Land Value Tax implementation - the easy way

Anytown District Council
1 High Street
Anytown AN1 1AA
xx January 202x

Mr & Mrs Smith
1 Acacia Avenue
Anytown AN2 4BQ

Dear Mr & Mrs Smith

Your Domestic Rates bill 202x-2y - property ref. XYZ1234
Following enactment of The Tax Simplification Act 202x, various taxes will be abolished and replaced with a single tax on land and buildings with effect 1 April 202x. The taxes which will be replaced include Council Tax, Stamp Duty Land Tax, Inheritance Tax and the TV licence fee (for full list see enclosed leaflet). These taxes were arbitrary; economically inefficient; prone to avoidance and evasion; and had high compliance and collection costs.

The new Domestic Rates will raise the same total revenues as the taxes it replaces in a fair and economically efficient way, with low collection and compliance costs. This will make budgeting and planning easier for government and households alike. Each household's share of the total taxes paid will be largely unchanged over the medium or longer term. Your local council's funding will be unaffected.

Valuation and assessment
Your property has been allocated to Band D (large terraced house or typical semi-detached house). According to data compiled by the Valuation Office Agency and HM Land Registry, the average gross rental value of all Band D homes in your assessment area (postcode sector AN2 4, see enclosed area plan) is £11,000 per annum. We have subtracted a general deduction of £4,000 for building and maintenance costs to arrive at a net rental value of £7,000 for Domestic Rates purposes. This is multiplied by the official rate of 25%, so your annual bill is £1,750. Please refer to the enclosed leaflet for details and worked examples.

Ways to pay
Please complete and return one of the enclosed forms within 30 days in the prepaid envelope provided:
* If you receive income subject to PAYE (salary or private pension), we recommend that you complete and return the attached 'PAYE details' form which will enable your employer or pension provider to deduct the amount due directly from your salary or pension in monthly instalments and pay it to HMRC.
* If you are not in receipt of a salary or a private pension and/or prefer to pay directly, please complete and return the enclosed 'Direct Debit' form.
* If you are over retirement age, you can apply for deferment using the enclosed 'Deferment' form.
* If you have suffered a recent change in circumstances and feel you are unable to pay (involuntary redundancy, divorce or death of a spouse), please complete and return the 'Hardship' form.

Failure to complete and return the appropriate form within 30 days may result in interest and penalties being charged.

Appeals
Please contact us within 30 days by completing and returning the enclosed 'Appeal' form in the prepaid envelope if any of the following apply:
* you are not the owner of the above property (please pass a copy of this letter to your landlord or other owner).
* your property has been converted to flats or you otherwise believe that it does not belong in Band D.
* you believe that there are other reasons why the net rental value of your property is significantly less than £7,000 per annum.

Please keep a copy of the form for your own records. An unsuccessful appeal may result in your property being allocated to a higher Band. If you submit an 'Appeal' form, you must still also complete and return one of the payment forms.

Finality
If we do not receive an 'Appeal' form within 30 days, you will be deemed to have accepted that your property has been allocated to the correct Band and that you accept the assessment. This will be binding on you and any future owners of the property.

Yours faithfully


Ms Henrietta George
Director, Council Finance Department

Killer Arguments Against LVT, Not (478)

KLN: "Valuations and collection will be a very complicated."

Well, firstly, no they won't. We can get 90% of the way to Land Value Tax by tweaking Council Tax (and Business Rates) valuations to reflect relative values and use the existing collection mechanism, which will be easier because owners will be primarily liable, not occupants/tenants.

And complicated compared to what, exactly?

LVT would be a good replacement tax for Council Tax, Capital Gains Tax, Stamp Duty Land Tax and Inheritance Tax, just to get the ball rolling.

If you want to see "complicated", click the above links to the relevant legislation. Council Tax (Local Government Finance Act 1992) is a model of clarity and brevity compared the other three acts.

Council Tax raises more revenue than the other three taxes combined with about one-tenth as much legislation and practically zero compliance costs. And it's not just legislation. Those three minor taxes require endless further guidance and an intrusive bureaucracy - and generate high fees for lawyers and accountants.

There are whole books written on these three taxes - how many books are there on Council Tax? Pretty much none. Your land and buildings are assessed and you just pay it. Don't want to pay so much? Then move somewhere cheaper.

And a proper Land Value Tax Act would be a about half the length of already brief Council Tax and Business Rates legislation put together. Instead of all the discounts and exemptions, there'd only be the roll-up option for pensioners. And I suppose a clause to say that local councils can introduce as many discounts and exemptions they like, provided they bear the full cost (either by spending less or imposing a precept on "everybody else").
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(Stamp Duty on share sales is another dreadful tax, but it would seem appropriate to make up the shortfall from scrapping it by increasing the corporation tax rate so that costs and benefits cancel out).

Subsidies for childcare costs.

My article is now up at the Citizen's Income Trust's new look website.

That's not tax simplification then, is it?

From City AM:

BRITISH small businesses are calling on chancellor George Osborne to reform and simplify the tax system in next week’s emergency budget.

Good start.

