Opinion: Why do the government tax people on the value of their home?

View from Launceston CastleI am not a politician or economist, nor am I some great thinker of our age. I am just a normal man, single, living in rented accommodation, in a well-paid job, for my part of the world. Yet I still have to rent out my second bedroom to afford normal things like the internet, satellite TV and the occasional visit to a good restaurant. I have to pay out £830 a month just for my Council Tax, rent, petrol and energy before I even eat, let alone pay for the internet or satellite TV!

Here in Cornwall, the average gross earnings for a full-time worker are £20,982. As any normal person knows, that is a lot more than the majority earn for a full-time job. I would suggest, based on the online job sites, that anything north of £15K for full-time work is considered a good job here. This county relies heavily on part-time work, anyway.

So, I ask a simple question.

Why do the Government persist in taxing people on the value of their home?

The value of the family home cannot accurately determine the wealth of a family or individual, as it is perfectly possible for a family to live in a relatively high-valued property and still be cash poor. Why is it not possible to move to a tax system for local government that is rooted in a person’s ability to pay?

Two options out there, which to my mind are perfectly workable if the political will is there, are:

PAYE—a local element to our income tax (with the appropriate tax element for people who have to declare their earnings).

Purchase tax – local authorities levying a percentage on what we buy with the usual exemption for food etc.

My Council tax bill was over £1300 for 2012/13, on a property with a value currently of approx. £100k. In my building we have a single mum who works and and gets a 25% reduction, but has half my household income. How does that work? She has no other income, other than child allowance. We also have a guy who works in I.T., owns his flat and earns more than my household and the single mum put together, yet pays the same as my household in council tax! How can that be fair? Can anyone please explain to me in simple terms the justification for our Council Tax system?

If the government wants to earn money from people who buy expensive property then they should do it when they purchase the property and when they sell it. Or is that too simple?

* William Townsend is a Liberal Democrat member in Cornwall.

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40 Comments

  • There is no simple way of devising a fair tax system. All systems have winners and losers. Inevitably the losers complain more than the winners; sometimes their complaints are justified, sometimes they are not. Therefore the only “fair” basis for levying tax to pay for public services is to have a wide range of different types, ideally with low correlation to each other. This means that for some taxes there will be winners, but for other taxes these people will be losers. It is therefore perfectly reasonable to have property taxes as part of the tax mix. (Indeed, the one advantage of a property tax is that buildings can be easily identified, and a reasonable value- whether it is capital value or rental value – ascribed to them. ) As for”ability to pay”, this in itself is a questionable concept. For instance, the ability to pay for someone who chooses to live in an expensive property (or in the case of London is obliged to buy a property quite modest in terms of the accommodation itself) with a big mortgage might be little different to someone on a relatively low income living in an area where housing is relatively cheap. There is nothing in principle wrong with local sales taxes or local income taxes but even these will throw up anomalies, for instance people who live in one area, work in another, and shop in a third. The arguments surrounding tax should therefore not come down to “this tax bad, that tax good” but establishing a reasonable balance between all the taxes levied by local and central government, both direct and indirect.

  • The injustice here isn’t that tax is being paid on the value of your property, its that you, who are a tenant, are paying it. Your landlord is making considerable money out of owning that property and letting it to you, it is right that, in return, they should pay tax to the government who provide many services for that property, such as roads, utility connections, police protection, litter removal and so on. It is also right that the landlord should pay tax as it is an incentive for them to actually let out the property, or they will lose money.

    In theory, by encouraging landlords to minimize the time between lettings, council tax should lower the rents people charge and not get wholly passed on to tenants. In practice our housing market is so inefficient that landlords can pass on all of the tax and know that they will find new tenants anyway.

    Furthermore, in any just system of housing taxation the amount of tax the landlord had to pay would go up with the rental value of the home, acting as an incentive for them to keep rents low. However, because council tax is based on 1992 rental value, not current rental value, this once again doesn’t happen.

    Personally I think you are wrong in saying that owner occupiers shouldn’t pay council tax on the grounds that “it is perfectly possible for a family to live in a relatively high-valued property and still be cash poor”. I say this becasue it is my current situation and believe me it is a very decent situation to be in. I do much better earning £16,000pa in a decent house I own outright (through inheritance) then those I know in very similar situations who are earning £30,000pa but have to rent. The fact is that at present our tax system is hugely skewed towards those who are asset rich to the detriment of those having to rent (like yourself), that’s just not fair, and removing the one tax we have that shifts the balance slightly in the other direction would only make it worse.

