Wednesday, April 6, 2011

Tax is for the little people

Britain's housing market, distorted

"Just in case, during the last couple of weeks, the property well-endowed needed reminding that things could be worse on the tax front, the permanently off-message Vince Cable managed to drag the subject of a “mansion tax” back into the headlines before the budget had even been digested. Surely he couldn’t be serious. Anyone with even a casual experience of the property market knows that – particularly when volume’s so low, and especially at the posh end of the market where property prices depend on the right tycoon walking through the door on the right day – the valuation process contains too much hocus pocus to make it a fair basis for annual taxation."

Posted by mark wadsworth @ 01:12 PM (2796 views)
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37 thoughts on “Tax is for the little people

  • “the valuation process contains too much hocus pocus to make it a fair basis for annual taxation.”

    So reform it.

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  • mark wadsworth says:

    Valuations is a doddle, in order to replace Council Tax, IHT, SDLT, TV licence and so on, the required rate could simply be set at £x/sq yard of land per year, with a different rate for each local authority.

    My spreadsheet says the rate would start at about £1.50 in Blaunau Gwent, the typical median rate would be about £2.40 in e.g. Swindon, rising to about £40 for Kensington and Chelsea. In my commuter suburb of London it would be about £7.

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  • I can’t see any case for a mansion tax or LVT, for that matter. The vast majority of British people would recoil in horror at the thought of LVT, so there comes a time when you have to accept the will of the overwhelming majority, whether you agree with them or not. Why tilt and windmills?

    I would leave things exactly as they are with two exceptions. I would introduce capital gains tax for private property sales and I would tax empty land/property at the same rate as fully utilised property. At a stroke, BTL and property speculators would be dealt a mortal blow and there would be no more under-utilised land or buildings. The majority would probably still vote against it but it would be a much more realistic sell than LVT. Most countries have a capital gains tax on private property sales, so it is not such a leap

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  • mark wadsworth says:

    Flash: “The vast majority of British people would recoil in horror at the thought of LVT”

    I am acutely aware of that, actually.

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  • Mark: I know that you know that. Would my simple tweaks achieve a good portion of what you want, without you being the cause of the nations recoil?

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  • mark wadsworth says:

    Flash: “I would introduce capital gains tax for private property sales (a) and I would tax empty land/property at the same rate as fully utilised property.”

    Each to his own, but you’re not going to be elected on this ticket, are you? Can’t you hear them now

    a) “But I paid for that house out of taxed income. It’s unfair to tax me again. How are people supposed to build up capital if the greedy government keeps confiscating it? It’s not my fault that house prices went up – blame Labour’s immigration policy and feckless council houses mothers. We have to restrict housing supply to preserve the Hallowed Green Belt for the benefit of future generations or else they’ll all starve to death. It’s my pension/my kids’ inheritance” (Continued page 94).

    b) “But if I rarely visit my holiday home on the South Coast, why should I pay any tax at all? I’m not using any local services. if the government wants empty properties to be brought back into use then it should pay the owner to renovate them”

    So I’d rather be a miserable electoral failure on the basis of a full-on Georgist policy as be one on the basis of something half-hearted.

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  • MW, I’m sure the libdems said that at one point 😉

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  • nobody likes being taxed. The government keeps trying to please all of the people all of the time but inevitably just p1sses them all off. The government have to impose taxes, nobody is going to like it, so the best case scenario is that they impose fair taxes. LVT is still the sensible option. Ok – there might be riots, but what the hey.

    And besides, surely basing teh LVT tax on the price that a house sells for, and an adjusted price based on annual land registry data thereafter, solves the problem. Everything we might need to implement – all of the difficult part of calculating a houses worth – is already done? Nobody is going to convince me that there “just aren’t enough indices tracking the cost of houses”.

    Vince cable needs to team up with MW, buy a couple of F-ing great big guns, and start removing some of the clagnuts that are getting in the way of LVT. That’s my opinion any way.

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  • mark: They are far more anti taxation in America but they still pay capital gains tax on their private property. If they can get away with it there, then we can surly get away with it here.. especially when it would allow a small reduction in income tax, across the board.

    inbreda: If the imposition of LVT caused riots then a government would be voted out at the first opportunity and a new government would repeal it.

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  • @ Flash. As you know, I think CGT on first house is actually only fair. Why should all other investment be taxed – and not the GAIN on a house?

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  • mark wadsworth says:

    Flash, OK, all the super-wealthy people in Mayfair are going to go marching because I’ve scrapped council tax, inheritance tax, stamp duty, non-dom levy of £30,000 per person per year etc and they’re now paying £5,000 LVT on their penthouse? And the two thirds of people who are now paying less are going to be rioting because…? Why exactly?

