Thursday, 26 April 2018

Summary of a conversation I had with a journalist today about Land Value Tax.

A journalist (who shall remain nameless as I do not disclose my sources:-) rang me this morning to chat about Land Value Tax, so we met at lunchtime to go through an implementation proposal I had drafted, I can't find the spreadsheet we were looking at, but apparently it's on the Labour Land Campaign website somewhere.

To summarise, including the stuff I didn't say, but wish I had...

1. I am a simplification campaigner as much as a pro-LVT campaigner. Even the worst taxes or subsidies can be made a bit less bad if they are at least simple and netted off as far as possible - there is no point subsidising something and taxing that same thing. Either pay a small net subsidy (and don't tax it at all) or tax it at a lower rate (and scrap the subsidy). At least that is the honest thing to do.

2. LVT is clearly the least bad kind of tax, compared to horrors like National Insurance or Value Added Tax. Endless articles have been written about why LVT is good and other taxes are bad, and either you understand them or you don't. I can explain stuff, but I can't make people understand stuff which they don't want to understand. (I can hear and I understand how sound waves and the inner ear works, but I can't give deaf people their hearing back).

3. The only real 'problem' with Land Value Tax is political. In the UK, we have a weird slavish worship of house prices. The last half century has shown, if house prices are rising, the party in government will be re-elected; if they are falling, the opposition party will win. So the politicians, of whatever party, don't like to utter the words "Land Value Tax" because - it is widely believed - this tax would push down house prices.

4. The UK already has a dozen fairly minor taxes (which between them only raise about one-tenth of total taxes) on housing, land values and private wealth generally. If we - in the interests of simplification if nothing else - replaced all these with a flat-rate LVT, there would be little impact on house prices and most households would pay the same total amount of tax over a lifetime as they do now. So this should be politically acceptable, assuming a rational electorate. (Business Rates just needs a few tweaks and it's LVT, that's a minor issue).

5. Annual revenues from the specific taxes in that spreadsheet (figures two or three years out of date) were as follows:

Council Tax - England - £24 bn
Council Tax - Scotland - £2 bn
Council Tax - Wales - £1 bn
Domestic Rates - N Ireland - £1 bn
Less Council Tax benefit, rebates etc - £(5 bn)
Stamp Duty Land Tax on housing - £8 bn
Capital Gains Tax - £6 bn
Inheritance Tax - £4 bn
TV licence - £4 bn
Stamp Duty on shares - £3 bn
Insurance Premium Tax - £3 bn

Let's call it £50 bn per annum, all in.

(Maybe we could scrap Housing Benefit for private landlords and exempt private landlords from income tax as a quid pro quo, in which case, the required revenues are only £45 bn. And scrap Help To Sell Buy, in which case, required revenues are only £44 bn and so on.)

6. The purists are quite correct to say that LVT should be based on site premiums i.e. the potential rental value of land and buildings, minus the cost/value of the actual physical building (referred to as the "Site-only rental value assuming optimum permitted use"). For a low level LVT, it is quite sufficient to base it on potential selling prices. So the purists say that £50 bn can be raised with a tax calculated as 25% of site premiums. The not-so-purists say that £50 bn can be raised with a tax calculated as 0.7% of potential selling prices. Comes to much the same thing.

Either way, there has to be some system of valuations, so I explained how we can adapt the Council Tax system very easily to get 80% - 90% of the way there. Is this the best way of doing it? For an expert valuer, clearly not. For administrative simplicity, I think yes, until somebody can think of something simpler and better, then I'll support that instead.

7. To summarise this summary: the UK already has LVT!! It is just diced and sliced and heavily disguised - the little people pay Council Tax and the TV licence fee every year; buyers/sellers pay Stamp Duty Land Tax; landlords and second home owners pay Capital Gains Tax when they sell; the really wealthy pay Inheritance Tax when they die; super wealthy foreigners pay the Annual Tax on Enveloped Dwellings etc. Each of these taxes is a minor tax, raises relatively little revenue and is fiddly and bad tax in itself, with all sorts of cliff-edges and unintended consequences.

If you replace them all with LVT, you have one slightly bigger and very simple tax (which would still raise less than half as much as VAT, for example) which is a good tax; most households would pay much the same over a lifetime; and the impact on house prices would be negligible (might push them up a bit, might push them down).


benj said...

Nice one.

While is would be best for a proper LVT to be done in one go, as evidenced by the ill conceived objections of even people who have written books called "re-thinking the economics of land and housing", that's going to be a struggle to convey.

Second best is if Labour ever get another majority, they wake up to the fact that be implementing a plan such as yours, they can shoot the Tories fox.

At least from that base, it's possible to start chipping away at taxes on output, while increasing whatever form of LVT/Reformed Council Tax exists.

My biggest worry doing that way is that because the gains won't be as large, the it can easily be reversed or left to wither by a prop 17 type cap.

James James said...
This comment has been removed by the author.
James James said...

A friend of mine suggested it would be politically easy to replace SDLT with an annual charge. Just impose it from whenever a property is sold, going forward forever. You could even make this optional. The government's interest rate is lower than most people's, so most people would prefer the annual charge.

Here's another policy idea: a one year holiday for capital gains tax, SDLT etc. Let all those people who want to change up but will never do so, do so. Would probably be good for the economy somewhat, too.

Lola said...

"...I can explain stuff, but I can't make people understand stuff which they don't want to understand. .." The story of my life...

Lola said...

Yup. Except the Telly Tax, which simply needs to be scrapped, and the BBC turned into a subscription service. I do not see why I need to be taxed to pay for a TV broadcaster.

Mark Wadsworth said...

BJ, ta.

JI, those are useful thought experiments.

L, don't confuse spending side (whether we should pay for the BBC) with the tax raising side (TV licence or LVT).

jack ketch said...

assuming a rational electorate

I think i see the fatal flaw...

George Carty said...

"Prop 17" Ben Jamin'? Don't you mean (California) Proposition 13?