Wednesday 24 November 2010

It's a bit long-winded, but the conclusion is excellent

From the Institute for Fiscal Studies/Mirrlees review of UK taxation, Chapter 16:

16.4 Conclusions

The taxation of property [a term incorrectly used to refer to 'land and buildings'] in the UK is currently something of a mess. As we have seen when considering the practicalities involved in implementing an ideal system, up to a point that is understandable. But it remains both desirable and feasible to clear up much of the mess. Out conclusions can be summarised thus:

* There is a strong case for introducing a land value tax. The priority should be to use it to replace the economically damaging business rates system.

* Council tax should be reformed to relate it more closely to actual property values: levied as a proportion of up-to-date values with no cap and no discount for unoccupied or single-occupancy properties. We have called this a housing services tax to reflect its underlying economic rationale as a tax on housing consumption to substitute for VAT.

* [bullet three is arcane to the point of being gibberish]

* Finally, stamp duty land tax should be abolished and the revenue replaced as part of the housing services tax (for domestic property) and land value tax (for business property).

This is a radical set of proposals, and the changes would need to be phased in carefully. But this is also an area where the current practice is a long way from an economically rational and efficient system. Stamp duty and business rates defy the most basic of economic principles by taxing transactions and produced inputs respectively. Income tax and capital gains tax create a significant bias in favour of owner-occupation.

Meanwhile, council tax is indefensibly regressive and, thanks to spineless government refusal to undertake a revaluation, we find ourselves in the absurd position that tax bills are still based on relative property prices in 1991. Over time, this arrangement will some to be seen as more and more untenable. At some point, some government will have to grasp the challenge of making the case for intelligent.

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1. The 'housing services tax' they refer to is a copy of the new system of Domestic Rates in Northern Ireland, i.e. a flat 0.6% per annum on up to date capital selling values, which they would have instead of Council Tax/Council Tax Benefit. The include a chart on page showing that only owners of houses worth £500,000 or more (which is the top five per cent of houses by value) would be more than a couple of hundred quid a year worse off. An excellent place to start.

2. Stamp Duty Land Tax is 3% on sales of homes for £250,000 - £500,000, and 4% on sales of homes for more than £500,000. If there's a sale every twenty years, it costs owners of houses worth more than £500,000 about 0.2% a year on average (i.e. £1,000 a year for a £500,000 home; £2,000 a year for a £1m home etc). To replace SDLT, we'd need to increase the 0.6% rate by +/- 0.1% a year (on all properties).

3. They don't mention Inheritance Tax in the chapter, which is 40% on the total value of most assets (in particular housing, cash and quoted shares) in your estate above the threshold of currently £350,000-odd. Let's assume this is payable once every forty years, to replace this would mean hiking the rate by another +/- 0.1% (on all properties).

4. Owners of second homes would be a bit miffed with all this, so it'd only be fair to scrap Capital Gains Tax on land and buildings liable to the 'housing services tax', for much the same reason as the arguments against SDLT. This would mean hiking the rate by another +/- 0.1%.

5. At this stage, owners of expensive houses and/or second homes can be pretty satisfied with the outcome - what they lose on the Council Tax swing, they more than win back on the SDLT, IHT and CGT roundabouts.

6. But owners of the vast majority of houses that aren't liable to 3%/4% SDLT every time they are sold, which are beneath the Inheritance Tax threshold and/or which are not second homes would end up one or two hundred quid a year worse off with an 0.9% rate. So let's just go the whole hog, round up the rate by another 0.1% to a nice round 1.0% and scrap the TV licence fee instead (currently £142.50).

Job done.

10 comments:

AntiCitizenOne said...

Lets go subscription on the TV tax. I think being forced through general taxation to pay for the BBC would be even worse.

I see the current system as skin to a letter box tax used to fund junk mail.

Mark Wadsworth said...

AC1, where did I say that part of the money would be spent on the BBC?

Scott Wright said...

Are you shitting me?

The institute for fiscal studies is advocating LVT?

Scott Wright said...

"So let's just go the whole hog, round up the rate by another 0.1% to a nice round 1.0% and scrap the TV licence fee instead (currently £142.50)."

Or slightly higher still to scrap higher rate taxes & raise the personal allowance and perform a drastic simplification of the income tax system. Too many idiots think "income tax is the only fair tax based on ability to pay" for it to be abolished yet, phasing out whilst gradually increasing LVT would be the only politically acceptable way.

Mark Wadsworth said...

SW, this is Mirrlees rather than IFS, but hey. The IFS are like me, when Labour were in power, they were seen as right wing (one of their gurus went to work for George Osborne) but now the Tories are in, they appear to be left wing.

As to your list, the correct order for phasing out taxes and replacing with higher LVT is as follows:

Year Zero - Council Tax, Business Rates, SDLT, Insurance Premium Tax, TV licence, CGT, IHT.

Year One - VAT

Year Two - Employer's NIC and higher rate income tax.

Year Three - reduce to flat income/corporation tax of 15% or 20%.

Year Four - scrap income/corporation tax and have full blown LVT.

Year Five - lose badly at General Election and spend the next few decades watching all our hard work being undone.

As to higher personal allowance, this is a Year Zero thing and has more to do with tidying up the Welfare System.

Scott Wright said...

"Year Five - lose badly at General Election and spend the next few decades watching all our hard work being undone."

I was always under the impression that once implemented there would be many more winners than losers and losing the next election may well not be on the cards.

I would have thought that the "poor" vote alone (who would of course do best out of the changes) would be significant enough to keep one in the driving seat. Even the not so poor like myself (thats a joke) would be a hell of a lot better off as a result.

Mark Wadsworth said...

SW, the Home-Owner-Ist elite is not going to take this lying down.

Further, in practice, people vastly prefer stealth taxes to in-your-face taxes:

Hike VAT by £13 billion? Not a problem, there'll be a lot of grumbling, a lot of failed businesses and unemployment, but people won't make the connection and they won't take to the streets.

Now, imagine that they'd increased Council Tax bills by half to raise that extra £13 billion...

And the public sector unions will have a thing or two to say about a welfare system that's run by a couple of hundred data inputters and a couple of thousand fraud investigators; or about a tax system that's run by a few hundred data imputters and a few thousand collectors/enforcers, etc.

Scott Wright said...

Ah yes, the age old "biggest threat to society today is the people's own stupidity"

What a mountain to have to climb to put the Great back into Great Britain.

Mark Wadsworth said...

SW, exactly.

Or another example that occurs to me is that having LVT is the political opposite of 'right-to-buy' legislation, which had a lot of clear winners and also a much larger number of losers (the taxpayer and people stuck on waiting lists). The fact that total losses far outweighed total gains is irrelevant in political terms, because the losers are too stupid to notice how much and why they are losing.

LVT would also prevent the Nulab trick of making people think that they are becoming wealthier on the back of rising house prices. People would whine about the 'no more boom' bit of this policy and never thank you for the 'no more bust' part.

AntiCitizenOne said...

Yes it is depressing a form of Bastiat's Parable of the Broken Window.

"Ce qu'on voit et ce qu'on ne voit pas"
http://en.wikipedia.org/wiki/Parable_of_the_broken_window

It's just that the property being destroyed is the proper payment for the right of the landowner to exclude.