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Mansion tax: wrong then, wrong now; already causing damage

    Head of Economic Research Ryan Bourne comments on rumoured manoeuvres to resurrect the case for a Mansion Tax.

    There are rumours in Westminster that the Lib Dems are again pushing for a mansion tax. It takes a weird mind to think: growth crisis? A new tax is the answer. But never mind. Back in January we thought our pamphlet written by Lucian Cook of Savills, who have lots of data on these houses, had done enough to explode the myths that those in high-value property don’t pay their ‘fair share’ or that the mansion tax was in anyway a good tax. Evidently not. So it’s worth laying out the facts clearly again:

    Top end property owners already make a disproportionately high contribution to tax revenues:

    • the UK already has by far the highest property tax take of any OECD country (property taxes contribute 4.2% of GDP compared to the OECD average of 1.8%)
    • the highest 1.6% of residential property sales yielded £1.2 billion in 2010, the equivalent of 26% of all stamp duty receipts
    • last year’s introduction of the 5% stamp duty band for properties over £2 million will contribute a further £290 million a year
    • the top 0.7% of housing stock held at death contributes 36% of inheritance tax receipts from residential property
    • the non-dom levy, which will rise from £30,000 to £50,000 a year, already collects revenue from owners of high value property domiciled overseas

    In contrast, a Mansion Tax set at 1% of the value over £2 million would yield just £1 billion (or 0.2% of total tax revenues) at most – but bring with it significant problems:

    • it would unfairly target the income poor, equity rich (31% of properties in London worth over £2 million have been in the same ownership for over 10 years, 15% over 20 years.  Price growth has been +89% in the past 10 years and 426% in the past 20 years)
    • it would be both difficult and expensive to value all relevant properties (there is little comparable transactional evidence; valuations would also be vulnerable to extensive legal dispute)
    • it would undermine London’s position as one of the world’s leading business locations. If only a handful of the new class of international wealthy were no longer to come to Britain, the resulting loss of tax revenue would be far greater than that raised by this tax.

    So, it would do very little in terms of contributing to closing the deficit, it would require an expensive re-evaluation of property values open to legal dispute and would punish those who live in property which has gone up in value because of loose monetary policy and restrictive planning laws (and we know how much people want to remain in their family homes from the reaction to the Dilnot proposals).

    More than that, the Lib Dems proposals are not ‘fair’ even by their own warped definition of fairness which implies the “rich” should always pay more – why only take into account housing assets? what about mortgages? people with multiple properties? the history of the investment? It’s a highly selective wealth tax, at a time when other countries are getting rid of theirs (with the exception of our Socialist friend in France).

    As my CityAM article earlier this year explained: it’s populist, inefficient, illogical and unfair.

    And we’re already seeing the damaging effects that ‘compromise’ with the Lib Dems on this issue had in the last budget. The Treasury introduced a new stamp duty rate of 7 per cent on properties over £2 million. Guess what? The number of luxury homes sold in London has declined sharply (by 24%) in the four months since the Budget, in contrast to an increase in sales on properties valued between £1m and £2m of 26%. The implication? “the net tax gain from the £2m-plus market in London is £11.8m. The figures will make grim reading for the Treasury, which is expecting to garner an extra £150m.”

    This should come as no surprise. Recent research by Henry Overman and Dr Christian Hilber at the LSE shows that stamp duty is a highly distortionary tax, with their analysis suggesting “a two percentage-point increase in the stamp duty from 1% to 3% reduces household mobility by around 40 per cent” with a “very strong adverse effect on short distance moves, which are typically housing related”. Thus, the recent hike is likely to lead to substantial misallocation of dwellings in London and the South East, with large welfare implications on society. As their blog makes clear, “wealthy households, whose children have moved out for example, may opt to stay in their mansions in order to circumvent the tax. Yet, in the absence of the tax, they may well have preferred to ‘downsize’. It may even pay for them to keep their properties empty for longer periods of time.” Thus, in the name of compromise, the Conservatives have fought off one bad tax and replaced it with another.

    When I explain these things to people in conversation, many people will say: if the mansion tax is illogical and unfair, and the stamp duty rise highly distortionary, then what should we tax?

    Here’s the truth: we don’t need new taxes. We have a spending problem, not a tax problem (see the chart below). You can’t tax your way back into prosperity. Thus far a large proportion of the deficit closure we’ve seen has come from tax hikes, which might explain why our economy is as flat as a pancake. 

    So it looks like we’re relying on Conservative MPs, many of whom lost their bearings on this before, to fight this one off. 

    Ryan joined the Centre for Policy Studies in January 2011, having previously worked for a year at the economic consultancy firm Frontier Economics.

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    Comments

    Chris Rickard - About 2958 days ago

    Not only is it wrong, but contemplating the entry point at £ 2 m solely to minimise the impact in Vince Cable's Twickenham constituency is gerrymandering in the extreme.

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