  • David Allen 18th Feb '13 - 3:33pm

    LDV, please take Graham’s excellent comment above, and put it on autopost, so that it automatically reappears every time someone talks about an “unfair” tax. It deserves to be repeated until it sinks in!

  • Richard Dean 18th Feb '13 - 3:58pm

    How is it that the average can be £20,982 for full-time work, but this is “a lot more than the majority earn for a full-time job”? Unless there are a small number of extremely rich people there in Cornwall, skewing the distribution in a major way, I would have thought that average means that a majority earn about that amount.

  • The government does tax income – a lot. Receipts from income tax + national insurance (which is another income tax) come to £260bn. Council tax receipts are £26bn. These are IFS figures. We tax income ten times more than housing.

    We should be re-balance tax away from income and onto land wealth. Mansion tax will be a good start. Looking ahead, we need to reform council tax so it more accurately reflects house prices.

    Something to think about – you pay rent to the landlord and council tax to the government. Why do you only complain about the latter? It’s the rent that’s too damn high. Landlords charge as much as they can get away with (whatever the market will bear). If the government scrapped council tax, the extra money that all tenants now have would be extra money that the landlord can get away with charging you. So overall, the money spent on council tax is money that would otherwise be spent on rent. It’s effectively the landlord paying council tax, not the tenant. It would be better if we made that formal and made council tax payable by the owner rather than the occupier.

  • “The value of the family home cannot accurately determine the wealth of a family or individual, as it is perfectly possible for a family to live in a relatively high-valued property and still be cash poor. ”

    Given that a home is the most expensive item of property that most individuals are ever likely to own then I can’t think of a better single item to judge the wealth of a family or individual. If they are cash poor and own an expensive house then they can simply downsize to something more appropriate.

  • @Richard, there’s a difference between the median and the mean average. Look it up.

  • Richard Dean 18th Feb '13 - 4:29pm

    @Duncan. You look it up. Then re-read my comment. Median and mean are pretty close to each other unless the distribution is very skewed.

  • Given that all taxes are, economically, paid by landowners anyway (they always get passed on to the landowner in the same way that all subsidies end up in the pockets of landowners who can get away with charging a higher rent) then why not get rid of all taxes and just have a land tax? There would be much less bureaucracy and people can’t hide land offshore. Our current tax system levies greater amounts of tax on the landlords that make better use of their land. Those that do nothing with their land pay nothing. So, why not make the tax proportional to the local land value, ensuring that landlords that use their land productively get rewarded and those that don’t get punished. What’s more, if the local value of land rises and gives a landowner a windfall, obtained without them having to lift a finger, then the amount of tax they have to pay increases, thus righting the iniquity.

    There we go – a tax system that is less bureaucratic, more difficult to avoid and encourages productivity.

    @Richard Dean
    Income distribution are asymmetrical. The majority of people earn less than the mean salary, especially in Cornwall where local incomes are small and a small percentage of the population have very high incomes obtained from working elsewhere in the UK.

  • to put duncan’s post another way, if you’re not convinced the land lord is paying the council tax, would william reduce his rent for his tennant if council tax was abolished?

    No. he may take his room off the market, reducing housing supply and raising rents even more for everyone. so taxes on property have the effect of increasing housing supply and reducing the money gained from rent by people performing no useful work. which seems pretty fair to me, whatever that word means.

    it also has the effect of making people reluctant to build extensions or develop land for fear of increasing their taxes though. This is why land tax is better than property tax.

    finally notice jewellery tax does none of these things :D

  • In addition to Graham’s v. sensible points, taxing property has scope to drive other behaviours you might want to see – for example, encouraging people to live in smaller houses and release larger homes to those with larger households.

  • You mention purchase taxes, with the usual exclusions for food etc. Does housing fall under etc? Is there good reason – if we didn’t have council tax – why a mansion should be VAT exempt but cars, phones and most other things shouldn’t be?

