Killer Arguments Against LVT, Not (296)

I'm sure we're all familiar with the Poor Widow Bogey, see also "LVT doesn't relate to ability to pay"; "LVT would be paid out of taxed income"; "I've paid for my house out of taxed income"; "LVT is a dry tax"; or the supposedly rhetorical question "How can you collect tax from an asset which doesn't [currently] generate cash income?".

OK, let's answer that question by looking at some actual hard facts and applying common sense.

Let's imagine our half-way house tax system, which could be implemented fairly quickly, where there are only two taxes, which would each raise about £200 - £220 billion a year:

1. LVT on current site-premium rental values (about 3% of the current selling price of UK land and buildings, farmers would be paying about £16/acre/year) in place of Council Tax, Business Rates, SDLT, IHT, CGT, Insurance Premium Tax and TV licence fee, and

2. A flat income/corporation tax of 20% (with no VAT, NIC or higher rate income tax on top).

(Over the next few years, income tax would be phased out and the overall site-premium, and hence LVT receipts, would increase accordingly, that's the easy bit, it's getting started which is trickier).

And let's imagine there are no exemptions or discounts for pensioners whatsoever (local councils can all make up their own systems, we'll see which ones work least-badly). Instead of starting with hardship/corner cases like Poor Widows In Mansions, let's look at The Big Picture:

3. Seven million pensioner households (about 4 million couples and 3 million single, i.e. widowed) own about a quarter of UK homes, so the total LVT to be collected would be about £50 billion a year.

4. Total pre-tax cash pensioner income is about £174 billion a year (£94 billion state pensions and Pensions Credit; £30 billion in public sector pensions and £50 billion in private or employer pensions).

5. The total tax currently clawed back from pensioners is £42 billion, according to The Daily Mail, or £6,000 per pensioner household.

6. The Daily Mail helpfully adds that "average pensioner [household] income is £20,130 a year", and Ros Altman reckons that "Median incomes of pensioners are around £15,000 per year".

What the Lord giveth, the Lord taketh away.

7. My counter-question is thus: "Is it beyond the wit of mankind to simply deduct LVT from pensions in payment, in the same way as income tax is withheld from pensions in payment?" To which the answer is, no, of course not.

8. So the £80 billion in non-state pensions is subject to the flat 20% income tax (as at present) and the £50 billion gets withheld from the net figure of £188 billion. So by and large, there would be a 100% collection rate.

9. For example, our average pensioner household with gross income of £20,000 would get £14,000 state pension paid gross and £4,800 net public sector or private pension and have an average LVT bill of £7,500, ending up with £11,300 a year to live on. Our median pensioner household with £15,000 total income minus a few quid income tax and a median LVT bill of £5,000 would end up with just under £10,000 a year to live on (which sounds like plenty to me).

10. So in the absence of exemptions and discounts, pensioner households would be paying more in tax overall (potentially £66 billion)than under current rules (£42 billion), but that is inevitable, there's still nothing to stop them trading down, taking in a lodger, getting their potential heirs to pay and so on.

11. Of course, our proverbial Poor Widow In A Mansion who receives only Pensions Credit would have a net cash income from the government of precisely £nil* and there would be an annual shortfall which would have to be rolled up and collected from sales proceeds when she dies, and sometimes the shortfall would be more than the selling price of the house, but so what? These cases will be few and far between, tuppence ha'penny in the grander scheme of things.

* No doubt her children and grandchildren will be happy to chip in a couple of thousand pounds a year each to see her right.

For more detailed workings, based on quartiles rather than totals or averages, see the next instalment of this gripping series.