Polly Toynbee has written:
Kick-starting the housing market is the urgent priority, isn't it?
So the government put money into preventing repossessions, and yesterday Northern Rock was reborn as a lender able to offer mortgages of up to 90%.
And as she then goes on to argue, this is not the case. Precisely because housing has been so lightly taxed in the UK it has become an asset subject to speculation and price bubbles. We all lose as a result.
There are several solutions. Polly mentions some, I offer these as well:
1) Reduce Inheritance Tax thresholds: this creates appropriate progressiveness in taxation and charges properties to tax at the precise point when it is absolutely right to do so: when the owner no longer has a use for them. And yes, a modification or two to allow for co-habiting sisters and off-spring who have been genuine carers will be needed. But this reform is essential now - and let's ignore everyone who says this is double and triple taxation. That's rubbish, as I show here. And, if we are to avoid capital gains tax charge on increase in property prices during a person's lifetime a totally realistic level of tax paid on death is the only option. An appropriate inheritance tax is the price of labour mobility which a capital gains tax during life would constrain.
2) Speculation in housing must be taxed as income - buy to let is fine: I am in favour of rented property being available. Buy to speculate is not. So short term property gains on rented property must be taxed as income.
3) Restrict tax relief on buy to let property. The 100% tax offset fuelled the property boom. Interest caps - for an individual in total and against the value of individual properties have to be introduced.
4) We have to look at land value taxation. I know this is a contentious issue. I know it will give rise to comment on this blog. But it is inappropriate to ignore the issue, even for pensioners and others who do not have the cash flow to make payment. For them a deferred charge against the value of the property can be agreed.
5) Housing must be considered to be a communal asset again. It is not just private property. Bond financed, environmentally sound, family friendly property has to be built to meet the massive demand for decent housing that exists in this country.
We cannot afford the duck this issue. When parents all over the country wonder how their children under the age of 25 may ever live independently it is obvious that house prices remain completely inappropriately high. When tax exemption of property is a major reason for this it is abundantly clear that now is the moment to address this issue. We will never get a better chance.
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Just what, exactly, is the woman arguing for?
Only when “housing” is a collectible (i.e., when the structure has some unique historical or architectual character) do investors speculate in housing. Speculation occurs in the location because the supply of locations is inelastic.
My own work to expand the supply of affordable housing in the United States brought me to understand that the taxation of property here has been a destructive force. The ideal rate of taxation on housing units is “zero,” whereas the ideal rate of taxation on locations is the amount that would equal what a location would yield in rent under a ground lease awarded by competitive bidding.
In discussions here with public officials and others concerned about displacement of long-term residents on fixed incomes I have proposed a “circuit-breaker” of sorts. Resident homeowners would be permitted to petition the local taxing authority to have their property tax payment capped based on a formula tied to household income and liquid assets. The unpaid amount would accrue as a lien on the property (at whatever interest rate the community is paying for its bond debt) to be repaid upon sale or other transfer of title to the property. This will permit people to remain in their communities in the face of rising land values but not impose on others a long-term obligation to subsidize the cost of public goods and services.
I hope these comments are of some value as you consider which options are the best to pursue.
I find it disturbing that I find myself agreeing, in broad terms, with anything Polly Pointless writes. The central thrust of her argument, being that the generous tax code applying to residential property has stilted people’s “investment” decisions is, to my mind, undoubtedly correct. Many people, including myself, would add to the mix that the lack of faith in formalised pension savings (especially in the aftermath of the 1997 tax credits raid) has contributed significantly to the equation.
It remains anomalous that we have a system which encourages ordinary people to invest in residential property but discourages them from investing into SMEs. In my view, it is time now to lessen the extremely restrictive rules for tax relief for investment into SMEs (whether directly or via pensions, ISAs etc).
At the same time, a denial of any interest relief for loans taken for any new BTLs should be introduced.
Whilst I a tax expert, and not an economist, I struggle to find any argument to defeat the economic merits of such changes.
Germany has none of the taxation and regulation you suggest and no problem at all regarding affordable housing or housing asset bubbles.
You do not solve a supply problem by taxation, that simply distorts the market without lowering price or improving living conditions.
The UK has a demand and a quality problem… the first provokes the second… the British are paying high prices for low quality. Demand forces capital value into the land and skeleton of a property, removing it from its infrastructure as one pays everything one has just to get in the door.
Property quality is dependent on city planning and amenities. Every since the destruction of the second world war the Germans have been investing more in infrastructure while the British have let a supply problem drain their cities and property of investment.
Drive around Mecklenburg, in what was East Germany, to see how beautifully maintained and affordable the area is… it is just 1 hour north of Berlin… so compare it with prices in Cambridge.
Milton Keynes is an example Britain easing demand by designing somewhere people actually quite like. It needs to be done again and improved on.
Finally, you cannot solve this problem if you do not face up to demographics and environmental carrying capacity. Britain has added nearly 20 million to it’s population since the last world war and yet not wanted to plan, build or increase density for it. One doesn’t solve that with more taxes… unless ones intention is to provoke emigration.
The problem is a function of immigration and not population density:
Canada – low density – high immigration = property boom
US – low density – high immigration = property boom
Spain – medium density – high immigration = property boom
UK – high density – high immigration = property boom
Germany – high density – low immigration = no boom
The relationship is complicated by rate of property construction, mortgage lending rules and internal local demand variation.
1) Reduce Inheritance Tax thresholds: the horse has already bolted.
2) Speculation in housing must be taxed as income: the horse has already bolted. Also, this creates a problem affording the next property. In times of high inflation it would be unworkable.
3) Restrict tax relief on buy to let property: Mortgage tax relief marginally inflates capital values. Ending any form of it is good but doesn’t end property asset booms (which are based on high demand, low interest rates and credit availability).
