A mansion tax fails at the first step
If you don’t think the Liberal Democrats will form the next government then their proposed ‘mansion tax’ is irrelevant. Yet, as a good example of bad taxation it should be studied by every politicians who might have to find new ways to extract more taxes.
The first thing wrong with the annual half per cent tax on houses worth over £1m is that it is based on gross assets not net. The £1m house might have a £400,000 mortgage leaving the owner worth just £600,000 – less than his debt-free neighbour in an untaxed £750,000 home. The owner of £1m-plus home could even be in negative equity and technically insolvent, but still face the LibDem’s tax.
Nor does the tax proposed by Vince Cable, the party’s economics spokesman, take account of owners’ ability to pay. The inflation in house prices has left many people on modest incomes living in houses worth over £1m and some who bought expensive homes have seen their incomes collapse in the recession.
Cable’s suggestion that owners borrow to pay the tax, take equity-release schemes, or roll up the debt until death are muddled. All those ‘solutions’ reduce the owners’ net assets, possibly below the £1m threshold, but still require them to pay the tax.
As a London MP, Cable must know there are many terraces of modest Victorian houses that Up North would have been condemned as Coronation-Street-style slums, but which in the capital have been gentrified and sell for £1m. These are not mansions but they would attract Cable’s tax.
These homes are already in Band H for council tax of probably £2,500 or so. Cable’s tax would double that on a £1.5m home when residents are already also paying fees to park outside their house, paying a congestion charge to drive their car and privately paying for services that council’s do not provide.
If Cable wanted to extend the council tax beyond Band H it can be done, but the important question is why? Council tax should pay for services provided and a house twice the value of another does not necessarily use twice the services –read more library books or use more streetlights.
Do the LibDems now believe in taxing the better-off simply because it is they who have the money? But by setting a flat nationwide threshold of £1m the tax is effectively a levy on southerners rather than a levy on the rich. There are grand mansions in the provinces worth under £1m.
And if it is a wealth tax, why not include non-property assets such as cash, pensions or shares? Is property ownership now a socially unacceptable?
One answer is that property is easier to tax than people because it doesn’t move. The switch from rates to poll tax found that. But it is not that easy. It will require a valuation of all the 250,000 homes Cable thinks will come within his tax, plus all the others that might be worth £1m.
Given the distribution of values, I’d guess the bulk of homes worth over £1m are only just above that line, not £2m-plus properties that are obviously above or £600,000 homes that are clearly below. That means a big valuation exercise. The last national valuation was 18 years ago and the government ran away from the one due this decade because of the electoral consequences of changing rates bills.
Next year’s 50 per cent tax on incomes over £150,000 already taxes the rich from money they have; a mansion tax on assets that provide no cashflow is bad taxation. Money must be raised but this is not the way to do it and in proposing it – especially without thinking through the detail - Vince Cable has damaged his reputation as a sound economic commentator.
