To want ‘fairness’ is to want a distribution of the spoils which reflects the value of the contribution of each to the economic and social resources of society. A fair tax system should seek to tax according to capacity to pay. It must also act to discourage those, such as polluters, whose economic choices negatively impact on society.
It must encourage those, such as in renewable energy development, whose economic activity has the potential to positively contribute to society. The next category when looking at the efficacy of a tax is the ability of the tax to contribute to economic stability.
On each of these criteria the Mansion Tax is a bad proposal.
It’s not equitable because the cash-poor asset-rich owner of a large house is liable for this tax, while a property speculator who has ten houses worth 250k each is not. The person in the £2million house may have bought it for much less, and is not gaining economically from its value. The speculator is living off the rents and making it harder for first time buyers to get into the market, while rising rents impact on the wider health of the economy.
Advocates of the mansion tax argue that those who buy houses as investments will seek an alternative investment if they have to pay the tax. This, they argue, will mean that less demand at the top of the housing market will trickle down to more affordable housing for first time buyers. This is fallacious, as in many of the cases in London properties are bought not for investment in the purely economic sense. The priority is to have assets held in a country where, unlike some of the other assets held by oligarchs and plutocrats, they cannot be lost at the whim of political change.
Supporters of the mansion tax argue that cash-poor home owners can either roll the tax bill into the equity of the house, by borrowing from the bank to pay the bill, or by waiting until after their death and giving the government a share in the equity of the house.
This would be a disaster.
In the first instance, any sentient banker would rather lend a comparatively small amount of money against a £2million house than lend to a first time buyer, as the £2million house will not lose its value by more than the amount of equity taken out, while the first time buyer’s house could collapse in value by more than the value of the mortgage.
At a time when the rhetoric is about ‘the banks lending more’ to help small businesses and first time buyers, the Liberal Democrats propose a tax which will hinder such lending.
Giving the government an equity stake in the £2million house until after the taxpayer has died, falls into the final trap which must be considered when framing tax policy.
A tax must cost less to collect than the amount which will be raised. I anticipate that there would be numerous court cases if the government looks for a share of the house’s sale price after death.
A fairer tax system should target second home owners, and particularly buy-to-let home owners. This group inflate prices and rents, restricting entry to the market for first time buyers. They benefit from a boom and enhance the chances of a slump, the capital gain on the house is unearned wealth, and they profit from rising rents.
* David Thorpe is a member of the Liberal Democrats in Newham, and works for an economics publication.