Unpicking the mansion tax

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October 6, 2014 by Paul Goldsmith

mansion

Oh the mansion tax, the mansion tax, the mansion tax….it’s been talked about for a long time and now, given the arithmetical ease with which Labour could be in Downing Street, and the likelihood that the Lib Dems, the originators of the mansion tax, will be in coalition with them, it is almost here.

The politics of the mansion tax is simple, we take from the rich and give to the poor. We get to take from those we envy and give to those we pity. In fact, Labour’s plan is to ‘hypothecate’ (meaning ring-fence) the proceeds from the tax, believed to be about £750 million, for the NHS, which can be used by everyone, so it’s not just those we pity. But it is an attack on the rich. We are told that people favour the mansion tax in polls – well of course they do – the majority won’t be paying it.

Of course, it depends on what you class as ‘rich’. Here, the distinction between income and wealth is important. Wealth is a ‘stock of assets’, and income is a ‘flow’ of money. Some people add to their wealth by earning income from their work. Some people, however, add to their wealth by income from their investments in, say, stocks and shares. Our wealth is also added to by inheritance and from the growth in the value of the property we own. This wealth, which some argue ‘falls into our mouth while we sleep’, is what is being targeted by the mansion tax. Property, also, cannot be hidden, whereas income can.

So far so politically comfortable. But the problem is with how it is implemented. In order to tax this wealth, we need to grab some income. There are quite a few people who, having bought their house many years ago, are now pensioners, on a small income, but are living in a home that is worth more than £2 million (the suggested threshold). 40% of these properties are worth between £2m and £2.5m, and on average these people would pay around £10,000 (assuming the tax is set at 2% of value over £2m), which means they would be having to find £18,000 before income tax) in order to pay it. There are at least 25% of the 50,000 homeowners who are believed to be in a position where this would be impossible. We may not shed any tears for the value of their assets, but we do need to pause for thought on what this may force them to do.

It is thought that the payments from the mansion tax would force the elderly to move out of their houses. Some could argue that this could force a more efficient allocation of houses, because many of the elderly are living in houses with far more bedrooms than they ever use, explaining why we have 20 million spare bedrooms in this country, even though there is a massive housing shortage. That may make sense. But we would be forcing the elderly and cash poor out of family homes that they may have lived in for 40 or 50 years, and may have been in their family for countless generations. That emotional ‘fine’ is far greater than any mansion tax deserves to be.

Ed Balls, the shadow chancellor, has addressed this in a small way by saying that he would “roll-up” the mansion tax payments on these properties, to be paid when the house is sold, or when the occupants die. That might mean that the occupants are not forced to move out. But, depending whether it is put on the sale of the home, or on death, it could actually make people LESS likely to sell their homes. This means that the revenue that Balls is after for the NHS will be delayed AND the 20 million spare rooms may be even LESS likely to be released. Therefore, none of the Labour Party’s objectives are met.

An alternative would be to reset the council tax bands. Wales have recently added a new band to their list, and there is no reason new bands can’t be added to England’s too. The bands can be based on the value of the properties, which can mean that sheikhs in £30million pound houses aren’t paying the same council tax as a council worker in a £400,000 flat (yes, that really happens now). Why won’t Labour do that? Well, Labour believe in centralisation of power, and that includes the centralisation of tax revenue. So local councils getting that revenue and having the freedom to use it just won’t do. Which goes to show that a tax that makes the envious feel good is more important than a tax that works.

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