Mansion tax: No substitute for better housing or fairer tax

The political attractions of a Mansion Tax on houses worth over £2 million are obvious.

It’s anti ‘Fat Cat’, it’s anti-London; and sends a message to those who can’t afford housing: “we’re on your side”.

I’ve argued before that many in the baby-boomer generation, myself included, have had housing for nothing. House price inflation has meant capital gains have outweighed interest payments, leaving us with a windfall (although one we can’t easily benefit from without downshifting).

So I understand the temptation to tax valuable houses. The problem is that pandering to the politics of envy almost always makes for poor economics.

We should ask three questions about the Mansion Tax:

  • Would it help the housing market?
  • Would it help the (possibly next) Chancellor grapple with the deficit?
  • Would it be fair?

Would mansion tax help the housing market??

No. The basic problem is supply and demand: there simply aren’t enough houses. ‘The Standard’ recently reported that over 70% of ‘mansions’ are in fact flats or terraced houses which happen to be in central London.

After forty years of inflation, prices are certainly astronomical, but the simple answer is that we need to build more. 250,000 new homes per year wouldn’t be a bad start, with easier planning for brownfield sites within the green belt.

The building we need should be for all forms of tenure: sale, private rental and affordable housing. One of the great housing mistakes of the last fifty years was that no additional suitable housing was created by the public sector to match the sell-off of council houses under Mrs Thatcher. Government – local and central – could and should get back into the house building business.

A well-functioning housing market needs people to move. We’re already seeing the threat of a mansion tax slowing down sales at the upper end of the market – and this has repercussions down the chain. What may well happen is that fewer top-end houses get built, more homeowners stay put, and ultimately fewer opportunities exist for first-time buyers.

Building more homes is again the answer and this would help the 4.5 million older people that Claudia Wood of Demos pointed out want to move out of family homes that have become, over the years and almost by accident, valuable. Taxation makes it harder for them to right-size and unlock those savings.

Would mansion tax help with the deficit?

Again, the answer is No.

This is not an efficient way to raise tax. Savills have calculated that a charge of £3,000 per year on the 40,000 properties worth between £2 million and £3 million would raise only £120 million in tax.

This is, if anything, a generous estimate: many ‘asset-rich, cash-poor’ people, a lot of them elderly, will have valid reasons for not paying, or at least deferring payment. Others might find ways round it. This will be even more pronounced with the 57,000 properties worth more than £3 million.

This is a far cry from annual £1.2 billion that the Labour Party say they could raise. It would barely dent our £100 billion deficit, and certainly come nowhere near delivering 30,000 more jobs in the NHS.

If politicians insist on another tax on property, there is a better way to do it: reform the domestic rating system so that higher bands (and additional higher bands) pay more. Second homes should pay a premium, whereas in the past they’ve had council tax discounts. The mechanism is in place to do this, and the money can be utilised, not by the man in Whitehall, but by cash-strapped local authorities. I’m willing to pay more myself and I could end up contributing more than I’d pay in Mansion Tax.

A local solution would not have the same attractions as a big, symbolic ‘soak the rich’ sound bite: but practical reforms are much more use in the long run.

Would mansion tax be fair?

This is another “No”. We can all think of individual situations where it would be unjust.

Most obviously, it’s unfair on those who have lived in a property for a long time. The Guardian reported in August that average prices in London’s richest borough were about to hit the £2 million mark. Yet in 1996, the average price was just £275,000, which is hardly an extravagant outlay.

Mansion Tax is also a form of double taxation. Since the long-forgotten abolition of MIRAS, mortgages are paid out of income that has already been taxed.

People who choose to prioritise buying a home have typically made sacrifices to do so: fewer foreign holidays, meals out or other luxuries. Through no fault of their own, their prudence would be punished by a Mansion Tax.

A Mansion Tax would potentially be ‘the thin end of the wedge’. If it didn’t raise enough money at a £2 million level, what would a Chancellor do next? The shortfall wouldn’t be made up from the very top end of the market: an army of tax advisers would see to that. It would come from lowering the threshold to, say £1.5 million or £1 million – whatever was politically expedient in the short-term.

There is a better way

I’m all in favour of a progressive tax system, where those who can afford it pay more.

But the way to make our tax system more progressive or fairer is not through a low-yielding, basically symbolic, Mansion Tax. Instead, we should be reforming those areas where taxation as it stands is regressive or unfair.

For example, pension tax relief works by giving tax deductions at the individual’s marginal rate of tax: so the more you earn, the bigger your tax break when you save into a pension. The result is that while just one in six people pay higher-rate tax, according to the Pensions Policy Institute they take two-thirds of the £35 billion subsidy.

By changing this relief to a flat rate – I have argued for 25% - the government would save £8 billion every year, as well as making the system fairer and improving incentives for the lower-paid.

And, as I’m sure the Labour Party knows, £8 billion is almost seven times more than their optimistic projections hope to raise from Mansion Tax.

Tackling pension tax relief is less eye-catching than taxing expensive houses.

But that is a good thing: as the famous French Finance Minister Colbert said, 300 years ago: “the art of taxation is to extract the maximum number of feathers from the goose, with the least possible amount of hissing.”

It’s a watchword for good, effective policy-making.

I also want to hear from you: 

What are your views on the Mansion Tax? Do you think it will help with the deficit? Would it be fair? Do you think there is a better way?