Killer Arguments Against LVT, Not (378)

I went to a Labour Land Campaign meeting last weekend to discuss "implementation".

If you want to skip the boring background to all this, click here.

Another member and I had, independently, drawn up a list of existing property/wealth taxes which could and should be replaced; added up total revenues R (about £80 bn); calculated the total amount of rental value of UK developed land and buildings which relates purely to the location premium L (about £240 bn); divided R by L and arrived at a figure of around 25% for residential and 50% for commercial.

The annual tax on the bottom two-thirds of homes would be the same as or less than their current Council Tax plus TV licence, assuming they don't claim Council Tax Benefit or its replacement. The LVT on commercial land in London would be higher and in most other places would be lower than their current Business Rates bill. That's them dealt with.

So far so good, then 'politics' got dragged into it, i.e. identifying the 'losers' i.e. those who would pay more on an annual basis, even though over a lifetime, getting rid of SDLT and IHT would largely even it out. Remember that SDLT is a very crude LVT paid in advance and IHT is a very crude LVT paid in arrears. Surely it is far better to get rid of those two taxes and ask people to pay-as-they-go?

One member present actually is a low-income pensioner whose home in London would now sell for around £1 million; we both had calculated that the LVT on such a house would be about £9,000 a year against a current Council Tax £1,500. We pointed out to him that all sensible LVT proposals include a deferment/roll-up option for such pensioners, the chances are that the deferred LVT payable when they die and the house is sold would be much the same as the comparable IHT and SDLT bills. Much less for those who die sooner, much more for those who live longer, it all averages out.

The next political objection was the diagonal opposite of the low-income pensioner in a high value home, namely, the aspiring young couple who had taken out a large mortgage to buy an expensive home and who were absolutely maxed out. My view is, they should have budgeted for an increase in interest rates of at least 1% or 2% and having to pay 0.9% LVT on the current selling price would only eat into that reserve, but was shouted down.

OK, Plan B, I said, for those borrowers whose LVT is significantly higher than their budgeted-for Council Tax, how about we just tell the banks to write off a corresponding part of the mortgage debt? Not good enough, came the reply. That would benefit people with large mortgages but not those with a small mortgage. At which stage I gave up on that line of reasoning.

So in the meantime, I have cooked up Plan C. That is simply to cap the interest rate on mortgages which were taken out prior to the introduction of LVT being announced.

Let's imagine our aspiring young couple has taken out a £900,000 mortgage to buy a £1 million home. (To justify that sort of mortgage, they must be earning around £180,000 a year between them, so they are not exactly starving, but hey…). A quick Google tells us that at the moment, they are probably paying 2.5% interest on their mortgage.

So for a 25 year mortgage, their annual repayments are currently £48,848 (=PMT(0.025,25,900000) and their Council Tax is £1,500, total £50,348.

If their LVT bill is £9,000, that leaves £41,348 to be spent on mortgage repayments, which would mean reducing the interest rate on their mortgage to 1.1%.

As far as I am concerned, we could cap the interest rate on all pre-existing mortgages at 1.1%. So nobody at the top end loses out, and people further down get a double win - their LVT is lower than what their Council Tax/TV licence was and they save a few quid in mortgage repayments.

The total annual 'loss' to the banks, i.e. land rent which they can no longer collect because the government is now collecting it would thus be be a surprisingly small £8 billion a year*. This is about the same as the pay and bonuses paid out to senior staff, or 0.1% of what they claim are their total assets; or 2% of their net assets, so nothing they can't afford.

No doubt somebody will think up an objection to Plan C, in which case, I will do a Plan D, and so on.

The only counter-objection I can think of is that banks will somehow game the system and charge more than 1.1% interest. In that case, the government just sets up a 'government mortgage bank' and offers people with pre-existing mortgages a remortgage at 1.1% interest. So the 'government mortgage bank' pays the banks the face value/amount outstanding of existing mortgages by creating more bank deposits with the Bank of England in exchange.

Let's imagine everybody did this. It would be like more QE. Instead of the BoE paying banks 0.5% interest on £300 bn, the BoE would be paying banks 0.5% interest on £1,300 bn. But seeing as the government bank is charging the ultimate borrowers 1.1% interest, that looks like a nice little earner for the government, and faced with this sort of threat, I think that banks will toe the line and cap interest rates at 1.1%.

* Total outstanding owner-occupier purchase mortgages excl. 'equity withdrawal' slightly less than £1,000 billion, average interest rate 2.5% and duration remaining approx. 15 years.
=PMT(0.025,15,1000)=£81 billion a year cash coming in.
=PMT(0.011,15, 1000)=£73 billion a year cash coming in.