This is clearly untrue. Let me remind you what a proper "hurt the poor" programme looks like:
- replace Domestic Rates with a Poll Tax (or something pretty close, like Council Tax).
- reduce welfare payments
- savage means-tested withdrawal of welfare payments
- reduce or scrap the tax-free personal allowance
- increase regressive payroll taxes, such as National Insurance
- increase sales taxes (like VAT)
- have high prices for certain goods (alcohol, tobacco)
- push house prices as high as possible
- sell off social housing.
These clearly hurt low or non-earners the most, and more subtly, taxes on output and employment are the most economically damaging and ensure that there will always millions of people capable of working who are out of work. The tax and welfare system outlined here is pretty much the opposite of all that, isn't it?
• Landlords will pass on all the tax to their tenants (skip to article)
• Poor people will be forced out of nice areas and will be forced to live in ghettoes (skip to article)
• What if somebody loses his job? How will he pay the LVT? (skip to article)
• Low earners will be forced to sell their homes to rich people who will end up owning all the land, so ultimately, it will benefit the wealthiest landowners (skip to article)
• Low earners will all end up homeless (skip to article)
• Landowners will evade the tax by registering land with offshore companies (skip to article)
• Wealthy people will avoid the tax by moving into one-bed flats
(skip to article)
• Multi-nationals will relocate abroad and end up not paying a penny
(skip to article)
As regards the first bullet point, see also Tenants will end up paying nothing. They’ll always vote for increases.
It's either one or the other, but it can't be both, and in fact it's neither as the two arguments cancel out. Similarly, the collapsing revenue theory says that "Everybody will cram into the smallest houses, so not much tax will be collected".
1. "Landlords will pass on all the tax to their tenants"
This argument is the most infuriating of all as it completely ignores (a) observed facts, (b) economic theory, (c) logic. And even if it were true (which it isn't), (d) so what? Tenants would still end up better off. It is also largely crocodile tears as 80% of privately owned homes are owner-occupied, so it's a bit of a red herring anyway.
What can add to the confusion is the fact that the basic economic theory only holds if LVT is an additional tax. If LVT is matched with corresponding tax cuts on output and employment, tenants' net incomes will increase, which will increase rental values. But even if LVT is a replacement tax, it bring a flood of homes onto the market when people "right-size" (be that up- or down-sizing), which will tend to level rental values downwards.
a) Observed facts
It is a commonplace that higher interest rates = lower house prices. It is difficult to show this with data because periods of higher interest rates tend to coincide with periods of high inflation, so real interest rates are lower than nominal ones and when people fear inflation, they tend to "invest in bricks and mortar" rather than cash. And the amount of easily available credit is just as important as the rate.
Nonetheless, the basic assumption is correct.
This is because potential first time buyers are tenants and their rent is fixed ("rents are the Maypole around which house prices dance") and they will only buy a home if the monthly mortgage payments are in line with the rent they are paying. So the amount of monthly mortgage payments are also fixed and the amount of money they are willing to borrow to buy a home is simply the inverse of the interest rate.
MIRAS was a modest tax subsidy for mortgages, it was intended to make it cheaper to buy a home, which was phased out in the 1990s. In the context of land, a subsidy is the opposite of a tax; withdrawing a subsidy is exactly the same as imposing a tax.
But did the subsidy really benefit purchasers with a mortgage (most purchasers) or vendors? If it benefitted purchasers, then the share of income which purchasers were prepared to spend on mortgage repayments would have been higher after MIRAS was phased out. If it benefitted vendors, then the share of income would remain constant and the net amount of interest collected by banks/vendors would stay the same.
So which was it? The latter of course, as the Council of Mortgage Lenders confirm:
(More explanation here).
b) The Economic Theory
Quite simply: any tax is borne by whoever is less price sensitive, the quantity demanded by consumers or the quantity supplied by suppliers/producers.
So a tax on tobacco (demand is little changed by increases in the total price, but suppliers have a minimum price which they need to receive in order to stay in business) is borne by smokers.
And a tax on discretionary consumer spending generally (like VAT) is borne two-thirds by the supplier (being the whole chain from retailer back to manufacturer) and only one-third by the consumer (evidence and workings here).
