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Mansion maths: an open letter to Ed Balls, MP

2 January 2015

Dear Mr Balls
Your article in yesterday’s Guardian, claiming the centre ground for Labour, has enough to commend it to receive the endorsement of people such as the FT’s Chris Giles. But it makes no mention of your determination to press on with the proposal discussed in another Guardian article, “Mansion tax to come in…” (23 December). This, as some of your colleagues have already pointed out, fundamentally undermines your claim to the centre ground and to fairness. It’s irrelevant that you identify a worthy cause for the tax. No one has yet explained why you think raising money this way (with all the attendant need to counter avoidance and anomalies) is fairer than say putting the top rate of income tax up to 51% instead of 50% (where all the mechanics are in place to ensure that the burden falls on those who have the money to pay).

But have you even done the arithmetic? To purchase a £10m house, you already have to pay £1.1m stamp duty. A mansion tax of 1% on the excess over £2m is an additional £80,000 per annum. For a 50% taxpayer to produce such an amount out of post-tax income would require substantial additional capital: if invested in 10 year gilts (currently yielding 1.85% pre-tax), some £8.65m would be required (without covering any capital growth). This is a burden no rational investor would tolerate. But the wall of money from foreign crime, City kleptocracy and developers seeking to divide up houses into £2m flats may still prop up prices at the top end.

The mansion tax will hit hardest not the Angelina Jolies but the retired people in £5m homes on pensions sufficient to drag them out of basic rate tax (the threshold for the only safety net your populist approach need concede) but who will face effective tax rates on their income of over 100%, and who when forced to sell will find it very difficult to do so. (Other countries with wealth taxes include measures to restrict total taxation to no more than say 75% of income.) For these few thousand people, this policy is nothing short of expropriation.

There will be a massive gap between “values” and what people are prepared to pay. You spend £5m to buy a two-bedroom terraced house in London because you think it will be worth £6m in a year’s time, not because you think it will cost you another £3m in tax and will be worth £2m until the Tories are reelected. So until then there will be a virtual freeze on housing transactions. No one will undertake home improvements when they face a penalty equivalent to raising VAT to 100%. A sector which would have contributed much-needed growth to the economy will be killed.

Whatever its aleatory effect on house prices at different price bands, this policy does nothing to address the real problem of housing. It is wrong that London homes are too expensive for ordinary salaried people. But you don’t solve that by adding crippling taxes that make them even more expensive. You won’t in practice solve it by building more houses, although the number you might be able to build could help. You should instead be looking at where the money supporting these prices is coming from: taxing foreign investors’ gains should certainly help.

But there are also wealthy British people who buy London houses. What a genuine socialist party would be doing is examining from a far more fundamental perspective how this works. It is right to encourage enterprise and make London an attractive centre for talent that creates growth and makes a positive contribution to our economy (not to discourage it through a mansion tax). But Labour has conspicuously failed to get to grips with the City kleptocracy in which tens of thousands of bankers continue to be paid the sort of bonuses that permit these house purchases, despite the fact that their “performance” is taken out of a zero-sum trading pot that cleverly monetises the state subsidy on which banking in the UK still rests. That is the major scandal your policies should address, not seeking to humiliate a few thousand pensioners in Kensington.

Postscript – 24 January

The mansion tax has been much in the news since the above was written, including in an excellent article in today’s Financial Times. Lord Mandelson has added his voice to Labour dissent, calling the measure “crude”; while Ed Balls (who needless to say has not responded to me) has denied this, but refuses to provide any more detail before the election beyond the concessionary rate offered to houses between £2 and £3m, and the idea that the tax will be levied on a banded system and will rely on self-certification of values with stiff anti-avoidance measures. But how my valuation question is to be answered is unknown; nor is it likely that the level on a £10m house will be less than my illustrative £80,000 if the tax has any hope of raising the £1.2bn that has been bandied around. This is no way to gain acceptance for such a radical and destructive measure.

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From → Politics

8 Comments
  1. Here, here! As a resident of France, we are only too aware of how damaging such a tax can be. Taxation based on earned income is the only fair system.

  2. timoffer permalink

    I fully believe that our life experiences help form our opinion. If you’d spent your life living in house shares and bedsits with no hope of ever owning a home of your own you might think differently. So whilst I admire the intellect of your argument, I disagree with your sentiment.

    Bedroom Tax; affects over 660,000 people, more than half of whom are disabled and penalises the poorest in our society, those without millions of pounds of capital to look after themselves. People have to pay even if their income is very small. This tax has caused evictions, homelessness and overcrowding to increase whilst the number of children currently living in temporary hostels has soared to 90,000.

