The transition

Arguments rage within the LVT community as to quite how far we should go and how fast the transition could be achieved.

The tax system I have assumed for the purposes of this 'blog is a "halfway house" where approximately equal amounts are raised in
a) taxes on land rents, natural resources and other government protected monopolies and
b) a flat income/corporation tax of 20% (with no National Insurance or VAT on top).
For some, this is "too far, too fast" and for the purists who would like to see an LVT-only tax system and no income tax at all it is a timid cop-out.

Clearly, under an LVT only system, ultimately everybody would be better off. For sure, the large landowners and bankers would have to find something else to do, but can these people said to be "worse off"? From a moral standpoint, certainly not. That's like saying that burglars, car thieves and muggers would be "worse off" if crime rates were reduced if there were better policing and clear-up rates, better home and car security systems in place and if nobody carried cash, jewellery or a mobile phone not protected with a totally secure password.

From a short-term practical point of view, most households would be immediately better off in cash terms. Here are those two Zoho Sheets again. Feel free to enter your own figures:

1. The first illustrates how much tax a working family who already own a house would save in tax every year:

2. The second relates to private tenants and assumes 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 and that (contrary to any sort of economic logic) that the Domestic Rates/LVT is "passed on" in full:

3. Pensioners would be allowed to defer and roll up their Domestic Rates/LVT bills to be paid out of the sales proceeds of their homes as explained here.

4. There is no point disputing that there will be hardship corner cases of people who bought a house ages ago when they earned a decent income, who are in semi-retirement, voluntary or otherwise and whose house now has a very high rental value. How many such households are there? It's a few per cent of the population, and you can't make an omelette without breaking eggs.

You have to make some fairly extreme assumptions to find a household which is measurably worse off and who genuinely cannot afford to pay the tax, and are incapable of taking some sort of evasive action, like taking in a lodger, working a few extra hours etc. If a couple has a personal allowance/Citizen's Income entitlement of £7,400 a year, then that would cover their Domestic Rates liability on a main residence worth up to £250,000 or so (at 2012 selling prices). This means that couples in the bottom three-quarters of homes by value would have no net LVT liability once the personal allowance is taken into account.

5. It is only in the top five percent of homes, currently worth £400,000 or more (astronomical sums by any normal standards) that the net liability would begin to bite, i.e. £5,000 per year for a couple (£400,000 x 3% minus £7,400). The maths is what it is, if both people in a childless couple in a £400,000 home are doing a full-time job on the National Minimum Wage (a not unreasonable expectation) and earning £10,400 a year each, they will pay £16 a week more in tax.

For even more extreme cases than this, we could simply cap the net Domestic Rates-minus-personal allowance liability at 50% of gross earned income, so let's take a single earner in a £500,000 home (the top three percent). His or her break-even point is a wage or salary of £30,000 year (at that house value/salary level, their tax bill would be the same under old and new rules). For the very few people who live in the top three percent of homes by value and who earn less than the national average full time wage, the initial Domestic Rates-minus-personal allowance bill of £11,000 or so could be capped at 50% of their earnings by issuing that person with a K-code for PAYE purposes. This is of course a much lower withdrawal rate than is faced by most welfare claimants; the marginal tax rate on income is somewhere between 80% and 100% for the bottom half of earners, once you take means-testing and taxes on earnings into account!

6. Of course, any tax system has to have the grudging support of the majority of the population, but most of the wailing about the "asset rich, cash poor" not fall on deaf ears?

People compare themselves with their peers; on that street where houses are worth £400,000, the couple with two kids who earn £80,000 between them, i.e. enough to justify taking out a large purchase mortgage, will be £20,000 a year better off. A childless couple who earn £40,000 between them will be £5,000 a year better off. How keen will they be to pay extra in tax so that the semi-retired couple don't end up paying £800 a year more in tax? If they are so keen to "preserve their mixed community" or whatever weasel words the Homeys like to use, they are perfectly entitled to set up a standing order for their semi-retired neighbours, aren't they? And shouldn't the adult children of such a couple be the first port of call?

And people compare themselves with their colleagues. If everybody on the same shop floor is on a similar wage of (say) £25,000 a year and their spouses earn half that, then those who live in houses currently worth (say) £200,000 will be £8,000 a year better off; how much sympathy are they going to have for the occasional colleague who lives in a house currently worth something ludicrous like £600,000 or £700,000 who ends up paying more in tax? If the majority of that workforce can "manage" in a £200,000 home, can't the outlier couple just make do with that as well? Again, they are perfectly entitled to set up a solidarity fund to subsidise the colleague in a mansion if they so wish.