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In my Father’s house…

9 July 2013

Kensington-PalaceThe Times yesterday reported that “Treasury figures ‘reveal cost of mansion tax as £36,000 a year’”, reminding us of the stubborn persistence of the spectre of this unfair and malicious proposal. The figure is an average sum for the estimated 55,000 houses affected; as these already suffer council tax at the top rate of £2000 per annum, this represents an average increase of 1800%: a hike for which I can think of no precedent. Many excellent points are made in today’s edition by an economist from the Centre for Policy Studies, to which I refer you before adding my ha’p’orth.

To those who argue that the rich should pay more, there may be good sense in opposing the reduction of the top rate of income tax from 50% to 45%; but there can be no justice in a measure that would instead arbitrarily (and without affecting many who have benefited from the reduction) impose an effective tax rate of over 100% on the incomes of  some families who have lived for many years in neighbourhoods where prices are currently inflated. They will be obliged to lose their homes.

You may think they are all wealthy: but some may live in a 1000 sq. ft, two bedroom flat in Kensington (an area which does indeed contain many mansions), on retirement incomes that have been destroyed by the government’s policies of artificially low interest rates (“decimated” means losing one-tenth; base rate has fallen by nine-tenths in a few years, a penalty for which I can think of no stronger word than “oppression”). They can only qualify for your jealousy by selling their homes: and surely that is the time to tax the proceeds. But no government would dare to impose capital gains tax on domestic residences.

Not all of the current price level is attributable to foreign wealth of dubious origin: the profits of our own kleptocracy – bankers’ bonuses, the very sums nominally taxed at Mr Osborne’s reduced rate – have contributed as much to the bubble, as will the chancellor’s insane Help to Buy programme.

The Times quotes the Lib Dems’ Treasury spokesman as saying “For the 95 per cent of people that do not live in mansions, this is a popular policy.” The blatant cynicism of that approach needs no further comment, but it is certainly not how I interpret the message of tolerance in John 14:2.

Postscript

My letter to The Times on this topic, penned on Monday, appears today (11 July; firewall). See also the comments below.

PPS

This issue won’t go away. Merryn Somerset Webb (“The perfect tax?”, Financial Times, 28–29 September) proposes a land, or location, value tax, a thinly veiled version of the mansion tax, and selectively cites Adam Smith’s approval for its efficiency. In a lengthy discussion of various types of land tax, Smith is quite clear that, where property ownership is not changed, tax should only be charged on “some part of the revenue arising from it”. Any system, whether called an LVT or mansion tax, that is charged on people living in property that has gone up in value more rapidly than their income offends against one of his four fundamental maxims with regard to taxes in general, viz. that “Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.”

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From → Justice, Politics, Tax

8 Comments
  1. It’s an emotive topic, but here are a few contrary observations that I offer without concluding one way or t’other.

    Economists generally consider consumption tax more economically efficient than income tax, because income tax discourages effort whereas consumption tax encourages investment. The main problem is that consumption tax is regressive, because poorer people spend more and richer people invest more – so consumption tax puts burden on poorer. Better off people ‘consume’ more housing – that is, they enjoy the usufruct of bigger and nicer houses. Property taxes are one way of distributing the burden of consumption tax more equitably.

    The UK has extraordinarily low property tax by international standards (vastly higher in most of the US, for example), and also by historical British standards. So the big headline increase is just addressing an anomaly.

    The problem with capital gains tax on housing is that it’s an impediment to labour mobility, which is a drag on the economy. Stamp duty has the same effect – it would be more economically efficient to abolish tax on property transactions and replace with annual tax on value.

    The problem of forcing people to move just because the area they live in has become more desirable (which I agree is unreasonably) could be solved by the government taking equity in the property, to be realised upon death of the owner.

    I do agree with you on the cynicism of the LibDem comment. A sensible approach to taxing housing would be progressive but wouldn’t impose an arbitrary distinction between ‘houses’ and ‘mansions’.

  2. For the academic arguments, it is worth reading Ryan Bourne’s piece in The Times today. For example, according to the OECD, the UK has the highest property tax burden, at 4.1% of GDP, of all OECD countries. As for your suggestion that the Government take equity in property, I agree: in fact I take this to the logical conclusion in my piece recommending 100% death duties.

  3. I can’t get access through Times paywall, but OECD data aggregate recurring tax on property (which we’re discussing), together with transaction taxes (high in UK), weath taxes and inheritance/gift taxes. I’m not sure how they treat offsetting impact of mortgage tax relief.

    There is much to be said for your argument on death duties – personally I would tax recipients rather than estate, treating inheritance as income. This OECD report has more on economic benefit of recurring property taxes, e.g. para. 48: http://search.oecd.org/officialdocuments/displaydocumentpdf/?cote=ECO/WKP%282008%2928&doclanguage=en

    In UK, I think it’s somewhat misleading to view council tax as property tax because it’s so regressive. It’s more like a poll tax adjusted for property value. One point the mansion tax addresses is that the undifferentiated top rate doesn’t distinguish ultra-high value property, and it’s further distorted regionally (e.g. Westminster keeping rates low in one of the wealthiest parts of the country by raising revenue from parking tickets!). In California, for example, there’s a 1% rate charged on property value, plus additional local property taxes. On top of that there are local sales taxes and income taxes – so it’s only part of local taxation.

  4. Thanks for the link. Yes, those data are from OECD stats, which (like many OECD stats) can be very misleading given the different ways that they are collected and aggregated – no fault of the OECD, but CPS ought really to have been more balanced if it seeks credibility in the debate. It’s a shame that a serious debate has become polarised between crass attempt to pit 95% against minority with big houses on one side, versus CPS sound-bites on the other.

  5. Indeed that was one reason why I didn’t raise the OECD statistics in my main piece.
    This is a topic which raises so many more issues. This is not a tax on consumption, but on location.
    There is a particular irony in arguing that the top rate of tax must come down so that we can continue to attract top international talent to London, without whom our economic recovery would not tke place – and then hit them with a tax like this. Will Mark Carney, for example, renegotiate his housing package (you may expect that any mansion tax applied to owners will be passed on, grossed up, to tenants)? The proposal favours only the super-rich. The ethnic cleansing of Notting Hill started years ago, with antiques shops giving way to branded retailers of international gewgaws and tat, and continues with gated fortresses with basement swimming pools in the place of Victorian cottages.
    I would suggest that the proposal be put back in the box of bad ideas if there were not so much evidence that that is where George Osborne rummages so frequently.

  6. Justin permalink

    Surely the solution would be to levy such a tax only on buildings that are empty for a substantial part of the year. Those who want to leave a second home empty can pay for the privilege; the retired folk in their homes in Kensington or Sandbanks can avoid selling up and moving abroad.

    As for Help to Buy and other schemes that inflate property prices, they are obviously crazy and make me mad. Where I live, the authorities are constantly building on expensive city-centre land to create subsidized homes for the poor, driving up prices for everyone and driving the working middle classes out to commuterland.

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