I’ve made no secret of my personal preference for altering the mix between taxes on wealth – on those who have – and taxes on income – on those who accrue. I recognise the technical impediments to wealth taxes – but don’t see them as insuperable. I tend to think a better balance might offer Governments a bulwark against the defining fiscal (indeed economic) problem of our time – that of competition between nations. And I would counter the political challenges by introducing wealth taxes as part of a package which cut income taxes.
I have grey hair enough to recognise this, today at least, as a pipe dream. Labour’s first faltering step in this direction – the mansion tax – has met widespread opposition.
But one aspect of the debate has puzzled me. We have heard much of the elderly widow – that unfortunate beneficiary of a rising property market – who now lives in a £2m London property but without the means to meet a tax bill. What of her?
The outrage that changes in tax regimes might precipitate changes in behaviour I find puzzling. The world I inhabit is one where the ability of tax to influence behaviour is regarded as a helpful orthodoxy. Why, otherwise, increase the personal allowance rather than increasing benefits? Is there not something to be said for increasing the costs of holding a scare resource?
Anyway. I said there was a question. Let’s assume – merely for the sake of argument – that it would be a bad thing that those who could not afford higher property taxes should be compelled to downsize. I have seen no modelling of the number of those who would be driven from their homes. If one was to assume (for example, for the details of the mansion tax are not yet known) a rate of 1% per annum of values over £2m, how many are there in £2.5m homes who could not find £5,000 per annum? How many in £5m homes who could not find £30,000 per annum? (For scale, if the target of £1.2b per annum is to be hit, the average annual bill for those owning a house worth more than £2m is estimated to be £11,000 – but obviously this burden will be skewed towards those owning more valuable homes.)
For if our tax policy is to be designed around the interests of the few, I’d like to see (numerically at least) the whites of their eyes. Just how many people are we talking about?
Three quick points from Ed Balls’ announcement – just hours after I posted the above – on the Mansion Tax.
First, he says that liability for the tax will be banded. And for those owning properties between £2m-£3m per annum the tax will amount to £3,000 per annum. This will create a precipice effect – either your property is worth over £2m (in which case you will have a liability to £3k per annum) or it isn’t (in which case you won’t). But it will be a modest effect – because the precipice isn’t terribly high.
Second, he says there will be a right to defer the liability if your taxable income is less than £42,000 per annum. This is a measure designed to tackle the ‘Granny’ issue (see the foregoing and the helpful discussion in the comments section) and will carry a price in terms of delaying tax receipts. The quantum and period of delay will need to be modelled – and will be a function (in large part) of the age and income profile of the ‘Grannies’ in question. My gut says the delays will be very modest indeed in terms of quantity but (and this is the question I posed this morning) until we model it (and I’m not aware that anyone has) we can’t know.
Third, Ed Balls says the £2m threshold will rise with property price inflation. But what happens in the event of falls in the property market? If the threshold is subject to a £2m floor, then a falling property market will lead to disappearing tax revenues all of which have been politically hypothecated to fund fixed costs (i.e. the NHS).
Very well said. I’ve found some of the arguments against the tax specious at best. As to whether a mansion tax has consequences of causing some people to move out of properties – I should bloody hope so! One of the advantages of value based taxes on property is that they encourage efficient allocation.
In terms of which taxes it should replace, I think SDLT is an obvious one. For political reasons Inheritance Tax may be more likely (ie scrap IHT in exchange for residential property tax).
Jolyon, I agree very much with most of this sensible post, but query this statement:
“the defining fiscal (indeed economic) problem of our time – that of competition between nations.”
Would you like to explain in detail what “competition between nations” means?
I guess you are putting this in the context of tax.
Bearing in mind that e.g. a corporate income tax is a transfer within a nation, not a cost to it, and that “investment” that is tax-sensitive is (by definition) footloose and therefore not embedded or rooted locally and therefore the least useful kind, does a corporate tax cut make the UK as a whole more ‘competitive?” And if so, how? How exactly do nations “compete” on corporate tax?
And do they even need to? I would say that THIS is one of the defining questions of our times.
Take a corporate income tax rate cut, for instance. Where are the gross benefits to the UK, in ‘competing’ this way? Who in the UK benefits? What are the costs? Who bears those costs? And can you demonstrate that the costs outweigh the benefits?
(Demonstrating changes in “investment” flows won’t do it: those are gross benefits, not net benefits, leaving aside the question of what kinds of investment one is talking about.)
If you can’t demonstrate that there is a clear NET benefit, then there is obviously no demonstrable need to ‘compete’ on corporate tax.
