The eternal fall back of the Home-Owner-Ists when opposing the idea that we tax incomes less (or not at all) and tax land values instead, is 'The Poor Widow Bogey', which had its most recent outing e.g. here:
jaffa said... You all seem to forget the old 85+ pensioners who live in a house they bought and paid for 40 years ago out of their earnings. They have no income so are unable to get a mortgage of any sort, they have no cash all spent/inflated away. So where do they get the dosh from to pay this bill that lands on their mat..?
If you apply common sense to this, as I did at length here, you'll know it's not really an issue.
To cut a long story, assuming a given required total amount of tax revenue (a large chunk of which is used for paying old age pensions and NHS costs for the elderly, let's not forget), it makes little difference whether we keep it simple and collect LVT of about 6.5% of the total current market value of all UK land and buildings and make pensioners pay as well (allowing them to roll up and defer the tax if they so wish), or whether we exempt pensioners main residences completely and apply a rate of 8% to everybody else.*
We can think up any number of transitional or relieving provisions, it's just a question of working out which one has the least bad unintended consequences. I personally am not too fussed what we do, this is politics not economics.
So for future reference, I have added a new widget to my side bar called The Poor Widow Bogey, which links back to the earlier detailed post and to which I will refer people in future to save me explaining this again and again and again and again. And again.
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* People who are hoping to inherit a large house might take the superficial view and say they prefer the latter solution (and people who aren't will prefer the former) but actually that's not necessarily the cleverest thing to do; assuming they intend to sell the house as soon as they get their hands on it:
Imagine you are in line to inherit a large house in the next few years - although there'd be no LVT in the interim, would you rather inherit something with an annual LVT bill of £16,000 (8% x £200,000) or with an annual LVT bill of £13,000 (£200,000 x 6.5%)? The selling price of the former will be (say) £60,000 less than the latter (assuming the annual difference of £3,000 is capitalised at 5%), so that's a one-off cost of £60,000.
Add to this, the fact that the NPV of the LVT payments on the houses that you and your fellow heirs are living in (let's say three heirs, who pay an extra £2,000 a year each if LVT were 8% and not 6.5%), that's an additional capitalised cost of £120,000, so the total cost is £180,000. We could add on further costs for your own children etc, but let's skip that step.
We compare that £180,000 extra one-off cost with how much the accrued LVT would be, assuming £13,000 a year, i.e. if you expect the elderly relative to live another 14 years or more, you prefer the total exemption method (whereby pensioners pay £nil and everybody else pays 8%), and if you expect the elderly relative to die before then, you actually prefer the 'everybody pays 6.5%' method.
Jammy
1 hour ago
23 comments:
I has occurred to me that LVT is an inheritance tax by any other name. Given the most valuable thing most people will ever own is their house, taxing it via LVT means that for most people (certainly more so than now) they stand little chance of inheriting any capital.
The truly wealthy, those with large amounts of business assets and cash/investments will be unaffected, better off in fact, because they can pass on their wealth free of any IHT at all.
Whereas those in the middle, with a house worth 150-300K (which is fairly bog standard for a house in S England certainly) don't have any other wealth to pass on, just their house. And at the moment such a person pays no IHT anyway, being under the IHT threshold.
But under LVT they can either roll up their LVT (in which case, if they live a decent amount after 65 will probably take all the value of the house), or they can get their children to pay the LVT (so they are effectively paying IHT anyway, and who would or could pay that amount, never knowing when the parent might pass away?) or they can downsize to a smaller house. But even that isn't perfect because there will still be LVT on the small house, and even a small house in a decent area doesn't come cheap. You might release £100K by downsizing, say going from a £200K house to a £100K flat. The LVT would continue to roll up on your small house, such that if you live 15 years from retirement, 8% annual LVT would have more than eaten up your equity. So you are left £100K to leave to your heirs, from a £200K house. They have effectively paid 50% IHT on something they could inherit for free right now.
Incidentally, if you roll up the LVT and upon death it comes to more than the value of the house, will you want some of the other assets in the estate too?