The Federation of Small Businesses (FSB) has asked the government to “widen the scope of reform to radically simplify the tax system and improve incentives to encourage investment”. The small business group praised the seed enterprise investment scheme – a government programme providing tax relief to individual investors who buy into small, early-stage companies – and entrepeneurial relief – a tax break for business owners – for “having a positive effect in stimulating growth”.

Trying to introduce all sorts of tax breaks is not simplification, is it? Our tax code is ten per cent actually saying what will be taxed and the other 90% is a mixture of tax breaks and anti-avoidance provisions. And one man's tax break is another man's tax burden. If you reduce taxes on one favoured group/activity, then 'everybody else' has to pay for it and the whole thing is a negative sum downward spiral.

And they are making the usual mistake of confusing real investment (in R&D, training, advertising, plant and machinery) with financial investment (paying money from a private bank account into a company bank account). If there are profitable real investment opportunities, then people will make them, wherever the money comes from.

But the FSB put pressure on the chancellor to ensure that the Treasury’s review of the business rates system “delivers a new, fully reformed system that is flexible, fair, transparent and efficiently adminstered”.

That's contradictory nonsense. If a tax is fair, transparent and easy to administer (i.e. Land Value Tax) then all the landlords and owner-occupiers squeal that it is "inflexible".

What they mean by "flexible" is shifting the tax burden off land and onto e.g. corporation tax, which would have to go up from a nice flat 20% to 35% or 40% of profits to replace Business Rates. Call that "fair" if you like, but is it "fair" as between landowners and wealth creating businesses?

As we were saying yesterday...

From City AM:

BRITAIN’S housing market is inflated by tax rules, which push up prices, and is left vulnerable to booms and busts because of stamp duty, the European Commission (EC) warned in a report yesterday.

Transaction taxes such as stamp duty can cost buyers tens or even hundreds of thousands of pounds on each purchase, forcing them to hold on to property longer than they would like.

"Transaction taxes on properties tend to discourage transactions, which might ultimately make the market thinner and thus hamper the price discovery process," said the report on taxes across the EU.

And the failure to update council tax in line with house prices also pushed up prices, the EC said.

"Failure to update the tax base regularly risks leading to erosion of the tax base — and thus revenue — over time, while giving further support to rising house prices," the report said.

Solutions could include cutting stamp duty – which ranges from zero to seven per cent, depending on the sale price – and reforming council tax to make it more progressive and more in tune with the current housing market.

Correct. SDLT at higher rates and IHT (bad taxes as they impede transactions and/or are jealousy surcharges and/or semi-regressive) primarily collect that element of land values which are unaffected by Council Tax (bad tax because it is regressive to the point of being a Poll Tax).

So why not merge the three into a flat tax on land values or house prices? We could call it "Domestic Rates" or something. Once you start along these lines, you realise that there are plenty more of these stupid little taxes on wealth or transactions which we could chuck into the mix, to the overall benefit of everybody.

"Simplify taxes now"

Allister Heath talks sense for a change:

It would be great if Ben Gummer, the Tory MP for Ipswich, gets his way. He wants national insurance contributions (NICS) to be renamed the earnings tax. This would be a far more accurate way of describing a little-understood levy...

To make matters worse, NICs are dishonestly divided into an “employees” bit (at 12 per cent and two per cent) and an “employers'” share (13.8 per cent on almost all pay). In reality, as most economists would agree, there is no difference: employees pay all of it.

The forces of supply and demand determine workers’ total cost; the fact that some of this is made up of wages and some non-wage costs makes no difference. If employers’ NICs were abolished, wages would eventually rise commensurately. So-called employers’ NICs are a stealth tax on workers.

The total tax bill on wages, salaries and bonuses, including income tax and all NICs, is shockingly steep. Earnings above £7,717 face 12.1 per cent; this increases to 22.7 per cent from £7,769; then to an astonishing 40.2 per cent from just £9,440.

The tax rate then spikes punitively to 57.8 per cent from £41,450; fortunately, that is merely a weird aberration and tax dips back to 49 per cent from £41,558, where it settles; eventually, it explodes to 66.6 per cent from £100,000 before falling back to 49 per cent from £118,880. Earnings above £150,000 face a cumulative tax rate of 53.4 per cent.

It’s time some clarity were injected into our hopelessly complex tax system.

It's just a shame that he didn't squeeze in a mention of the extra high marginal rates for many lower earners, i.e. benefits withdrawal, working tax credits withdrawal and student loan deductions.

And unfortunately he ignores VAT. He appears to have succumbed to the delusion that this is a tax on "consumption" not "production" and of course his beloved banking and residential construction sectors are either VAT exempt or zero-rated.

If you treat VAT more correctly as a tax on "value added", the bulk of which is wages, those marginal rates for people in the productive sector all go up by about ten percent*.

* assuming that an employee gets all the marginal extra income from a sale, the customer pays £100, 20/120 = £16.67 goes in VAT, 13.8/113.8 x £83.33 = £10.10 goes in Employer's NIC, leaving £73.23 gross wage; from which 32 per cent basic rate tax plus NIC is deducted = £49.80 net wages, a marginal tax rate of 50.2 per cent; not the 40.2 per cent he mentions.