    I think I can manage without the votes of poor widows in £1m mansions in Hampstead in the London Borough of Camden who will be asked to pay £20,000 a year – surely their heirs can work out it’s a lot less than £300,000 Inheritance Tax and £50,000 when she pops her clogs.

    Rates from here

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  • “and a new government would repeal it.”

    no they wouldnt. They would get voted in because they would promise to reppeal it. But as pathological politicians this would make it seemingly physically impossible to subsequently do so.

    Besides – I don’t think there would be riots. Not if it was marketed properly.

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  • Agree re CGT on main residences; they should have done this a decade ago. Very little room for argument given that it is based on a real transaction.

    Sorry MW but I don’t agree with you saying that basing LVT purely on square footage would be fair; actually I think this would be monstrously unfair. You can find giant discrepancies in the values of similarly-sized properties in any London borough; your proposal would harmonise these people’s taxes, which is completely unfair.

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  • mark: The riots were suggested by inbreda. I don’t think it would remotely get that far because it’ll never make it past a white paper.

    You said earlier that you were acutely aware that people would recoil in horror at the thought of LVT, so I don’t see why you are suddenly hinting that it would be acceptable to the majority (including Mayfair bints etc).

    Btw, who are the one third of the population that would end up paying more? Is that one third of the actual population or one third of adults/voters?

    I would suggest that some of the suspicion is caused by the supporters of LVT. Many of them are suspected by the public of being purely motivated by wanting to take a bit of cash off people who’ve got more than them. I’ll bet some of the declared LVT supporters couldn’t string more than two sentences together on the subject but they sure do like the sound of taking some rich buggers wad. Maybe it’s a bit like religion, where the followers are all evil buggers (yourself excepted) but the original text is well intentioned.

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  • mark wadsworth says:

    Pele, sure, as the tax increases to replace other taxes it would have to be a bit more scientific, the geographical sub-division would get smaller and smaller until we have a separate rate for each local authority ward, or postcode sector or street or individual plot, see if I’m bothered.

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  • mark wadsworth says:

    @ Pelethar, further, I’m not sure what level of petty-mindedness we are working on here. Say your council tax plus TV licence is currently £1,500 and you’re LVT goes down to £1,200. Are you really going to whine because your neighbour’s bill has gone down to £1,000 because his garden is smaller?

    @ Flash: “Btw, who are the one third of the population that would end up paying more? Is that one third of the actual population or one third of adults/voters?”

    The people for whom LVT is more than Council Tax plus TV licence. Where I live I’d be all of £400 a year worse off, boo hoo, and my local authority is in the ninth decile. So maybe it’s even less than a third.

    You have to contrast that extra bit of tax with the fact that there’s no IHT. I’d happily pay an extra £400 a year if I knew IHT was scrapped to be honest.

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  • Would I find it objectionable that one person was paying £200 a year more in tax than his neighbour because his garden is slightly larger? You’re damn right I would. The guy with the smaller garden could have a house worth double his neighbour’s and be far better off. Sorry, but your system is just far too unsubtle. The entire thing is founded on the supposition that you would make gigantic savings in administration costs by eliminating the other taxes, the scale of which would outweigh any increase due to the crudity of the new system. Personally, I think that’s too much to take for granted.

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  • mark wadsworth says:

    pele, If the guy with a small garden’s house is worth double that of his neighbour’s, we can safely assume that is because HE HAS A BIGGER AND NICER PHYSICAL BUILDING on his plot.

    The whole point of LVT is to tax the LAND VALUE (the clue is in the name) and NOT the value of the bricks and mortar thereupon. If the guy with the big garden removes his static caravan and builds a block of flats, then his tax changes not one iota, so each of the six families in the block of flats pay one-sixth of what he was paying.

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  • Pelethar: its land than needs taxing not whats built it. It all boils down to the fact that land is finite so those that hog more than their fair share should pay more. If a blok with 5 flats is built on the same sized plot as 1 sprawling bungalow with apple orchard then each flat owner would pay 1/5th as much as the bungalow owner.

    But heres the rub: those who have long understood that the property game is simply a big game of Monoply have directed all their efforts into getting ahead by owning (more and more) property. Having established an advantage over those who have been too lazy or too stupid to do the same, they’ll fight tooth and nail to ensure the rules arent changed to undo all of their hard work.

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  • 19. greenmind,

    Good lad!

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  • shipbuilder says:

    I think LVT would simply be sold to the electorate on its benefits – introduce a land tax, reduce income tax and other taxes accordingly – you get to keep what you produce. The problem with it is that it has never been discussed or explained properly – too many VIs wanting to keep it away from public minds. Actually I think that it’s inevitable – fairness and logic always win through eventually, sometimes when people see it for themselves, sometimes when the truth becomes impossible to avoid.

