Saturday 9 June 2012

How much tax would you like to pay?

Our policy is to shift from taxing incomes and output to taxing the rental value of land. We all know that the Home-Owner-Ists always wail on about "Poor Widows In Mansion being forced to downsize", but who would be the winners under such a tax shift, and by how much?

If we wanted to replace all existing taxes (see footnote 1) with ad valorem National Domestic and Non-Domestic Rates, the tax would be seven per cent per annum on the current selling prices of UK land and buildings (see footnote 2) and the following charts show the break even points (see footnote 3).

To give an example:
- A single earner with no children who earns £16,740 a year and lives in a median value home worth (currently) of £150,000 currently pays £7,000 in tax. Some of this - the Employer's National Insurance and VAT - is stealth taxes which people aren't really conscious of, but they still reduce that person's income/spending power.
- The same single earner on the same wages in the same house would also pay £7,000 in tax (£150,000 x 7% = £10,500 NDR minus £3,500 Citizen's Income).
- So a single earner who owns a median value home who earns more than £16,740 would be better off.
- If he or she earns (say) £30,000, then the chart also gives a guide as to how much they would be better off. These calculations are tricky, but broadly speaking the gain would be between half and three-quarters of the difference between the current income and the break even point, so such a single earner would be at least £7,000 a year better off (half of £30,000 minus £16,740).

Footnote 1: Total revenues for 2012-13 according to the Public Sector Finances Database from income tax, National Insurance, VAT, corporation tax, Business Rates, Council Tax, TV licence, capital gains tax, inheritance tax, Insurance Premium Tax, Stamp Duty and Stamp Duty Land Tax, bank asset tax = £497 billion.

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Footnote 2: If we retained the extra rate of corporation tax on North Sea Oil and increased the bank asset tax to something sensible like 2%, National Domestic & Non-Domestic Rates would need to raise £447 billion. The total value of UK residential land and buildings is currently £5,600 billion, and commercial land buildings are a seventh as much again. £447 billion divided by £6,400 billion = 7 per cent*. So the tax on a home currently worth £200,000 would be +/- £14,000 a year (before deducting Citizen's Income); the tax on a supermarket currently worth £10 million would be £700,000 a year, and so on.

* Strictly speaking, Rates would apply to the "site only rental value assuming optimum permitted to use" which is more subtle concept, so the 7% figure is only a rough guide and an average. On some homes, the tax would be more than 7% and on others it would be less.

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Footnote 3: A household's current tax bill takes into account income tax, National Insurance, Working & Child Tax Credits, an estimate of 7% of earned income for VAT and 1% of the value of the current home for other taxes such as Council Tax, Stamp Duty Land Tax and Insurance Premium Tax. A household's tax bill under the system proposed here assumes that the entire welfare system is replaced with a Citizen's Income of £3,500 per annum for each adult and £1,750 for each child, which would be deducted from the households NDR bill or paid out in cash if it exceeds it.

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  1. Yes but would the government actually need the amount of money it takes now to cover the cost of its massive welfare bill?

  2. Phys, that's the wrong question.

    The land rents have to be collected, and they would vastly exceed the cost of the core functions of the state, so the rest can be dished out as a Citizen's Income, which serves (at least ) three purposes:
    1. To act as a tax-free personal allowance, so that the median household in the median home pays plus/minus nothing in LVT net off Citizen's Income.
    2. To replace the welfare system.
    3. Because having collected the rents, you have to do something with them, and paying off the National Debt and paying it out as CI look like the most sensible options.