Mansion Tax: bugs & features

Some of the opposition to Labour's proposed mansion tax seems to me to be confusing bugs with features.

For example, in the Times (£) Janice Turner claims the tax will hit "shabby family houses" which have soared in price because of the property explosion. But this is precisely the virtue of land taxes. London's house prices have soared for several reasons, but none of them because of the efforts of their owners. It's fair to tax people if they reap a benefit with no effort. And as for £2m being "shabby", Hugo Rifkind's tweet was right:

Anybody who says "perfectly normal houses in London now cost £2m" is welcome to buy my perfectly normal house in London anytime they like.

Similarly, Allister Heath says the tax would force people on low incomes to sell up. But this too is a feature, not a bug. Forcing such people out of their homes would free up the houses for those who need them more - families or people who need to be close to where they work.It thus ensures a more efficient use of the housing stock.

Jay Elwes objects that it would be difficult to value houses. I'm not sure. We know the price at which houses changed hands, and it should be straightforward to apply an inflation rate to those prices. I suspect this is just an example of the status quo bias - an objection to policies simply because they don't exist. Imagine if we had serious land taxes and someone proposed a tax on profits instead:

Are you mad? Do you know how difficult it is to measure profits accurately, and how easy they are to fiddle or to shift overseas? Only a fool would want to tax profits rather than land.    

However, I don't want to wholly condemn the tax's opponents. When he says that the tax is "an arbitrary confiscation of wealth", Mr Heath has a point in two different senses.

First, taxes on assets should be capitalized into prices; if people expect to pay a tax on an asset, they'll pay less for it. This provides a double blow to current owners of £2m properties; they'll both have to pay tax and they'll suffer a capital loss. But it means that the future rich who'll want to buy a mansion won't suffer at all. Sure, they'll have to pay a tax on their mansion. But they'll have bought the mansion cheaper than they otherwise would because of the tax. It's a wash. In this sense, the mansion tax penalizes today's owners of expensive homes whilst leaving tomorrow's owners unscathed.

Secondly, there'll be some beneficiaries of this tax. People who own homes slightly less than £2m could see a capital gain, as buyers of £2m+ house switch to slightly cheaper properties. (Here's what sub-£2m buys near me.) I reckon that people who own houses woth around £1.8m are quite well off.   On both counts, then, I sympathize with Mr Heath; this does seem arbitrary.

The solution to the second problem is straightforward (in theory!). As Ben Southwood says, council tax could be rejigged to become more progressive.

The first problem, however, remains. One solution would be to raise income tax on the rich. But that would raise far more opposition than there is to a mansion tax.

Comments

[Jim]

Pedantry: Owners of a house worth £2m will pay little or nothing, if what we end up with is similar to the Lib Dem proposal of a 1% tax on the value *above* £2m. It's the homes worth multiples of £2m which will produce most of the revenues, so let's not perpetuate the myth that it's those in homes worth 'only' £2m who are being hit.

[Alix]

More pedantry, I think the word "retired" is missing from para 3, as of course working people on low incomes also need to be near their workplaces. But all the debate has been about retired people and I assume this is basically correct.

[Jolyon Maugham]

Not sure you'll see the distortive effects around the £2m mark. Unlike stamp duty land tax, there's no fiscal precipice. Your liability to the tax as you move up-market will be 0,0,0,1,2,3 etc... But otherwise great post.

[fake]

Take london out of the question, would anyone care?

[Luke]

Why do people go on about the difficulty of valuation? There are hundreds, probably thousands, of surveyors who spend their time valuing properties. That's their job. They are called "valuers", the clue being in the name.

Every time someone gets mortgage, there's a valuation. There are thousands of valuations done every year to see if (and how much) inheritance tax is payable on an estate. Yet suddenly the idea of valuing a property is seen as impossible.

And there's an easy way to appeal against a valuation - if you think your house is only worth £1.8m, put it on the market for £1.8m.

