How mansion taxes will make us all poorer

They're actually wealth taxes, and wealth taxes are the last resort of a cash-strapped economy

2 November 2013

9:00 AM

2 November 2013

9:00 AM

There are few things most of us enjoy more than watching the value of our houses rocket. Every homeowner will have felt the pulse of excitement that comes from a mental calculation of how much has been added to their net worth by the latest bulletin from Rightmove or the Halifax. Yet fast forward two or three years and the same news could make our hearts sink — because by then a mansion tax could well have been introduced, and rising prices will take many middle-class owners over the threshold.

The mansion tax bandwagon has been rolling for several years, pushed enthusiastically by business secretary Vince Cable and his Lib Dem colleagues. The idea is that any home worth more than £2 million would be taxed at an annual rate of 1 per cent of its value above the threshold. In February, Labour leader Ed Miliband embraced the concept — and there’s a growing sense of inevitability about it. If Labour wins power in 2015, either on its own or in coalition with the Lib Dems, the tax looks certain to be imposed. If David Cameron needs to renew his existing coalition, it may be the price of a deal. Indeed, probably the only way it can be avoided is if the Tories win an outright majority. But stuck on 32-34 per cent in the polls, with Ukip splitting the right-wing vote, how likely is that?

In fact, expensive homes are one of the last things left to tax. Most British families have the bulk of the wealth tied up in their ‘primary residence’, which is exempt from capital gains tax. But for a state chronically short of cash — even in a recovery, our government is still running one of the world’s largest deficits — wealth is the only thing left to tax. There’s a lot of it about, and everything else is already taxed to the hilt.

According to a recent study by Thomas Piketty of the Centre for Economic Policy Research, private wealth in the UK has now reached 500 per cent of GDP, a level last seen before the first world war, compared with 300 per cent in 1970. Income can’t be taxed much more: if you put the rates up, revenues go down. VAT can hardly be increased without crucifying an already struggling high street, and neither can business rates. Raising National Insurance destroys jobs. As for fuel taxes: good luck with raising those.

So a government that wants to spend yet more on the public sector will have to tax wealth. There’s nowhere else to go. The trouble is, the mansion tax will be disastrous if it is implemented. ‘Like all bad ideas and especially bad taxes, the impact is seldom immediate and the knock-on effects are not obvious,’ says Graham Wainer, a fund manager with GAM. ‘Mansion taxes will not be an exception.’

Indeed so. The new tax might be sold as easy to enforce. After all, you can’t move your house offshore. But once you get into the detail, it becomes incredibly complex. A mansion tax would require a vast new bureaucracy tasked with valuing every home, as well as a cumbersome appeals procedure as judgments were inevitably challenged.

Worse, all taxes change behaviour, and not necessarily for the better. Once a mansion tax was introduced, homes would start to change. Basement dens will go back to being dank cellars, and that spare room in the loft with its tastefully varnished beams would go back to being a draughty attic. That garage extension will go back to being just a place to park the car.

Far-fetched? Don’t bet on it. When windows were taxed, people bricked them up. More recently, look at the way cigarette sales have fallen since government began taxing them punitively. Householders close to the threshold may find that a few minor adjustments brings the value down below £2 million — and think it worth the inconvenience for a modest tax saving. The building trade will suffer as people stop upgrading their homes, and since construction accounts for 6 per cent of GDP that is hardly to be welcomed.

Foreign buyers, who have kept the London market buoyant and boosted the capital’s economy, will be deterred from coming into a market where they fear they will be punitively taxed. A slice of consumption will be taken out of the economy — after all, that annual mansion tax take is money that won’t be spent on something else. Many private schools will have to shut down — their catchment population is much the same as the mansion-tax demographic, and how many parents will be able to afford both?

In some cases there will be real hardship as elderly people with valuable houses but low incomes are forced to sell up — in a collapsing market for £2 million-plus houses. Homeowners in the bracket below £2 million will fear it will hit them next. Most taxes start with a high threshold, then the net is cast wider and wider. You hardly have to be a plutocrat these days to pay inheritance tax, which starts at £325,000. In a decade or two, every semi in the ’burbs may be deemed a ‘mansion’ and taxed accordingly.

Worst of all, a mansion tax is just a disguised wealth tax. And while that may appeal to egalitarian instincts, it can do huge damage to an economy. Private wealth is the main source of investment in new business — it is family capital or loans against a house that get most new ventures off the ground, and it is those small businesses that generate the new jobs the economy needs.

Wealth taxes don’t even make society more equal. According to the CEPR study, France with its wealth tax now has a higher wealth-to-GDP ratio than we do, even though it started in the same place we did in 1970. The supposedly unequal, low-tax US has a lower wealth-to-GDP ratio than the UK. A mansion tax will make us all poorer and less equal at the same time. The trouble is that Vince Cable and Ed Miliband won’t let inconvenient facts stand in the way of a good political gimmick — or the chance of raising quick cash to keep feeding our bloated public sector.