Reader's Letter Of The Day

From The Metro:

YOU don't need to go through the bureaucratic hassle and expense of setting up an Orwellian system for finding non-payers of the water rates (Metro, Tue).

Rather than have landlords put tenants' details on a central database so that water companies can chase them up for payments, simply make the property owner/landlord responsible for paying water bills. He or she then collects the money from the tenants.

This method is cheaper and avoids the totalitarian probabilities that are created by any database.

Richard Hewins, London.

Correct.

It would be a good idea to do this with Council Tax anyway, and the same general logic applies to other things closely related to each home, such as the TV licence and utility bills.

The landlord can round up the rent (and deposit) demanded and average it all out, or he can agree to add on the actual bills received each month to the net rent, that's up to him.

That's no way to collect Council Tax

From the BBC:

Hundreds of thousands of people have been taken to court in England for non-payment of council tax owing to benefit changes, according to the Labour Party...

Before April of this year, millions of people on low income in England paid no council tax at all, or had their bill substantially reduced. The council tax benefit system was then replaced.

The government said this was part of a wider package of changes designed to control the spiralling cost of welfare (1) - and encourage councils to find ways of helping those on benefits into work.

It reduced the overall level of funding by 10% and said each council should decide how much support to offer residents - although pensioners were protected from any cut.(2)

1) That's simply not true. The amount spent on/rebated for working age and child welfare has been very stable at around one-tenth of government spending since the dawn of mass unemployment/Home-Owner-Ism in the 1970s.

The Tories love saying that it's one-third of all government spending - but that includes the one-fifth spent on old age pensions (a cost which could be more accurately described as "spiralling" although "drifting steadily upwards" would be more apposite).

2) Inevitably.

The main point is this though, the government gives with one hand (welfare, pensions) and takes with the other (in this instance, Council Tax).

Whatever the rights and wrongs of all this, why not just withhold Council Tax at source i.e. deduct it from welfare and pensions payments? That would save a fortune in admin costs and hassle.

The same applies to rents for social housing or whatever nominal contribution a low income or claimant tenant renting from a "private" landlord is expected to make.

That would at least throw into stark focus how much (or how little) money welfare claimants get to actually live in.

We observe the same madness with the TV licence fee:

Southwark Council has issued a mass court summons to 5,800 residents failing to pay council tax, sparking fears that rent arrears could increase in the borough as a result.

The council asked around 19,000 people who previously paid nothing to start contributing £12 per month after the government scrapped council tax benefit in April.

Why not just deduct £3 a week from their welfare or pension payments and leave them in peace? For that matter, they could just add the TV licence to everybody's Council Tax bill and divvy up the spoils between themselves afterwards.

OK, here's a plan everybody can understand

Prompted by Ben W, and bearing in mind political considerations i.e. the fact that people consider income tax to be a worse tax than VAT or NIC and pensioners do pay some income tax but little or nothing in the way of VAT or NIC, how about this for a tax shift:

1. Reintroduce Domestic Rates/Land Value Tax at 100%-ish of site premiums (i.e. rental value minus running costs and amortisation of improvements) = would raise £200 billion (this means approx. 3.5% on current selling prices).

With this extra money, we do the following (approx. static revenue "cost"/tax cut in parentheses):

2. Get rid of the usual list - Council Tax/Council Tax Benefit (£20 billion net) and all the other crappy little ones: Stamp Duty Land Tax, Stamp Duty (on shares etc), Inheritance Tax, Capital Gains Tax, Insurance Premium Tax and the TV licence fee (total £52 billion).

3. Increase the personal allowance for income tax to £50,000 per annum (£89 billion), so only the top tenth or earners pay income tax (i.e. at flat 40%).

4. Reduce standard rate of VAT from 20% to 15%. The EU won't allow you to have a lower standard rate than this, which is unfortunate (£19 billion after adjusting for corporation tax).

5. Replace Employer's Class 1 and 1A NIC (currently 0%/13.8%) with a flat 5% on all wages with no lower threshold (£19 billion after adjusting for corporation tax).

6. Replace Employee's Class 1 (0%/12%/2%), self-employed Class 4 NIC (0%/9%/2%) and Class 2 (£2.50 per week) with a flat 5% on all earnings up to £50,000 with no lower threshold (£19 billion).

So doing the monthly PAYE calculations will be a doddle, it's just be 10% of the total wage bill, half deducted from headline wages and the rest "paid" by the employer.

7. I've cross referenced it all to HMRC's tables 1.5, 1.6, 3.4 etc available from here. I won't bore you with the workings, but it all stacks up - and that is ignoring all the dynamic benefits that would flow (higher employment, more profitable businesses, much better GDP growth etc, which is the whole point of the exercise).

8. Doing the valuations is easy, it's barely trickier than the revaluations for Council Tax which would - by the Morbidly Obese One's own admission - cost less than £10 per home as a one-off cost.

9. Clearly, the biggest winners would be young families who have recently bought a home (they have the smallest homes relative to their incomes i.e. they have the largest income relative to the value of their homes), on the whole they would be £5,000 - £10,000 a year better off.

