Debate Magazine

Killer Arguments Against LVT, Not (481)

Posted on the 04 August 2020 by Markwadsworth @Mark_Wadsworth

I might have done this before, but it's worth repeating.
The KLNs go something like this, "The future LVT would be capitalised into a massive one-off tax hit on current landowners or home-owners" and "House prices would fall, people's savings would be destroyed [and banks would go bankrupt etc etc]"
OK, maybe the first KLN is true, but the flip-side is, having taken this on the chin, current landowners and home-owners wouldn't have a future LVT liability.
For example - if you have a mortgage of £100,000, you'll have to make regular, monthly payments for the next few years or decades. The NPV of those payments is £100,000. You can't add the two ways of measuring the amount of the mortgage together to make a mortgage of £200,000. That's Home-Owner-Ist maths, not real maths.
The second KLN says that house prices would fall by the NPV of the future LVT. So another way of measuring the NPV of the future LVT is by looking at how much house prices would fall.
I see no reason to assume that house prices, in nominal terms, would fall.
House prices are dictated by how much purchasers are willing to pay i.e. borrow to buy them (or how much tenants are prepared to pay to rent them). If the LVT on each home were approx. 3% of its current selling price and taxes on output and earnings (not to mention minor crap like Council Tax, SDLT, Inheritance tax and so on) reduced accordingly, then most working households' disposable income (after tax) would be £10,000 to £15,000 higher each year, year in, year out.
So working owner-occupiers would be laughing anyway, and less likely to want to sell (unless they want to trade up). Even if landlords 'pass on' the LVT, tenants will still be a lot better off (the LVT would only be half as much as the NIC and VAT reductions) and pensioners will either pay it or roll up and defer. So there would not be a flood of homes put up for sale (even if there were, where are all those seller going to live? They'd have to buy or rent somewhere else, so there's be an equally large flood or buyers and tenants. Some of them will trade down, but just as many others will want to trade up.)
Would a rational person accept a fall in the selling price of their home if it meant a massive increase in net pay, and if it made trading up a lot cheaper? Surely yes, provided the fall in the selling price weren't too horrific. (Personally, I'd be delighted if house prices fell anyway, we've paid off the mortgage, have no intention of moving ever again and I'd like my kids to be able to buy their own homes out of their own earnings without resorting to BOMAD. Every £1 of paper capital gain that evaporates for me and Mrs W means each child will save £2 in mortgage payments, so that's a net £3 gain for us as a family.)
And how much would that fall be?
Likely buyers (and tenants) are prepared to commit a certain fraction of their net earnings (after tax) towards housing costs (SDLT, Council Tax, mortgage payments; or Council Tax and rent). This fraction is around 40% across the UK. The amount which purchasers (or tenants) are willing to pay would go up (40% of a larger number is greater than 40% of a smaller number), the annual LVT comes off that first and the balance would go on mortgage payments.
You can muck about with spreadsheets to your heart's content (and I have done), but by and large, what people are prepared to pay towards a mortgage wouldn't change much, therefore, house prices wouldn't change much (and if there were the slightest risk that they would fall, then the government could just cap mortgage interest rates at 2% or something).
So on closer inspection, the KLN's melt away (as they usually do). The NPV of the future LVT hit would be plus/minus nothing.
But the future tax reduction on output and earnings is real and can be enjoyed every year for the rest of your life, or the rest of your working life at least. The NPV of that is massive. After that, you can just roll up and defer if you'd rather spend it. There's no particular need to "Leave the house to the children" because they will have bought their own homes long before you shuffle off.


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