Tenants are price-sensitive, they don't want to waste all their money on rent and will tend to choose the cheapest accommodation and will share if necessary. And the landlord? He cannot vary his output one jot, one home is one unit, either he rents it out at anything up to market rates (and we can safely assume that most of them do) or he demands more and receives nothing. If he is has fixed costs associated with that home (be it mortgage repayments or LVT) then he does not have the luxury of withdrawing the home from the market and leaving it empty, he has to rent it out for as much as he can (market rates).
This is often expressed with supply-demand curves, see e.g. Wiki.
We also know that rents are dictated by local average wages (after deducting PAYE and so on), plus extra if it's a nice area minus a bit if it's a grotty area. That is the beginning, middle and end of the matter. The landlord's actual cash costs are more or less completely irrelevant. As long as the actual or potential landlord can collect more in rent that it costs to provide and maintain the building he will rent it out (if not, he will abandon it).
If the rent is more than the maintenance costs, the balance is the site premium (or the location rent or whatever you want to call it), so the tenant pays rent sufficient to cover the cash costs and the site premium on top. If the government now decides to tax away the site premium, that is between the government and the landlord, this does not increase the rental value of the home by a single penny; the amount of rent which the tenant will pay is the same and so the landlord bears the tax. His remaining rental income after tax is, by definition, still enough to cover the maintenance costs and so he stays in business.
Again, the amount of money which a landlord is willing to borrow to buy a home is simply the site premium (the pure profit) divided by the prevailing interest rate. House prices do not push up rents; rents pull up house prices.
d) So what?
Even if the claim is correct (which it isn't) and landlords passed on every penny of the tax, tenants would still end up noticeably better off.
Here's another Zohosheet, based on:
- median full time male and female earnings from here
- average rents from here
- assuming that bare minimum return/bricks and mortar cost for a flat is £2,500 a year, for a terraced house is £3,250 a year and for a semi-detached is £4,000 a year, the "site premium" and hence the LVT is the current rent minus the bricks and mortar cost
...most tenant households would be better off even if the LVT were "passed on" in full:
1a. "Poor people will be forced out of nice areas and will be forced to live in ghettoes"
This is rank hypocrisy of course. The whole Home-Owner-Ist system is designed to take away as much of people's earned income in tax and in rent as possible, clearly, somebody starting out today has to make do with being stuck on the bottom rung. And all land ownership rests on "force", land isn't created by normal market forces, the same as most other goods and services, it's a natural monopoly (cleverly disguised as a free market).
a) The Homeys then take a hardship corner case (often plucked out of thin air), somebody who bought an average house when he was on an average wage ages ago; since then his earned income has fallen and his house has shot up in value because of Home-Owner-Ism in general and gentrification in particular, claim that this person would not be able to afford the LVT (which is only true in a tiny minority of cases and assumes that the person cannot take evasive measures, like earning a bit more, taking in a lodger etc).
b) With or without LVT, when that low earner's house is eventually sold, to whom does it get sold? To another low earner for a low price? I don't think so. Worst case, LVT speeds up the process of gentrification; and why shouldn't those people who are prepared to pay most into the common fund for everybody's benefit get to live in the nicest housing? Why is it preferable for the new arrival to hand over his hard earned money to the unproductive sector?
c) The Homeys then warm to their theme and merrily claim that all "poor" people will somehow end up worse off, which is clearly nonsense. Most low earners live in low value housing, or they rent, and they will be among the big winners from the tax shift (try the spreadsheets!).
c) The difference between "nice" and "grotty" areas is not just the physical architecture, it is the people who live there, you pay a bit extra to live among "nice" neighbours and get a discount if you are prepared to live near less desirable neighbours. LVT itself will put pressure on land owners to maximise the availability of good quality housing at an affordable price; it will give each council an incentive to concentrate on making their areas as desirable as possible, and with an end to means testing of benefits and lower taxes on productive activity there will be more jobs and hence fewer "poor" people anyway.