10. Most people in the middle will break even. The "hard working" will benefit, the "not so hard working" won't. Tenants will tend to win out slightly and landlords will tend to lose out. Parents with working adult children at home will be laughing, the children can pay the Domestic Rates for them instead of rent and they all live effectively tax free.

11. That just leaves us with Poor Widows In Mansions.

a. Pensioners' main residences are about one-fifth of all housing by value, so their potential bill is around £40 billion a year.

b. Total pensioner income in the UK is at least £165 billion a year (State pensions and Pensions Credit £92 billion, private/funded/employer pensions £72 billion, plus bits and pieces).

c. Seeing as nearly all of this would now be income tax free (only one or two per cent of pensioners have income over £50,000), £40 billion in Domestic Rates doesn't seem unaffordable, does it?

d. Fact is, pensioners currently pay £13 billion in income tax and about £14 billion in Council Tax and all the crappy little ones listed in para 1. So in theory, their total tax bill under this system would not actually be much higher (£40 billion instead of £27 billion).

e. As a compromise, we could cap their Domestic Rates payments at 12% of their income or something, and allow them to roll up and defer the rest.. 12% x £170 billion = £20 billion. So pensioners would pay £20 billion annually, slightly less tax than at present, and the other half would be collected on future death/sale (instead of the heirs having to pay Inheritance Tax/Stamp Duty Land Tax).
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To keep things simple and reduce distortions further, we can do the same for companies/commercial land.

Company/business profits would increase by about £50 billion, of which £10 billion would go in additional corporation tax at 20% (currently), bringing on-shore corp tax receipts to about £40 billion a year. Business Rates (pretty close to LVT) are currently just under £30 billion a year, so total tax paid would be £70 billion.

Higher rents/rental values would soak up (say) half of the additional company profits. So we can replace existing Business Rates (a low tax on total rental values) with new LVT-style Business Rates (a 100% tax on the location value only), which would bring in (say) £50 billion and we can halve corporation tax to 10% (same as two layers on NI on wages) which would bring in £20, total revenues stay constant at £70 billion.

Sorted.

Bright Idea Of The Day

From City AM Forum, on the topic of tax avoidance:

HMRC could pay all PAYE state employees on a net basis. There is little point in the state handing out money, only to reclaim it in tax.

State employees with other income could simply have their main salary grossed on their tax return, so the additional income is taxed similarly to private sector workers.

Tom Spencer

It would be a particularly good idea to move public sector workers to a net salary basis before we did our planned massive reductions in the rates of income tax/NIC, so if yer overpaid quangocrat or GP is currently paid £100,000 gross as quasi-self-employed, they would just receive £65,000 net of tax with a £35,000 income tax/NIC credit.

If we then introduced a flat rate of income tax of 20%, they would continue to receive £65,000 net, but instead of their P60 saying £100,000 gross minus tax/NIC of £35,000 = net £65,000, it would say £81,250 gross minus £16,250 income tax = net £65,000. if they don't like it, then they just get a P45 saying that instead.

Sorted.

"The Local Support Service Framework"

Emailed in by Bob E:

Ministerial Foreword

Universal Credit will make work pay – so that people are better off in work than claiming benefits. It will improve and modernise the benefit system and bring the experience of claiming and receiving benefit into line with the world of work.

And as Annex B illustrates, it really is going to be "so simple" ...

In making a claim to UC, the claimant will experience a series of key steps:
• Learn about UC;
• Create a UC account;
• Provide details for the claim;
• See likely payment amount;
• Submit claim;
• Prepare for an interview;
• Attend an initial interview;
• Prove ID
• Sign a Claimant Commitment; and
• Receive award notification and payment.

and once you have "got it":

In maintaining a claim to UC, a claimant will need to:
• Budget monthly and pay rent;
• Demonstrate “actively seeking work” (where appropriate);
• Take up work;
• Seek to increase their earnings from work; and
• Update their details.

and nor is the role that LSS's are expected to play "that big" either, and better yet, that is expressed in a totally "jargon and wonk speak free" way:

Local support services have to be focussed on delivering appropriate outcomes for claimants, communities and wider society. Although individuals will present specific challenges, and so require a tailored pathway to bring them closer to the labour market, the broad criteria for success are:
• Constructing a service that claimants, agents and intermediaries view as easy to use, easy to understand and easy to access - giving them confidence in the system;
• Helping individuals, especially those who need extra support, to make and manage a claim to UC;
• Providing a joined up and holistic support service to claimants ensuring minimum hand-offs between different agencies;
• Substantially improving work incentives and the recognition that work pays; and
• Increasing the number of people in employment when compared to the equivalent point of the previous economic cycle.

The ultimate aim of those providing services under the framework will be the creation of a “single claimant journey” from dependency to self sufficiency and work readiness, as far as is possible, behind which all service providers should be aligned. To this end DWP and delivery partners will identify specific outcomes required by individual claimants to help move them closer to the labour market and financial independence.

Can't fail, can it ?

Well duh.

The CPS got a fair bit of coverage for their report yesterday, which reminded us that "39.6 per cent of [working age] households received more in benefits than they paid in taxes in 2010/11 compared to 31.7 per cent in 1979 and 29.0 per cent in 2000/01.".

