Thursday, July 21, 2011

Taxing recommendations

House prices would be hit by 'revolutionary' property tax proposed by OECD

Cash-strapped governments have long wanted to grab a bigger share of the wealth we hold in housing, now the Organisation for Economic Co-operation and Development (OECD) says Britain should adopt a Continental European-style property tax.

Posted by dill @ 09:57 AM (2709 views)
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35 thoughts on “Taxing recommendations

  • mark wadsworth says:

    Yippee! They said the same as I’ve always been saying – roll Council Tax, SDLT, CGT and IHT into a flat tax on land values. And they get teh same dumbass responses as always

    “We’d have to value twenty million homes” (no we wouldn’t)

    “It’s an attack on wealth” (no it isn’t, income tax and so on are an attack on wealth because the wealth has to be created first – cut income tax and you get more wealth, and the people who created it get to keep it)

    “It’s an attack on homeownership – if you tax something you get less of it” (The houses are there anyway and aren’t goingto disappear overnight, it is clearly the case that our Home-Owner-Ist policies of the last ten or fifteen years have reduced the number of homeowners – and dampening capital gains discourages BTL and hence allows FTB’s to get a look in )

    ” the owners would presumably pay property value tax. They would no doubt pass this on by higher rents which might, or might not, be equivalent to the tenants’ savings on council tax.” (maybe they would, maybe they wouldn’t, so what, red herring, a tenant benefits from the same community services as an owner-occupier, why shouldn’t they pay the same?)

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  • Will never happen.

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  • ontheotherhand says:

    Mike Warburton, a senior partner at Grant Thornton, was even more outspoken: “In my view, economic policy should encourage people to increase their wealth through hard work, sensible saving and improvements to their property. There is an old adage in economics that the more you tax something, the less you get of it.”

    No. If you tax land, it does not disappear. If you tax jobs and enterprise, they disappear. ‘Encourage people to increase their wealth through hard work..’ Why bother when their house was making them more money each year than their salary? Give up working and become a BTL speculator.

    What this article is missing and all the comments is that this is a replacement tax. OECD should make clear that the UK should pledge to get total tax below 40% of GDP at the same time as shifting some tax from income and enterprise on to rentseekers.

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  • mark wadsworth says:

    OTOH, that’s the bitter irony. The article made it perfectly clear that the OECD proposed replacing bad taxes on housing or wealth (council tax, CGT, IHT and SDLT – the same as my list except they missed off Insurance Premium tax and TV licence fee) with a good tax, i.e. property value tax-cum-land value tax, but the Home-Owner-Ists are a bit dense and never read or understand that bit.

    I especially love the bit about “the government wants to take our wealth”, ooh the hypocrisy, the UK government has been doing its best to make sure that there is a massive transfer of wealth from productive economy to banks, from FTBs to BTLs, from young to Baby Boomer and from workers and businessmen to speculators, all that such a tax would do is stem this flow slightly. Why do people not realise that the house price boom was just privately collected tax – the simple fact the government forced private individuals to give money to other private individuals directly rather than via a government bank account seems to escape them.

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  • cynicalsoothsayer says:

    If tax has to be paid as money then the taxpayer has to have money to pay the tax, hence most taxes take a portion of a transaction involving money. LVT fails this reality test, and would require exemptions or forced sales.

    MW – would you roll income tax into that as well?

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  • Doomwatch..

    ..correct. I won’t happen.

    This is the most wet-behind-the-ears rubbish I’ve seen from a supposedly serious outfit for a long time..

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  • Oops… IT won’t happen – not me..;-(

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  • mark wadsworth says:

    Cynical – did you just ignore the bit about scrapping IHT, CGT, SDLT and Council Tax? If it is deemed politically expedient to give exemptions or discounts to Poor Widows In Mansions, then so be it, and finally there will not be any forced sales – by definition, the LVT will always be a lot less than the full rental value of the home so worst case, you can rent it out.

    “would you roll income tax into that as well?”

    Er, income tax is about £150 bn, the tax I mentioned above are about £45 billion, so it’s a question of where we start. So let’s get rid of taxes in order of how damaging they are to the economy, so VAT would be next to be replaced, and so on.

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  • mark wadsworth says:

    Cynical: “If tax has to be paid as money then the taxpayer has to have money to pay the tax” Well, duh.