The wealthy and the poor won't be affected, its the broad mass in the middle who will end up paying. At the moment a couple can pass on over £700K to their children free of IHT, if they use decent tax planning. Under LVT people would effectively be paying tax on their inheritance at a much lower level.
S, you consistently show a surprising lack of imagination and common sense.
As I keep saying, let's assume a fixed total tax bill, and it is a choice between paying 40% on all normal income (employment and business income) or 6.5% on total value of land and buildings with no exemptions, and let's further assume that all pensioners live long enough to erode value of their house to nil and that pensioners have no other assets to leave to their children.
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What is the impact on e.g. me, in practice and in round figures?
Current rules
Parents' house = currently worth £300,000 (in second to top decile by value) and I have three sisters. So I stand to gain £75,000 at some distant point in the future (assuming my parents haven't MEW'ed the lot).
The cost to me of this is me and my sisters handing over 40% of our income every year in tax.
Under Land Value Tax
If we go with 6.5% LVT, then I inherit (say) nothing, but I each year, I save 40% income tax x my lifetime earnings minus 6.5% x value of house I live in.
Let's further assume I live in a house which is [on average] five times one year's earnings for me and Mrs W
So my annual saving is 7.5% x my earnings. Income tax would be 40% x earnings; LVT would be 6.5% x 5 x earnings = 32.5% x earnings. 40% minus 32.5% = 7.5%.
For sure, I would inherit nothing, but the question which you resolutely refuse to address is:
"Why I (or millions of other people) would want to hand over 7.5% of their earnings every year in exchange for possibly, with a bit of luck and assuming our parents haven't MEW'ed it all and that house prices don't crash???"
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Now, what I'm not telling you is what I or my sisters earn. Maybe we earn respectively £zero; £10,000; £25,000 and £60,000 for example but all live in houses of similar value.
For the ones who earn zero or £10,000, sticking with income tax might be a better bet (in the vague hope of landing a £75,000 windfall later on); for the one who earns £25,000 it is neither here nor there; and for the one who earns £60,000, going with LVT will be a better bet, but the matter is nowhere near as clear cut as you pretend it to be.
@MW
As a land taxer of longer standing than you (not something to boast about, I admit)I don't think we are going to make any progress to the the Economic Nirvana with the Henry George Land Tax with Single Tax knobs on.Nobody is going to believe their income tax is going to go down as a quid pro quo for LVT.Look what happened to Income Tax: a war tax to fight the French originally.
I seriously think that we should opt for the earlier JS Mill version cut with JM Keynes stimulus
plus added Grant Shapps Tory credibilty by proposing that the guv take as much land value as is necessary to keep "property price inflation below wage inflation."This is a reworking of Shapps idea ,(we really mean land price inflation of course).This formulation is so useful I think we should honestly steal it and if
Shapps squeals, face it out by saying we've been using it for years ( Like Lola did subsequent to me inventing the term "Homeownerism" mutter mutter).
There is no mileage in alarming unstupid people like Sobers.
DBC: "As a land taxer of longer standing than you (not something to boast about, I admit)..."
Correct. I have achieved nothing in five years and you nothing in fifty. And I will achieve nothing in the next forty-five years either :-)
As to the 'sentinel tax' I would be completely happy with this and have suggested it before, but you get the usual Home-Owner-Ist whining about 'there's no cash to pay the tax'. I get this whining with my "one per cent tax to replace council tax and IHT like in Northern Ireland" idea. We'd get the same whining with an even more modest "Let's add a few extra council tax bands at the top" idea.
So whatever we suggest, we get the same pathetic counter-arguments, whether we go for a very modest proposal or a full-on Single Tax model, so may as well be hung for a sheep as a lamb*
* The real reason why there was the death penalty for poaching is to remove people from the gene pool who didn't fall for the lie that 'land ownership confers a special status'.
PS, Sobers is far from stupid. He is the intellectual wing of the Home-Owner-ist movement, and keeps presenting arguments which look pretty solid PROVIDED people who read them are stupid enough to only look at one side of the equation.