In their 'Questions for policy makers', they ask "Is there too much “churn” – taxing people and then returning many of the same funds to them in benefits?" to which the answer is almost certainly yes, but apart from that, so what?

Here's their Table 4 on original and final incomes, which is original income minus tax plus cash benefits and benefits in kind such as 'free' state education and NHS:
If you put those figures in a chart with a line of best fit, it looks like this:

So once you've done the netting off, what it all boils down to is a flat tax on incomes of 41% and benefits worth £12,825 for each household.

Now, you would be correct to argue that even a flat tax of 41% has huge deadweight costs, and that it would be far better to reduce this to a flat 20% and collect the balance with a tax on the rental value of land (perfectly do-able, as I showed at the weekend). And while there is a lot of evidence to show that allowing the state to be the monopoly provider of education or healthcare does not lead to the best outcomes, that does not mean that these cannot be funded out of taxes (via a voucher system - see plenty of European countries, schools in Sweden or nursery vouchers in the UK).

But the bold statistic that "39.6% of working age households receive more in benefits than they paid in taxes" itself is fairly meaningless.

Killer Arguments Against LVT, Not (232)

Tim Montgomerie of Conservative Home wrote an article yesterday explaining why Tories should support more property taxes if proceeds are used to cut other, more harmful taxes.

He's hardly a hard-core land value taxer - he says in favour of e.g. more council tax bands and he's happy with higher SDLT or even CGT on main residences - and he's not specific about which taxes he would cut (income tax?) but nonetheless, he gets the usual shit storm in the comments. Most of the objectors play the Poor Widow Bogey; there's a "landlords will pass on the tax"; a few "attacks on wealth"; a "double taxation" or two and a smattering of "Tories should be cutting taxes not increasing them".
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Nothing new here, all easily dealt with, in fact, we can do all of these in one fell swoop...

... let's not bother collecting Land Value Tax at all. Let's just replace all taxes with a single, flat income/corporation tax at the revenue maximising rate of about 60% (this is hardly more than the current average tax rate on income of about 52% - there are lots of people with a much higher tax rate than that who still go out to work or run a business), no deductions and no tax breaks except the one outlined below. In theory, that would raise about £600 billion a year, much more than the government needs (before we factor in the 'cost' of the tax break).

Poor Widows In Mansions don't have much income so wouldn't pay much tax; landlords can't pass on tax paid by their tenants (and nobody has advanced the thesis that landlords pass on their own income tax, unless they are idiots); it's not an "attack on wealth" in these people's eyes because - apparently - your earning capacity and your earned income is not wealth; and even though in practice taxing incomes is double taxation (and LVT is not), these people don't appear to consider it as such.
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That leaves us with the objection that the government should be cutting taxes on work and enterprise (and rightly so), which requires one simple tax break....

... we cap each business' corporation tax liability at whatever its liability under full-on LVT would be (i.e. double what they currently pay in Business Rates), so three-quarters of businesses would pay nowhere near 60% tax, it would be more like 20%.

... we cap each household's total tax liability at whatever its tax liability would be if we had full-on LVT and an equal and opposite Citizen's Dividend/personal allowance. About three-quarters of households would benefit from the cap* and most of those will end up paying a lot less than all the taxes they currently pay, directly or indirectly.

This would reduce the overall tax take, net of Citizen's Dividend to roughly the right level (£200 billion a year? This is a thought experiment not a maths lesson), and if we have to cut spending to match, then I'm sure all those Poor Widows In Mansions will be only too happy to do without old age care, free NHS treatment, bank bail outs and so on, as long as they can keep their cherished memories etc.

* Let's take a home at the bottom of the top decile by value, which is currently worth about £280,000. The LVT on that at (say) 7% of its current value = £20,000 from which we deduct an 'average' working age household's Citizen's Dividends. 1.9 adults @ £3,500 + 0.7 children @ £1,750 = £7,525, giving this household a net tax bill of £12,500. A household which can afford to buy a house for £280,000 with a mortgage must be earning about £56,000; to be in the top decile by income, a household has to earn something like £80,000. Such households are currently paying massively more than £12,500 in publicly collected taxes (and a shedload more in privately collected taxes, if they bought their house in the last seven or eight years), so they're happy.

If a household in such a home only has taxable income (however defined) of £10,000, then they pay £6,000 tax, of course. The break-even point for being better off under the new improved system is where a household's income is about one-tenth of the current value of the house they live in; so a household earning £28,000 or more in a top decile house will be better off under these rules.

The tax bill for an 'average' working age household in a median home currently worth £150,000 would be capped at about £3,000, which equates to an average tax rate of about ten per cent of their earned income, scarcely worth worrying about.

Granny Tax 2: Storm In A Teacup

There's a splendid bit of misinformation in The Daily Mail:

Advisers to George Osborne are calling for a new ‘granny tax’ that will fuel public anger at the Government’s treatment of the elderly. The Chancellor will be presented with plans to tax the basic state pension at source which could leave many pensioners with a cash flow problem.(1)

Some six million pensioners pay tax. But the state pension, which has just risen from £102.15 to £107.45 a week, is currently paid before tax is deducted.(2) The Office of Tax Simplification (OTS), which advises the Treasury on tax matters, is calling on the Government to take tax when the state pension is paid.(3) That would reduce it for those paying basic rate tax to £85.96 a week and to £64.47 for those on the 40 per cent rate.(4)

1) Nope, deducting tax at source (to the extent that this is mathematically possible) will make life a lot easier and if anything it will ease cash flow problems.

