Tony Travers and Christine Whitehead have an interesting paper out on the housing market as part of the LSE’s “Creating the Conditions for Growth” series, which landed on my desk yesterday. As part of it, they review the situation on property taxation, in particular the so-called “mansion tax”. Lucian Cook first wrote about why the mansion tax was a bad idea for us here. We’ve subsequently written about it in various contexts here, here and here.
Below is a long quotation from Travers-Whitehead which looks at some of the potential effects of the tax, in particular pointing out the damaging effect that uncertainty can have on the market (emphasis mine):
“There is a dynamic in this new desire to make tax ‘fairer’ which has led to three years or more of new efforts to introduce changes. The problem with this new approach to property tax reform is that it is random and unpredictable. Unlike the operation of council tax (or, indeed, of property taxation in many other major cities internationally), these constant changes make it impossible to predict how the tax regime will work from one year to the next.
The ‘mansion tax’ is another example of a political response rather than a coherent approach to addressing a problem. This tax proposal remains a policy objective for many leading national politicians and would, if introduced, add a further annual tax on homes worth more than a sum to be determined (although probably £2 million).
The discussion of possible reform itself generates further uncertainties, since the details of its operation have not been specified. There are varying suggestions about how much money it is intended to raise – a mainstream estimate is perhaps £2 billion per annum. It is seen by some as simply an extension of the Enveloped Dwelling tax. Others view it as a slab tax affecting the whole value of the dwelling, although the current political discussion centres on a tax rate of 1% on that part of the value over £2 million (which would be inconsistent with raising £2 billion per annum). Additional complications include the possible exemption of pensioners and farmers and the suggestion that it could fund an introduction of a 10p band of income taxation.
Arguably, the uncertainties are worse than the tax itself for investors; and if the tax were to be imposed but generated only a limited amount of revenue, there would be likely to be continued pressure to increase rates.
The impact of this kind of uncertainty will be felt most profoundly in those areas with the largest number of high value properties, such as west and central London. Most of the tax taken from recently-introduced taxes will have been paid by property owners in these locations (approximately 20 per cent of all ‘Band H’ properties in England are in South Westminster, Kensington and Chelsea). Uncertainty and/or a high tax rate could lead to a fall in sales and prices, reducing the overall yield.
Uncertainty would also extend to future development. If London were to be seen as a city where property tax was unpredictable and might soon become higher overall than in competitor cities, demand would surely ebb away. The problem is less the size of the property tax bills than the difficulty of predicting what might happen next.”