting rid of non-frontline services, not by hiking taxes.

ii. The figures for household spend on VAT and Council Tax are from the Household Expenditure Survey for 2008-09 (Excel, table 16 non-retired households)

iii. I pencilled in a modest Citizen's Income of £20/week for each working age adult to flatten off the ratios. In the purist scheme, the CI would be more like £60 or £70/week (so the break even lines would be higher as well). I've only looked at the top half of the scale, because I assumed that existing welfare spending of £120 billion (excluding pensions) would be largely dished out among the poorer half of households (the Citizen's Income for the richer half would be about £20 billion out of that).

iv. Home values are based on HMRC's Table 16.1 (available here) and the current average price according to the Nationwide of £166,500 (which tally quite closely).

v. For other assumptions, see the first link.


Bayard said...

I'd be so much worse off, I'm off the scale!

Mark Wadsworth said...

B, go on, what's your ratio? Couldn't you do anything on that list, or even build a couple more houses in your back garden or something?

Bayard said...

Around 20! I have already converted and let part of my house as a flat, and have a lodger. I could work more at income-producing activities, but the problem is that much of my time is spent repairing the house which is a double whammy, because it reduces my income, whilst increasing the value of the house.

Mark Wadsworth said...

B, that's a lot!

There are one-and-a-half earners in my household, and our ratio is about 6.5 so it's touch and go with us (depending on how much of the LVT our landlord can pass on, and whether they can continue to pass on the LVT element that they currently collect privately). But it's all moot because I am a tax advisor, so I'd be unemployed anyway :-(

dearieme said...

At last, a reason to vote for it.

Mark Wadsworth said...

D, what's the ratio for your household? Or are you in or very close to retirement?

Derek said...

These costed proposals are pretty good stuff, Mark. You should gather this one and the previous ones together from the old posts where they tend to get lost and put them up as a separate cross-linked set of pages to increase their visibilty. They make a really good concrete case for LVT/CD which complements the usual abstract "natural justice"-based or "economic efficiency"-based one beautifully.

When you can show people that something is good for their pockets as well being the Right Thing To Do. it makes a powerful case. And your last few posts on LVT/CD have done just that. Kudos.

PS. If what Bayard says is true, I think we may have found the real Poor Widow(er)!

Bayard said...

I think I'm just an anomaly. The problem with putting LVT on property, as opposed to land, values is that it acts as a disincentive to improvement. If, like me, you buy a large, derelict property and proceed to repair it, the repairs cost you twice, once in the expense of doing them and once in the added LVT you pay on the increased value of the repaired property.

Mark Wadsworth said...

Derek, thanks. I am planning to write all this up an hawk it round the think tanks again.

B, what I propose is (in practice) LVT - i.e. the tax would be £x per sq yd, where £x is a different rate in different postcode sectors.

Individual properties would not be valued. It's just easier to understand an 8% tax on total property value than a 16% tax on underlying land value.

Bayard said...

M, off to the re-education camp: that should be £x per sq metre.

Mark Wadsworth said...

B, if you're going to go that far, why not €x per sq metre?

Lola said...

If I sum Mrs L and Me on gross taxable income we go about 7.1 times. But add in Mrs L's pension entitlements (State Teacher), which are about 30% of salary it becomes 6.something. So, the deferred pay provided by taxpayers improve things for us.

In reality, being self employed person I would much much rather keep more of the money I can make than I would be grumpy about paying 8%LVT. In any event I am sure two things would result from this change. One, a reduction in house prices and two, a massive and relentless increase in wealth creation.

Now, if you can also allow me to reform banking and money I will also do myself out of a good part of my job - trying to protect my customers wealth from the ravages of State Sponsored inflation.

Mark Wadsworth said...

L, I had a feeling you'd be towards the upper end, but...

In any event I am sure two things would result from this change. One, a reduction in house prices and two, a massive and relentless increase in wealth creation.

Which are both Good Things in my book, it's just that we have to learn to counter the objection that 'LVT is a tax on wealth' (which it isn't, not really) with 'Income tax is a tax on wealth creation'.

I also strongly suspect that with no taxes on incomes or output, consumer price inflation would become a thing of the past.

Lola said...

