Tim Knox is Director of the Centre for Policy Studies.
You can see the political attractions of the Mansion Tax. Its advocates claim that it is a tax that would be paid by a handful of very rich people who own vast properties. And they say it would bring in lots of money, money that is of course desperately needed by the Treasury.
These claims are false. And, worse, we should recognise that proposals for a Mansion Tax are profoundly un-conservative – and it should be a source of deep embarrassment to the Conservative part of this administration that proposals for such a tax have even been considered.
To understand how a Mansion Tax would work, the Centre for Policy Studies asked the leading estate agents, Savills, to look through their deal book so that we can understand who really would be affected by a Mansion Tax. The answers are revealing, as we show in our paper published today Taxing Mansions: the taxation of high value residential property.
The most obvious point is that a Mansion Tax is a tax that would not take any account of an individual’s ability to pay. It would unfairly penalise those on low incomes whose property happened to have substantially increased during their period of ownership. A third of the properties sold for more than £2 million in central London have been in the same hands for at least ten years. This suggests that there are many, many people living in a house whose value might have increased rapidly over the last few years who may well find themselves unable to pay a new tax which they haven’t budgeted for.
Then you must also think about how difficult it would be to collect such a tax. How do you value these “Mansions”? This question goes to the very heart of the question of how you put a price on any asset. For the true answer is that the monetary value of any object – a house, a painting, a car, or any object ever sold on E-bay – is only what someone else is prepared to pay for it. But if a Mansion Tax is introduced, are we to see teams of clipboard-wielding form fillers wandering around trying to work out how much these Mansions are worth? Accurate valuations of high value individual properties (which are by definition illiquid) are incredibly difficult to establish: an individual property’s value is determined by the interaction of many different, often intangible, attributes.Factors such as location, position, architectural style and balance, layout and quality of accommodation, all have a significant bearing on valuation. Is the Mansion in a good or a bad state, when the clipboard-wielder comes round? If the sun is shining and the birds are singing, will the Mansion’s garden seem more valuable than when it is raining and the next-doorrottweilers are barking? Oh, and don’t forget: any valuation will of course be subject to legal appeal.
So the Mansion Tax might just be justified as a one-off job creation scheme for jobsworths and lawyers – but not in terms of simplicity. Nor can it be justified in terms of equity. The UK already has by far the highest property tax take of all OECD countries at 4.2% of GDP compared to an of 1.8%. And, just as the top 1% of income tax payers contribute 27% of all Income Tax, so do high value residential properties already pay far more tax than lower priced properties: their Council Tax bills are twice the national average; the highest 1.6% of sales (roughly equivalent to those properties which would be caught in a Mansion Tax)yielded the equivalent to 26% of all residential stamp duty – or £1.2 billion in 2010. The new upper 5% Stamp Duty band will have added around £290 million to that figure this year.And the top 0.7% of housing stock held at death contributes 36% of inheritance tax receipts from residential property.
In contrast a Mansion Tax would raise, at most, £1 billion – the equivalent of 0.2% of total tax revenues. But the damage it could do could be far greater, particularly if it undermined the UK’s attraction to international entrepreneurs and investors. If only a handful of the new class of international wealthy now with a property in London were no longer to come to Britain, the resulting loss of tax revenue would be far, far greater than that raised by this tax.
As Lucian Cook, the author of our paper, explains,
“The common perception is that owners of high value homes pay a disproportionately low level of taxes but this analysis really explodes this myth. A new annual levy such as proposed, with a fixed threshold, would distort market dynamics and would penalise cash-poor long-term owners of properties that have passed the threshold by dint of house price inflation."
It’s time the idea was put to bed, just as Keith Joseph et al thought they had in ‘The Right Approach To The Economy’ published in 1977. Then they concluded:
“We will have no part in introducing a wealth tax in the United Kingdom. We can see that if there were an opportunity in an ideal and simplified world to redesign the entire tax system, there might be a place for a wealth tax instead of other capital taxes. In Britain today, with its multiplicity of different ownership patterns, varied investment forms, property rights and existing taxes on capital and investment, we believe a wealth tax is out of the question. Either it would be crude and unjust, leaving a mass of loopholes to be exploited by the ingenious, or it would be equitable and level handed, in which case it would be extremely expensive to run.”
Wealth taxes are wrong. For they strike at the heart of aspiration and of property ownership. And be sure that a Mansion Tax would, over time, spread to include more properties as politicians seek new funds for their pet projects. Yes, there is a pressing need for reform to our tax system based around Adam Smith’s principles of fairness, simplicity, certainty and efficiency. Closing the opportunities for stamp duty avoidance would be a sensible measure – and could raise about £150 million. But for economic health and greater prosperity for all, the UK does not need a new complex tax targeted at the aspirational and successful. It needs lower, simpler taxes aimed at encouraging, not penalising, wealth.
Taxing Mansions: the taxation of high value residential property by Lucian Cook is published by the Centre for Policy Studies. More here.