    MansionTax; affects around 110,000 people, either very rich or those who have made millions through the sheer luck of house price inflation. The £2 million limit is more than most in our generation can expect to earn in our entire lifetime (and no doubt most of that will be spent on rent). Only those with a high income will have to pay anyway.

    There is also a bigger picture here. The Conservatives are now the only party happy to use Property Taxes that are 23 years out of date (in the form on Council Tax bands set in 1991), when the average house price was a fifth of what is was today.

    This means that one of their billionaire friends in an £80 million mansion pays less Council Tax than a £197,000 family home, in fact £1,369 a year. Whereas In New York a property costing $36 million attracts $564,666 a year in property taxes.

    £1,369 a year is less than 1% of $546,666 a year and its clear to see why the Buy to Leave investors are flocking to London to snap up our housing stock to leave empty whilst the rest of us stare in horror.

    Bedroom Tax; affects over 660,000 people, more than half of whom are disabled and penalises the poorest in our society, those without millions of pounds of capital to look after themselves. People have to pay even if their income is very small. This tax has caused evictions, homelessness and overcrowding to increase whilst the number of children currently living in temporary hostels has soared to 90,000.

    MansionTax; affects around 110,000 people, either very rich or those who have made millions through the sheer luck of house price inflation. The £2 million limit is more than most in our generation can expect to earn in our entire lifetime (and no doubt most of that will be spent on rent). Only those with a high income will have to pay anyway.

    There is also a bigger picture here. The Conservatives are now the only party to be happy to use Property Taxes that are 23 years out of date (in the form on Council Tax bands set in 1991), when the average house price was a fifth of what is was today.

    This means that one of their billionaire friends in an £80 million mansion pays less Council Tax than a £197,000 family home, in fact £1,369 a year. Whereas In New York a property costing $36 million attracts $564,666 a year in property taxes.

    £1,369 a year is less than 1% of $546,666 a year and its clear to see why the Buy to Leave investors are flocking to London to snap up our housing stock to leave empty whilst the rest of us stare in horror.

    Most of the other UK parties have come up with solutions to this problem; Labour with a Mansion Tax, the Liberal Democrats with a long overdue revalued Council Tax Bands and the Green Party with a progressive Land Value Tax.

    In Washington DC vacant properties pay 5% of the properties worth per year in tax, as opposed to occupied properties at 0.85%. A policy such as this in the UK would not only increase housing supply in London but also help prevent the ghost villages in Cornwall and other rural areas, where 70% of properties lie empty in winter all whilst families are priced out of living in a decent home. And its even more important in a far more densely populated country like England that our housing stock is used more fairly.

    The United States is one of many countries to realise that “in examining the effect of various types of taxes on economic growth, it found property taxes to be the most growth-friendly, followed by consumption taxes and then by personal income taxes.”. This is because it incentivises those born into no money to create their own wealth by working hard whilst ensuring that the very rich pay some tax on their capital wealth. The Liberal Democrat policy, that the Conservatives initially opposed, of raising the tax threshold from £6,475 to £10,500 was a good idea.

    Other countries now readily criticise our Government using property taxes that are 23 years out of date, all during a severe housing supply crisis. It’s no surprise that the gap between the rich and the poor is getting bigger and it’s a sad fact that the UK is one of the most unequal societies in Europe.

    Surely the Conservative Party now need to accept, like Labour, the Liberal Democrats and the Green Party, that we can no longer morally justify property taxes from the wrong century. Updating the Council Tax bands and increasing taxes on empty and 2nd homes could have multiple benefits.

    It would reduce the incentive for multiple home ownership, therefore spreading limited resources more fairly and enabling more people to own their own home. Isn’t increasing home ownership a Conservative goal?

    More homes in rural areas can be occupied by young local families that desperately need them rather than left empty by second homeowners. Therefore greater numbers of children will get the chance to live in nice detached properties with gardens surrounded by attractive countryside rather than crammed into ever smaller shoeboxes; the UK now has the smallest homes in Europe, creating a healthier society. Villages and rural areas will become vibrant mixed communities once more.

    Central London properties will be lived in, rather than left empty by property investment speculators and we won’t have to live further out and commute ever larger distances. It would dampen house prices, making them affordable once more.

    The Conservatives have cut by 40% Central Government Grants to Local Authorities, leaving Council Tax Revenues as one of their main sources of income. Therefore up to date Council Tax bands could help protect vital public services for the poor and needy. Why are central London Councils and Councillors not campaigning for this?

    So why are the Conservatives happy to impose a Bedroom Tax whilst opposing Labour’s Mansion Tax and refusing to update our shockingly out of date Council Tax bands. Is it vested interests at play again, since most of the Conservative cabinet and their powerful friends live in Mansions?