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  • I think Marx had a good handle on LVT. He thought that it was an obsessive “ground rent” dogma that was was far too simple to do the job. I think he was right then but he’s even more right now because it was devised at a time when the welfare state didn’t exist and government was much smaller that it is now. It could not handle the intended load now without loads of tweaks, additions and exemptions, which is anathema to the intended simplicity of the concept.

    Don’t get me wrong, I approve of the aims of LVT but I am absolutely certain that the complexity and size of todays government/society renders it inadequate to the task. The reason that it will never happen in this country is not because because it is unfair or undesirable. It’s because it is an anachronistic oddity. Most advocates of LVT are not advocates at all. Push and prod them a bit and they will invariably agree that this and that minor change would have to be made. If there are any alterations at all, then it is not LVT, as George meant it to be.

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  • @17 pelethar

    To put a litte more flesh on the bones of my original comment.

    In the absence of any genuine and more equitable reform, the country needs a more transparent and reflective system of property valuation. The RICS red book has, by and large, been a secretive entity which must be very bizarre, by now, given the disparity of prices quoted for dwellings which are effectively the same.

    A proposal:

    An asking price is quoted based on the following checkable going rates:-

    1. Land value. (The official total value of square footage according to the Land Registry). This to include the area of land on which the building stands.

    2. Rebuild cost. (The cost of all materials and labour at the prevailing price) For the total square footage of living space.

    3. EPC. A premium is applied for ratings above C50, a discount applied for ratings below it.

    4. Condition. This would require a ‘condition report’ prepared by a qualified Surveyor using a grading system similar to an EPC, and with reference to minimum DCLG guidelines for basic standards (would require new legislation). From this, a premium or discount can be applied.

    Each of the breakdown valuations must be quoted as a sub of the whole.

    Subsequently the Land Registry must show the difference, on completion (via the TR1), of the ‘Fair Value’ price and the price paid, This can be applied with a simple + or – figure on the report.

    Each time a property is proffered for sale, the EPC and condition report is updated to reflect any improvements (or degradations) between sales. This acts to bring the fair value price up or down according to current conditions.

    Furthermore, as land and rebuild costs are calculated at the time of listing, they will automatically take account of inflation (or deflation).

    The rest is determined by Buyer/Seller negotiating power; money supply and credit availability.

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  • mark wadsworth says:

    Flash, Marx was wrong about most other things as well, so I’m not sure that proves anything.

    As a matter of fact, Georgism has been tried to a greater or lesser degree in most countries and quite simply it ‘works’, what we say will happen simply happens. Look at Business Rates, for example, which is so close to LVT as makes no difference – do you think our economy would do so much better if they scrapped it and adjusted corporation tax up to 50% to make up the shortfall?

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  • Your business rates comment proves my point. Business rates exist side by side with a host of other taxes and policies because on their own, they are inadequate to cover the complexity of a modern system. You say ‘most’ countries have tried LVT? I don’t think thats true. Very few countries have tried it in its true and pure form. ‘Some’ countries have tried it in conjunction with other taxes and policies which of course means that that didn’t try it at all. However the most important word is “tried”. If it had worked for them you would have been able to say something more positive than ‘tried’. If they only tried it, then it implies that it didn’t work for them. Over the years you have conceded that many adjustments and tweaks would have to be made. You are not therefore a true advocate of LVT. The aims of LVT are noble but by the implicit admission of most of its advocates (they readily admit that it needs tweaks and additions), it is not up to the job. It needs to be rebranded and redefined before it is fit for purpose. As it stands, it is just an overly simplistic dogma and an overly simplistic dogma will always struggle for traction, in todays more sophisticated world.

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  • “…in todays more sophisticated world…” has an empty ring to it given the massive deficiencies of the modern financial system e.g. derivative products being developed and traded by bankers and investors who dont understand how they work. The sophistication you cite is a smokescreen for vested interests to carry on having it all their own way.

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  • Hi flashman

    How’s Young Mark these days? Haven’t seen him around lately.

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  • mark wadsworth says:

    Flash: “Business rates exist side by side with a host of other taxes and policies because on their own, they are inadequate to cover the complexity of a modern system”

    Are you saying that complexities are good or bad? Are you saying that Business Rates are too simple, or that they wouldn’t be able to raise enough revenue if all other taxes were scrapped? I don’t like tweaks and refinements I like simple things. Markets can and do adjust to imperfections in the tax system, so if the rate isn’t calculated to three decimal places then prices will adjust up or down and that is that.

    When I say “tried” I say “tried and worked” it never doesn’t work, it always surpasses expectations wildly, and I’m one of nature pessimists, as you well know.