2) The current rules are that the basic and second state pension is paid gross. It counts as taxable income and so uses up the personal allowance. I don't know if the full basic state pension plus maximum SERPS/S2P can ever exceed the personal allowance of £10,500 or more (it is a while since I've done a pensioner's income tax return) - for nine of ten, the state pension will be less than the personal allowance so no tax could or would or could be deducted. If the total state pension is less than the age-related personal allowance is then offset against other regular pension income (via the PAYE code used for that other pension) or can be claimed on a Self-Assessment tax return if the pensioner has other income with tax deducted at source.

3) I've skim read the OTS review of pensioners' taxation and see no mention of it, but maybe it came up in conversation.

4) Nope, see (2). If somebody had £11,000 a year total state pension, then the excess of a few hundred quid above the age-related personal allowance would have 20% tax deducted. So a £210 a week pension would have about £2 a week tax deducted, somebody with a pension of only £107 a week pension would not have any tax deducted.
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They're still doing it all wrong.

a. IDS has come up with (well he nicked it off me and I in turn nicked it off the Lib Dems, long story) the bright idea of a Citizen's Pension ('CP'). Good start. That's the government giving pensioners money, nice and simple. Then along comes the government, in the form of the taxman, and takes some back. Can't the two departments or ministers concerned have a little chat and iron out their differences?

b. Surely it cannot be beyond the wit of mankind to align the CP with the age-related personal allowance ('APA'), so that every pensioner gets the CP paid gross, no tax deducted and all other income (mainly bank interest, ha, and other pensions) just have 20% tax deducted at source - but without a significant number of pensioners ending up better or worse off?

c. For example, if the CP is increased, that costs the government money £1 for £1 paid out; if the age-related personal allowance is reduced, that saves the government money 20p for every £1 of reduction. So instead of a CP of (say) £7,500 per annum and an APA of £10,500, they could have a CP of £8,000 (so every pensioner gets extra £500 a year) and an APA of £8,000 (so wealthier pensioners have an additional £500 extra basic rate tax deducted at source). Poorer pensioners end up a bit better off and wealthier pensioners end up the same.

d. While we're at it, let's get rid of the residual savings rate band of 10% and the 30% stealth rate band for pensioner income between £25,400 and (about) £30,000. Scrapping the 10% band would mean a few people with a low-ish pension and quite a lot of interest income lose up to £271 a year; scrapping the 30% stealth band would mean a few people with pretty decent pensions would gain up to £240 a year. The two cancel out, and seeing as pensioners at the bottom end are £500 a year better off from c, I see no need for any further measures.

e. Finally, let's get rid of the age-related married couple's allowance where one spouse or civil partner was born before the Canadian science fiction writer Douglas Arthur Hill while we're at it, which is an extra £296 a year (or up to £770 if you are in some bizarre marginal rate band). That figure is per couple, so also not worth replacing with anything.

f. Again, there will be squealing and wailing involved, but it's a one-off thing and people will get used to it, let's round things off by rounding up the CP from £8,000 to £8,105 per person, to align the CP/APA with the normal personal allowance of £8,105, then even better. If the whole exercise ends up too expensive, then we can just scrap the winter fuel allowance or free TV licence, free bus pass or something to keep it fiscally neutral.

g. It will save the Chancellor the hassle of announcing all the updated amounts for the state pension and the personal allowances and bands separately, he can just increase the general personal allowance, and the CP/APA moves up in line; and very few pensioners will have the hassle of doing a tax return.

NOW That's what I call simple!

Emma Boon on top form

Emma Boon of the TPA, who waste most of their time bleating about Council Tax talks sense in today's City AM Forum:

The national insurance fund is little more than an accounting fiction. The government is already consulting on moving to a flat rate pension and qualifying years for that benefit could as easily be assessed on number of years paying income tax as number of years paying national insurance...

... transparency is fundamentally a feature of this tax reform, not a bug. If the real basic rate is 40.2 per cent, not 20 per cent; the real higher rate is 49 per cent not 40 per cent; and the top rate is 57.8 per cent, as the Centre for Policy Studies has suggested, then it is better people should know that than be misled into thinking they are getting a better deal than they actually are. An honest tax system would mean a better-informed public debate and could even improve industrial relations.

Lengthy, but well worth a read.

Cunning Plan # 9,837

Ho hum, I like to muse on different topics simultaneously, and every know and then, I manage to join the dots...

Exhibit One

With longer life expectancies, we are going to have to increase the state retirement age. But as the PPI pointed out (in 2003): "The gap in average life expectancy at birth between manual men and non-manual men is 3.5 years; for women it is 2.8 years". So increasing the retirement age by three years would, for example, reduce the amount of pension collected by blue collar workers by a larger fraction that for white collar.

