COLUMNISTS Has Vince Cable, much-praised Treasury spokesman of the Liberal Democrats and vindicated Jeremiah of the UK’s property bubble, produced a “batty idea”? Even the FT thinks so. But the batty Lib Dem idea is not Mr Cable’s “mansion tax”, but replacing council tax with a local income tax. Taxation of property should be heavier, not lighter. But it should also be less regressive. That is why the mansion tax is the germ of an excellent idea.
Property taxes are economically desirable, though the best such tax is on site value, rather than on completed development. What makes such taxes attractive is that they bear not on effort, but on “rent” – value over and above the economic costs of production. Income tax, by contrast, bears on successful effort.
The value of a site is determined not by the activities of the owner, but by its location and amenities. The most important amenity is the infrastructure created by public authorities. A tax on updated site values automatically recoups the cost of infrastructure investment from its principal beneficiaries. If local authorities were allowed to keep the additional revenue generated by their investments, they would have a powerful incentive to further the development of their area.
Taxes on property have other benefits: they automatically rise with prosperity; they are hard to evade; and they are automatically imposed on otherwise untaxed foreign owners. The latter benefit from the amenities of the UK without paying for them. A higher property tax is a simple – and inescapable – way of making them contribute to what they enjoy.
Higher taxation would also lower the intensity of property speculation. Can anybody doubt the damage that highly geared purchases of property can do to the financial sector, the economy and even the purchasers? The British have become a nation of property speculators. Today, as usual, the hope is that houses should be as expensive as possible. But a house is a place to live, not a good way for people, let alone a nation, to become rich.
Unfortunately, while better than nothing, council tax is a good tax only in comparison to the disaster it replaced – Margaret Thatcher’s unlamented “community charge”. Cobbled together in haste by Michael Heseltine, environment secretary in John Major’s government, council tax was launched in March 1991. Even today, astonishingly, the bands are based on the valuations of April 1991. Presumably because it was seen as a replacement for a charge for council services, rather than as a tax on property, all houses in the top band – above the then-valuation of £320,000 – pay the same tax. Today, the equivalent would be a little over £900,000 if one uses the average rise of the FT House Price Index.
Intriguingly, that sum is very close to Mr Cable’s threshold value of £1m. The case for imposing a proportional tax (proposed by Mr Cable at a mere 0.5 per cent) above this sum is, as Mr Cable himself has noted, that “Messrs Mittal and Abramovich in their £30m palaces pay the same as a [top band] family home, though their properties may be worth 40 or 50 times as much.” The top band is unreasonably broad. Only in a country both besotted with property and determined to tax the middle classes, rather than the hugely wealthy, would people object to this obviously just idea. The UK should either impose several further upper bands on the council tax, or a proportional tax within the top band.
It would be better still if the council tax itself were proportional. That would work best if properties were revalued regularly. This is far from impossible: many high income countries manage it. All that is needed is data on recent transactions and a computer programme. This is not rocket science.
At this point, people will bleat about the injustice done to the house-rich, income-poor elderly. My reaction is: tough. The UK has decided to make it as difficult as possible to expand the supply of housing. Can it then really make sense to encourage the elderly to remain in valuable houses that are far too large for them? The costs of this policy for families with young children are horrifying, forcing them into poky little flats. Making people rethink where they live, as their needs change with age, is one of the arguments for property taxes. But if we really do want to keep the elderly in their family homes, we can capitalise the property tax and take it from estates, on death. The state is the country’s most solvent bank. It can finance this very readily.
So Mr Cable is quite right: the UK should try to raise more revenue from property taxes. But the best way to reach his objective is not to abolish council tax, but to extend it. A local income tax, by contrast, would damage incentives to work and push higher earners out of local jurisdictions with substantial numbers in relative poverty. This is a recipe for social segmentation.
Property remains an ideal base for taxation and, especially, for local taxation. So Mr Cable was right where he is now thought to be wrong. But his party is wrong on the local income tax, where many think it right. So what else is new in the UK public’s debate over taxation?
More columns at www.ft.com/martinwolf