I'm an economist and gentleman, so I look at both sides - in the instant case it is a trade off between paying more income tax now or inheriting less later on. Clearly, on average, most people will be better off with LVT.
It may not be as clear cut as I put it, but it is true that a lot more people who nominally would be better off under LVT, will be worse off if you include the value of any potential inheritance. And the more people who will be worse off as a result of LVT, the less popular it will be.
In fact as you have admitted, it is those on low incomes who stand to lose the most under LVT by losing their inheritances. In fact if £25k is the cut off point for break even, that's more than 50% of the population.
Its a strange system that ends up charging a higher rate of IHT on the poor than the rich. The wealthy will be able to pass assets to their children with no fear of paying IHT, and retain enough to live on, and one averagely luxurious house. They might choose to roll up the LVT on that house, lets say its worth £400K and it all disappears on their death. If they have other assets over £1m they are ahead of the game straight away.
Whereas those in the middle and the bottom cannot do that, most of their wealth is tied up in the house they live in. Let us assume that a retired couple own a very basic 3 bed semi, its worth £140K, and its paid for. I can't remember if pensions are replaced by CI or not, but even if they aren't they would have to be stupid to try and live on their pension and their CI (c. £18K together?) AND pay their LVT of c. £9K. Anyone in that position will just say 'Sorry kids we can't afford to not roll up the LVT. No inheritance for you.' And their kids, who probably earn lower than average wages as well won't be gaining that much from LVT either - 40% of 20K (say) is 8K, which will soon be spent.
So the kids will have a bit more money in their pocket, but not enough to change their lives. The parents will slowly eat through their equity, and at death will have nothing to show for their life's work.
There is a big difference between someone getting a lump sum of capital and having a much smaller sum of extra income over their lifetime. The former is more likely to be saved and invested wisely (being a memory of the parents) whereas the latter is just extra spending money. I suspect such a system would actually polarise wealth - the rich would get richer, as they could pass it on, the poor would get poorer as they would spend any extra they got and never achieve any capital savings, other than their house, which would then disappear in rolled up LVT at the end of their lives.
Sobers, you've gone round the clock this time:
"I suspect such a system would actually polarise wealth - the rich would get richer, as they could pass it on, the poor would get poorer as they would spend any extra they got and never achieve any capital savings..."
So are you attacking LVT as some wicked Communist strategy to rob from the rich and reduce the tax burden on the poor; or are you attacking it as some wicked neo-liberal strategy to rob from the poor and reduce the tax burden on the rich?
Firstly, make up your mind.
Secondly, the maths is much simpler than that - people with high incomes relative to the value of land and buildings they own will end up better off; and people with low incomes relative to the value of land and buildings they own (or choose to continue occupying) will end up worse off.
So young tenant earning £40,000 whose elderly mum lives in a council house = ends up better off.
Baby boomers who earn £40,000 sitting on a quarter of a million quid unearned paper gains on their house = worse off.
Young dynamic entrepreneur earning £1 million living in a £500,000 mansion = better off.
Large rural landowner raking in £1 million a year in ground rents and agricultural subsidies who 'owns' land worth hundreds of millions = worse off.
And so on. You want the system to continue transferring wealth from workers and entrepreneurs to land 'owners'; a Georgist system does not actually involved any redistribution whatsoever. The people who create the wealth get to keep it, end of discussion.
Sobers, you've even resorted to outright lying here:
"In fact as you have admitted, it is those on low incomes who stand to lose the most under LVT by losing their inheritances. In fact if £25k is the cut off point for break even, that's more than 50% of the population."
Nope, I never said anything of the sort.
What I said was that somebody earning less than £25,000 might end up worse off IF they own a house worth more than five times their current annual income AND IF they stand to inherit a quarter of a house that is in the second decile by value in the next few years.
That's two big IFs and one big AND.
You deliberately ignore the fact that somebody earning £25,000 who happens to be a tenant and whose parents house is worth £150,000 will end up considerably better off.
