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Property rich? Watch out! The mansion tax is coming
Like a horror film villain the proposal for a new swingeing mansion tax just won’t die. Linton Chiswick considers if it's possible to tax property fairly.
It’s been beaten up by accountants, attacked by Tory backbenchers, even sat on by Eric Pickles but – like a horror film villain – the proposal for a new swingeing mansion tax to help plug the deficit and punish the property market lottery winners just won’t die.
It’s subtly shape-shifting, too. Its latest incarnation is a form of council tax, collected on new, specially created ‘superbands’ in the UK’s wealthiest suburbs. A Lib Dem policy document suggests the extra revenue could be passed on to poorer councils in more deprived areas, and apparently earmarks 70 places – chosen for their land values – as robust enough to cope with such a tax.
At the heart of this, and of the old mansion tax proposal, is a conundrum. The rich, in times of need, can afford a bit more taxation but what, today, does it mean to be rich? Is it fairer to tax income or another measure of wealth?
An 'envy duty'
Vince Cable and his supporters see taxing income as inherently discouraging, a punishment for working hard. Taxing property wealth, on the other hand, is a way of hitting unearned, undeserved windfalls. Nick Clegg even managed to equate homeownership with tax avoidance, when he told the Telegraph, ‘We will also review how people at the very top seek to avoid taxes and to make sure people at the very top, owners for instance of high-value property, cannot avoid paying their fair share’.
That’s an extraordinary statement. Were you to go out tomorrow and buy a £1.5 million home, you wouldn’t be profiting from an unearned windfall, you’d be spending income that had already been taxed, much of it (it’s okay to assume if you’re buying a £1.5 million home) at 40%. Then you’d be taxed a second time, at 5% (so, to the tune of £75,000) in stamp duty. This is hardly shaping up to be most people’s definition of avoiding paying a fair share. At what point would a further annual tax go beyond fair and become ‘envy duty’?
In Greece, where the government recently announced a temporary two-year property tax of around four Euros a square metre, collected via electricity bills, there’s been widespread consternation, even in the face of national bankruptcy. People hate been taxed on property. It feels intrusive, nosey, nasty. In Greece, it’s been dubbed the ‘monster tax’ by a leading left-wing newspaper.
An administrative nightmare
Like all interesting ethical arguments there are practical issues to this too. There’s a reason why income has traditionally been a primary source of taxation. It’s relatively easy to measure. Wealth, however, and especially property wealth, is something of a movable feast. It’s controversial in its calculation.
Have you ever asked three different estate agents to value your property during a slow market? Its value is dependent on your need to sell it. It’s chronically illiquid (a house that’s been owned by a single pensioner half his or her life and is now worth enough to warrant a punitive tax doesn’t actually provide the cash with which to pay the bill… unless he/she sells, or somehow manages to remortgage, and I can’t see Vince Cable arguing that poorer people should be forced out of larger homes).
The value of a property can go down as well as up; so should homeowners be able to claim property losses as a taxable expense during a falling market? There’s also the issue of fiscal drag. Can we trust a government to shift the thresholds to keep in step with the realities of the market? Not if we take stamp duty as an example, we can’t.
It would turn into an administrative nightmare, too, with thousands of appeals from people falling just across value thresholds.
Is there a fairer way?
Eric Pickles appeared to have ruled out a mansion tax at the end of August, but – as the Lib Dems hunker down and discuss the demands that will shape the second half of the coalition’s government – there’s a sense that an enthusiasm for some kind of wealth tax (and property is the UK’s primary wealth) isn’t going to go away.
Is there a way of doing this that might be fairer? Possibly. But it’s still ugly. If Cable and Clegg are serious about shifting the burden of extra taxation from income to unearned windfall, then the obvious answer is to take a closer look at capital gains tax on principal homes, perhaps abolishing stamp duty and loading the entire burden onto sales.
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