Personal allowances

1. Taxing the rental value of land is not primarily intended to raise money for the government!

The point is that physical land/location has no cost of production, it is a free gift of nature/geography and was created by 'nobody'. The rental value of land/location is created and sustained by 'everybody'. So whether land/location morally belongs to nobody or everybody; or whether individual, named owners are given special protected legal recognition of land/location by "the nation-state" is a side issue. Land Value Tax does not interfere with this set up.

LVT recognises that the rental value of land/location is very much created by everybody making up "the nation-state", all the citizens and businesses and its appointed government as a mechanism for providing and charging for public goods/the core functions of the state (law and order, defence, roads, public health such as refuse collection or sewerage etc). Without a 99% law abiding population and common rules, land has no rental value (try buying, selling or renting land in Afghanistan, Somalia or Haiti!).

LVT collects the rental value which the whole of society creates to pay for the core functions of the state (on a 'user pays' basis) and recognises that everybody contributes to creating rental value and is burdened by being excluded from everybody else's land by dishing out the bulk of the LVT receipts as personal allowances or a "Citizen's Income".

In an ideal world LVT would collect exactly 100% of rental values ("the site premium") but quite how much that is in £ billions doesn't really matter because most of it gets dished out again as personal allowances/Citizen's Income. So by definition, the median-sized household in the median-value home pays or receives +/- nothing. Whether that +/- nothing is made up of a £5,000 LVT liability minus £5,000 personal allowances or a £20,000 LVT liability minus £20,000 personal allowances is pretty much irrelevant.

The only real net cash transfers are from households and businesses occupying the top five or ten percent of land by value to the households occupying the bottom half of land by value; whether that ends up as a net transfer of £50 billion or £200 billion a year does not matter, that is down to market forces. Broadly speaking, a small number of households and businesses occupying the highest value land/locations will each be paying large sums in rent to the bottom half of households, who will each be receiving small net amounts of rental income (via the personal allowance), which is surely far better than the majority of people paying small amounts in rent to be collected by those at the top of the 'property ladder'. It's a choice between a trickle-up economy (as at present) or a true 'trickle-down' economy (under LVT).

2. Opinions get very heated about personal allowances/welfare payments

* The authoritarian-right prefer higher to lower personal allowances, because, they say, it means that people get to keep more of their own money. And they don't like welfare payments at all; if there are to be welfare payments, they should be as complicated and as hard to get as possible, so we end up with a mixture of contributory, conditional and means tested benefits, the arguments for each of these being equal and opposite. And a massive bureaucracy.

* The libertarian-left prefer welfare payments to higher personal allowances, as they "reach the poorest" and the purist libertarian-left view is that they should be universal and non-means tested.

You can only have a rational debate if you realise that the tax and welfare systems are two sides of the same coin; the system takes with one hand and gives with the other; all that matters is the net figure in either direction, so you have to look at both together and rationally to come up with a sensible answer. And whether we call it "personal allowance"; "tax rebate"; "Citizen's Income" or "Homestead Allowance" simply does not matter.

Quite simply, mathematically, it makes no difference what you call it. Basic unemployment benefit (in its many guises) in the UK is currently £71 a week (£3,700) a year and the income tax-free personal allowance is £9,440 from 6 April 2013.

The basic rate of tax and Employee's NIC is currently 32%, so somebody earning £9,440 is paying no tax and receiving no unemployment benefit (ignoring tax credits). If that person were allowed to waive the personal allowance and claim a universal benefit of £71 a week instead, they would be £680 a year better off. In practice, instead of having a use-it-or-lose-it personal allowance of £9,440 they would have £3,020 PAYE deducted (32% of £9,440) and then be credited with £3,700 a year universal benefit or tax rebate, so their employer would add £13 a week to their pay packet. Working Tax Credits clouds the issue, because people earning £9,440 a year might be getting more or less than £13 a week in WTC (it could be anything between £nil and £28) but it probably averages out to somewhere near £13.

The same applies to Domestic Rates (or Land Value Tax). If Domestic Rates is approx. 3% of the current market value of each home and each adult gets a "Homestead Allowance" of £3,700 a year then all couples in houses currently worth £246,000 or less (£246,000 x 3% = £7,380) or less simply pay no Domestic Rates (they are exempt up to £7,400).

I see no reason why the tax rebate should be offset against only income tax (but not Domestic Rates) or vice versa. It is better to collect both taxes in the same way (i.e. via PAYE or by Self-Assessment for the self-employed), offset the "tax rebate" against DR first, then income tax and pay out the cash value of any unused part.

For example, a couple living in a median value home (currently worth about £160,000) will have a Domestic Rates bill of (say) £4,800 a year, so that uses up £4,800 of their £7,400. This leaves £2,600 to be offset against income tax liabilities. The flat income tax proposed here is 20%, so each adult in that couple would get an income-tax free personal allowance of £6,500, which is worth £1,300 in income tax saved (or they can allocate it all to the higher earner). If one or both of the adults in that couple earns less than £6,500 (or if the higher earner earns less than £13,000), then the unused part is simply paid out in cash (or added to their pay packet, or given as a refund on their self-assessment return etc).

Or, comparing like with like, if that couple currently has a Council Tax bill of £1,000, they could picture it like this: £3,800 of their combined tax rebate of £7,400 is being offset against their Domestic Rates bill, leaving £1,000 to be paid in cash (so their DR bill is the same as their Council Tax bill was) and the balance of £3,600 tax rebate is equivalent to a £9,000 personal allowance each for income tax purposes (or £18,000 for the higher earner), which is certainly no worse than the current position. The real savings that the couple will make are from not having to pay/suffer two layers of National Insurance; not having to pay/suffer VAT and all the other taxes which would be replaced.

How this shows up in the national accounts depends entirely on your definition. Let's assume that the higher earner in the couple in the example above earns £25,000 a year and the other adult is not working. The net tax paid by the couple is £2,400 a year. Does this count as £2,400 in "tax", (which looks like a very low tax, small government system, it's less than a tenth of what the higher earner earns) or does this count as £9,800 in "tax" and £7,400 in "welfare spending" (which looks like a relatively high-tax, high-spend system)?