I'm a simplification campaigner, so I believe in having a Citizen's Pension, call it £8,000 a year for sake of argument, with the same retirement age for men and women, but this doesn't address the difference in life-expectancy.

Exhibit Two

The whole question on who should pay university tuition fees - the students themselves (to be repaid with an ugly mixture of interest and higher tax rates) or the taxpayer in general (education is a merit good, borderline public good)?

It appears that universities operating in a free market would charge around £8,000 a year, i.e. that's the price they can charge and the price which covers their running costs per student.

Exhibit Three

Who should pay for student's living costs - the students themselves (again, via stupid loans collected by charging them a higher tax rate as above) or the taxpayer generally?

Again, as a simplification campaigner, I believe in scrapping all these separate benefits, like unemployment benefit, incapacity benefit, New Enterprise Allowance, statutory maternity pay, tax credits, even the tax-free personal allowance and replacing the whole lot with a Citizen's Income, which for working age people would be £4,000 a year for sake of argument.

Cunning Plan #9,837

How about reducing tuition fees by half, to £12,000 for a three year course, which is a perfectly manageable sum for qualified students to pay off, by working part-time, cadging off their parents, taking out a short term loan from a bank etc, and the taxpayer funding the other half - but as a quid pro quo, people who have enjoyed a university education (whether they benefit from it financially is their problem, not mine) have a retirement age which is three years more than those who haven't?

In other words, they get an extra £4,000 a year from the taxpayer for three years when they are young (towards their tuition fees), but when they are old, they can't shift from Citizen's Income of £4,000 a year to £8,000 a year until three years later, so they lose the same amount later on?

This is the sort of thing you can apply retrospectively, i.e. the government could merrily announce that the retirement age is to be increased to 66 by 2016. After that, they could announce that the retirement age for people who studied at the taxpayer's expense (i.e. before 1998) are going to have a retirement age of 67,68, 69 and so on, but non-students can stick with a retirement age of 66 for a much longer period.

At first, this will only affect a few people, because decades ago, only a tenth of people went to university, so the overall effect will not be very dramatic.

Disclaimer: yes I did go to university, I've got two degrees, I contributed towards my fees (long story) and I didn't get a student grant but it was still clearly being subsidised, so if they slap me with an extra three years before I can claim my pension, I'd be willing to accept that as some sort of rough justice - all I'd be losing is £12,000 difference between CP and CI (which is a small fraction of the extra I've earned because of having been to university).

Westminster Council adopts an idea from UKIP's Welfare Manifesto

From our Welfare Manifesto (2010 version, pdf)

6.5 UKIP therefore recommends that social rents be set at a single inclusive figure (rent plus Council Tax, net of notional Council Tax and Housing Benefit) calculated at around 20 per cent of each household’s gross income: This would ease the poverty trap for the most needy; social tenants on very low incomes would keep 49p for every £1 earned (assuming a flat tax rate of 31%) rather than 4.5p as at present.

It would also encourage households on higher incomes to move into the private rented sector or owner-occupation, as above a certain level of income, the social rent they are paying would be higher than a comparable rent in the private sector or the cost of a repayment mortgage. This may seem unfair, but it is exactly these households who will benefit most from UKIP’s proposal to double the tax-free personal allowance, so taking the two measures together, very few households will lose out.

The preceding paragraphs 6.1 to 6.4 are worth a read if you want to see the workings. I explained how the extra 'about 20%' could be collected with the minimum of administrative hassle by using K-codes for PAYE on my 'blog here (scroll down a bit to the section beginning "Here's my crash course in the existing PAYE system").

Lo and behold, from yesterday's Daily Mail*:

Conservative-led Westminster Council has asked Government for new powers to introduce a sliding scale which would link social housing rents to incomes. The move comes after the council found it had 2,200 social housing tenants earning more than £50,000-a-year, and more than 200 on over £100,000...

Many of those on £100,000 or more were paying rents of £97-a-week for a one bedroom flat, or £110-a-week for a two bedroom place, said Mrs Roe. She said a new formula should be applied which would see tenants paying 35 to 40 per cent of their net income on accomodation, the national average.

They say 35 to 40 per cent of their net income, we said 20 per cent of their gross income, which comes to the same thing in £-s-d, only 20 per cent of gross income is far easier to calculate.

From the point of view of the council, there must be a revenue maximising point; i.e. if they set the rate too low then they won't get much rental income and much longer waiting lists; if they set it set it too high then they'll discourage out of work and low earning tenants from earning more and you'll lose all your better earning tenants.

Sure, there may be some middle to higher earners who would end up paying above market rents on the place they're in in the short term, but - even if they don't move out - the advantages to them are:

a) The council will be more inclined to upgrade them if a nicer council house or flat becomes available, and

b) It's like unemployment protection insurance with a mortgage; you overpay while you are still working, but if you lose your job, take a pay cut or retire and draw your pension, then you get your money back.

c) It's got to be better than being turfed out entirely, as the Tory government has vaguely suggested, a strategy with pretty obvious unintended consequences...

d) The local council will then give preference to people on the waiting lists who have jobs, so you'll probably end up with nicer neighbours.

* Spotter's Badge, MBK.

