The housing-tax scam: how taxpayers are milked to enrich land owners. TAP affordable housing campaign BLOG 5.

25 October 2016

TAP affordable housing campaign BLOG 5.

The housing-tax scam: how taxpayers are milked to enrich land owners

Fred Harrison argues that UK citizens are penalised for working. Taxes are levied on wages, while the owners of land or other assets receive capital gains without lifting a finger. Land has no cost of production - it is there from time immemorial, a “free gift of nature”! He estimates that the top 20% of taxpayers who pay around £1.7 million income tax in their life time are reimbursed every penny by the increase in the value of their land by the same amount.  Wealthy land owners have tax-free lives while the middle to low earners pay for all the roads, the sewage, the police and other public services with the income and council tax.   He argues that the “scam is lawful”.  The tax system burdens low-income families, whose lifetime tax bill is not reimbursed through capital gains. Governments turn a blind eye to the injustice while wringing their hands in despair at not being able to deliver affordable housing to people on the lowest incomes. The way to equalise everyone’s life chances in the housing market is to shift the revenue system off taxing people’s wages, and on to paying rent for land.  

The housing-tax scam: how taxpayers are milked to enrich land-owners

Fred Harrison

PEOPLE whom they brand as “benefit scroungers” are routinely ridiculed by sections of the media. Television companies even make documentaries about people who should not qualify for tax-funded benefits. But the luckiest scroungers of state largesse - I am one of them - are never held to account for the money they pocket from the public purse. That is because the scam is lawful.

The scam is a legacy of a bygone age of irresponsible governance. We do not talk about it because the debate about the housing crisis is distorted by notions such as “hard-working middle class home-owners”. But if we continue to advocate the need to “get on the housing ladder”, there is no chance of solving the problem of unaffordable housing.

At the heart of the crisis is the way government raises and spends our money. Let’s examine the covert way in which tax policy interfaces with the housing market, and one of the techniques for distracting us from the biggest financial scandal facing the nation.

The Taxpayers’ Alliance (TPA), a libertarian champion of taxpayers, wants government to reduce its tax-take. To argue its case, it points out that the average household in the top 20% of income earners will pay more into the public purse than any other group of people. And we are expected to believe that this is “progressive taxation”. It’s fair that the rich should pay the most into the public purse - right? An individual within the top 20% bracket will pay, on average, £1,686,970 in tax over his working lifetime.1 The calculation is based on Office for National Statistics data for 2016.

But the TPA does not reveal that high-tax payers are the nation’s biggest winners from the State’s handout of benefits. By following the money trail, we discover that the public services they enjoy are funded out of the pockets of low-income families. I will illustrate this tax-scam with an example taken from London.

According to the estate agency Rightmove, terraced properties in London’s Kensington had an average sold price of £4,507,685 in the 12 months to August 2016. Semi-detached properties averaged £7,633,846. What does that mean for the owner of a (say) £5m residential property, who would be in the top 20% income bracket? With house prices rising at conservatively estimated rates of increase between 2017 and 2021 (with a weakening of prices in 2019), I estimate that the value of that £5m dwelling will increase by about £1,700,000. In other words, the average high-income taxpayer will be reimbursed for his whole lifetime tax liabilities in five years flat!

Who reimbursed him with those windfall capital gains? Father Christmas? An alchemist holed up in a cave in the Swiss Alps who splays out the riches that come cascading down from the heavens and into the pockets of the owners of residential property?

No. Capital gain measures the value of the location occupied by the house, the value which government fails to collect to defray the cost of the services it delivers. It is the subsidy to property owners for which there is no means test.

The family occupying that £5m house in Kensington will enjoy access to public services which are funded, in part, by low-income taxpayers who live in rented accommodation.

This State-sponsored device for making the rich richer (and the poor, poorer) means that, for most of their lives, rich folk enjoy public services without paying for them. I first spelt out the economics of this scam in 2006.2 Governments turn a blind eye to the injustice while wringing their hands in despair at not being able to deliver affordable housing to people on the lowest incomes.

People’s minds are coloured in ways that reinforce the injustice. This technique was paraded by the Daily Mail on October 13. Its headline asked: “When is an 89p brick worth £121?” The answer: “When it’s part of a London house”.

Really?

A brick is worth 89p on the shelf of a DIY store, according to the Daily Mail. The newspaper was comparing London house prices with the value of a brick in Liverpool (£25.87), Glasgow (£22.55) or Belfast (£22.09).

Now for the reality check.

The instant a brick is clamped between cement, it loses value. It’s called depreciation. The brick begins its long life of continuously losing value until, one day, the house is demolished and the brick ends up as hard core beneath someone’s driveway.

But something is going up in value. What? The answer: location! More honestly, the Daily Mail should have compared a square meter of residential land in London with a square metre of land in the other towns. But that would create psychological discomfort for its wealthy shareholders. Why? Land has no cost of production - it is there from time immemorial, a “free gift of nature”!

How can something that costs nothing to produce have such a huge value in London (compared to Glasgow)? That question, in turn, leads us to the uncomfortable truth: through the tax system, people are penalised for working: taxes are levied on wages; while the owners of land or other rent-generating assets receive capital gains without lifting a finger.

This is not fair. It means that Prime Minister Theresa May’s mission to treat everyone as equals is not possible. Her government’s tax system burdens low-income families, whose lifetime tax bill is not reimbursed through capital gains. They spend their lives paying rent to their landlords - who pick up the capital gains!

The way to equalise everyone’s life chances in the housing market is to shift the revenue system off taxing people’s wages, and on to paying rent for land. This way, we all pay for the public benefits we receive. Now that’s what we can call fair.

1 http://www.taxpayersalliance.com/lifetime_tax_2016

2 Harrison (2006), Ricardo’s Law, Ch.1.

 

 

 


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