Monday 23 August 2010

That's a fair question

At my post HM Revenue & Customs Table 16.1 (2009), H asked the following question:

How do you deal with the transition period? The losers would need time to adjust and it would be thought unjust if a lot of residential properties had to be put on the market simultaneously.

1. The number of losers would be relatively small, and would be largely recent first time buyers who are pushed into negative equity and the 'asset rich, income poor' (i.e. pensioners).

2. There's an important tweak that I didn't mention. The 7% rate would be a national rate, calculated using a flat formula for the whole of the UK (or each constituent nation) but local councils would only be obliged to hand over (say) 80% of what they could collect to central government (to pay for core functions, Citizen's Income/Pension and school/education vouchers).

3. Councils would be free to collect that last 20% and spend it on stuff (like free care for the elderly) or they would be allowed to waive up to 20% of the total tax that they could theoretically collect. So no doubt right wing councils will cap pensioners' LVT bills at £3,000 or something (so that it's no different to Council Tax or Domestic Rates in Northern Ireland); left-wing councils will introduce a 'Homestead exemption' so that pensioners only have to pay the excess of their LVT bill over a fixed amount of £10,000; and politically neutral councils might give pensioners 75% discounts (or whatever).

4. Recent purchasers in negative equity are not really an issue either. The harsh view is "it serves them right - it was their own decision to take on the mortgage". The more pragmatic view is, rather than allow people to avoid that debt by declaring themselves bankrupt, if they wanted to move, the government would just take on the excess bit of the mortgage and net it off with the £300+ billion that the banks owe the government anyway (and which they are unlikely to ever pay back), and allow those people to pay it off interest free over a much longer time scale (or whatever). Of course this is to some extent 'socialising losses', but that's what Home-Owner-Ism is all about, big deal.

5. For sure, there might be more people wanting to sell than there are now, but only to the extent that people want to buy, thus we'd get rid off the ridiculous stand off highlighted by The Daily Mail, by allowing the markets to set the clearing price (rather than trying to subsidise the gap). Maybe the number of annual sales/purchases would double and, for a year or two, go back to its 2007 peak of about a million a year - nothing we can't cope with.

6. Assuming that those who don't want to pay the tax are trying to trade down (thus freeing up cash), there'd be no harm in councils allowing people to defer payment for six months or a year and allowing them to pay off the arrears from the equity released*.

To cut a long story, you just apply commonsense.

* To put this in context, if you sell an upper quintile property, Stamp Duty Land Tax of 3% or more is due when you sell, as well as possibly Capital Gains Tax. So this is no big deal either.

9 comments:

Bayard said...

To cut a long story, you just apply commonsense.

There's commonsense and there's (House of) commonssense. One you get in Westminster and one you don't.

Mark Wadsworth said...

B, exactly. That is why I would officially wash my hands of the matter and leave it to local councils to sort out.

James Higham said...

1. The number of losers would be relatively small

How can you be sure, Mark?

Mark Wadsworth said...

JH, I am sure because I've spent hours doing the calculations.

Whether you call 10% or 20% of households 'relatively small' is a separate issue, but it's no bigger than the number of households who'd be affected if we slimmed down the size of the state to something sensible.

But that's short term stuff - give it five years and most people will adjust to the new rules (no income tax, for a start) and nearly everybody will end up better off.

H said...

Perhaps commonsense will prevail. But we are talking about local authorities here. I remember being pained by the introduction of the council/poll tax, when I went from paying nothing to handing over an additional 5% of my net income.

The introduction of a new tax will throw up hard cases - it's inevitable. Now, the case of someone on a low income in an expensive house might not be terribly appealing, but such people - and there may be others - will be placed in an at least an awkward position.

When's LVT coming in, anyway?

Mark Wadsworth said...

H: "When's LVT coming in, anyway?"

That's easy - never, because the Home-Owner-Ist coalition have had a whole propaganda unit working against it for decades.

As to your first question, feel free to imagine you ran a local council and make up your own rules (I'd be interested to hear them).

As a guide:
a) We know that in the long run, by and large, people with the highest incomes buy the nicest houses and those with the lowest incomes buy or rent the smallest/cheapest.
b) In terms of tax collection, the optimum optimum long run position is that everybody lives somewhere where they can afford the LVT.
c) So all you have to do is speed up the process whereby people cut their housing cloth according to their incomes.

Robin Smith said...

Its much simpler to use a :

Land Value Covenant

Avoids all the fake problems we keep getting hit with time after time. Even the Treasury asked us for them. As has John Redwood recently though he doesnt know it yet and I dont rate him as someone interested in economic justice anyway. He is looking for infinite evidence as they all are.

Trouble is LVC's are NIH!

Mark Wadsworth said...

RS, that's all too fiddly.

Robin Smith said...

MW. Definition of the most fiddly thing:

"how hard will it be to get it adopted in the first place"

If you cannot get that far who cares how simple the mechanics are. LVC's address all the REALLY BIG fiddly things that prohibit adoption. They enable adoption. In any case they are as simple as anything proposed here too.

This is a moral and a political problem. Not a technical one.

Are you sure you are not really saying "Not Invented Here"?