If you can demonstrate a clear NET benefit, then I’d love to see it spelled out. I have never seen anyone demonstrate this convincingly for the UK.
“Do they need to” compete is the question. The conventional view – the perception of Governments around the world – is that regimes need to be competitive. Prove that perception wrong and you’ve put policy making back into the hands of nation states. I’ve never examined the question: perhaps lazily I subscribe to the view that they do need to compete. My own ‘insights’ – I hesitate to call them that when they are no more than instincts – is that we in the UK sometimes undervalue the non-financial advantages to individuals of living and working here.
“The conventional view – the perception of Governments around the world – is that regimes need to be competitive. Prove that perception wrong and you’ve put policy making back into the hands of nation states.”
You have hit the nail square on the head.
I think that this can be the defining economic question of our times.
I also have noticed that once you start making this ‘net benefit’ argument, you find that you’re pushing against an open door. Plenty will say ‘you’re wrong’ – but I’ve never come across anyone who demonstrates – or even tries to demonstrate – why or how you’re wrong.
A mansion occupied by one person (an elderly widow), eh?
There is no need for her to downsize to avoid a mansion tax – she could simply let part of her mansion to another individual or family. Her rental income should then provide her with the cash to pay the mansion tax. Moreover, she may also be liable to income tax on her rental income. That would be good for the exchequer too.
Letting part of her mansion to another family would yield a more efficient allocation of the scarce resource that is housing. Win – win is the expression that comes to mind.
I seem to recall the rationale for introducing the so-called poll tax was based on a similar premise of the asset rich, cash poor elderly widow struggling to pay her rates. On this basis,,the then rates were abolished and the poll-tax introduced. That worked out well, didn’t it?
“she could simply let part of her mansion to another individual or family”
As has been pointed out elsewhere, many of the properties which would be caught by the proposed ‘mansion’ tax are far from mansions.
There also seems to be cheeful disregard for people who might be affected.
“So, they might have to sell a property that’s beeen their home for decades? Who cares?
So they might have to let out rooms to strangers? Who cares?”
Is this because they have what some might see as ‘wealth’ and so are less deserving of sympathy? I suspect that those who could afford to pay extra tax are already contributing lots in the first place and this whole mansion tax just seems a bit of bash/squeeze the rich.
Jolyon does raise the valid point of asking how many ‘elderly widows’ might have to sell their home to which I can’t help asking, how many would he be comfortable with?
I’ll allow the rhetorical flourish (even though you can help asking it. Unless something very odd indeed is going on).
But I am prepared to answer your question. Personally, I don’t think it much matters how many. Incidences of taxation drive behavioural changes all the time. Indeed, they are almost invariably designed to. There is a lot of hardship out there for the less well off – and I have no difficulty at all with confronting a theoretical person in a £2.5m property but without £5,000 per annum with the choice of withdrawing equity to stay in their property or downsizing. If you do have a difficulty with that – and I know some do – you need to start by identifying whether that theoretical person exists and in what number. Only then can you begin to make the case that there is sufficient unfairness to ditch the proposed ‘mansion’ tax.
New detail from Ed Balls on the Mansion Tax just released: http://www.standard.co.uk/comment/comment/ed-balls-a-mansion-tax-will-be-fair-simple-and-pay-to-save-the-nhs-9805924.html
Am I right to assume from your comments that you are opposed to the “spare room subsidy”, aka the bedroom tax, then?
To put the Mansion Tax in context, in Lambeth where I live, the top rate of council tax is £2448 a year. That is for houses worth £320,000 in 1991. Lets say that those houses are worth £800,000 today, which is the average rise in house prices in London over that time. That means that council tax is the equivalent to an annual payment of 0.3% of the value of a home.
As that is the top council tax band then the proportion you pay as a value of your home decreases as your house price increases. By the time you get to £2m your council tax is the equivalent of 0.1% of the value of your house.
As you rightly point out, the mansion tax is only paid on the value above £2m. So if your home is worth £2m, there is no mansion tax, the amount you pay in tax including council tax is 0.1% of the value of your house.
If the tax is set at 1% of the value above £2m, which was the Lib Dem proposal before 2010, a £2.5m would pay an annual tax of £5,000.
So a £2.5m home in Lambeth would pay a total tax of £2448 + £5000 = £7448, which is, wait for it, 0.3% of the value of the home. Back to where we started.
So – all the mansion tax is doing is asking people in high value properties to pay taxes equal to the amount that people in lower value properties are paying today.
Interestingly the mansion tax proposal from Balls today seems to set it at a lower rate.