[Luis Enrique]

here is a recent paper - which I haven't read but just came across whilst looking for something else - about the effect of the mansion tax in New York on prices:

http://www.columbia.edu/~wk2110/bin/mansion_tax.pdf

[Luis Enrique]

note New Yorkers pay above $1m, quite a gap from our £2m

[Phil]

"the mansion tax penalizes today's owners of expensive homes whilst leaving tomorrow's owners unscathed"

Isn't the second part of this - a tax that's effectively expenditure-neutral - also a feature rather than a bug when it comes to levying a tax? Buyers spend the same amount of money they would have done, but a larger proportion of it goes into taxation.

[Mick Beaman]

Let us not confuse the Mansion Tax with a Land Tax.
RICS reckon that most valuations (around two thirds) are accurate to within 10% and valuing houses is generally easier than valuing commercial property. It is very, very much more difficult to value land, so while I love the idea of a land tax, the practicalities are scary.

[Deviation From The Mean]

"It is very, very much more difficult to value land...the practicalities are scary"

Don't local authorities do this all the time? And don't courts arbitrate if there are issues?

[Dipper]

We are living in momentous times. The UK is manifestly not competitive on the world stage and unable to pay its way to the tune of £100Billion pa. Economic "growth" is largely achieved through foreigners moving themselves and their jobs to the UK. The fundamental assumptions and relationships that have underpinned our society have been washed away by the financial crisis.

It is time for a reshaping of the power relationships between workers, capital and the state, a time for ambition for workers, and action to build a state where workers can take on the challenge of the new world and prosper ... and Labour's big idea is a consequence-free magic tax to raise 2% of the deficit and spend it on the NHS.

Its just the complete poverty of any notion of the task we are facing, and the complete inability to produce any policies that might make a difference to anything.

[Stevenclarkesblog.wordpress.com]

"In this sense, the mansion tax penalizes today's owners of expensive homes whilst leaving tomorrow's owners unscathed."

That goes against nearly every other policy in this country, which seeks to protect today's owners of property at the expense of tomorrow's owners.

[rogerh]

First they came for the mansion owners, then the band H'ers and as sure as night follows day the rest will follow. On its own the mansion tax looks like petty cash so once it gets started the coverage will have to spread more widely. Anyway, check out the Country Life property site. £2M is well down the list even out in Gloucestershire, so there will be a lot of antis, mind you they probably won't tick Ed's box anyway.

Surely this points to a much bigger problem - tax receipts are not going to go up much so there will be a big problem funding the deficit and raising funds for say the NHS. The game at present seems to be to squeeze a little here, a little there and to flog stuff off to the private sector. A combination of commercial confidentiality and ineffective regulation and carefully cultured lethargy will ensure Jo Public pays more for less which is how it has to go anyway, less honest this way though.

[gastro george]

And now Kate Barker steps in: http://www.theguardian.com/politics/2014/sep/25/mansion-tax-very-disruptive-housing-market

Who would have thought that government policy could affect markets?

[John Moss]

Any tax on "wealth" betrays a fundamentally flawed approach. It assumes that those with "wealth" also have income or savings with which to pay the tax on their wealth. It is perfectly possible that an elderly couple relying solely on the State Pension are living in a £2m+ home.

There is no prospect of their income covering even the Lib-Dem alternative of a marginal value tax. If they have no savings, or do not wish to deplete them, they would be forced to sell.

However, forcing them to sell, also forces them to incur other significant costs in legal and agency fees, removal costs and that other "Mansion Tax" Stamp Duty. (A far more appropriate property tax as its impact is factored into a one-time decision and not subject to arbitrary political adjustment after the fact.)

Deferring payment may be possible and I suppose after 10 maybe 20 years the flow of deferred payments might stabilise, but hardly something to bet the farm on, especially as political pressure to scrap the tax - and presumably with it, any deferred liability would grow.

Ultimately, by promoting such a flawed scheme, Labour and the Lib-Dems confirm that they are out of touch with the real world.

