Is a mansion tax really such a batty idea?
Citywire : December 1, 2009 : Tony Bonsignore
'And might a land value tax be a fairer replacement for the much unloved council tax?'
So the Lib Dems are persevering with Vince Cable’s controversial proposal for a ‘mansion tax’, though the policy has undergone significant revision since first being announced a little over two months ago.
Back then the plan was for a 0.5% tax on all properties worth more than £1 million. Yesterday however, Lib Dem leader Nick Clegg - under pressure from Liberals contesting seats in the property-rich south of England - announced that the threshold would be increased to £2 million, though the proposed annual levy would also be doubled to 1%.
Someone with a house valued at £2.5 million would therefore pay an additional £5,000 in annual tax in the unlikely event of a Lib Dem government.
The mansion tax proposal forms just one part of a raft of redistributive measures announced by the Lib Dems, including ending higher rate tax relief on personal pensions; a 10% windfall tax on bank profits; and new taxes on polluters.
The Lib Dems argue that the new levies would allow them to raise personal tax thresholds to £10,000 a year - taking four million people out of the tax system altogether.
It is the mansion tax proposal, however, that is likely to continue to attract the most attention, particularly given the simmering debate over inheritance tax and the fact that house prices in the south are climbing once again.
When first announced at the Lib Dem conference in September critics were quick to label the idea as ‘codswallop’, the politics of envy.
It was not only unworkable, they said, but deeply unfair.
Why, for example, should the income-poor but through-no-fault-of-their-own asset-rich elderly be lumbered with a tax bill they cannot afford?
The Daily Mail called it a ‘left-leaning…tax grab on wealthy homeowners’ - one that would hit up to 250,000 households, and might even force thousands to flee the country.
The FT, meanwhile, simply dismissed it as ‘batty’.
Others, however, were broadly supportive of the idea, believing it to be a fair way of raising much-needed revenue from those who can most afford it.
Why not tax property, it was argued, when house price rises have been so steep and arbitrary?
Besides, those sitting on expensive properties are doing nothing to help the economy, they added.
Perhaps the most eloquent defence of the idea of a ‘mansion tax’ came from the FT’s own Martin Wolf, who recognised in it the germ of an excellent idea.
‘Property taxes are economically desirable,’ Wolf wrote, although he argues that such a tax should be on site value, rather than on completed development.
That way local authorities can claw back some of the money they have spent on developing the area – the main reason for the increase in the cost of property on that land.
A property tax might even make a replacement for council tax, it is suggested.
Taxes on property have other benefits, Wolf claims.
‘They automatically rise with prosperity; they are hard to evade; and they are automatically imposed on otherwise untaxed foreign owners.
‘The latter benefit from the amenities of the UK without paying for them. A higher property tax is a simple – and inescapable – way of making them contribute to what they enjoy.’
Even better, he says, a property tax would hit the UK's obsession with property speculation.
‘Can anybody doubt the damage that highly geared purchases of property can do to the financial sector, the economy and even the purchasers?
'A house is a place to live, not a good way for people, let alone a nation, to become rich.’
But what of the house-rich, income poor?
‘Tough,’ he declares.
‘The UK has decided to make it as difficult as possible to expand the supply of housing. Can it then really make sense to encourage the elderly to remain in valuable houses that are far too large for them?
This 'horrifying' policy forces families with young children into 'poky little flats', Wolf observes.
'Making people rethink where they live, as their needs change with age, is one of the arguments for property taxes.'
If the state really wants to keep the elderly in their homes, he says, we could take the tax from estates on death.’
So what do you think, then, have Cable and Wolf got a point? Is a property tax the fairest way of raising taxes? And might a land value tax be a fairer replacement for the much unloved council tax?
Thoughts please.