This has nothing to do with 'rich' or 'poor' and you know it. It has to simply do with whether you and your family have a high or a low 'current income-to-land ownership' ratio.
I could just as well say:
Somebody earning £250,000 who happens to be a tenant and whose parents house is worth £1.5 million will end up considerably better off.
or
Somebody earning £2,500 who happens to be a tenant and whose parents house is worth £15,000 will end up considerably better off.
Sobers, having read your last diatribe again, this bit is complete lies and propaganda:
"There is a big difference between someone getting a lump sum of capital and having a much smaller sum of extra income over their lifetime.
The former is more likely to be saved and invested wisely (being a memory of the parents) whereas the latter is just extra spending money."
Isn't it a general observation that people spend their own money more wisely, and the harder it is to earn, the more carefully they spend it? So what you actually meant to say is exactly the opposite:
"There is a big difference between a lucky few getting a lump sum of capital at a time when their income usually comfortably exceeds their expenses, and being allowed to keep all your earned income over your lifetime.
The former is more likely to be splashed on 'once in a lifetime' big ticket items, and the former is more likely to be spent, saved and invested wisely (being a memory of all the hard work you put into earning it)."
I've been trying recently to attune my mind to the opposing side of the debate and come up with things I don't feel i've seen adequately explained either by our esteemed colleague Mr. Wadsworth nor elsewhere. So here goes my attempt at a "killer argument against"
I know that replacing ALL taxes other than "sin taxes" with LVT is administratively the most cost effective way of running "the state" however, taxes on incomes come with the added bonus of the aforementioned incomes being reported each year. We would not get these statistics if incomes were no longer reported. The obvious answer to this is to require them to be reported but if there is no basis for this to happen (i.e. tax) then would it really fly with the public to be forced to do so?
Would it be more politically acceptable to not entirely replace all taxes but to scrap some and merely reduce & simplify to minimise the admin cost of the less economically damaging ones (income & corporation tax) what level of LVT/income taxes would be a sensible equilibrium point in this case?
SW:"... taxes on incomes come with the added bonus of the aforementioned incomes being reported each year. We would not get these statistics if incomes were no longer reported."
I refer you to the real life experiences of Georgist hero Mr J Cowperthwaite:
He returned to Hong Kong in 1945 and continued to rise through the ranks. He was asked to find ways in which the government could boost post-war economic outlook, but he found the economy was recovering swiftly without any government intervention.
He took the lesson to heart, and positive non-interventionism became the focus of his economic policy as Financial Secretary. He refused to collect economic statistics for fear it would encourage officials to meddle in the economy.
PS, under normal company law, the price of limited liability is disclosure, so all limited companies and LLPs would still have to submit accounts. This is, for example, still a requirement in Dubai where there is no income or corporation tax, so they know perfectly well who earns what.
So in other words, if relatively few people are bitching about how shit the country is and how shit their lives are then the gov't is doing a good job and all the statistics cloud the issue?
I suppose we know this to be true when we look at the way poverty is measured in this country...
SW, that about sums it up.
In any event, there are plenty of other ways of measuring GDP, most of which do not require every single individual to report his or her income to the nearest penny. And prices paid for land and buildings (and LVT collected and dished out again as Citizen's Income) give us a very good idea of how well particular regions are doing.
Coming slightly late to the fray:
"the most valuable thing most people will ever own is their house."
True, but only because we have had rampant property price inflation. If LVT caused rampant deflation which took house prices back down to the historical long term multiplier of income, then much of the argument that follows this statement is nullified. In the early twentieth century, an old house in poor condition could be worth so little that, if its owner died, the heirs would simply leave it to rot. Even today you can still see ruins in the countryside that resulted from this state of affairs. There is no economic law that says houses have to be someone's most expensive possession.
@MW
50 years a land taxer?Do me a favour: 30 years tops .
I am not sure Sobers is responding to treatment (though how he thinks a house is your principal asset is a facer: surely a job is more valuable).