Reader's Letter Of The Day

From the FT:

... it is worse than that: the economics profession is not even sure how expansionary an expansionary fiscal policy is, because of crowding out. This would be funny if the consequence were not millions of homes repossessed worldwide and lives wrecked.

I suggest that the solution to this farce is to abandon the distinction between fiscal and monetary policy, as advocated by Modern Monetary Theory. Under this regime, government simply creates new money and spends it (and/or reduces taxes) in a recession.

Conversely, when inflation looms, government reins in money via extra tax (and/or reduced public spending) and “unprints” it, or extinguishes it. As to government debt, that becomes near irrelevant: it can gradually be whittled down to near zero and be left at that level.

Ralph Musgrave, Durham.
------------------------------
Phew! So it's not just me who thinks that the distinction between 'fiscal policy'* and 'monetary policy'** is completely artificial.

Ralph's longer summary of Modern Monetary Theory is here.

* Which in turn relates to two barely related areas, i.e. tax decisions and spending decisions.

** Setting interest rates in order to control money supply and/or controlling the money supply to influence interest rates, with a vague hope of controlling inflation.

Killer Arguments against LVT, not (114)

Sobers again, who launches the occasional 'sophisticated' argument in favour of taxing incomes and against taxing land values...

"I think I have conclusively proved that incomes ARE intimately linked to the type, size and level of sophistication of society, and as such, IMO, are perfectly fair game for taxation."

1. Yup, it is indisputably true that "incomes ARE intimately linked to the type, size and level of sophistication of society", so seeing as taxes are raised to pay for things which are of benefit to that self-same society, would it not be nice if we could just tax (a) the extra incomes which arise because of "the type, size and level of sophistication of society", rather than taxing (b) truly 'earned income' (i.e. that which owes nothing to "the type, size and level of sophistication of society") or those incomes which are required to pay for the basic essentials (however defined)?

2. Methinks yes - it's just a question of somehow splitting gross incomes up into (a) and (b). This could easily be done on an intellectual level, but actually working out the split for each worker or businessman and each type of income would be administratively impossible and subject to far too much guesswork (how would you deal with overtime, for example?).

3. Luckily - there is absolutely no need to look at individual incomes, as the land market carries out this split for us: all (or nearly all) income in excess of (b) goes straight into higher land values, i.e. (a). We know that human beings are more or less the same in terms of innate abilities etc in all parts of the UK, and we have free movement of people within the UK, so the only explanation for the massive differential in gross incomes must be different levels of "sophistication of society" in different areas (be that transport infrastructure, or the fact that some industries have died off and others become more important, better schools in some areas than others etc).

We can easily illustrate this by looking at actual figures for average incomes and average house prices (or rents) in all local authority areas and there is a very high correlation - you can guesstimate the average price of a semi by deducting a 'personal allowance' of about £7,000 from the average wage and multiplying it by 10, for example; or if you want that expressed in terms of rental values, it's average wage minus £7,000 times forty to fifty per cent (sure, for a two earner household, the rate is twenty to twenty-five per cent).

4. Income tax (and National Insurance, and indirectly, VAT) are calculated in exactly the same manner, so people are paying two kinds of income tax; official income tax paid to the government and privately collected income tax on the extra value generated by "the type, size and level of sophistication of society".

5. So as a matter of simplification, would it not be easier to roll the two into a Single Tax on land values, which collects the same amount of money from the same people, while preventing the 'private state' from siphoning off a large chunk, by simply taxing rental values (or their close proxy, house prices), thereby reclaiming for 'society' exactly that which Sobers agrees was generated by 'society' and is thus fair game for taxation?

Google Doc's - Residential Land Valuations

For future reference, I have set up my spreadsheet on Residential Land Valuations as a Google doc so that anybody can access (but not edit) it.

I took the average price of a semi-detached house in all the local authority areas of England, Wales and Northern Ireland from the BBC website (as at a couple of months ago) and filled in some estimated rows for Scotland.

At the bottom, (Row 391) I typed in the amount of tax revenues that would be required to replace all existing taxes that relate to wealth generally or residential land and buildings specifically* (£40 billion); the number of acres of residential land in the UK (2.1 million) and arrived at the tax rate/sq yard/year by a bit of multiplying and dividing.

So if you want to work out your LVT bill on Day One of my brave new world, you just have to look up find your local authority area (some may be missing), multiply the tax rate in the right hand column by the size of the plot on which you live, divide it by the number of dwellings on that plot if you live in a block of flats, and hey presto.

* In descending order: Council Tax less Council Tax Benefit, Stamp Duty/SDLT, the TV licence fee, Capital Gains Tax, Inheritance tax, Insurance Premium Tax, non-dom levy.

FOR CLARITY: I mean getting rid of Stamp Duty, Capital Gains Tax, Inheritance Tax and Insurance Premium Tax on everything (shares, cash, paintings, cars, whatever) not just to the extent that they relate to land and buildings. As long as we have income tax, we need CGT purely as an anti-avoidance measure to prevent people turning taxable 'income' into tax-free 'capital gains'. CGT was never intended to raise much in tax from actual capital gains (and in practice it doesn't).