Mark Wadsworth

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

X/Y times Y = X (Part 2)

Sobers, commenting on part one:

If you recalculate the LVT rate in year 2 to 10% to get the same amount of income, what will happen? The people at the bottom of the pile will see their gains eroded and many will tip into losses. Those at the top will be even greater losers and thus have even greater incentive to sell their houses thus reducing the price. The house prices get pushed into a smaller and smaller band in the middle (because most incomes are in that middle band) and thats where the majority of the LVT burden will eventually fall, on the same people tax does now, the masses.

As I explained in the footnote, LVT is a tax on rental values and what Sobers thinks will happen will not happen to any great degree.

Let’s boil all UK houses down to two sample houses, one Up North in a low wage area costing (presently) £100,000 (HUN) and one Down South in a high wage area costing (presently) £200,000 (HDS). The main reason for the difference is because the higher net wages bids up the price of houses Down South (there is a very close correlation between wages and house prices).

So the rental value of HDS is clearly (say) £4,000 a year more than the rental value of the HUN, which is because net wages are (say) £5,000 higher Down South. And with a marginal tax rate of about fifty per cent, that means the person buying or renting HDS is paying £9,000 more in [rent + tax].

Let’s say in Year One, the tax on the house Up North is £8,000 and Down South it’s £16,000 and all other taxes are scrapped. What happens if Sobers is right, and the HUN rises in price to £120,000 and HDS falls to £150,000?

Answer: not much.

In Year Two, our required tax take from those two houses ‘X’ is still £24,000, and the tax base ‘Y’ is now as follows:

HUN: [selling price x 5%] + [current LVT bill] = £14,000
HDS: [selling price x 5%] + [current LVT bill] = £23,500
Y, total tax base = £37,500 (rental value, not selling prices).

So X/Y now becomes 64% (£24,000 ÷ £37,500)

The tax on HUN is adjusted to £14,000 x 64% = £8,960
The tax on HDS is adjusted to £23,500 x 64% = £15,040.

We see that because it is a circular calculation, in Year Two, despite the large change in relative prices, in absolute terms, the tax on HUN goes up £960 and the tax on HDS goes down £960, and so on every year in ever smaller increments, because people will anticipate the changes

Now, let’s also focus on the difference in the total tax bill; if you live Down South, in Year Two you are paying £6,080 a year more in LVT than the bloke in HUN. Under current rules, you would be paying £9,000 more in [tax + rent], and that balance of £3,000 (in round terms) will still feed into a higher rent receivable by the landlord of HDS, clear of all taxes, which, capitalised at 4%* still means that HDS will be worth £75,000 more than HUN – so it’s clear that the difference in price between HDS and HUN would not fall significantly.

* I used 4% for consistency with the example above; you could just as well argue that the current 4% discount rate is the discount rate applied to income before (say) an average 25% income tax is deducted from rental income, so if £4,000 gross rent (net £3,000) is worth £100,000 capitalised, that £3,000 gross-for-net rent is still worth £100,000 capitalised, and the price differential between the two houses will barely change.

It’s all very simple, really. As a general rule, not much will happen apart from some people trading down and others trading up.

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