4) We have to look at land value taxation: an unsettling tax that severely stresses the old and the redundant at the most inopportune moment possible; forces the best locations into the hands of the rich, thus, segregating society (including schools) based on current income; creates clone high streets by weeding out quirky family businesses on low margins and does nothing what-so-ever to prevent property booms.
5) Housing must be considered to be a communal asset again. It is not just private property. Bond financed, environmentally sound, family friendly property has to be built: Yes, here’s something that would have an effect! I’m in total agreement.
Build functioning organic communities: energy efficient properties: mix of housing and clean work places with walking to work (planning based on the simplistic notion that all work is heavy industry has separated work from home and caused a commuting problem).
Treating planning and development as an investment for posterity in what the UK has to offer it’s citizens and the businesses that establish themselves here…
… and do this in proportion to a target population which you attempt to maintain based on a public debate informed by an assessment of what is responsibly sustainable in the long-term: that means you consult marine biologists, environmentalists, foresters, historians, geologists, farmers and demographers, NOT lawyer politicians.
Your views on tax havens would totally disappear if we scrap the notion of tax altogether.
Why do we tax? Why not get rid of it. we would get less interference from government who think they know better than the individual, money would not be wasted, and we could all decide what we do with our hard earned loot.
Replace it with charges, privatise the services, and support those who are truly unfortunate not to be capable of earning an honest shilling with charity. Just like the good old USofA. And we could also ban wars so we don’t need tax for armies, weapons etc.
Honestly, what is the issue here?
Not entirely sure what point Polly was making, but twas always the case.
Richard lights the Land Value Taxation blue touchpaper but then the changes to the website’s format keep me and no doubt others from posting comments for a day or two.
Background
There is a housing shortage in the United Kingdom. From the end of the second world war until Margaret Thatcher substantial amounts of housing were built at public expense. Some of it was good quality, some of it mediocre and some of it utterly abysmal (particularly in the 1960’s). Mrs Thatcher believed firstly that the private sector could always do things better than the state and secondly that if the state stopped building housing then the private sector would step into the gap and increase supply. The world will argue forever on the first point but Mrs T was plainly wrong on the second. Rather than analyse why the private sector has not increased the supply of housing government has settled on the entirely anecdotal claims of developers that it is hard to get planning permission, but as anybody who lives adjacent to a proposed development in England will tell you it is very difficult to persuade local authorities to refuse planning applications. In the absence of any properly conducted peer reviewed academic research, and do please provide a link if any of you know of any, perceptions of the English planning system are purely subjective. In very simple terms public investment in housing was on a need basis and private investment is on a demand basis, not quite the same thing. Some well known / household name ‘developers’ made a lot of money in the last decade by getting planning permission and selling sites on. Having sold the sites on, they were not in their ‘landbanks’ when the government checked their portfolios.
Land Value Taxation (LVT)
Imlemented in many parts of Pennsylvania as part of hybrid property taxes it encourages the efficient use of land and discourages the sort of dereliction that many UK developers create in order to make sites such eyesores that local authorities will allow almost anything as a replacement.
Edward Dodson states that “the ideal rate of taxation on locations is the amount that would equal what a location would yield in rent under a ground lease awarded by competitive bidding.” This is not taxation but appropriation and bears no relationship to the sucessful implementation of LVT anywhere in the world. Such views not only tend to obscure the arguments in favour of LVT but, all too often, are the only version of LVT that people get to hear of.
Many of the proponents of LVT as a backdoor method of nationalising land proclaim the 19th Century American politician Henry George as the messiah. Apart from his racist views on Chinese immigration he was also the first person stupid enough to propose the idea, often wrongly credited to John Major, of seperating the ownership of railways and rolling stock. The names of those who made LVT a practicality are forgotten, and it is a great pity that Henry George has not been.
LVT is not a panacea that would rid the UK of all ills but, sensibly implemented as a percentage of the rental value of land, would encourage the efficient and effective use of land. It would also ensure that when public investment is made in projects such as the Jubilee Line Extension in London that a reasonable proportion of the uplift in land value accures to the public purse. At too high a rate it would cause the social problems that Richard and Stefan are entirely right to mention. To create a tax that required widespread deferment of payment would seems a bit pointless and would hit middle England’s curiously raw Inheritance Tax nerve.
I note that the Coalition for Economic Justice has a seminar regarding LVT at the House of Commons on 24 March 2009, Committee Room 15 5-7pm. Speakers include Vince Cable and Samuel Brittain so it should be informative and practical. I presume Richard will remind us all closer to the time.
None of the above will solve the housing shortage or calm the housing market. 15 to 20 years public investment in social housing is required to do that.
Bill
If you really are paranoid enough to think the hassle I’ve had with the blog was meant to stop you posting then no meaningful debate is possible
I’m sure there is merit in LVT
Those who propose it make sure all reasonable people run a mile from it
It’s a characteristic they share in common with monetary reformers – again an issue with which I have enormous sympathy and a reluctance to engage because it seems to produce only paranoia and massive animosity amongst the camps that propose it
Which is a shame in both cases.
My message is simple – get your acts together so we can engage. Right now it is very hard to do so
Richard
Stefan
“Milton Keynes is an example Britain easing demand by designing somewhere people actually quite like. ”
I take it you’ve never been to MK, Stefan.
On the subject of abolishing tax relief on mortgage interest for second homes, Australia did this. They found that landlords simply upped the rent to maintain their margins. The Australian government had to reinstate the relief.
Re. taxing property speculation as income rather than cap gains – I believe this is the case already. If someone buys a 2nd property purely with a view to sell it at a profit then HMRC will treat it as trading income. I have no problem with that.