Raising the tax threshold up to £10,000 to take the poor out of tax is something which Conservatives support just as much as LibDems. Meanwhile, we want to cut the top rate of tax, not because we want to help the rich, but because we want the economy to grow.
On the Today programme yesterday morning I argued that we should accelerate tax cuts for the least well off and pay for it by taking more tax from the very wealthy. The way to do this is to cut high income tax rates, which are internationally uncompetitive, but raise tax on high-end UK property, which we tax less than property almost anywhere else in the world. I propose three urgent reforms.
1. Make the rich pay stamp duty
Labour pretended to make the rich pay more stamp duty by raising it to 5% for properties over £1million. However, the globally wealthy avoid it by putting properties into shell companies, so that only the 0.5% stamp duty on shares is paid on sale. For instance, all but two of the eighty or so flats costing an average of £15m at One Hyde Park were sold to offshore companies, while Roman Abramovich may just have saved £4m in stamp duty by buying his new £90m house in a company wrapper.
I would have expected Treasury officials to have brought forward workable proposals to tax residential property shell companies as residential property years ago, before such tax-avoidance got out of hand. It may be that Labour vetoed such proposals, or that the calibre of Treasury officials is just not what it was. Either way, it is time George Osborne cracked the whip.
2. Introduce a capital gains withholding tax
Extraordinarily, non-UK residents are exempt from capital gains tax. There is a reason why if you stroll through Belgravia it is so eerily quiet. Along with much of prime central London Belgravia has been bought up by foreigners, who are allowed to keep capital gains on the property tax free so long as they do not actually live there. What a waste.
We benefit when foreigners invest money in companies creating jobs in the UK. It is not clear that we benefit from wealthy non-residents pumping up the price of central London property so that no-one else can afford it. We should therefore levy capital gains tax on property held by non-residents, while retaining the exemption for risk capital.
It is also likely that there is widespread avoidance by UK residents of capital gains tax, e.g. on property other than a primary residence, since it is generally only paid when notified to HMRC on a tax return.
We could deal with both problems by removing the non-resident capital gains tax exemption and applying a capital gains withholding tax to property sales. The Land Registry, which ensures security of title and has the necessary property data, could release the tax back to potentially exempt UK residents on proof of HMRC notification.
3. Implement a ‘mansion tax’
Conservatives should not rule out a ‘mansion tax’ or similar proposal in the context of a package which cuts unjustifiably high forty to fifty pence income tax rates. Perhaps the threshold could be set nearer £5million than the £1million or £2million that Vince Cable has floated.
Such a tax would be far harder to avoid than high income tax rates. UK housing, unlike the talents of the highest earners, cannot be taken offshore. A mansion tax targeted at the very wealthy would depress spending by less than the current high taxes on income and, unlike those, would not harm work incentives. It could therefore be pro-growth.
We should also recognise that UK property taxation is almost uniquely generous to owners of high value property. The international norm is for property tax to be levied as a percentage of capital value. In the UK the council tax regime means that property tax is capped at what, for very high value properties, is internationally an extraordinarily low rate. For instance, the owner of a £20million property in prime central London would pay only £1,375 of council tax annually if in Westminster, or £2-3thousand in other boroughs.
Flatter, fairer taxes boost growth
Cutting the 50p tax rate to 45p and the current 40p tax rate to 38p would in my judgment, and that of much of the research, e.g. as recently shown by the ASI, soon raise revenue, rather than reduce it, because of the likely dynamic impact on growth.
Treasury estimates are more cautious, but even these project only a small loss in revenue from such pro-growth measures. This could be more than recouped through even a modest mansion tax payable only above a high threshold.
Combining this with the stamp duty and capital gains tax changes proposed above would raise substantial extra tax from the very wealthy. This would enable the coalition to accelerate its plans to lift the poorest out of tax entirely, as well as getting the economy back on a strong growth track.