CPI, (and the rise in the equity culture) would/should also die with inflation, but it does absolutely require sound money, and to date no government at any time throughout history has ever been able to be trusted with the monopoly of money. As well as tax reform, lvt for example, we must have money reform. When I am i/c financial services I will de-monopolise money.

That'll learn the bastards.

Bayard said...

"B, if you're going to go that far, why not €x per sq metre?"

Because there are proven benefits to using SI units (I bet you didn't have to try and learn physics using imperial units) and having plan and map scales that aren't something silly like 1:96 or 1:63360, but not to using a currency unit that replaces one decimal system by another.

desperately seeking a solution said...

So just to put real numnbers to this, if earn £40k, and live in a house 'worth' £250k, your LVT of 8% per annum of property value would give me a tax bill of £20k on my £40k earnings?

Or have I missed something?

Mark Wadsworth said...

DSS, yup.

Assuming you are single, you have to compare £20,000 LVT minus £1,000 Citizen's Income = £19,000 with your current tax bill:

C Tax £1,300; TV licence £145; PAYE + Employer's NIC £14,875; VAT bill approx. £3,000 = £19,320 in total, so you are a smidgeon better off even on a static basis. And do you not think that your income would increase much more quickly in the income-tax free world which I envisage?

PS, £250,000 ÷ £40,000 = 6.25 (less than the break even point for single adults of six-and-a-half), so we would expect you to be ever so slightly better off - that's why I did the graph.

desperately seeking a solution said...

Mark, thanks for the breakdown. You'd have a hard job convincing someone in my position that reducing their monthly take home pay from £2,500 to about £1,700 would make them 'ever so slightly better off' overall.

I accept your reasoning broadly, although my CT is about £900pa, I don't pay the Employer's NIC at the moment and I save a fair bit and prob only spend about £7k a year on non-food consumables, so the VAT estimate is way too high. I reckon my full tax bill a the moment is nearer £16k, but let's not quibble.

What happens if I rent (i.e. don't own land)?

Mark Wadsworth said...

DSS: "You'd have a hard job convincing someone in my position that reducing their monthly take home pay from £2,500 to about £1,700".

Strictly speaking, your take home pay would go up to [at least] £3,333 (depending on what line of business you are in).

"What happens if I rent (i.e. don't own land)?"

Much the same logic applies, there'll be more winners than losers, but trading up or down is no big wrench for tenants.

Mark Wadsworth said...

DSS, according to Table 10.2 of this, VAT is about 11% of household expenditure, so don't underestimate it.

desperately seeking a solution said...

"Strictly speaking, your take home pay would go up to [at least] £3,333 (depending on what line of business you are in)."

OK, I clearly don't understand how this works, because this statement stumped me. Surely I would be paying 20k in tax, and still earning 40k? So, my take home pay would be 20k per annum?


Please send me link if you can't be bothered dealing with such basic questions. :o)

I'm happy to read up if I can. I do think LVT sounds promising, but would like to understand exactly how it would work.

Scott Wright said...

Seems a bit extreme from the point of view of my own circumstances, comes out at 2.23

Scott Wright said...

"MW: But it's all moot because I am a tax advisor, so I'd be unemployed anyway :-("

Erm if we were adopting your system wouldn't you be Chancellor?

Mark Wadsworth said...

DSS, see next post.

SW, 2.23 is impressive! Is that high household income (you and Mrs W) or low house value? Either way, you'd be a winner (notwithstanding welfare reforms).

As to your second comment, if I came anywhere near becoming Chancellor, the Home-Owner-Ists would shut me up somehow, whether that's bribes, scandal, murder, whatever.

Scott Wright said...

My 2.23 is based on a couple with two (not so great but above £8/hr each) incomes and a £60,000 house. I'm not sure how accurate it is though, does your line take into account children and the various benefits/credits associated with them as we have two.

I fail to see what's so impressive though as such a system is as likely to be implemented as I am of curing cancer. (i'm an accountant)

Mark Wadsworth said...

SW, ignoring Child benefit/tax credits, you & Mrs W would be two or three grand a year better off.

The graph is based on a very low CI of £1,000 (to make the lines as horizontal as possible); as you are aware, I'd bin CTC and have a flat-rate Child Benefit of £30 or £35 per child per week; and I'd roll the childcare element of WTC into flat-rate nursery vouchers of about £80 per week per child.

Either way, you'd end up a tad better off overall.