    I could just as well say: “If a mortgage or rent has to be paid as money then the borrower or tenant has to have money to pay the mortgage or rent”

    I could go on to say “Borrowers and tenants make some effort to forecast how much they are willing and able to spend on mortgage or rent in future so that they have enough cash to pay it. Why is it a thing of impossibility to expect them to budget for future tax payments and reduce the amount they spend on mortgage or rent accordingly? It’s a fixed pot of land and a fixed pot of income out of which it has to be paid, so all that happens is that banks earn less and landlords earn less – making life easier for FTBs”

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  • mark wadsworth says:

    Oops forgot to close tag.

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  • cynicalsoothsayer says:

    “Borrowers and tenants make some effort to forecast how much they are willing and able to spend on mortgage or rent in future so that they have enough cash to pay it.”

    Don’t they go see just how much they can borrow?

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  • mark wadsworth says:

    CSS, yes of course. Let’s apply commonsense.

    Borrower estimates he has £10,000 spare income a year to spend on housing after paying for living costs. If interest rates are 5%, and provided the bank is willing, he can borrow £200,000 @ 5% = £10,000. Or rent a house ‘worth’ about £200,000.

    If he knows that the LVT will be (say) £2,000 and he has to pay it, that reduces the amount he can spend on interest or rent to £8,000, so he can only borrow £160,000 or rent a house worth £160,000. Clearly, house prices are a function of credit availability or rental yields, and there is a fixed number of houses, so houses wouldn’t disappear in a puff of smoke, they would just fall by 20%. Our FTB is no better or worse off and the bank or the landlord lose out. Tough, if your whole business model is based on subsidies to land ownership and these subsidies are withdrawn, that’s not my problem.

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  • mw does not need to be told that it will never happen. He’s spent more time presenting it to more people than anyone here and he’s felt the overwhelmingly consistent indignation of the people. In a way it’s admirable that he ploughs on regardless but I always prefer to spend energy on something, that at least has a glimmer of hope.

    A tax on the profits of private house sales would go a long way to smoothing out house price peaks and troughs. Most people would still regard it as a turd on their sofa but it at least has a tiny chance of being adopted. The Americans are far more culturally opposed to taxation than we are but they’ve accepted a tax on the profits of their private houses. Even MEW would be limited because the mortgage companies would have to take away the possible tax from the equity available for withdrawal. Nothing could have entirely prevented this last house price boom because the bankers didn’t care about how much actual equity you had but it would still have tempered it. In any normal time of credit availability, house prices would only rise in line with inflation as a result of this tax. I would suggest setting it at the top rate of income tax with the usual sneaky government trick of ramping it up from a smaller introductory level

    How about it mw? Why don’t you divert some of your considerable energy to a cause with a glimmer of hope? I actually think someone like you could make a small difference

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  • mark wadsworth says:

    Flash, how about what? CGT and Stamp Duty are bad taxes, let’s get rid of them on everything to level the playing field a bit between housing and proper investments (i.e. shares). And the opposition of the Home-Owner-Ists and Faux Libertarians to CGT on houses is just as vehement as to LVT etc.

    As to ‘glimmer of hope’, may I refer you for the hundredth time to the system of Domestic Rates in Northern Ireland, which they have instead of Council Tax? That would be a significant step forwards and is completely realistic. It exists. In real life. In the UK. Or indeed Business Rates which is so close to LVT as makes no difference.Stop doing ad hominem attacks and try and understand as much as I understand first, rather than making me explain it to you again and again and again.

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  • cynicalsoothsayer says:

    LVT would be replacing other taxes that add up to a similar overall amount that the borrower has to pay at the moment, which makes little change to his affordability calculation. His costs are still dominated by interest payments, the tax only a small proportion.

    “Clearly, house prices are a function of credit availability or rental yields”

    and still would be under LVT. The boom and bust housing market cycle would continue.

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  • mark wadsworth says:

    Cynical: “”Clearly, house prices are a function of credit availability or rental yields” and still would be under LVT. The boom and bust housing market cycle would continue.”

    Look, people are constantly posting articles on this here website which (inadvertently) illustrate that exactly this wouldn’t happen.

    There was one in the Telegraph by Roger Bootle recently which said that the price of commercial land and buildings had lagged inflation by about 2% a year since 1945 whereas residential had beaten inflation by 2%.

    And what is the biggest contributor to this? It’s because commercial building are liable to business rates (about 30% of the gross rental value) and what’s left is liable to corp tax or income tax at average another 30%. Thus half the rental income goes straight into the national pot, and the other half of the rental income is probably a fair return on the bricks and mortar. Under full-on LVT, a commercial landlord’s net income would be barely affected – some might go up a bit, some might go down a bit.