    Surely the Conservatives must now have a plan to update our antiquated Council Tax bands if they wish to be re-elected? Or does the richest 110,000 people in the country count more to them than the 10 million private renters, many of us priced out of owning just one home of our own?

    • I quite agree that the bedroom tax is also unfair. But the mansion tax will increase the cost of housing, not reduce it. The way to deal with house prices is 100 % inheritance tax. That would be far more equitable. So would higher top rate tax. The problem is not taxing the really wealthy but those pensioners who don’t have the cash to pay the mansion tax but who are just above basic rate tax, so Balls so won’t protect them.

  3. timoffer permalink

    Hi Neil. Apologies for my cut and paste job on the smart phone whilst in a rush last night. There’s duplicated paragraphs, it’s bit unwieldy and didn’t doesn’t address all your points.

    And thanks for clarifying about the 100% inheritance tax. That would indeed deal with many things, including house prices. It would help social mobility far more than any property tax. It also puts to rest any thoughts I had about you being someone who doesn’t believe in a fairer distribution of wealth.

    However just one more point to pick up on. Ed Balls has already come up with a solution for asset rich cash poor pensioners, they won’t have to pay anything until they die, so effectively an inheritance tax that you support?

    I do believe that adding a Mansion Tax to our existing Council Tax would be crude. My writing is designed to put pressure on the Tories to do something to solve our housing crisis, so its political and therefore not a completely balanced argument if I’m honest.

    Personally I think that it would be more logical to have one or the other, and I’d prefer updating our woefully out of date Council Tax bands, bringing them into the 21st century and having the money brought in from higher rates of council tax bands ring-fenced to affordable housing. Or scrap Council Tax altogether and have a progressive Land Value Tax as advocated by the Green Party.

    But if it would be a choice of doing nothing, not updating our Council Tax bands or Inheritance Tax as per the Tories, or bringing in a Mansion Tax as per Labour, I’d rather the latter. At present there are too many Buy to Leave investors snapping up luxury flats and leaving them empty all because London’s property taxes are much lower than other global financial cities. And I do believe a Mansion Tax would dampen house prices and ensure that more luxury flats are lived in or rented out.

  4. Let us just be clear about Balls’s concession to the “asset rich cash poor”, because unfortunately the media have ignored this. His offer for deferral is restricted to basic rate taxpayers, ie. those whos income is less than £31,865. He’s done this so that he can claim this group is protected, knowing the media won’t probe more deeply, and in the cynical expectation that this will win votes. Suppose you bought your house in London for £500,000 twenty years ago when you were a reasonably well paid professional. Now you’ve retired on a pension of £45,000 a year. Just because some Russian crookos want to launder their money in London property your house is now worth £5m, even though it’s a small 2 bedroomed terraced house. How on earth are you going to find £30,000 out of post tax income? What you really want is for the price of your home to come down to realistic levels, but it won’t while the foreign buyers ignore economics.
    Now explain to me why this person should suffer a tax rate of about 100% of income while a banker on £1m a year pays a tiny fraction of this (they won’t even pay 50% under Labour as most structure their remuneration as carried interests, taxed at 28%, or offshore). Why doesn’t Labour target tax on those with the shoulders to bear it?
    It may be that only 3-4000 people will have to sell, and that may well be fwere than those forced to move by the bedroom tax. But that doesn’t mean that both aren’t unfair.

  5. timoffer permalink

    Neil if someone bought there house for £500,000 and its now worth £5,000,000 then they have made £4.5 million for doing absolutely nothing!!!!!!!!

    That’s more than I’ll earn in my entire lifetime and they’ve earnt it through the sheer lucky of house price inflation.

    Every policy has its winners and losers. The winners will be millions of us who can’t afford ever spiralling rents and have no hope of ever owning a home of our own. The losers a few extremely lucky people who have made millions not through hard work but sheer luck!

    I think you have your priorities wrong

    There are millions of people who need help more than a select few people who are millionaires through sheer good luck!

  6. Totally agree that house price inflation creates undeserved gains: but the answer is to keep prices down, not to force people to take these gains when they don’t want to move. That doesn’t help others onto the property ladder. Proper housing policy means lowering the ladder, not knocking people off it. That’s my priority, and it should be politicians’ as well. 100% IHT gets you there, and allows people with ordinary jobs to buy or rent decent homes. Isn’t that what we both agree is the aim?

  7. timoffer permalink

    Yes I agree with you that allowing people with ordinary jobs to rent or buy decent homes should be the aim of government. At present they are failing.

    We appear to differ slightly on how the government should fix our broken system, but every individual will have different ideas, that’s only natural. We’ll probably have to agree to disagree on property tax. But at least we have that same overall core belief.

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