I suppose I’m wary of taxes that seem to be set for reasons of political spite. Those set to affect behavoural change are different. New tax ‘A’ might be implemented to encourage beahvour ‘X’. Tax ‘B’ to raise ‘Y’ amount of money and tax ‘C’ because the people who pay it are not liked by those that implement it. It’s tax ‘C’ that I don’t like and I see the ‘mansion tax’ as falling into that bracket. It doesn’t really raise all that much, will be cumbersome and complicated to put into practice, possibly difficult to collect (if much or some is deferred then even more so) so why implement it? Because it will be popular as it targets people living in ‘mansions’ who as we all ‘know’ probably aren’t paying ‘their fair share’ of tax and may well have caused the banking crisis.
If this sort of tax is justified why are houses singled out? If our elderly widow sells her £5m mansion, buys a £2m house and puts £3m cash in a suitcase under her bed then, tada, she pays no additional tax. She’s just as wealthy. Indeed, she could actually pay tax as she has the cash to do it but won’t be asked to.
It’s all very well saying the tax can be deferred but what happens to the £1.2bn due to be raise then? You can be sure the spending it’s earmarked for will take place but what if the tax is not collected for 10 or 20 years? What happens if a large debt is rolled up into a house and we have a housing market collapse? What happens if Mrs ‘A’ who is earning loads transfers the ownership of the house to Mr A who is earning nothing? Where does this put houses held in trust if the tax is deferred until the house ‘changes hands’?
I’m not opposed to the mansion tax because I think it unfair, it’s just that i see this as a badly thought out tax introduced for political reasons. There are far easier ways to raise £1.2bn
The mansion tax is not a good tax, admittedly. It would be far better to remove the cap on Council Tax by extend the number of bands, perhaps even up to Band Z, if necessary.
It’s not about spite – it’s about fairness.
Regarding people on low incomes inhabiting mansions, e.g. the elderly, couldn’t a mansion tax be linked to your personal income? For example person who survives on government benefits could submit their annual return and claim an exemption. Anyone over a certain level of income (that needed for day to day living?) could not claim that exemption. I’m thinking that you should be able to devise the legislation such that trust beneficiaries would not be able to claim the exemption.
“The defining fiscal problem of our day – that of fiscal competition between nations”
Sorry, I disagree. Surely the defining fiscal problem of our day is gov’t debt, the markets’ reactions to it and the impact on the fiscal policy of certainly every European gov’t.
I think you’ve slightly misquoted me…
Leaving the politics aside (which is extremely difficult to achieve on this matter), I consider that the proposed mansion tax is fundamentally flawed for the following tax technical reasons:-
1) We have no need for any extra ‘precipices’ in the UK’s tax system to add on to those for child benefit, personal allowances and SDLT (there are others!). Allowing basic rate taxpayers only to defer collection might only affect a minority but it will do so significantly for that group.
2) Further precipices appear to be introduced by the £2 million and £3 million triggers.
3) Surely, wealth only exists to tax if it is net wealth; the proposals take no account of the borrowings to buy the property. One might consider these ‘never knowingly under-levaged’ individuals to be foolish but is that sufficient reason to tax gross, rather than net, residential property wealth?
4) The fiscal impact is just too small to merit a new tax being introduced. The Coalition Government broke this rule itself by the introducing a new tax, ATED, rather than fixing the SDLT regime itself.
5) My instinct is that mansion tax, if introduced as proposed, will collect much less than £1 billion and would end up lost within ‘other taxes’ in the annual Budget Red Book.
6) If 5) is reasonably accurate, one wonders how this compares to adding three or four bands on to Council tax which already collects £28 billion and will always merit its own line in the Red Book.
Technically, of course, your points 4-6 are good and substantive ones – although, as you and I both know, the real answer is likely to be that this is all that is politically possible at the moment. Of course, if one wanted to look at wealth taxes (notwithstanding your point 3) more generally, there would be a case for dipping your toe in the water to start with. Why doesn’t the IOD host a round table on the Mansion Tax? I will very happily speak in favour…
Land taxes are increasingly being talked about. Readers may find this post interesting. http://www.taxjustice.net/2014/10/07/land/
Yes I did indeed misquote you Jolyon – slightly, as you say. My point stands though.
May I suggest your blog slightly misquotes those who criticise the mansion tax. I believe their objection – which I do not share – is based upon the nature of the change in behaviour rather than there being a change as such.
My objection is simply to the name – Mansion Tax. It is deliberately emotive, conjuring an image of a bad person ( ie rich) who deserves to be taxed. Thus and quite ironically a serious debate about property taxes has been closed down.