The Sentinel Tax (the JS Mill land tax plus money chucked at the economy ) would cut his argument off a the knees.People would n't pay anything in his inheritance scenario since Mill's LVT only taxes increases in land value.If land prices remain static (or below wage inflation levels in the Shapps /Reed formula)nobody pays anything,house prices remain static and we all make out like its the Promised Land because we have mega disposable income to spend how we will.
BTW While nobody doubts you are a gentleman I don't think you can be a gentleman AND an economist.Oxymoron,surely?
B, of course, but Sobers is tapping in to the mass delusion that high house prices make us wealhier.
He, like most idiots, overlooks that children have lost three times as much money as the parents have gained, because each of them will have been tricked into overpaying by two hundred per cent for the houses that they buy.
DBC, I've suggested Sentinel Tax and I get the usual Home-Owner-Ist whining - and please don't forget that a lot of idiots see house price rises as A Good Thing, they equate high house prices with wealth, not with poverty.
or whether we exempt pensioners main residences completely and apply a rate of 8% to everybody else.
I should think it makes quite a difference to the pensioners.
JH, that all depends on whether the government demands payment in cash every year or is happy to allow pensioners to roll up and defer the tax.
But like I say, I'm not too fussed either way. I'm just saying that the Poor Widow Bogey is a non-argument.
(allowing them to roll up and defer the tax if they so wish)
This was an idea I hadn't thought of. Isn't this the perfect response to the "Widow Bogey"?
Converting LVT into a charge on the building addresses the "widow can't get a mortgage" argument. Unlike "unlock the equity in your home" schemes, there is no component getting stolen by some evil company tricking old ladies into selling their homes then renting them back to them.
The fact that it reduces inheritance is neither here nor there, as the current system of taking income tax off the widow for her entire life means that the inheritance is already reduced. Why with all that tax, she could have bought a bigger house.
OP, in the real world, yes of course.
But on Planet Home-Owner-Ist, it is better for everybody to hand over half their income in tax so that a random few at random intervals can inherit random amounts of money (depending on what house prices are like at the time, whether the Poor Widow has MEW-ed it all or not etc).
On Planet Home-Owner-Ist, things like your income or wealth generating capacity or shares in a business aren't proper wealth, only house prices are. So it's OK to tax the former but not the latter.
Required reading in school should be Bastiat's parable of the broken window (or better still, the whole of "that which is seen, and that which is not seen").
Every economic ill (muddied thinking about house prices especially) in this country are addressed by that one idea.
Everybody loves free money. Houses being worth more than you bought them for feel like free money. That which is not seen is that there is no free money.
It's one step removed from "why don't the government just print more money"? It's the sort of thing you expect to explain to a child. Not to an adult.
Why is the Widow's house "an investment", but the Widow's car is not? Why can't she pass on all the electricity she's bought as some marvellous inheritance? GAH!
(Sorry, lost it a bit, it's been a long day).
OP: 'there is no free money', that's a good one.
But it is very difficult explaining to the HOists that their gain is somebody else's crushing mortgage (with a handsome cut for the banks), they insist that 'it is a return on their investment' and that 'today's youth want everything on a plate' and so on. Their Achilles' Heel is when their own children can't afford to buy a house, of course...
jaffa said... You all seem to forget the old 85+ pensioners who live in a house they bought and paid for 40 years ago out of their earnings. They have no income so are unable to get a mortgage of any sort, they have no cash all spent/inflated away. So where do they get the dosh from to pay this bill that lands on their mat..?
In that circumstance, they bought it when domestic rates were in place, so it isn't as if the situation they would find themselves in would be drastically different to the one that was in place at the outset.
As has been said, deferment is one option. There is a scheme that offers precisely that option to pensioners in Northern Ireland when paying their domestic rates. I see no reason why it couldn't work UK-wide.
PL, indeed. Actually, the 85 year old would have bought it earlier than that when we still had Schedule A tax as well (on top of Dom Rates).
Thanks for tip-off about NI rates deferment, that's a welcome new development.
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