Saturday 7 April 2012

National Domestic Rates

1. Economists down the ages have all established that taxes on the rental value of land are the 'least bad' taxes because they have no negative impact on economic activity and do not push up the price of goods and services; reduce business activity and employment; or eat into truly earned income or truly private wealth.

2. On a moral/philosophical level, taxes on the site rental value of land are actually just a user charge for the net benefits which accrue to the owner of any site because of what 'everybody else' is doing (or not doing) in the vicinity. If the owner chooses to rent out land which he owns, then he can collect the value of those benefits from the tenant as rent. Quite clearly, the benefits which accrue to the owner of a flat overlooking St James's Park, London are far greater than the benefits to the owner of a flat overlooking St James' Park football stadium, Newcastle; and more benefits accrue to the owner of that flat than to the owner of one overlooking the town gas works. The owner of each home has absolutely no input or involvement into creating this value, and so it is truly unearned income, the owner is benefiting from national wealth - and it is the rental value of this wealth which we could claw back to pay for national expenditure.

3. The UK already has a system of taxing the rental value of commercial land and buildings, called National Non-Domestic Rates ('Business Rates'), this is flawed in that it taxes the rental value of the owner's own improvements (the buildings) as well the rental value of the site (the total rental value minus a reasonable return on bricks and mortar) but this is a minor issue. The only major change we would make to National Non-Domestic Rates is that undeveloped and derelict sites would be subject to the same tax bill as similar developed sites in the area to encourage development.

4. There is no reason why we can't reintroduce such a system for residential land and buildings and reduce taxes on earned income accordingly. By taxing incomes to pay for public services and reducing taxes on residential property, older generations (and landowners and banks) have ensured that there is a one-way flow of wealth away from young people and the productive economy towards themselves. Although the middle aged pay as much, or possibly more, income tax than young people, most of that spending flows back to them in terms of higher house prices.

5. Young people end up paying twice over - they pay for the cost of public services via income tax and then they pay again for the value when they rent or buy a home. The purists argue that the best kind of tax is Land Value Tax, "a tax on the annual site-only rental value of each plot of land, assuming optimum permitted use", which is a bit of a mouthful. In practice, it does not matter what we call it, and neither does it really matter how accurately it is calculated, provided it is broadly proportional to the value of the extra benefits which each home owner or landlord receives by owning land at that particular location.

6. At its simplest, we could just work out the current rental value of all homes using HM Land Registry's database of fourteen million sales since 2000 (the experience of Wales and Northern Ireland where revaluations for Council Tax/Domestic Rates were carried out in 2005 shows that this can be done quickly, cheaply and accurately), multiple prices by 4% for gross rental value and deduct a few thousand for annual running costs. We then allocate each home to a 20% wide band, staring with Band A (for homes worth £50,000 - £60,000) on which the annual NDR bill is (say) £1,000 a year all the way up to Band Z (for homes worth over £5 million) on which the annual NDR bill is £200,000. The median bill would be £6,000 - £7,000 and three-quarters of homes would have a bill of £9,000 or less.

7. The total revenues which could be raised in NDR at that level would be £220 - £250 billion a year, which is enough revenue to replace National Insurance and Value Added Tax and reduce income tax/corporation tax to a flat ten percent (combined with other tax changes).

8. An issue that a tax reformer always faces is that people do not realise how much tax they actually pay - the marginal rate on earned income, once you include benefit withdrawal is far higher than fifty percent. With a system of NDR and a flat income tax of ten percent, an average first time buyer couple on a median income buying a median home would end up paying about £8,000 less in tax every year.

9. By the same token, those people who have ridden the house price bubble and earn a low income compared to the current value of their home would end up paying more in tax, but so what? We are expecting no more of them than they currently expect of younger people. And yes, we are aware that the Baby Boomers will squeal about the "asset-rich, cash-poor" but this is crocodile tears because they are looking forward to inheriting the houses their parents live in and want it to rise in price as much as possible.

10. So we could either exempt pensioners, in which case 'everybody else' pays a bit more, or even better, why not pass the legal liability to paying the tax to those who stand to inherit it, with any unpaid balance to be rolled up and repaid on the death of the current owner?

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