    Replacing council tax with just stamp duty would mean people would have a big disincentive to move house – even if they could move to get a new job or wished to downgrade. Whereas, an annual tax is an incentive to not use much more property than you need.

    The real problem is that the government doesn’t tax you on the value of your home but on a ridiculously flat band system with a high minimum (and on what it thinks your house would have been worth in 1991!). A proportional tax of 0.6% of the value would be revenue neutral and mean those with the most expensive homes paying more but a £100k home would pay only £600 instead of the over £1300 you say.

  • Alex Baldwin 18th Feb '13 - 5:36pm
  • Richard Dean 18th Feb '13 - 5:54pm

    Yes, Alex, that is skewed. It’s a technical term – see Google and “skewness and kurtosis”. Basically it means unsymmetric. A symmetric distribution always has its median equal to its mean.

  • Reference the average wage in Cornwall. I can assure you that the majority of full time employees DO NOT earn anything like the reported average wage. I don’t know how the figure is reached but if income from investments is included I can see one way the figure can be inflated! Does anyone know how many wealthy retired people are down here driving up house prices!

  • Richard Dean 18th Feb '13 - 6:03pm

    Are those wealthy retired people not bringing income into the area?

    Are we now going to have a LibDem campaign against wealthy retired people?

    Gee, is this really the future for Lib or Dem?

  • I am not against wealth! I am not against people taking early retirement and moving to Cornwall BUT there is a side effect. House prices are exceptionally high compared to income and this has a knock on effect to rents. I believe more so than anywhere else in the UK.

  • Stuart Mitchell 18th Feb '13 - 6:25pm

    You need to look at the wider picture. Your higher-earning neighbour may be paying more council tax than you, but he is likely making a much bigger contribution to your local authority’s income than you are due to the fact that over half of council income comes from central government, so is paid for out of income and other taxes.

    As Graham alluded to, no tax can ever be perfect in terms of fairness and coverage, therefore we need a mix of different taxes, of which council tax is only one. You should look at it in that context.

    I don’t know if the Lib Dems still have their local income tax policy, but it was always an idea I disliked intensely as it would put far too much of the tax burden on the shoulders of the mugs on PAYE, while those who by hook or by crook (most likely, crook) manage to avoid paying a fair share of income tax would get away with even more of a free ride than they do now.

  • Richard Dean 18th Feb '13 - 7:20pm

    I would also like to ask a simple question, actually more than one. The first is, does Stuart get anything in return for the £830 a month spent on

    > Council Tax
    > rent
    > petrol, and
    > energy

    If not, why pay? If so, why not?

  • Richard Dean 18th Feb '13 - 7:20pm

    … or indeed William! :-)

  • Richard,

    Salary distributions are always skewed: You can earn a lot more than £20K, but you can only earn £20K less.

    Anyways, on the wider point, I care very little if someone is “cash poor” because they put all their money into a “£3 million house”. It’s perfectly appropriate to tax wealth, we bizarrely don’t do it at the moment and so we do need to find ways to move from just taxing income – one of the worst things to tax.

  • @Gordon 18th Feb ’13 – 4:48pm
    “taxing property has scope to drive other behaviours you might want to see – for example, encouraging people to live in smaller houses and release larger homes to those with larger households.”

    This of cause assumes that those with larger households also have the spare income to pay the higher rate of council/property tax…

  • I have to say, I am with Graham. I have little else to add, other than to say I am a big fan of taxing the value of over income. Yes, council tax bands are flawed, but the idea of taxing one on the value of their property is fairer than taxing them on things like their income.

  • Keith Browning 18th Feb '13 - 9:24pm

    I think we should return to the ‘hearth’ and ‘window’ tax. The second would be an excellent way of recouping the slosh of money that has ended up in the City of London.

  • Eddie Sammon 18th Feb '13 - 11:41pm

    Great initial comment from Graham. Where did you first hear about diversification and tax rates? I have not heard about the diversification principle being used for taxes, previously I thought the mansion tax was a really poor policy. I still have some reservations, but this helps me see it in a new light. We really need to be communicating the logic behind these policies, otherwise we just look like a second anti rich party. I nearly didn’t join because of the mansion tax.

