Mansion maths: an open letter to Ed Balls, MP
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.