    Sure, there was a bubble in commercial L&B, but it was much smaller than the bubble in residential. And could have been choked off entirely by increasing business rates and reducing other taxes like VAT or Employer’s NIC to balance it out.

    Conversely, residential land is heavily subsidised and lightly taxed.

    These are all widely known and easily observable facts which completely accord with economic theory.

    House prices are whatever the government wants them to be, taxes are whatever the government wants them to be. These are all value judgements.

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  • Well I’m with MW all the way on this. Why on earth we have a tax system which incentivises people to earn less and spend less is beyond me. One thing that would ensure it never happened would be if people stopped arguing in favour of it. So rather than do that, I would encourage people like Mark to campaign harder.

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  • mw: I think you’ve misread the tone of my post. I was actually quite complimentary. I honestly think you should take a step back from this LVT stuff before you blow a gasket

    Just because you say that x is a bad tax and y is a good tax, does not make it so. I think that LVT is a bad tax and so do most people. By the way, Business Rates is a reviled tax for all the reasons I’ve posted before. Do a google search and feel the hatred from businesses all over the country. It carries on taxing companies who are making a temporary loss and sucks away their ability to invest in future production and profitability. Thousands of businesses have gone bust because they’ve had to carry on paying it when they’re not doing well and in doing so they’ve been prevented from using their reserves to survive and pay their staff. You can’t or at least shouldn’t ignore this fatal flaw. You should also heed cynicalsoothsayer because he has made several good points

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  • mark wadsworth says:

    Flash, let’s just rehearse a few facts before worrying about opinions, as we all know full well,

    Business Rates is no different to rent – they have experimented with BR free zones and all that happened was that rents went up
    So if the business is struggling, whether it’s BR or rent that tips them over the edge is completely irrelevant.

    Collection rates for BR are very good – about 97%, for VAT and PAYE it is much less – these are the taxes which drive companies bankrupt (Where I work has an insolvency department, I’m doing facts and figures here)

    VAT, corporation tax, income tax blah blah not only “sucks away at their ability to invest” but also punish success. BR does not punish success. It’s a flat rate tax ultimately borne by the landowner, and this is largely a reflection of how desirable an area is and has nothing to do with teh individual efforts of landlord or the businesses occupying the premises.

    It is pointless of you referring endlessly to how much people hate BR or COuncil Tax, that is because they are brainwashed and/or incredibly stupid. If, for example, the government spend decades telling people that apples were dangerously unhealthy, and I realised that this was not true and went round telling people to buy and eat apples, then the fact that you can refer me to people saying how terrible apples are is of little concern to me. Apples are healthy, some taxes are far worse than others and LVT is a good tax by any analysis, unless of course you think Adam Smith and Milton Friedman were idiots.

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  • “I would encourage people like Mark to campaign harder”

    That’s easy for you to say but what about the cost to him? If you walked in his shoes for a month, I doubt you’d be so encouraging.

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  • Flash, if everyone who believed in something gave up working towards it because it was difficult we’d live in a pretty sad society.

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  • “It’s a flat rate tax ultimately borne by the landowner”

    And there we have it. The above is just dogma and rhetoric borne from an obsession with land and landowners. Try telling that to the owner of a shop who’s about to be tipped over the edge by his Business Rates bill. “Don’t worry Mr Abouttobeunemployed, you only think you are paying this tax. It’s actually your landlord who is paying it”. Get real. Taxing a loss is just plain foolish.

    “It is pointless of you referring endlessly to how much people hate BR or COuncil Tax, that is because they are brainwashed and/or incredibly stupid”

    And there we have it again. The arrogance and petulance of a chap who defaults to calling the people of this country ‘brainwashed and stupid” because they don’t agree with him. You need to stop and listen. The people of this country are better than you think they are

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  • timmy: I couldn’t agree more but what if the cause is a bad one? What if it was impossible rather than just difficult? What if it damages the campaigner?

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  • Flash – to answer your points in order:
    It’s not a bad cause, it’s a very good one in my opinion
    It’s not impossible, it’s just difficult
    It won’t – why would it?

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  • I agree that LVT won’t happen in this country in our lifetime. Why dont they introduce CGT on first homes at say 15% and scrap stamp duty? Would be a step in the right direction (taxing real gains) and would remove a major barrier to entry to first time buyers.

