Property taxes: the lesser of two evils
By
MoneyWeek editor-in-chief
Merryn Somerset Webb Dec 04, 2009
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A few months ago Vince Cable shocked the richer end of middle-class Britain with his 'mansion tax'. This was the suggestion that each house worth over £1m would, under a Lib Dem government, be taxed at 0.5% of its value every year.
Cue mutterings about the unfairness of such policies on the asset rich and income poor. And from the banking community, cue a pile of discounted cash flow spread sheets working out how much the new tax would wipe off the value of their Notting Hill homes (the answer being 'a lot').
After all that, the assumption was that Nick Clegg would quietly drop the policy. He hasn't. Instead, they've just moved up both numbers – now it's 1% over £2m. And Clegg and Cable aren't the only ones wondering if UK property is under taxed.
This week, Monetary Policy Committee member Adam Posen seemed to suggest imposing capital gains tax on residential homes and then making it, along with stamp duty, variable. So the taxes would rise or fall with house prices. The idea would be for the taxes to become an "automatic stabiliser for house prices".
Just how bad are these ideas? As tax-raising ideas go, neither is truly awful.
A mansion tax is bad for all the usual reasons. It's a huge double tax (you pay it with money that's already been taxed at least once); it's the kind of tax that is bound to trickle down if implemented (even in 20 years' time, when inflation has made three-bed semis in Manchester worth £2m, the £2m threshold is unlikely to have budged); like stamp duty, it will distort the market around its threshold.
But it does have the virtue of taxing the very rich in a pretty unavoidable way: they'll have to pay whether they hold their houses via trusts in the Cayman Islands or not.
Posen's idea works in theory, but it's too complicated. As David Wighton notes in The Times, it would be "fiendishly difficult" to implement. The taxes would have to rise and fall pretty sharply to affect behaviour and they'd have to be recalibrated constantly. And it would be politically awkward. Raising the cost of house buying when prices are rising won't make a government popular with first-time buyers. As Wighton puts it, it's an "ivory tower" idea.
But given the state of government finances and the fact that the debate has begun, the odds are we'll soon see some sort of property tax.
The least bad option could be a capital-gains tax on first homes. It might have some of the effect of the Posen idea, in that the tax take would rise when prices were rising, which might dampen speculation automatically. It would be progressive, in that it would tax sellers of big houses more than those of small properties. It wouldn't be a double tax of any sort; and it wouldn't be taxing earned income, just gains.
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