Victoria Borwick is a London Assembly Member and Statutory Deputy Mayor.
Put it this way. Would you rather live in a wealthy, dynamic city where jobs and opportunities are plentiful and people are actually queuing up to live and work there? Or would you rather live in a drab and declining alternative, where unemployment is rising and the young and energetic are leaving for a better life elsewhere? Because that is the underlying argument about the benighted mansion tax.
London, the city where I have lived and worked all my life, has undergone a renaissance over these past 20 years. The city has gained enormously in wealth, power and population. Average earnings are up sharply and the wealth of Londoners of all descriptions has increased markedly off the back of a rising housing market. Entrepreneurs have flocked to London: artistic and cultural activities have blossomed. Even the notoriously unreliable transport systems have been improved and school standards, another historic failing, have risen sharply.
Contrast London with its near neighbour, Paris. High taxes and a sclerotic labour market have taken the city in a dramatically different direction. Hundreds of thousands of talented French workers now make London their home.
The French Consulate estimates that there are around 300,000–400,000 French nationals living in London, compared to just 130,000 Britons living in France. To put things in perspective, London would be the sixth largest city in France if inhabited by the diaspora alone. London is also more successful in attracting foreign investment. In the years leading up to the financial crisis London attracted on average 24 per cent of all foreign direct investment of the fifteen largest European cities – Paris only accounted for 19 per cent. According to the Economist, Londoners are also better off financially – with an average of eight per cent greater purchasing power than Parisians.
The extortionate tax rates in Paris have also driven away wealthy individuals. All those earning one million Euros or above (approximately £800,000 a year) are taxed a whopping 75 per cent, compared to London which has 45 per cent as its highest tax bracket. As a result, there are over 4,200 multi-millionaires living in London compared to just 1,500 in Paris. In February this year, France’s mammoth state and high taxes have also made the unemployment rate hit a record high of 11 per cent (or 3.3 million people), while the UK stands at 6 per cent, the lowest since 2008.
The case of Detriot in the USA perfectly illustrates what can happen to a city that fails to remain competitive and ignores (or underestimates) the impact of low tax economic incentives. It is the perfect example of an “industrial” city in a post-industrial (western) world: high unemployment (15 per cent in 2014), rapidly diminishing population (from 1.1 million In 1990 to 688,000 in 2014), a local budget deficit of over $160 million per annum, and the bankruptcy filling of the city in July last year with over $18.5 billion worth of debt. Most of Detroit’s economic glory has now been transferred to low-cost manufacturing countries such as China and India. Let’s make sure London will not have the same fate.
A rising tide lifts all boats, unless, of course, you happen to be a Labour or Liberal Democrat politician. For them the politics of envy – and ultimately the politics of penury – are back in fashion. Ed Miliband, the Labour leader, told his party conference that he planned to raise an extra £1.2 billion for the NHS by slapping a mansion tax on homes worth over £2 million. There are 100,000 such properties in Britain, mostly in London. Quite a few are not mansions at all, but flats in the more fashionable parts of the city. Miliband’s figures imply an average annual tax of £12,000 a year.
Amidst criticism from within Labour’s own ranks, Ed Balls, the Shadow Chancellor, has attempted to sugar the pill by saying that owners of £2 million plus homes earning less than the 40 per cent income tax threshold of £42,000 would be able to defer payment of the tax until they died or the property changed hands. He has also said that owners of homes in the £2 million to £3 million bracket will not have to pay more than £3000 a year. What he did not say is that experts predict the annual charge of more valuable homes will be left facing bills of up to £30,000 a year – a staggering amount.
Nick Clegg has characteristically shifted his position on the mansion tax. He was once categorically in favour of the formula favoured by the Labour Party. Now he wants to introduce new council tax bands on the most valuable properties. The effect, of course, would be much the same, though Mr Clegg has opted for a typically convoluted approach. Only the Conservatives have unequivocally ruled out a tax raid on the owners of high-priced homes.
The fundamental objection to the mansion tax is that it would impoverish London. It would drive wealth away from the city, cost jobs and ultimately reduce, not increase, the tax revenues that pay for our vital public services. Ultimately, the losers would not be the rich but ordinary Londoners who benefit from the businesses and demand for services created by the wealthy.
It has many other flaws. It would be grossly unfair because takes no account of ability to pay. People of relatively ordinary means who bought a family house 30 years ago will be clobbered. Asset-rich but cash-poor, how can they be expected to pay an annual tax in the region of £12,000 a year? Such people may be forced to sell their homes, depressing the housing market right across the capital.
Then there is the additional bureaucracy and expense that will come from the need to value properties up and down the land. Inevitably, there will be injustices and appeals. And, no doubt, the wealthy, equipped with fancy lawyers and accountants, will find ways of avoiding the tax.
Britain already has some of the highest property taxes on earth (4.2 per cent of GDP compared with an OECD average of 1.8 per cent). It makes no sense to add to them in the forlorn belief that there exists in London’s bricks and mortar a pot of gold to be raided by politicians of the Left. Even by the arithmetic of Miliband and Clegg, a mansion tax would raise little over £1 billion. That might sound a lot but it is only one per cent of the annual cost of running the NHS – and a tiny fraction of total government revenues (0.25 per cent).
Nor will the tax be borne mainly by “foreigners”. According to research by Savills, the estate agents, in 2013/14, only seven per cent of properties sold in Greater London went to overseas buyers. And these overseas buyers are rarely absentee landlords. Some 85 per cent of them live and work in the capital. The real motive behind the mansion tax is simple and ugly. We are back to the good old politics of envy, the kind that brought us a top rate of income tax of 98 per cent in the 1970s. And we know where that ended.