If you want to raise revenue, do it by lowering tax rates and simplifying taxes to attract taxpayers and make avoidance less attractive.

[Neil]

"London's house prices have soared for several reasons, but none of them because of the efforts of their owners. It's fair to tax people if they reap a benefit with no effort."

This line is so tremendously wrong that I can barely put it into words. If I buy a house shortly before a property boom, the theoretical market price of my house may well go up - BUT I WILL GAIN NOTHING. I have exactly the same asset as I had before: one house; no more no less. It won't spontaneously acquire extra bedrooms.

IF I choose to sell my house at the peak of the market, I will get more money than I paid for it, and at that point I have indeed benefited - and we have a perfectly good tax for that already: capital gains tax. But if I don't sell, one house is one house and I have gained nothing.

Think about it this way: I buy just before a property bubble starts to inflate. The bubble causes the notional value of my house to go above £2m, and you start pinging me for taxes. Then the bubble collapses, and my house drops back down to its original price. I've spent all this time paying tax because of my "unearned gain", and in the end I don't get the gain at all? Where's the justice in that?

No, I'm sorry, no. This is terrible, illogical policy and it must be opposed.

[TickyW]

@Neil
"IF I choose to sell my house at the peak of the market, I will get more money than I paid for it, and at that point I have indeed benefited - and we have a perfectly good tax for that already: capital gains tax"

Wrong!
Capital Gains Tax is not levied on Principle Private Residences. People do not pay capital gains tax when they sell their PPR at a profit.

As for paying a tax in good years but not in bad years: welcome to the work of work! Workers pay income tax on their earnings in good years and in bad years they may pay nothing (or even get a meagre subsidy via unemployment benefits). Is there a logical reason why a wealth tax should not recognise variations in a taxpayer's circumstances, just as income tax does?

[gastro george]

@JohnMoss. It's amazing how such a high proportion of large houses always seem to be occupied by the near-mythical pensioner-on-the-breadline.

@Neil. Too simplistic. Think about multiple properties. Think about re-mortgaging which releases capital.

[Rahul]

A point not touched on by Chris is that this is a tax on the consumption of £2M+ houses, not on their ownership (i.e. not a wealth tax). The tax makes no allowances for the relative debt/equity financing of the £2M+ house, making someone with 0% equity (effectively a renter) as liable as someone with 100% equity (full ownership).

[Neil]

@TickyW: If Captital Gains Tax is not currently levied on principal residences, and you want to tax people's "unearned gains", there is an obvious solution that presents itself - start levying Capital Gains Tax. Duh.

My whole point is that until you actually come to sell your house (or, as gastro George points out, taken other steps to release capital), YOU HAVE NOT MADE ANY GAIN. The nominal value of your house, estimated against on the basis of the prices at which other people's houses have sold, is NOT reflective of any actual gain. One house is one house, and remains one house until you sell it, at which point it becomes a pile of cash. If that pile is bigger than the pile you used to buy the house, the difference is income and can legitimately be taxed. But up until that point, you are not in any real sense wealthier than you were.

"Is there a logical reason why a wealth tax should not recognise variations in a taxpayer's circumstances, just as income tax does?" --> An income tax IS a wealth tax that recognises variations in a taxpayer's circumstances. You have received income? Then your wealth has increased, therefore we levy a tax. You have not received income? Your wealth is unaffected, therefore no tax is due.

[Neil]

@Gastro George - good point, but remember what a mortgage is: it's borrowing against FUTURE earnings. If the nominal value of your house goes up, you might well be able to free up some capital through a remortgage, but if you do so, you are putting yourself in debt, and pledging some of your expected future profit on the sale of the house to cover that debt. Taking out a loan doesn't make you any richer, even if your credit rating has improved.

Still, if you felt like levying capital gains tax on remortgages, that would be a considerably more logical policy than a "mansion tax", whose only merit is that is makes a good soundbyte.