So to sum up, when half of tax revenues are collected via LVT; taxes on earnings significantly reduced and LVT receipts matched with Citizen's Income payments, there will be fewer "poor" people and better and more affordable housing. So by and large, those people who are currently "poor" and overpaying for housing will end up better off, in better quality housing among nicer neighbours. It seems insane to condemn one hundred people to this for ever more for the benefit of each individual human shield (the "asset rich, cash poor" who features so often in these discussions).
1b. "What if somebody loses his job? How will he pay the LVT?"
a) It's amusing that the typical Mailexpressgraph reader is happy to rail against "welfare scroungers" who are unemployed, but comes out bleeding heart liberal when it comes to home owners who have lost their jobs.
b) The counter question is: if people have taken out a mortgage to buy their home, they have committed themselves to monthly payments for the next twenty or twenty five years; and if people are renting, they have committed themselves to monthly payments for the foreseeable. If they lose their jobs, how are they going to keep up the rent or mortgage payments?
c) I have assumed that the bulk of the welfare system and the system of tax-free personal allowances be rolled up into a flat-rate personal allowance/Citizens Income with a cash value of about £3,500 a year for each working age adult. This will be offset against LVT liabilities first, and if there is any left over, it will be offset against PAYE liabilities or paid out in cash.
d) This kind of flat-rate universal distribution has its own merits (nice and simple, no disincentive to getting a job, good for social cohesion) and reflects the general observation that it is society in general which generates the rental value of land, so it's fair to dish out out a lot of the revenues as a flat-rate payment.
e) So the obvious answer is: if you are worried about losing your job, then find yourself a house where the LVT bill is less than your household's personal allowances/Citizen's Income entitlement (which, under the tax system proposed here, would cover more than half of all households/homes anyway). And then, make sure you don't lose your job, and if you do, try and find another one ASAP.
f) And we can have a deferment/roll up option for LVT as well, i.e. if you are out of work for up to x months, you don't have to pay LVT in cash upfront, you just have to pay a bit more back in future.
g) The flat rate personal allowance/Citizen's Income scheme is not central to the debate about LVT versus taxes on output and earned income; we could just as well keep the welfare system exactly as it is, so that people who have lost their job get paid a higher amount that those who don't; or that we have a system of "LVT benefit" in the same way as we have "Council Tax benefit"; or we could have a scheme (optional or not) whereby people choose to pay a higher LVT rate when they are in work and are given a credit for that if/when they are out of work.
h) Ultimately, there will have to be some kind of insurance scheme. That could be self-insurance (save up some rainy day money); private insurance (ha!); or a state-sponsored scheme, see (g) above.
i) So it's all administratively do-able. The most fundamental point is that when the government collects revenue from the rental value of land instead of from earned income, the economy will be much more stable and boom-busts will be dampened. So there will be less unemployment in the first place and fewer people will ever lose their jobs; even if they do, they will find a new one much more quickly.
2. "Low earners will be forced to sell their homes to rich people who will end up owning all the land, so ultimately, it will benefit the wealthiest landowners/lead to a greater concentration of land ownership"
This argument is so fatuous and obviously stupid that it is barely worth debunking, but here goes...
a) Back in 1909 when eighty or ninety per cent of people were private tenants and LVT was seriously on the Liberal government's agenda, who was campaigning strongest against the introduction thereof, to the extent of provoking a constitutional crisis? The large landowners in the House of Lords of course, they wanted to keep all the lovely rents for themselves. The situation is no different today, it is the same vested interests (and the bankers) who are fighting against LVT (or Mansion Tax or Council Tax rebanding or Business Rates increases etc). If LVT would really enable them to re-acquire all the bits of land they sold for cheap and then make even more money by renting them out again, why wouldn't these powerful people be subtly campaigning for it?
b) Owner-occupation rates in the UK rose fastest between 1950 and 1970, from 30% to over 50%. What were we doing differently? Rents were capped; rental income was taxed at higher rates than earned income; there was lots of new construction (social housing and for private purchase); mortgage lending was strictly rationed and we had Domestic Rates, which were much higher than Council Tax on all but the smallest homes and Schedule A tax, which between them were something approaching a modest LVT. There just wasn't much point being a landlord as you couldn't make much money from it. I don't approve of rent caps, as it happens, they cause more bother than they are worth, but by taxing away the site premium, the net rent collected by landlords would be effectively capped at a few thousand pounds per year per home.
