Killer Arguments Against LVT, Not (371)

Emailed in by MBK from The Southern Reporter:

Last week’s audience, such as it was, was split into three discussion groups with each asked to consider one of three broad alternatives – Property Tax, Land Value Tax and Local Income Tax.

“As one would expect, a Property Tax was most readily understood and is administratively quite simple to collect, but without a long overdue revaluation, which would undoubtedly result in both winners and losers, it would not be progressive,” said Councillor Bhatia.

“Land Value Tax, which is based on an assessment of someone’s land as well as property, was considered the most difficult to understand although it is used in a number of European countries and also Australia. Although this was probably the least popular of the options, on the plus side it would help prevent land banking and may free up brownfield sites for housing in preference to greenfield sites."

“Local Income Tax, based on PAYE and ability to pay, was considered the fairest alternative, although revenues would be most likely to fluctuate with economic cycles. Although no consensus emerged from the options discussed, all the feedback will be considered by the commission when we formulate our final report at the end of this year.”

We've done the 'ability to pay' nonsense enough times. As to "fair", just imagine that a small group of people own all the homes in the UK and everybody works and pays rent. Would we still think it "fair" to tax earned incomes at much higher rates, use that money to pay for the local services which give homes their rental value in the first place and then tax the landlords' rental income at low rates (as at present)? Surely not?
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What I don't understand is why people say "OK" to a property value tax, or revalued Council Tax with additional bands but think that LVT is off the scale and somehow administratively unworkable. If you want a longer version of the progressive property tax 'good' vs LVT 'too complicated' school of thought, see also pages 6 to 10 of UNISON's submission to the Scottish tax commission.

In terms of assessment and collection, there is no difference between Council Tax and LVT, they are just calculated slightly differently and could in theory end up with unchanged tax bills.

For example, our Council Tax is £2,800 a year, because the house we live in was worth between £160,001 and £320,000 on a certain date in 1991.

We could simply rename Council Tax to 'Land Value Tax' and leave the annual amounts payable unchanged, in which case our LVT bill would be £2,800, expressed as 16% of the "site premium" of £17,800 a year. (The "site premium" is quite simply the rent we had to pay to the landlord (£20,000), plus the Council Tax which we had to pay as tenants (£2,800) minus (say) £5,000 a year for the rental value of the bricks and mortar.)

They can leave the collection completely unchanged for the time being, in administrative terms it is always better putting the legal liability on the owner registered at HM Land Registry to pay because unlike a tenant, he can't just leave the tax unpaid and do a bunk, but that's details.

We could do the same for the Mansion Tax for foreigners (i.e. ATED) and collect it together with the LVT/reformed Council Tax. To anybody who wails that "foreigners won't pay" all I can say is "Well in that case, why does the ATED raise more money than HMRC was expecting"?

And we know pretty well how much Inheritance Tax would be payable on each home on average (current value minus nil rate band(s) x 40%), divide that by average time between purchase and death (forty years?) and make that an annual amount (we would be paying £nil on that basis as our house is just about covered by our two nil rate bands). Seeing as housing makes up the vast bulk of people's estates for Inheritance Tax and there is no logic in subjecting anything else to IHT, plus it is a right old faff taxing anything else, we can then get rid of Inheritance Tax.

The same goes for SDLT, a dreadful tax on transactions, if we sold the house today for what we paid last year, the SDLT would be £20,000. Assuming a sale every twenty years, that equals an annual tax of £1,000. £1 million homes would be paying £2,188 a year instead of £43,750 every twenty years etc.

And so on. We can replace lots of stupid little faffy taxes on 'assets' this way, and the administrative savings in future would far outweigh any extra up front costs of implementing the system. So maybe our annual bill would end up as £3,800, now expressed as 21% of the site premium of £17,800.

Having got this far and done the same calculation for every home, we will soon notice that people pay wildly different rates, it might be more than 100% of the site premium for homes in cheaper areas down to 15% for £1 million homes and then rising again for £-multi-million-homes with potentially high IHT/SDLT/ATED bills. You then just harmonise the rates across the board, so that the bill for each home is a similar percentage (about 25% - 30% initially) of its site premium. It doesn't need to be too terribly accurate, and in any event, it will be much fairer/flatter than the current hit and miss system.

And then we can start replacing the big ugly taxes - VAT, National Insurance, higher rate income tax. That 25% - 30% rate just goes up and the tax base (the rental value) will go up all by itself and after five or ten years we could have phased out VAT, NIC, higher rate income tax.

(Clearly, some councils will now collect more and some will collect less, in which case their central government grants, which make up three-quarters of their funding get adjusted up or down a bit to even things out. Separate topic).

Sorted.