Tuesday, 6 March 2012

Is Vince Cable Right?

The 50p rate is a silly tax and raises little if any money, so needs to go. Osborne appears to want this. Both the Tories and Lib-Dems want to raise the income tax threshold to £10,000. This makes sense too. Why tax people earning less than a "living wage" and make them beg for some of it back? This seems perverse. This tax cut offsets any benefit cuts suffered by low-waged workers and makes a great deal of sense and seems fair. Politically, I can see why "the rich" need to be seen to pay more, even if I disagree they do.

Economically speaking cutting the 50p rate is a free win for the exchequer because it's raised a great deal less than expected and may actually raise more money at 40% (the jury's still out on this one, though I suspect the IFS will show the 50p rate has cost the exchequer...). Raising the tax threshold however is a genuine tax cut. As such, we at this blog are not punk-Keynesians who believe that more deficit is any form of "stimulus". This means a raising of the tax threshold to £10,000 either needs to be matched by spending cuts (the best option) or a tax raise elsewhere.

Given that further spending cuts are not on the table, the question is what to tax. I am in favour of cutting income and payroll taxes, as well as those on capital and profits in order to raise taxes on consumption. I am also persuaded by the economic rationale for land value taxation, which is why council tax doesn't get much abuse on this blog.

According to the BBC news, the options are extra council tax bands at the top, an increase of stamp duty, or a mansion tax on properties worth over £2m. A Mansion tax is silly. Why introduce a new tax, when there are land value taxes in place which could be modified? Although this was in the manifesto of the wooly-inbetweens and will probably be the most politically easy to implement, it's not the right option. It's distortionary, creating an arbitrary cut-off at £2m and will hardly raise any money at all, and with an additional bureaucracy for a new tax, is gratuitously inefficient.


There are not enough of these to make a "mansion tax" pay

An increase in stamp-duty on the most expensive homes is probably the next most politically likely. After all, you only pay it when you sell or buy which for most voters is far enough away to be ignored. Gordon Brown did this, and the result was a much less efficient market, one we're still suffering now. Transaction taxes like this reduces liquidity in the housing market. A Tobin tax is a silly idea for shares, and houses are no different. Such a tax will encourage people to hang on to homes they rattle around in, thus increasing prices of four bedroom family homes for those, young families, who need them most, but can't afford them. They're paying income taxes, effectivly subsidising grandma's three spare bedrooms in which nick-nacks gather dust. Transaction taxes are stupid. They decrease liquidity and predictability of markets, and therefore increase volatility. These are not good things in a market as central to an economy as residential property.

By far the best, most economically efficient tax, with the fewest economic side effects and one or two positive effects too is to simply increase the number of council tax bands, increasing the council tax on the biggest, most valuable homes. This will encourage empty-nesters to move down the property ladder, freeing family homes for, well, families who need them. It will encourage a more liquid, and therefore less volatile and more predictable property market. The act of downsizing your property will free vast amounts of capital currently tied up in property, to be redeployed elsewhere in the economy. It will increase incomes for pensioners who downsize.

One of the biggest structural flaws of the UK economy is the love affair with bricks 'n mortar. By taxing property to pay for an income tax cut you replace a damaging tax (high rate income) with a less damaging tax (property value), and improve the liquidity and assortiveness of the UK property market into the bargain. You also increase the amount of tax raised locally, increasing the power and prestige of local government, which fits the Government's localism agenda.

However. This isn't what will happen. The arguments in favour of raising council tax are too difficult, the tax too unpopular to be the vehicle to replace the taxation of income between £7,000 & £10,000. What will happen is that a "mansion tax" on "the rich bugger down the road" will be levied and an opportunity to reform council tax will be lost. There will be a tax cut. There will be a replacement tax, which won't raise as much as income tax on income between £7,000 and £10,000 and therefore the deficit will go up. The property market will be made a little more complicated and a little less liquid.

The Tories are half right. (actually a bit more than half). The Liberal Democrats are half right (actually a bit less than half). Half times a half, is a quarter, so I suspect the coalition will be a quarter right. This is why tax systems should not be designed by a committee.



9 comments:

wulfhound said...

Couple of points - council tax liability falls on the occupier, not the owner. Doing what you describe would damp down the high end of the rental market, don't know if that's a good or a bad thing.

