Wednesday 25 April 2012

Who's never had it so good?

A rallying cry of older generations has always been that "you" have had it so good. Sure, there are some people who have never had it so good, but who exactly?

Traditionally, the Tories were always the part of landowners (homeowners, in a modern context), who want house prices and rents to be as high as possible - who have clearly achieved this, as the amount of GDP going into rents and house prices has nearly doubled in the last sixty years.

And originally, the Labour party wanted to nationalise everything, which clearly doesn't work, so they settled for second best and want high taxes on everything to fund a large government sector - and they have clearly achieved this as well.

The two positions, portrayed as 'right wing' and 'left wing' settled their differences long ago and the major parties push both agendas at the same time. Landowners have always been happy with high taxes, as long as those taxes are on earned income and not on the rental value of land and the proceeds are spent on pushing up rents and house prices, and there are plenty of leading 'socialists' who happen to own large houses or buy-to-let portfolios.

The question is - if the unproductive sectors - landownership and the government are winning, they who is losing out?

Sixty years ago, workers and businesses kept 60% of their earned income after paying tax and rent (or mortgage), but this is now down to 46%, with established homeowners and the government enjoying or collecting more than half of GDP. Homeowners will bleat that their homes don't generate a cash income, but this is not much consolation to a generation which has to pay 18% of its income just for somewhere to live:
Sources: Nominal GDP and total taxes from the Public Sector Finances Databank.
Total rents derived by multiplying average house price x 5% x number of dwellings plus one-fifth for commercial and farm rents.
Average house price as published by the Nationwide.
Number of dwellings as published by the DCLG.

How can we reverse this so that people starting out in life today have the same chances as those who started out a few decades ago? That's easy! If we assume that 36% of GDP is a reasonable amount for the government spend or redistribute, then all we'd have to do is to shift the burden of taxation off earned income and collect tax from the rental value of land instead by having National Domestic Rates as well as National Non-Domestic Rates (also known as Business Rates).

If half of the 36% of GDP that goes in tax were collected from the rental value of land and only half from earned income, the result would be that workers and businesses would keep 64% of their earned income, i.e. they would be over one-third better off than now (they currently only keep 46%).

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