  • andrew purches 19th Feb '13 - 10:48am

    I think we should, for starters, bring some rational into this conundrum. The taxing of property,on a value basis,has a place in the scheme of things, and should be based on an up to date scale of values, and not one based upon that of twenty odd years ago. It is somewhat perverse to have a maximum valuation on property based upon a 1991 assessment, where I suspect that, today,the highest tax band payable is on property that would have been valued as a near mansion at 1991 prices. My house in E band was valued originally at £ 65 – 70.000, and is now valued at £ 325.000. The overall increase in Council tax has gone someway towards balancing this discrepancy out, but, even so, there is an unfair loading towards the lower orders for the recovery of local government costs. What is needed is: 1) an overall revaluation of all property in line with current values, with a much broader banding of tax rates, and 2) a residents service tax, based upon an individual’s share of the cost of services provided. A poll tax variation maybe, but properly marketed, this would be accepted by most people as being fair and justified. All that would need to be done then is to hammer the private rented market, with strict rent controls, reducing the need for such an unbalanced level of housing benefit that is skewing all local authority and government expenditure.

  • Matthew Huntbach 19th Feb '13 - 11:29am

    William Townsend

    Here in Cornwall, the average gross earnings for a full-time worker are £20,982. As any normal person knows, that is a lot more than the majority earn for a full-time job. I would suggest, based on the online job sites, that anything north of £15K for full-time work is considered a good job here.

    Yes, so why do you defend those who come into your county, push house prices up beyond the reach of locals, and make more out of owning housing than people who work for a living do by working? So long as housing is considered untouchable in terms of tax, a source of income better than any productive investment, house prices will be pushed up beyond affordability by those who need them, and industry will suffer because why invest in industry when more money can be made by doing nothing but owning housing?

  • “a residents service tax” – VETO VETO VETO!!

  • Eddie Sammon 19th Feb '13 - 2:03pm

    Regarding a residents service tax: why don’t we have an NHS tax? And a Schools Tax? In other words, I don’t see why the local council needs its own tax.

  • Alex Sabine 19th Feb '13 - 3:51pm

    I’m interested in why the devotees of a Mansion Tax in these parts content themselves with such a gimmicky reform to our messy property tax system.

    If the premise is as Matthew argues, to redress a situation in which ‘people make more out of housing than people who work for a living do by working’, then surely the obvious way to accomplish this would be to tax those (rental) incomes and/or capital gains? The mansion tax doesn’t do this, though: it simply taxes the ownership of an asset above a certain arbitrary value.

    Of course, rental income is already taxed, but less heavily than earned income because it doesn’t attract National Insurance contributions. This contrasts with the situation in the postwar decades, in which not only rental income but investment income in general was taxed more heavily than labour income (through the application of an ‘investment income surcharge’ on top of the already high rates of income tax).

    Economically and in terms of the efficiency of the tax system, it would make more sense to charge a uniform rate on all sources of income, as I have often argued, and this implies abolition of NI as a separate impost.

    Property is also subject to capital gains tax of up to 28pc, the same rate that applies to other assets when a capital gain is realised at the point of sale, and a much higher than the rate which applies to those selling their businesses (10pc up to a lifetime limit of £10 million). Note that CGT applies to paper gains not just real gains, so the real tax burden is higher than the statutory rate. So no obvious reward for cashing in on property portfolios there.

    The elephant in the room, of course, is the principal private residence exemption, which means people pay no CGT on gains from selling their home. There are strong theoretical arguments against this exemption (although strong practical arguments for keeping it), and the yield from ending it would probably be enough to scrap the crazy stamp duty altogether. But the Lib Dem passion for property taxes clearly doesn’t extend to challenging this sacred cow!

    The mansion tax does not increase the tax on rental income, then; nor does it tax gains, part of which may be attributable to home improvements etc but a big part of which are driven by the planning system rigidly controlling the supply of housing and pushing up development land values.

    Economically and in terms of equity, a land value tax would be preferable to a property tax. But if you support property taxes as a proxy for a land value tax – which it seems is the position of people like Vince Cable – then why not overhaul the property taxes that we already have rather than add another one that will require a separate system of valuation and administration? And what is the logic behind only applying it to 70,000 properties? The priority seems to be the symbolism of hitting ‘the rich’ rather than the substance of reforming property taxation.