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Show comments
  • Mike Barnes

    “There are few things most of us enjoy more than watching the value of our houses rocket. Every homeowner will have felt the pulse of excitement that comes from a mental calculation of how much has been added to their net worth by the latest bulletin from Rightmove or the Halifax. ”

    Why though? What have you done to earn such a rise? You’re not working any harder, you’re not improving the home, you’re just profiting because you bought at a time when not enough houses are being built and the population keeps rising.

    It’s something for nothing, a culture of entitlement.

    • Beth Swain

      Actually, no. We bought our house because we needed somewhere to live and raise our children. We paid off our mortgage after years of hard work, during which we also had to re-roof and generally maintain the place. Any ‘profit’ we make needs to be viewed in the light of shifting values: how much were a pint of milk, a litre of petrol, a pint of beer, when we bought our house? One heck of a lot less than now.

  • dalai guevara

    “…The supposedly unequal, low-tax US has a lower wealth-to-GDP ratio than the UK. A mansion tax will make us all poorer and less equal at the same time…”

    Is this the Kristie Allsopp line of argument? She lost 15% of her viewers after that.

  • megamurph

    It’s worse than a wealth tax. A wealth tax would at least be paid by an individual based on the real net value of the assets he or she actually owned. This Mansion Tax, as I understand it, would be like the council tax, with liability to pay triggered by the property falling into a £2m plus band. So joint owners – which is the best way for people who live together to share a property – would each have to pay a share of the tax. Yet if they each owned two separate properties worth £1m apiece they would be just as jointly wealthy but would not have to pay an additional tax. At a stroke the supposedly progressive Lib Dems would have fatally undermined the sacred principle of separate taxation and returned us to a world where it is a very bad idea financially for couples to live together. And since, presumably, mortgage debt wouldn’t be deducted from the value, those worst affected would be larger families living together in pricey areas like the South East who had taken on big mortgages to afford a suitable home. Nice.

  • MalcolmRedfellow

    Forgive me if I don’t find the essential thrust here [“mansion taxes will make us all poorer”] convincing.

    Last month [http://www.nytimes.com/2013/10/13/opinion/sunday/londons-great-exodus.html?_r=1&], Michael Goldfarb commented on London’s Great Exodus, for the NY Times. He noted, as most non-Metropolitans have done, that the Great UK Property Boom is a local phenomenon:

    “The farther away from London you go, the lower the numbers get. When you finally cross the border into Scotland, house prices actually decline by 2 percent.

    “The gap between London prices and those of the rest of the country is now at a historic high, and there is only one way to explain it. London houses and apartments are a form of money.

    “The reasons are simple to understand. In 2011, at the height of the euro zone crisis, citizens of the two countries at the epicenter of the cataclysm — Greece and Italy — bought 400 million pounds’ worth of London bricks and mortar. The Italian and Greek rich, fearing the single currency would collapse, got their money out of euros and parked it someplace where government was relatively stable, and the tax regime was gentle — very, very gentle.”

    Further on we find this:

    “… it’s not just those who work in London’s financial district, the City, who buy in. Hot money from China, Singapore, India and other countries with fast-growing economies and short traditions of good governance is pouring into London.

    “When I say property is money I mean it. An astonishing £83 billion worth of properties were purchased in 2012 with no financing — all cash purchases.”

    That is unsustainable, surely.

    It isn’t just Goldfarb. John McDermott in the FT [http://www.ft.com/cms/s/0/c89fc79c-4243-11e3-9d3c-00144feabdc0.html?siteedition=uk#axzz2jlwTpKBU] has this:

    “There were 97,000 home sales in the capital last year. Of the total, 32,050 were in “prime London”, covering the posher parts of zone one. Forty-six per cent (14,850) of these sales were to international buyers, according to Savills. In “prime central London” the share is higher …”

    So we have a bubble, which must burst. That probably will not greatly bother those foreign purchasers, who as they see it have put their money into some kind of currency shelter (often buy-to-let, and the upper-end of the market). It does impact on the “natives”, rendering living — let alone any prospect of buying — in London beyond realisation).

    Meanwhile the divide between London and the provinces is an ever-widening crevasse.

    There is a long tradition of revolt in England, whenever provincials felt the centre has “gone too far”: 1075, 1088, 1173, 1215, 1264, 1381, 1399 … all the way down to Pentrich in 1817. After that, the peasants laid down their bill-hooks and took to the ballot box: 1905, 1945, 1997 …

    So, there will be some form of mansion tax, and not just as a measure to “rebalance the market”. It’s plucking low-growing fruit, far too tempting for a Chancellor of any complexion. It may even be (remembering those revolting provincials) prophylactic.