Mark Wadsworth

This is a spare 'blog in case my main 'blog at markwadsworth.blogspot.com isn't working

Killer Arguments Against LVT, Not (133)

The ever reliable Sobers went to the trouble of putting some figures on the number of people who might want to move if we replaced ALL taxes on wealth, income, profits etc with LVT. I think he double-counted, it would be 25%, not 45%, but hey, and he concluded with this:

… what do you do to people who have their house on the market but can’t sell it, but don’t have the income to pay the LVT? Bankrupt them and sell their house for a pittance and throw them on the street?

1. On a practical level, there is no urgent need to sell, as by definition, the LVT will be always rather less than the rental income you can get from that home, so even taking mortgage repayments and letting agent fees into account, each home (or at least, all but 1% which are in a terrible state of repair or have an extravagantly large garden in an expensive area) will still generate some net income for the owner. For the owner, it is then just a question of renting somewhere which he can afford out of the net rental profit from his old house, his earned income and his Citizen’s Income.

2. Further, as matter of principle, the selling price of houses will never fall to ‘a pittance’, because LVT is only a tax on the rental value of the location; if the tax on a house were so high that it depressed the selling price to lower than the replacement cost/value of the bricks and mortar, then it is clearly too high; it would be as daft as having an income tax rate of more than 100%. The idea that LVT would so depress selling prices is no more an argument against LVT than the argument “If we had income tax, a government could increase the rate to more than 100%” is an argument against income tax. In either case, I’ll assume that while the government is greedy it is not insane.
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But I accept that the ‘transitional period’ will be a bit icky, so, as a thought experiment – and not as a serious policy proposal – how about this for a short, sharp transition (glossing over the fact that these things all take time), all figures are annual figures.

Year One, Day One; Government replaces entire welfare system with a Citizen’s Income (£1,800 for kids, £3,600 for working age adults and £7,200 for pensioners, let’s say, which is well within current spending limits).

Day Two: Government abolishes ALL taxes (except petrol, booze and fags duty; a bank asset tax and income tax on public sector pensions and pension which have received tax relief ‘on the way in’ and Business Rates), repeals all other tax legislation and destroys all historic tax records. This leads to a revenue shortfall of about £320 billion (workings here).

Day Three: Government tells people there will be one year’s, tax free breathing space, but that starting in Year Two, full-on LVT will payable, which will raise that missing £320 billion, publishes the rates for each postcode sector and send every homeowner (or landlord) an assessment so that he knows what LVT will be payable. The LVT on the cheapest houses, smallest flats will be a one or two thousand pounds; the average will be about £12,000 per annum (so two thirds will be less than that); and tax on a house at the top of the ninth decile will be £24,000 (without any upper limit, but these lofty heights need not concern us).

Day Four: Government mentions, as an afterthought, that in Year Two, the universal Citizen’s Pension will be doubled to £14,400 per year per pensioner.

People then have twelve months to plan their next move.

i. Half of all households will notice that the jump in their net pay, plus their household’s Citizen’s Income or Citizen’s Pension, plus the fact that stuff in the shops is now much cheaper, is more than enough to cover the LVT on where they live and they come out ahead. (By and large, people’s disposable income will double).

ii. Half of that half (i.e. a quarter of households) will realise that they’d be so far ahead of the game that they’d be able to afford to trade up, and will start saving up a bit of cash for the new furniture and perusing the ‘homes for sale’ and ‘homes to let’ pages, taking care to note what the LVT bill for that house will be if they intend to buy it. There are plenty of young couples who have delayed starting a family, who’ll want to trade up from the flat they currently live in, and never underestimate people’s urge to keep up with the Joneses!

iii. A quarter of households would be in a break even position and will come out plus/minus no better or worse off, are basically happy where they are, and these need not concern us further.

iv. A quarter of households will work out that it would be difficult for them to scrape the money together to pay the LVT, although a pensioner couple due to receive £28,800 a year between them would still have plenty of choice, and so they start looking to trade down.

Over the next couple of years, the up-sizers from group ii. will swap places with the down-sizers from group iv. Sure, that’s about six or seven million households, but for young people this is no big deal, they’ll just have to muck in a bit if their own parents or grandparents want to downsize (and why wouldn’t they? Why would they want their potential inheritance to be swallowed up by LVT?).

So that’s two or three million sales/purchases a year for two or three years, depending how quickly people respond, which is perfectly do-able; at the height of the house price bubble in 2007 there were nearly two million sales/purchases, so if removal men get used to working every day of the week and not just Fridays, it can be done.

Hey presto, problem solved. Apart from the one-off tax shortfall of £320 billion from not raising any taxes at all in the transitional period, that’s only a fifth of the accumulated public sector debt which the Tories plan to have by the end of this Parliament.

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