c) Since 1997, the period of extreme Home-Owner-Ism (fuelled mainly by easy credit and low interest rates; a reduction in new construction; modest real reductions in Council Tax; and savage tax hikes on the productive economy) owner-occupation rates have been falling. The number of private renter households has increased from 2 million to 3.6 million, and after Council House sales petered out in about 2002, the percentage of owner-occupier households has fallen from 70% to 65%. So it's clear that Home-Owner-Ism leads to land ownership being concentrated in fewer hands and more rent being collected by fewer people (top bankers). What evidence is there to suggest that LVT, which is the opposite of Home-Owner-Ism, would accelerate rather than reverse this trend? None or negative?
d) On the facts, it will always be cheaper to be an owner-occupier than a tenant; you'll be (say) £4,000 a year better off once you've paid off the mortgage. So there is nothing to be gained by selling up and then renting a similar sized house. If low earners trade down, then by and large the purchasers will be owner-occupiers themselves, albeit slightly higher earning ones.
2b. "Low earners will all end up homeless"
This is another triumph of circular Home-Owner-Ist non-maths and non-logic and goes like this:
- wicked landlords will "pass on" the LVT in higher rents, which no low earning tenants will be able to afford
- poorer homeowner won't be able to afford the LVT and will be "forced" to sell their housing at a loss to landlords
- so millions of poor people will be made homeless
What they can't explain is why profit-hungry landlords would want to be paying the LVT for the millions of empty homes which they own.
3. "Landowners will evade the tax by registering land with offshore companies"
Again, nonsense. People who say things like this have just illustrated that they know nothing about the UK tax system.
a) In 2013-14, the UK introduced an annual tax on high-value residential land and buildings which only applies to homes worth £2 million or more which are registered in the name of "non-natural persons", which means companies (whether UK or offshore), partnerships including a company, collective investment schemes and so on.
The tax is £15,000 per year for a home with a current market value between £2 million and £5 million, and so on, up o £140,000 a year for a home worth £20 million or more.
The tax was implemented without too much of a hitch - doing the valuations, sending out bills etc - and in the first year of operation, the amount of tax collected was five times as much as originally forecast.
Do the Homeys who trot out the argument seriously imagine that the UK government has just invented a tax which would have had a 100% evasion rate?
b) There's no need to debate what-if scenarios as we already have a tax which is so close to LVT (administratively) as makes no difference, namely Business Rates (aka National Non-Domestic Rates) which are a flat tax of about 31% of the total rental value of commercial land and buildings with no lower or upper limit. Officially, the rate is calculated at 45.8% of the rent net of Rates, which means the tax is 31% of the total rent incl. Rates.
We know that plenty of larger commercial sites are owned by foreign companies, or insurance companies who know a thing or three about tax havens. And plenty of commercial sites are in fact owned by non-UK companies (for other reasons, mainly to do with Stamp Duty Land Tax, a tax on transactions and thus relatively easy to avoid/evade).
c) And what are the collection rates for Business Rates..? From the DCLG:
Local authorities in England collected £22.1 billion in council taxes by the end of March 2012 out of a total of £22.7 billion collectable. This gave a national average in- year collection rate for council tax in England of 97.3% in 2011-12, no change over 2010-11.
Local authorities in England collected £20.8 billion in non-domestic rates by the end of March 2012 out of a total of £21.3 billion collectable. This gave a national average in-year collection rate for non-domestic rates in England of 97.8% in 2011-12, a decrease of 0.2 percentage points over 2010-11.
Those collection rates leave all the other taxes standing; the total evasion, avoidance and non-collection rates and compliance/collection costs for income tax, VAT, corporation tax and NIC are more like ten per cent of the tax actually collected.
Why might this be? For the blindingly obvious reason that you can't hide land and buildings. As it happens, the Rates are collected from the occupant if there is one and from the owner if the building is vacant; if the owner runs up large enough arrears the council can simply take a charge over the land title and sell it. I don't think that this happens very often, it would appear that the simple threat is enough.
