Tuesday, 12 September 2017

HERE'S MY ADVICE TO THE WELSH ASSEMBLY's
call for proposals on Financial Reform
(yes it's a re-hash of an earlier post!)
A step towards Land Value Tax that is practicable, popular, politically savvy and economically sound
ABOLISH STAMP DUTY (LTT) and replace it with LVT

A submission by ALTER, the Liberal Democrats Action for Land Tax and Economic Reform


Land Value Tax (LVT) -- so good you must implement it straight away!
No doubt WG will be receiving impassioned proposals for that hoary old chestnut, Land Value Taxation — LVT. Economists from ages past declare that this is a good tax, far better than taxes on wages or profits. Indeed, LVT was almost enacted into law in Lloyd George’s great Peoples’ Budget of 1909, with enthusiastic support from Winston Churchill. As the welsh representative of ALTER — the Liberal Democrats Action for Land Tax and Economic Reform — I inherit this great Liberal theme, and naturally support it. I am not alone.

Current Welsh advocacy of Land Value Tax
Mark Drakeford is on record as an advocate of Land Value Taxation[[1]] and can even be heard extoling the virtues of LVT from the Assembly floor. In the light of such cogent argumentation, why one wonders why LVT has not already been adopted both at the national (Wales) level and at the UK level too?
            The short answer is of course politics. The Labour Party manifesto for the June 2017 General Election made an anodyne mention about “examining the case for LVT to replace Council Tax”. This resulted in a campaign of vilification from the right-wing press[[2]] for what they dubbed ‘the Garden Tax’. Is this just ‘dog-whistle’ politics designed to craftily promote the agenda of the 1%? In part, yes, but something else is at work here. Simply browbeating the general public with rational arguments doesn’t work (or requires a very well-funded campaign to make it acceptable). Big changes to highly visible taxes will always be resisted, whatever schemes are hatched to compensate the losers from such changes. Unfamiliar concepts, too, will be viewed with suspicion. LVT hits so many political hot buttons it is not surprising that our elected representatives do not want to tangle with it.

Where is the best place to start on the long journey to implementing LVT?
Demanding total implementation of LVT straight away is totally unrealistic. No politician is going to back it. Instead, let’s be a bit crafty and look for an easy win — replace an unpopular tax on housing with a little bit of LVT. 
            There are many taxes on housing — Council Tax, Inheritance Tax, Capital Gains Tax, care home costs or Stamp Duty. Which tax is hated the most [[3]]? Inheritance Tax, IHT, is the number 1, most hated tax, closely followed by SDLT. This is ironic, because few voters will ever have to pay IHT. But thanks to a campaign by the ‘Tax-Payers Alliance’ many voters, especially middle-class home-owners are fear IHT greatly
            We could advocate that WG abolished IHT. It raises very little by way of revenue, especially in Wales, and it is easy for the super-rich to avoid outright. If or when a thorough-going LVT was in force, the main source of capital gains, ballooning house prices, would disappear. At present, abolition of IHT is not an option for WG, and the impact of LVT I am envisaging is so far into the future that it is pointless to discuss it.
            So for now I’ll stick with Stamp Duty Land Tax (SDLT) or as WG in its devolved responsibility call it LTT, Land Transfer Tax. This would be the easiest tax to abolish and switch to LVT. As a bonus it even has ‘Land Tax’ in its name! That such a deeply unpopular tax is the first to be devolved to the WG may be unfortunate, but for now that is almost all we have. In this paper I put forward a suggestion to reform LTT (as it will be called). This change will get rid of most of the negative aspects of the tax, and could be achieved without much political turmoil.
            In the rest of this paper I will draw on research I carried out for ALTER on the conversion of SDLT (E&W). Rates of LTT have not yet been announced, but probably will not differ greatly from before. So although the calculations here are hypothetical, they give some idea of the magnitudes involved.

The politics of SDLT: SDLT is a nasty tax which hits house-buyers at a financially vulnerable stage in their lives. But Chancellors of the Exchequer like it and have raised the rate of SDLT repeatedly. Unlike Thatcher’s Poll Tax in the 1990s, there have been no mass protests in the streets against SDLT hikes. 
            What makes SDLT a not-so-bad tax-option? In a way it is a ‘voluntary’ tax — you only pay if you buy a house. It certainly has the aura of tradition about it. Once upon a time an actual postage stamp had to be stuck on documents such as receipts to make them legal. 
            SDLT also seems ‘fair’ because it attaches to a sum of money which is changing hands. The fact that it is the buyer, not the seller who has to pay the SDLT means that it is an extra cost on top of the purchase price. (Government documents make it clear that the buyer must pay. This tax differs from say Income Tax where the recipient of the money must hand over a portion to the state.) 
            Chancellor Osborne got away with hiking SDLT because each year not that many voters are hit by SDLT. Only one or two million houses are bought each year, so only about two or three million people get hit by SDLT. 

The dire economic effects of SDLT:    House-buyers, having scraped and saved to get the money for a deposit, now have to find another large sum of money. Buying a house is a trigger for the purchase of lots of consumer durables, spending which stimulates the economy. But fond dreams of carpets, curtains and dishwashers may have to be put on hold to pay the SDLT.
            It is economically illiterate, too. Its lumpiness acts as a drag on the housing market, discouraging some sellers from putting their house on the market, putting off some buyers, too. This applies in particular to the over-housed elderly. Many would dearly like to downsize, but are discouraged by SDLT.
            Labour Market Economists have also spotted the negative effect of SDLT. In their ideal world, workers would face few impediments to moving to where the jobs are. If this involves selling your house and buying another, then this tax acts as a drag on free movement of labour. Since SDLT is imposed every time a house is bought, this is especially onerous on those heroes of the flexible labour market, the frequent job-changers and movers.
                  
