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Further to point (2) of my earlier post, here is how I would envisage it working. The people from HM Land Registry have already done all this in a far more sophisticated fashion (and would fall about laughing if they read this post), it's just that the politicians have told them to keep quiet about it:
1. We split up the UK into smaller areas (there are about ten thousand local council wards or postcode sectors, so there are about 3,000 homes in each sector) and use the average three-bed semi detached houses in each sector as our reference point for that sector.
2. Proper LVT is based on the 'site premium' element of annual rental values, i.e. if two physically identical houses in two different areas rent for different amounts, the difference between the rents relates to the "location, location, location" and that is subject to LVT. All we need to do is decide what the zero base line is.
3. Data on rental values is harder to find (you can look up current asking prices on Rightmove and so on, but there is little official 'history') and not as well documented as selling prices, but there is a clear enough link between the two.
4. I was bored one weekend in May 2012 and set up a spreadsheet and typed in the recent average actual selling price of semi-detached houses in each of 2,780 inhabited postcode districts using the HM Land Registry data available via e.g. Rightmove (there are three or four postcode sectors per postcode district). I added a column for rental values (as at December 2012) and entered the current average rental asking price for a three-bed semi in every 100th district (sorted by value) plus a couple extra in the upper range and ended up with the following chart:
5. Excel's trendline has a gradient of 3%, it crosses the y-axis at £4,000 and the coefficient of correlation is 0.96. So if you know the current selling price, the rent you would expect to get = [selling price x 3%] plus [£4,000]. Anything over and above the £4,000 a year (to cover maintenance and return on cash invested in bricks and mortar) is the site premium, so we could also say that the site premium is 3% of the current selling price.
6. For example, from an area which is well into the top decile by value:
. £429,000 x 3% = £13,000 a year, against a gross rental value of £22,000 plus Council Tax, which leaves the landlord or owner with plenty of net income to cover running costs.7. So to establish our total tax base, all we need to know is the total current value (at selling prices) of all housing in the UK and times it by 3%.
a) The figures quoted by Nationwide and Halifax of around £160,000 are misleading, the mathematical average is far higher than that at around £230,000, as Acadametrics explain. According to my spreadsheet, and assuming just under 100,000 homes in each postcode district, the average is about £250,000, but let's go with their lower figure.
b) 27 million homes x £230,000 = £6,210 billion total current value (selling prices), social housing is probably worth a bit less than privately owned, but by the same token, the government also has the income from the bricks and mortar, so I see little point in adjusting for that.
c) £6,210 billion x 3% = £186 billion potential tax base, to which we can add the £28 billion of the rental value which is already taken in Council Tax = £214 billion (a year).
d) For sure, this is going to have to be finessed a bit; all houses are not semis, so having established the site-premium for a semi in each sector (it would be £4,300 a year in the median sector), then we can call it 150% of that for a detached house with decent sized garden in the same sector, 125% for a detached bungalow; 80% of that for a terraced house; 60% of that for a large flat and 50% of that for a small flat (or a semi converted into two flats)*, or whatever the ratios are, and we can save ourselves a lot of hassle by putting homes into bands (like for Council Tax but narrower) and rounding everything down a bit, but hey ho, we'd then end up with a total site rental value of £200 billion a year.
8. So assessing the rental value of all but the most extraordinary or unusual homes is a doddle; we know the rental value of an average semi in that sector, and we then just assess all other homes as a proportion of that. The Valuation Office Agency already have records of all commercial land and buildings for Business Rates purposes, so that requires minor tweaks only.
Remember: it's only relative and not absolute values which matter. For example, if you are in a room with a dozen people all milling around and you have to guess how tall each one is in feet and inches, you'd struggle, but getting them to line up tallest on the left, shortest on the right is easy enough. If you are then told that the sixth and seventh people are 5'6" tall, you can easily guess how tall the others are.
9. It's then a question of which taxes we want to replace. "How about just cutting government spending?" shouts the crowd, well, we're currently running a deficit of over £100 billion a year, and getting that back to a surplus, assuming a constant tax take will be difficult enough, so let's not confuse the two issues.
If we just want to replace Council Tax (£28 billion a year), your new bill is 14% of the site rental value; if we want to replace C Tax and SDLT, your new bill is 19% of the site rental value; if we want to replace C Tax, SDLT and IHT, your new bill is 21% of the site rental value and so on.
10. Having got rid of existing land or wealth-related taxes borne by households (which raise about £50 billion a year), we'd still have £150 billion a year left over which we could collect (if we wished) in order to be able to get rid of the really bad taxes, so we could get rid of VAT (thus getting ourselves chucked out of the EU), get rid of higher rate income tax and make some headway into reducing National Insurance. There will be positive feedback from all this, so in a year or three, we'll be able to get rid of National Insurance as well, which boils the whole tax system down to two flat taxes: LVT and a flat 20% income tax (raising similar amounts each).
There, that wasn't difficult, was it?
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* According to the 2001 Census, about 27% of homes are semi-detached, 25% are detached, 25% are terraced and 22% are flats, with 1% 'other'. So we could use standard 3-bed terraced houses as another reference point, and e.g. purpose built 2-bed flats as another one, and so on. And a weighted average of the relative values I suggested is about 100%, which means that semi-detached houses are a pretty good guide to total rental values.
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