4. "Wealthy people will avoid the tax by moving into one-bed flats"
I might be missing the point here, but I think someone is suggesting that we abolish taxes and just levy tax on land?!? If Richard Branson rented a one bedroom apartment he would thus pay zero tax, is that seriously what is being suggested?
a) My initial reply to that was as follows:
"If he rented a small flat in a cheap area, then yes, he would pay next to no LVT (or tax in general). But it is highly unlikely that very wealthy people who need to show off would do so – they can already save themselves a fortune in rent or mortgage interest (or free up cash for more profitable investments) by trading down into a one-bed flat in Newcastle, but they don’t.
"That’s like saying “If we have VAT on new cars, then Richard Branson would start using the bus or walking to work” or “If private schools started charging £10,000 or £20,000 a year, then people like Richard Branson would send their children to state school instead” or “If we have tax on tobacco, then people like Branson would stop smoking and not pay any”.
"As it happens, Mr Branson derives a lot of his income from rents [Heathrow landing/take-off slots) in the first place, and so he would end up paying tax on all this at source. What he does with his net income is entirely up to him. And as it happens, I assume that he doesn’t smoke and hence pays no tobacco duty, and good luck to him."
b) The more fundamental point is this...
i. As between future subsequent owners of land, the LVT is quite simply not a cost at all, because the upfront price they are willing to pay is reduced by the future LVT liabilities on that site (rental values will be pushed up when taxes on output and earnings are reduced - quite what the net effect will be is unknown and largely down to psychology).
ii. This is the same as the basic observation that higher interest rates increase the future cash outflows for people who buy with a mortgage (or increase the opportunity cost to somebody with cash in the bank) and so depress the price of land. So somebody looking to buy a home with a mortgage in the near future is actually indifferent to interest rates, low mortgage rates are only good news for people with existing mortgages and sellers.
iii. So whoever is the next purchaser after LVT has been introduced is indifferent, assuming that people with similar housing budgets are bidding for the same home, whatever extra he has to pay in LVT reduces the amount he is able to pay in mortgage interest but it reduces the amount that other bidders are able to pay in mortgage interest as well, so the LVT reduces the amount which the winning bidder has to pay in mortgage interest, and hence pushes down the price of the home accordingly. And when he sells again in a few years' time, the same applies.
iv. Another way of looking at this is to say that actually LVT is not a recurring tax, it is a one-off levy on today's landowners which will be paid in instalments out of what the future sales proceeds of that land would have been in the absence of the tax.
v. So really, we don't need to speculate on the likelihood of Richard Branson "renting a one bedroom apartment" and it doesn't actually matter. We can safely assume that as at today's date he owns a very nice home or three in the UK, all of which will be subject to that one-off levy (but payable in instalments). The chances are, he will continue living in the UK in one or more of these homes (because the future income tax saving he can make by living in the UK rather than anywhere else will make it worthwhile and easily cover the LVT).
vi. Maybe Richard Branson will sell one or more of his UK homes and superficially, the next owner will be paying the LVT. So what? The LVT doesn't really cost the next owner anything (as explained), the whole cost is shuffled backwards onto Richard Branson. Sorted.
5. "Multi-nationals will relocate abroad and end up not paying a penny
If we replaced all taxes on output, employment, profits, capital gains, transactions etc. with a flat 20% income/corporation tax and replaced Business Rates with LVT (the amount raised in LVT would be similar to the amount currently raised in Business Rates), then [nearly] all businesses - including multi-nationals - would be paying far, far less tax then they are now (about half as much, let's say).
So if anything, multi-nationals and their higher-paid executives will be falling over themselves to relocate to the UK, not the other way round.
NB, all the much touted "relocations" like WPP were merely them shifting their head office abroad so that income earned outside the UK would not be taxed when it was brought back to the head office, they did not actually shut down all their UK operations. Like most countries, the UK now has a more or less complete tax exemption for profits earned abroad and brought back onshore, so that's not really an issue any more.