            So SDLT is both unpopular and a tax which gives the wrong market incentives. It is ripe for reform or replacement, but abolishing altogether would mean losing a very traditional, long-accepted tax.

We can offer a way to change SDLT (LTT) for the better, to a much smaller annual LVT?

The effect of Converting the 1-off LTT/SDLT into an annual LVT
Two of the worst features of SDLT could be fixed straight away.
—Instead of a lump sum at the time of the sale, there will be a smaller on-going payment based on the land-value of the plot.
—Regular movers, the heroes of the flexible economy, will be freer to move because they are hit once only by a small LVT. After that there would be no new big lumps of SDLT/LTT every time they move.

Will politicians, especially the Cabinet Secretary for Finance approve of this change?
That would depend on the rate of LVT to be charged.
            To keep the Cabinet Secretary for Finance happy we should try to be ‘revenue neutral’ — generating as much tax revenue as before. I’ve done the calculations [[4]] and this is what I reckon would do the trick

LTT could be converted to an annual LVT of ½ % of the Land Value
The LV would be re-rated annually by the Land Price Index for the area.
Alternatively the plot could be revalued using Mass Appraisal techniques,
But the simplest way would be an uprating by RPI or CPI.
and the slogan might be
“House-buyers: No need to pay a big lump of LTT now!
We will help you spread your payments out as a yearly charge of just
one-half of one percent of the value of the plot of land your house is built on!”

            ‘Stamp Duty’ is not a huge revenue earner for the government. It brings in about 1.5% of the total that HMRC (the UK taxman) collects, that’s £8.5 billion out of a total tax-take of £477 billion (in 2015). For Wales I imagine the figure is less than the 5% population equivalence (Wales 3mn E&W 55 mn), because the London mansions yield huge sums in SDLT. So let’s assume 3% of the £8.5 bn gives £250 mn revenue for Wales. This would represent a measly 1.7% of the total current WG budget of £15 bn.
            Back in 2007, just before the Crash there were 1.8 million houses traded in the UK. After the slump this had dropped to less than 700,000 in the 2009. Volumes have recovered a bit since then, but not by much, and are still way below the peak. For Wales the pro-rata figure currently is about 35,000. This matters in terms of revenue, because SDLT is only levied when a sale is made, so fewer sales mean less tax revenue for the Cabinet Secretary for Finance.

Examples of the impact of one-off LTT vs. annual 0.5% LVT
Sale price £     current SDLT/LTT        Land Value      annual LVT     
  £50,000                     £0                                £0                    0
£100,000                      £0                       £10,000                £50
£150,000                 £500                        £30,000              £150
£230,000              £1,900                    £110,000              £575
£350,000              £7,500                    £230,000           £1,150
£500,000            £15,000                     £380,000           £1,900
(under the current UK tax regime SDLT is charged at 2% for owner-occupied properties bought in the range £125,000 — £675,000 on the amount over £125,000 .)

Land values given here are a broad-brush attempt to produce realistic figures. It is possible to buy a plot with OPP in the Valleys for less than £10,000. In pleasant Margam (where I live) plots will be £50 to £80,000. Think new-building costs of about £100,000 per average house, and prices in excess of this are almost entirely land value.
            Instead of the steeply step-up rates of SDLT inflicted by Osborne, a single universal rate of ½% of the Land Value would be rational and fair. It would also be progressive, because of locational effects. Poorer people live in less attractive areas, with lower land values. The prestige of an address and the corresponding high land values are what attracts the wealthy to that location.

‘Winners & Losers’ is the name of this game.
Winners from tax changes are happy to quietly pocket their bonus. Losers will scream blue murder — and in the case of the Poll Tax it brought down the Prime Minister.
            While “No LTT and an annual LVT at ½%“ may sound modest, it hides a nasty  surprise for many house-buyers and would not be much of a bargain. A high percentage of sales of houses in Wales fall below the £125,000 figure which is SDLT exempt.
            It would be nice to think that the first stage of LVT, the abolition of SDLT/LTT and its replacement by a sensible non-distortionary land tax would be clean and easy on its own. Alas! No. The political consequences of introducing a new tax mean that any losers need to be bought off. The SDLT switch may offer the prospect of immediate lower payments, but not for all.
           
Collecting the new LVT: This could be included in the Income Tax Codes (as is the practice in Sweden). In this way the electors would hardly notice it! As time goes by a high proportion of all homeowners will be paying the new annual LVT. Adding in the remaining 10 or 20% of non-movers will not be popular, but would be justified. I imagine the 80% who are already paying LVT would also consider it ‘chwarae teg’!

The Main benefit of the switch of LTT to LVT: is of course to introduce the taxpayers to the benefits of taxing land values. It is also an opportunity to establish the conventions for valuing land separately from house plus land. (it’s not difficult; ask any estate agent). This could then act as a springboard to shift other taxes such as Inheritance Tax, but ultimately Council Tax on to a Land Value basis.

Note: I have said nothing in this paper about SDLT applied to rented property or businesses, but the same principles and benefits would apply there, too.




Conall Boyle                                                                                        29th August 2017
Welsh Representative — ALTER
3 Cwm Cadno
Margam
Port Talbot SA13 2TP
Phone: 01656 741487   Email: conallboyle@hotmail.com   Website: www.conallboyle.com



           

           





[2] Daily Mail 7 June 2017

[3] source: based on a YouGov Opinion Poll https://yougov.co.uk/news/2013/02/21/majority-support-mansion-tax/

[4] https://libdemsalter.org.uk/en/document/the-first-step-abolish-stamp-duty-and-replace-with-lvt#document

No comments:

Post a Comment