Also - as per mansion tax, would be necessary to phase in gradually. While I concur that, with a nationwide shortage of decent housing, people should be encouraged to move on from oversized properties (cue the bleating of "but i won't have 7 spare rooms for the grandkids to stay in when they come over" - when said grandkids sleep 3 to a room in the house they live in everyday), you don't necessarily want to create a situation where Granny is forced to downsize in an economy where families may not be willing or able to move up the ladder in any case.

That said, at least in a suburban London context, prices seem to track fairly linearly up to 3 or 4 bedrooms, then blow up in to the stratosphere around the 4-5 mark because of short supply. So perhaps that end of the market is overdue for a correction.

Jackart said...

Good point about the incidence of council taxation. If it fell on the owner, not occupier, it would add an extra disincentive to second homes, to the benefit of people who work in low-waged but picturesque areas like cornwall.

This is a small, revenue neutral change in the incidence of taxation from income onto property, so no-one is going to be forced to do anything.

Broadly then, I agree with you.

Weekend Yachtsman said...

"This will encourage empty-nesters to move down the property ladder, freeing family homes for...families"

I'm not sure it actually works that way. Our street contains six full-size family houses: not one of them is occupied by a family any more, but only ours could be described as an empty-nester. The other five were all sold on the open market by families who no longer needed them, and all five were bought by older couples with no children. In two cases, they were bought by single people. I'm not sure what this proves, other than that - as usual - it ain't that simple.

As for the mansion tax, nobody seems to recognise this for the Trojan Horse that it is. £2m sounds a lot now, but factor in a few years of high-ish inflation (as planned for, wished for, and being achieved by our present government), and practically any decent house will cost that.

What you'll have then is not a tax but a capital confiscation scheme,
and the money taken won't go into productive investment, it will go into public-sector pension payments, benefits, vanity projects, and other sorts of consumption. In short, it will make us all poorer. That, too, is no doubt a feature rather than a bug.

The need of the Leviathan State for other peoples' cash has become so monstrous and overwhelming, that there really is no solution.

Jackart said...

Weekend Yachtsman, that's what happens now when the wealthy have no incentive to invest in anything other than big houses.

When there's a carrying cost asscoiated with a big house, then the incentive will be improved to free them for people who need them.

Fulby said...

"The act of downsizing your property will free vast amounts of capital currently tied up in property, to be redeployed elsewhere in the economy."
I'm not sure how this frees capital, because every pound the seller gains from the sale if gains from the buyer. Where's the net gain to capital?

To add my two cents, I'm against a Mansion tax for two reasons:
1. I have retired parents in a huge house. They have very little income and the house has been on the market for a year already - a Mansion tax is something they can't afford and can't escape without a buyer for the property. There will be many others in this situation.

2. It attacks the principal of private property rights (not just houses, general property including cash and possessions). Once you buy something, it should be yours; you shouldn't have to keep paying for it. Council tax is ostensibly to pay for services, but a Mansion tax is just forcing the rich to pay 'their fair share' (which is only ever defined as 'more than they currently do').

wulfhound said...

"£2m sounds a lot now, but factor in a few years of high-ish inflation (as planned for, wished for, and being achieved by our present government), and practically any decent house will cost that."

Except that, what actually seems to be happening is they're keeping (most) house prices flat while money itself devalues. With the exception of the £500k+ market (and yes, I know that doesn't get you a whole lot of house in most of the bits of London anyone would actually want to live in), where supply scarcity, foreign buyers etc. (and the fact that the people in those houses aren't by and large the ones getting screwed over the hardest right now) seem to be keeping the bubble well and truly inflated.

Anonymous said...

Lib Dems, aren't they the ones that want to abolish council tax? A mansion tax is just a super council tax so yet again the Lib Dems can claim that whatever your view "it's our policy".

Real mansions will no doubt become a corporate asset, commercial premises that the CEO just happens to have a 'flat' in.

Luke said...

Fulby, you say that a mansion tax attacks the principle of private property rights. To an extent yes, but if you put your wealth in cash or shares you pay tax on the interest, dividends and possibly capital gains. I don't see why property should be exempt.

28481k said...

Instead of increasing Council Tax which is politically unpopular, I think the government should institute a Crown Rent for all lands (irrespective of occupying status) and charge it from the land value (rather than notional rent values that is hypothecated some years ago since the tax is introduced). But I'm afraid the landed gentry, especially those of nobles, will be dead against this arrangement.

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