The biggest challenge facing the country – and the government – is the lack of economic growth. So it is rather disappointing that the main focus of the Liberal Democrat conference wasn’t how to help business, but how to punish the rich. The Liberal Democrat leadership competed with themselves to insult the opponents of the 50p tax – which is an interesting turn of events for people who recently scrapped their party’s policy of introducing a 50p tax. Perhaps they believe that the status quo, whatever it is, is the best of all possible worlds.
Nick Clegg, Vince Cable and their colleagues would only agree to let George Osborne ditch the 50p tax if it was replaced by other taxes on the rich. If it doesn’t hurt the rich, it isn’t fair. In recent years, the share of income tax paid by the wealthiest 1 per cent has shot up to 24% of all revenue raised, provoking the question of what share it would be fair for them to pay? The Liberal Democrats pushed alternatives to the 50p tax which should be considered: a land tax, a wealth tax, and a mansion tax. Apart from the political benefit of punishing the rich, they all have draw backs.
The land tax, which has a wonkish head of steam behind it, has several attractions. It is probably impossible to move land overseas to escape excessive taxation. You can’t put your farm on a plane to Geneva. It would be difficult to get accountants to hide your paddock from Danny Alexander’s new army of tax inspectors. It will stop aristocrats hoarding unproductive estates. Perhaps best of all, most of those hit by it will be Tories. But the downsides are that it is a major new tax, which will require a whole new bureaucracy to collect and enforce it. It will require regular revaluations of land. It fails the Colbert test of minimising squawking: suddenly there will be a whole swathe of people hit by a very visible, painful new tax who will complain very loudly. Introducing a new tax on landowners – presumably including people with gardens – is politically unimagineable. Think of the whole of rural England hiring every lawyer and lobbiest in the country to challenge it. Think of the forest revolts, multiplied a thousandfold. You might even say it is cloud cuckoo land. Politics is the art of the possible, and this is not possible. I am not being unidealistic, just realistic.
It also suffers the problem of any broader based wealth tax – you are asking people to pay for a stock with a flow: to pay for capital with income. Many people – particularly pensioners – have capital but little income. They are asset rich but cash poor, and taxes on wealth of any description would hit them particularly hard. There might be financial products such as equity release schemes that enable them to turn slivers of their house into cash to pay the annual tax, but markets have inefficiencies, which can lead to many hard luck stories of pensioners forced out of their homes. Do we really want to force old people to build up mortgages to pay the taxpayer? Wealth is in reality not really an end in itself, except to the extent it can be turned into income: there is little benefit in owning gold bars unless you can turn them into fancy clothes, holidays and houses. In which case you should tax the capital when it is turned into income – that is, an income tax.
Taxes on wealth can also be a major disincentive to wealth creation (which surely we want to encourage), and create distortions in the economy. A tax on any wealth that is mobile has obvious consequences: the wealth moves to low tax regimes. France introduced a wealth tax, and quickly saw over £100bn in capital flee to countries where it wasn’t being taxed. It would be a bullet in the head of Britain’s very lucrative international wealth management industry. It is the ultimate in self-defeating taxes. Which is why wealth taxes in Europe – so popular in the 1970s – are in decline. Once idealistic Sweden recently ditched its wealth tax.
Which leaves us with the Liberal Democrat’s favourite option – a mansion tax. They have talked about everyone with a house worth over £2m paying 1% of its value a year. There are indeed real problems with our current annual property tax – otherwise known as council tax. It is patently unfair that a family with a three bed semi in Manchester incur the same band H council tax as a billionaire industrialist in his £100m gilded palace in West London – which is what happens at the moment. Band H is the highest council tax band, and starts at just £320,001.
But a mansion tax is not the solution. It is bedevilled by house-rich cash-poor people who would have to sell up. Such property taxes in the US have led to a befuddled muddle of schemes to avoid the iniquities. It would require a whole new tax collecting bureaucracy and enforcement regime. It would lead to iniquities that someone living on the steady income would suddenly have to pay major taxes because property rises in their area pushed their house over an arbitrary threshold. In central London, property prices are kept buoyant because of international money seeking a safe haven in the London property market. Should Londoners who bought a house in the 1970s really have to start paying tens of thousands of pounds tax a year because Russian oligarchs have pushed up house prices in London? It would complicate our already over-complicated tax system, giving us two property taxes – council tax, and the mansion tax. It would be centralising, with national government collecting taxes on local properties.
Far better would be to introduce higher bands of council tax above band H. Introduce a band I for properties over £500,000, a band J for properties over £1m – even a band K for properties over £2m. It would be easy to introduce, simple to collect, wouldn’t complicate our tax system, and will cause far fewer hard luck stories. That’s a tax that’s fair, and passes the squawk test. At the same time, the government should fill in various property tax loopholes, but that’s a discussion for another day.