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Hobson's Choices

Friday
Oct262012

Tax the Mansions!

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!): 

  1. 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.
  2. 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. 
  3. 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!)

Planet B »

Reader Comments (2)

Couldn't agree more with the arguments put forward - they make perfect sense!
I have been lobbying extensively myself on this topic for some time with only limited success at the last budget on the stamp duty anti-avoidance issue measures and the additional charge for non-natural person owners.
The Bahraini finance minister bought a property in Cornwall Terrace for some £40+ million and i) is not subject to capital gains tax (CGT) or inheritance tax, ii) will pay less than £3k p.a. council tax (no more than a sub-£1mn home) and iii) would have been able to avoid stamp duty with the share purchase device (1% stamp duty) or offshore share purchase (0% stamp duty).
Conversely, say an English black cab driver who either has no access to a final salary pension scheme or does not trust the opaque and rapacious charges of our financial services industry who instead saves and invests in a buy-to-let flat gets clobbered for CGT at 28% with no indexation (the highest rate in the Western world), pays full stamp duty, pays inheritance tax, pays income tax on net rental income etc etc.
It is outrageous that foreign despots such as Gadaffi's son owning a £10mn mansion in Hampstead etc enjoy this gilded tax-free treatment whilst our hardworking (aren't they always!) fellow citizens pay through the nose.
Keep up the good work and I hope your well-put arguments gain traction.

.............Martin Ward (non-despot and taxed to death!)

October 31, 2012 | Registered CommenterMartin Ward

I totally disagree with this view. All property taxes are a form of nationalisation without compensation, the tax in truth being a rent to the state. The sale value of the property is lowered by the capitalised value of that rent, so when the new tax is applied the property owner not only pays the tax but loses value which is many times the tax. Indeed at current interest rates the loss could be forty times the tax. Thousands of mortgagors will pushed by the tax into a negative equity position

Property cannot be converted into food and lighting for OAPs so the tax is really on income even though the amount is calculated by reference to a capital asset. If the property owner does not have the income to pay the additional levy the property has to be sold or mortgaged. Indeed for the income rich the mansion tax is a boon as they will pay less than if the tax was raised from a progressive income tax. As the income poor are forced to sell and move to cheaper houses, the prices of the more valuable houses will fall and the prices of the less valuable will rise, making life harder still for the first-time buyer. Unfortunately it takes up to 100 years for the profile of the housing supply to adapt to a change in the profile of demand. The worst effect of the tax is to ghettoise house ownership as the income poor are forced out ans replaced by the income rich. This unpleasant effect is already observable in the US where property taxes have always been on the owner and based on value. The UK has taxed the occupier not the owner, with the result the default rate is a third of one per cent. In the US where the owner is taxed the default rate runs at over ten per cent.

I was able to do a study of the probably effect in an estate of valuable houses in a University town with a resident of one of the houses who knew all the residents well and what their likely financial position was because he had been chairman of the residents association to which all had to belong. He reckoned 12 residents would have to move out, including himself. many of those needing to move were academics, indeed professors, all very articulate and very angry, no doubt.

Far from being sensible this tax is monstrously cruel, but there is an even dafter version which fascinates autistic economists, the Land Value Tax. the purpose of this tax is to nationalise the land, so the price of the property will no longer reflect site value. LVT has bern known to be pushed by owners of commercial property in declining areas, Philadelphia being the notable case. As commercial properties in such places have low site values the effect of LVT would be to move taxation from commercial to domestic property. They would be lucky if that happened as in most places domestic property values are heavily discounted relative to commercial property.

The basic principle of Mansion taxers is that no income poor person may occupy a nice house.

The idea that property taxes are a good thing tends to be obsessive. Obsessions, in the words of a former professor of medicine at Cambridge, are 'controlled by an area of the brain which is not amenable to reason'. so I do not expect my analysis to get anywhere. To make things worse, LVT is backed by massive trust funds in America. They were set up by rich followers of Henry George, a minor economist and populist agitator in the 19th century US. Nazi theorists were also believed to see virtue in LVT.

Maynard Keynes (General Theory page 355) noted that Silvio Gesell, unlike George, wanted compensation to be given when land is nationalised.

December 31, 2016 | Registered CommenterGeoffrey Gardiner
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