The Mansion tax: politics vs economics

If you want an example of how good politics makes bad (or at least indifferent) economics, the LibDems "Mansion tax" is it.
I was prepared to defend this, on the grounds that it's a minor move to improve the allocative efficiency of the housing market*.
The idea here is simple. £1m houses are scarce resources. Like all scarce resources, they should be owned by those that most value them. If someone can't afford the £2500 annual cost of living in a £1.5m house, they should sell up to someone who can.
This idea, though, is undermined by this:

People with low incomes living in £1m properties would qualify for a rebate if they were poor enough to qualify for housing benefit...
Older homeowners would also be allowed to defer payment of the tax until their death, when it would be paid from their estate. This would in effect turn it into a new inhertance tax.

These exceptions might be good politics, but they greatly weaken the ability of the tax to get houseblockers out, and so undermine its economic merits.
The upshot is that the tax is neither one thing nor t'other.
These loopholes mean the tax is a weak way of ensuring the scarce housing stock is used most efficiently. It's not a tax on wealth because it leaves non-housing assets untouched. This fact, plus its low rate, means it's a poor substitute for a proper inheritance tax.And on the LibDems own figures, it'll raise only £1.1bn, which is a tiny fraction of the forecast error in public borrowing, so it's barely signifcant in terms of fiscal policy.
It is, then, mostly a gesture. But that's what politics is about.
* I say "minor" because there are so few £1m houses. According to Land Registry (pdf), only 0.57% of the houses that sold in May were priced over £1m, and over half these were in London.The idea that the tax will touch any more than a teeny minority is a glaring example of the "middle Englanderror" - or more precisely, the middle England bare-faced lie.

Comments

[Diversity]

I think this proposal is a gesture; but it is also a lead in to a proper property tax. To make that work politically, there has to be a facility to postpone actually paying the tax until property disposal (and that facility has to have an interest cost). The unpaid tax receipts then figure on the assets side of the government balance sheet.

The gesture to potential housing benefit payers living in mansions does something for very rare hardship cases; but I do not see it as necessary if you can choose to defer payment.

A proper property tax would be a less bad substitute for some other taxes, and therefore would be a useful lesser evil.

[Sam]

"£1m houses are scarce resources."

But they aren't. Houses either cost £1m+ because of location (high land value) or because of their size (it's actually quite expensive to build a decent mansion).

1. Desirable land is certainly a scarce resource, although it's not all that scarce - the scarcity is hugely enhanced by the second point:

2. Planning permission is the problem. It's hard to get planning consent to knock down two moderately-sized houses and build one large house in their place. It's hard to get planning consent to build a large home in the country.

This is an entirely artificial restriction. It's a combination of government diktats and NIMBYism that makes it rather more expensive than it should be to live in a "nice" house. It's hard to see how making it even more expensive is a good thing.

The "solution" to point 1, of course, is a land value tax.

[blip14]

Surely the point of this, isn't housing efficency, but to tax the extremely rich in a way that they'll find hard to avoid.

[Giles Wilkes]

I suspect that if any politician changed the allocative efficiency, it would present itself immediately as a political downside i.e. You made my granny up-sticks and leave.

I'm also not sure CD is right here: the price of the house ought to fall to reflect the higher taxes attached to it, so that the overall cost of getting such a house/not selling such a house remains the same. So all it might do is shift houses more towards those with the liquid incomes to pay tax.

[a]

"£1m houses are scarce resources. Like all scarce resources, they should be owned by those that most value them."

Ah, so only the *really rich* should live in these houses, not the old-timers who happened to buy 40 years ago and have just stood by as their houses appreciated. How dare they hold onto their house when someone from the City wants it??!!

[Rob]

After all of the kerfuffle about 'how will the houses be valued?', I wonder if this measure isn't a Trojan Horse for LVT? The principle practical objection to Land Value Tax is that we don't currently have the means to administer it, as we don't know how much the various parcels of land are worth. Council tax re-valuation has become a political third rail, so perhaps the administrative infrastructure put in place for the 'mansion tax' would form the basis of the infrastructure of LVT, simultaneously making council tax valuation obsolete?

[Neil]

"only 0.57% of the houses that sold in May were priced over £1m"

It'd only take a few years and another property boom to make that figure more like 57%. And no, I don't think the threshold would be raised, not in a hurry.

[chrisg]

Over half the population having million pound properties is a very exciting prospect! (Though I thought from my reading of the Daily Express that that was already the case.) If the annual return on my housing equity is going to be several 100 per cent then, frankly, I'm not going to miss £5000 here or there.

[Andrew Duffin]

"there are so few £1m houses"

Yet.

Wait until fiscal drag has got to work on this for a few years.

[Hugo]

"I was prepared to defend this, on the grounds that it's a minor move to improve the allocative efficiency of the housing market*.
The idea here is simple. £1m houses are scarce resources. Like all scarce resources, they should be owned by those that most value them. If someone can't afford the £2500 annual cost of living in a £1.5m house, they should sell up to someone who can."

This is economically illiterate. The cost of living in a £1m house is the opportunity cost of the money. If the owner is willing to pay this (which they are, otherwise they wouldn't be the owner), then this is allocatively efficient. Any change will reduce the allocative efficiency.

[Chris]

Always interesting to read about abusive tax schemes.

[Sarah Danes]

nice post...
i really like this...

thnks...

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