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  • Timmy, I’ll reciprocate in the same order:

    I think it is a bad cause and I’m in the vast majority, who are vehemently against it rather than just a little anti

    The first point does rather make it impossible in a democracy

    Because these things can become all consuming and family and career are more important

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  • pelethar: well said that man

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  • Flash, we obviously won’t all agree, but you had a go at me for encouraging Mark to continue campaigning for something he believes in. As for the vast majority, I suspect the vast majority have probably never heard of LVT, and I fail to see why, when all things are considered, more wouldn’t be in favour of it if they understood it.

    That means it’s difficult, not impossible, because the barrier is that insufficient people understand it, not that insufficient people want it.

    I agree with your last point personally, but that just takes me back to post 22.

    Pelethar’s suggestion would be a great stepping stone and is one I’ve suggested, as have many others on here before.

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  • ontheotherhand says:

    MW I like LVT and I agree there are politically digestable steps towards it such as multiple upward banding of council tax at the same time as getting rid of stamp duty and a couple of others – along with deferrment for the poor widow in a mansion. Easy minority targets to get the majority voter behind it such as second home owners and multi-millionaire foreign owners in London. However, I do not see that it gets rid of booms and busts by itself otherwise they never would have happened in the US where there is residential land tax.

    Flashman @14, getting rid of the CGT exemption/subsidy for homes would be fine, but people would argue that it stifles mobility because they won’t have enough left to move home. My answer to that to make it more palatable would be to get rid of stamp duty.

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  • Mark Wadsworth says:

    Flash: “Try telling that to the owner of a shop who’s about to be tipped over the edge by his Business Rates bill.”

    Once again, we abandon facts and figures and real life and we’re off into home-owner-ist dogma.

    By definition, no business can possibly be tipped over the edge by the BR bill (total receipts £25 billion a year) – it’s the VAT and PAYE (total receipts £300 billion a year) which do that. I’m campaigning against VAT, income tax NIC and in favour of BR/LVT in equal and opposite measure. And if a man owns his own business premises and can’t even afford to generate enough income to pay the BR (about 30% of the gross rental value) then clearly he’d be better off if he hung up his tools and became a landlord and rented out the premises to somebody else.

    Win-win – he has higher net income and a new more successful business opens up, providing services to the community and creating jobs, making the area more attractive, boosting BR/LVT receipts even further. It’s called “creative destruction” although I note that the Home-Owner-Ists don’t like it up ’em – it’s fine for workers to lose their jobs and businesses to go bust, but owner-occupiers are magically exempt from this market discipline, aren’t they?

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  • otoh: Yes, simultaneously removing stamp duty would be fine and it would make the CGT on private house sales more palatable to the electorate. I paid it on my house in the States and I was taken aback by how the yanks (more culturally opposed to tax than we are) didn’t bat an eyelid at it. I guess it all comes down to no one liking taxation but if it’s on a profit, then at least it stings less because they’ve made a profit. If even they accept it, then it’s not too much of a stretch to think that we might one day accept it. It’s not futile

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  • mark wadsworth says:

    OTOH: “along with deferrment for the poor widow in a mansion.”

    Yup, they have that in Northern Ireland, let’s not reinvent the wheel every time.

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  • timmy: I was really just making the observation that there are real people behind this anonymous blog and that we can’t divorce ourselves from that reality. In real life, you would perhaps worry about a friend who had developed an all-consuming habit or obsession, so why not here? No dig intended

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  • ontheotherhand says:

    MW @15, thanks for the link to the Domestic Rates in Northern Ireland. It has ready made working schemes for those who can’t pay such as pensioners.

    But there was a boom and bust in Northern Ireland wasn’t there? If so another place that LVT had no effect on in this regard? Perhaps it’s because in the case of NI the rate one pays is based on 2005 valuations. If the valuations are as rare as this, how does it capture new amenities such as local schools, train links, paid for by the state? Nor will old valuations do anything to put a dampening mechanism on rising prices or public celebration of that. How often does the valuation aspect of LVT need to be done to make it most effective?

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  • mark wadsworth says:

    OTOH, sure they had a bubble, but it popped earlier and harder than in the rest of the UK (both the bubble and the bursting were very much influenced by what happened in Rep of Ireland, where construction was heavily subsidised and land values not taxed at all – they don’t even seem to have Council Tax or anything).

    Whether the 2005 revaluation made much difference I don’t know (they had Domestic Rates before this as well, all that happened in 2005 was the revalution – some ended up paying more, some ended up paying less).

    How often should the revaluations be done? Why not every year? It can all be done by computers using info held by HM Land Reg.

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