    Look at Japan in the first couple of decades after WW2 – that was Douglas McArthur’s fine work because he was a Georgist and he said “You have to have land value tax” it wasn’t until 1980 when the vested interests had managed to phase out his LVT again that japan had its big property price bubble and things have gone downhill since.

    Look at Denmark in the 1960s when the Justice Party ran an ever so slightly Georgist system.

    Look at England between 1945 and 1970 when we had Schedule A tax and Domestic Rates (= sort of LVT) well amazingly house prices were low and stable for twenty years.

    Look at Hong Kong, etc.

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  • Mark

    Look at Germany since WW2. No LVT, but tax on property gains a bit like CGT or income tax.

    –> Probably the most stable property market in what’s been the top 5 of economies in the world. Including rebuilding the GDR in 1990.

    You need to look at stable bank lending policies and inflation management as well as the nature of corporate Germany

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  • “Are you saying that complexities are good or bad”

    I wasn’t saying that they are good or bad. I simply said that we live in a complex world. That is an undeniable fact

    You have moved from ‘most countries’ have tried LVT to more accurately citing just a few. However you have also more or less admitted that none of them tried a pure version, which effectively means that they didn’t try it at all (because the whole point is purity and simplicity).

    You have cited a few examples of hopuseprice stability and credited LVT. The examples you cited didn’t actually have proper LVT and there was far too many other things going on in those countries, for you to pinpoint LVT as the cause of house price stability. There has to be some serious rigour and depth involved in a study before clear-cut claims like that are made. For example, post war Japan was a completely ruined basket case. House prices were hardly likely to rise in that environment, so it is not credible to claim that LVT was the reason for property price stability.

    You say that vested interests caused these countries/examples to abandon LVT. That is just wishful thinking or conjecture. It might be partly the case or it might not. It is more likely that their economies and societal systems outgrew such a crude and simplistic instrument. The plain fact is that after various experiments, no country on this earth has a pure form of LVT. It would be foolish to ignore the significance of this total rejection.

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  • cornishman: Who’s young Mark? Is it a reference to the Flashman papers

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  • flashman

    I was trying to confirm a suspicion – whilst preserving your anonymity.

    I was either too subtle – or completely wrong!

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  • cornishman: My real name isn’t flashman so don’t worry. I got it from the George MacDonald Fraser books. Did you find a Mark Flashman on the web? Yesterday jackc trolled a post of mine, so I was beginning to wonder what was going on.

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  • mark wadsworth says:

    Flash, there is tons of research on this and the facts clearly indicate that the less tax you collect from turnover, profits or incomes and the more you collect from land values, the better and happier everything is.

    There are degrees of everything, and there is of course a sliding scale between “Pure Georgist” at one end and “Pure Home-Owner-Ist/Socialist” at the other. You can plot countries’ “Success and happiness” level on the Y axis and their “Georgist vs HO” ratio on the x-axis

    “It is not credible to claim that LVT was the reason for property price stability”

    It is perfectly credibly to claim that

    a) Low income tax/high LVT was part of the reason for their economic success

    b) Reversing this happy state of affairs was part of the reason for the land price bubble and subsequent lost decades.

    Of course there are other factors involved. That’s like blaming an accident on faulty brakes when the driver was drunk and speeding at the time.

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  • mark: You have to understand that I am not against the aims of LVT and that I agree that the ethos might have some merit. I am always surprised by how little critical analysis or questioning you are subjected to. I think that a good grilling might even help you to sharpen up your LVT spiel

    “Flash, there is tons of research on this and the facts clearly indicate that the less tax you collect from turnover, profits or incomes and the more you collect from land values, the better and happier everything is.”

    Come on now mark, it’s me you’re talking to. I’d like to see some of this research that concludes that “the better and happier everything is”. I think someone must have slipped the last page of some fairy tales, into you LVT dossier.

    From this discussion, I think it is fair to conclude that LVT might have made a contribution (in conjunction with other policies) to the well being of a few countries, for a limited amount of time …but it is not provable. Either way it’s never going to happen, so why don’t you abandon it and support the more realistic CGT on private property cause? 🙂

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  • mark wadsworth says:

    Flash, you just Google around, there are lists and lists of countries or towns which have moved, for whatever time period and whenever, their tax base, however slightly or majorly, from income tax to land values. Don’t ask me for a link to the best example because I don’t have it. When they shift it back again (because people can’t resist the lure of a quick buck with rising house prices and bankers and politicians feed off that) it all goes into reverse.

    See e.g. Justice Party in Denmark http://findarticles.com/p/articles/mi_m0254/is_5_59/ai_70738922/

    And even if you read them, you would still be perfectly entitled to say”Ah yes, but that doesn’t prove anything”, sure, nothing “proves” anything to 100.00% certainty, but as a general question of correlation, it is very high.

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  • OK mark. Thanks for the discussion

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