While pursuing the so-called ‘Mansion Tax’ would likely be damaging for any party at the ballot box, it is an eminently sensible idea, particularly when combined with the removal, or at least a heavy reduction in, stamp duty on property transactions.
The argument for a reduction, or preferably removal, of stamp duty is based on the fact that taxing property transactions increases switching costs and therefore reduces the efficiency of the allocation of housing. The result is sub-optimal property decisions – people do not move for jobs when they otherwise would, they do not upsize as frequently or they may hold off downsizing for longer. Rather than taking a 5-year view on housing, people are now forced to take 10- to 15-year views. This then reduces long-term economic growth as resources are misallocated – labour becomes less flexible and investment in residential housing is either higher or lower than it should be, depending on whether illiquidity in the market results in a melt-up or melt-down relative to the optimal equilibrium.
Replacing a transaction-based tax with an on-going charge will therefore induce more transactions, so allowing the invisible hand to work more effectively. Moreover, an on-going charge also has the benefit of being hard to avoid. While many individuals seem to be able to find numerous wheezes to avoid paying income and capital gains taxes, it tends to be pretty hard to move a property off-shore or into complex structures.
Three arguments are frequently made against such a tax (turkeys do not tend to vote for Christmas!):
- An Englishman’s home is his Castle. Such a tax could result in people being forced to move. This is true; some people will be forced to move. But is this wrong? Owning a particular house is not a right. In the medium term society has a relatively fixed stock of property that needs to be allocated amongst the populace as efficiently as possible. Just because you paid an up-front consideration to someone for you property does not mean that you do not owe society anything for the opportunity cost of living there. People seem to agree with the concept of Council Tax, and given the unpopularity of the Poll Tax, it seems like they think it fair to tax those in larger / more expensive properties more.
- This would be double taxation. Tax has already been paid on earnings so it should not be taxed a second time. Unfortunately Governments have the right to charge taxes as and when they wish, whether on income, capital gains or consumption. When and how it hits you is their choice and unfortunately not yours. Their goal will be to optimise the tax take so as to raise the optimal amount of money and generate desired outcomes.
- The collection costs will be too high and determining the taxable amounts will be too complex. This is the argument I have most sympathy with. The solution is thus to introduce it on a limited scale and only for those where the taxable amounts are likely to be meaningful. It would also need to be implemented alongside certain policies which are designed to ensure the property market’s pricing is as close to fair value as possible including caps on mortgage LTVs and the at least partial removal of stamp duty.
My opening gambit would be to introduce a 1% tax on all properties in Central London (Zone 1) since this property market is particularly poorly allocated – utilisations are extremely low and those that own the properties frequently pay virtually no tax while benefiting from having a residence in the UK – and it would make for a good test bed of the scheme. Soon thereafter I would introduce a broader tax of 0.5%, which would likely increase over time, on all properties worth over 25x the average family income (i.e. circa £1million).
Anyone going to vote for that?
(The author declares that he owns a property in Zone 1 so some turkeys do vote for Christmas!)