    As the IFS argue, ‘rather than add a mansion tax on top of an unreformed and deficient council tax, it would be better to reform council tax itself to be proportionate to up-to-date property values’. Together with the abolition of stamp duty, which they also advocate, this ‘would make for a much more coherent system for taxing property’.

    One final point: It is not true that in the UK we tax property less heavily than other developed countries, as I’ve seen some Lib Dems argue. On the contrary, at 4.1pc of GDP, we have the highest property taxes in the OECD, and by some margin. The problem is that some of the biggest ones (stamp duty in particular) are highly market-distorting, inefficient and inequitable. They need root-and-branch reform, not papering over with a gratuitous mansion tax.

    http://www.oecd-ilibrary.org/taxation/taxes-on-property_20758510-table7

  • Alex – “then surely the obvious way to accomplish this would be to tax those (rental) incomes and/or capital gains? The mansion tax doesn’t do this, though: it simply taxes the ownership of an asset above a certain arbitrary value.”

    Consider the following;

    Semi 1: a single person who bought the house years ago, paid off their mortgage years ago, and has had sufficient disposable income to avail themselves of a second property, holidays, etc etc and who is sitting on a massive tax free windfall when he chooses to sell
    Semi 2: a family of four, two adults working, who struggle to pay their mortgage and who use what remains of their disposable income to bring up the children who will be providing Semi 1′s pension when they start work

    Property taxes go some way to redressing that balance.

  • Eddie Sammon 19th Feb '13 - 5:39pm

    Tabman, how do you value properties? Do you send an estate agent in a helicopter and ask them to peer into someone’s back garden? Or do you get them to knock on the door and ask to see the internal decor? If you know of any links from party spokespeople that would be good.

  • Alex Sabine 19th Feb '13 - 6:18pm

    Tabman – I wasn’t necessarily arguing against property taxes as such, but against the half-baked mansion tax idea. I agree that property taxes have some virtues: that is they are less bad than many other taxes, although not as good as a land tax.

    In any case, as the link I included shows, the UK already has the highest property taxes of any developed economy bar none.

    Given how unsatisfactory the current property taxes are (stamp duty, council tax and business rates) shouldn’t we fix those rather than overlaying them with an additional, extremely narrowly-based tax?

    And from the tax consultation paper I see the party’s ‘long standing policy’ of a local income tax rears its head again, presumably as a replacement for council tax. This would be very bizarre in the context of the party’s new-found emphasis on shifting tax from income to property wealth. (I realise this is only a consultation paper, but I had hoped LIT had finally been given a decent burial.)

  • Richard Dean 19th Feb '13 - 7:39pm

    I’d support a CASTLE tax!

  • Matthew Huntbach 20th Feb '13 - 3:14pm

    Alex Sabine

    I’m interested in why the devotees of a Mansion Tax in these parts content themselves with such a gimmicky reform to our messy property tax system.

    If the premise is as Matthew argues, to redress a situation in which ‘people make more out of housing than people who work for a living do by working’, then surely the obvious way to accomplish this would be to tax those (rental) incomes and/or capital gains?

    I’m not a “devotee” of the “mansion tax”. Just a realist who can see the more radical reforms that would be far better in theory are much harder to sell politically. Jedibeeftrix and I disagree on most things, but we both see the same, though from opposite directions, when it comes to the “mansion tax”.

  • @William

    “Reference the average wage in Cornwall. I can assure you that the majority of full time employees DO NOT earn anything like the reported average wage. I don’t know how the figure is reached but if income from investments is included I can see one way the figure can be inflated! Does anyone know how many wealthy retired people are down here driving up house prices!”

    Umm, I think you massively overestimate the investment income of the retirees moving to Cornwall. Often the reason retirees who have reasonable (not massive) incomes appear rich is their costs have dropped. So a family working on £20,000 paying for the rent/mortgage, children costs of getting to work etc has a very low disposable income but a retired couple who have moved to the area have no mortgage left to pay, and have an income of £20k are much better off.

    I doubt you have many people who earn millions from investments living in Cornwall which is what it would take to skew the average as much as you appear to believe it had been.

    The retirees may push up house prices by selling up in London/home counties and moving to Cornwall but I doubt they are affecting the average earnings much.

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