Opinion: Council tax reform is better than the Mansion Tax

The November 2014 AdLib makes interesting reading. Amongst other issues, it set me thinking about the Mansion Tax. It is axiomatic of any decent society that those most able to pay should contribute the greatest amount towards the cost of maintaining it; especially in respect of social costs.

This seems to be an unpopular concept with many on the right of politics, who would presumably see themselves as paying more; while those on the left may be tempted to adopt it as an unthinking mantra, without considering the practical implications. Nevertheless, we must find fair ways of making the better off pay their fair share.

One way of achieving this might be to avoid the use of emotive language such as a “Mansion Tax”, which immediately enrages those in London and parts of the South East who have homes that approach or exceed the magic £2 million level simply by virtue of living in that area.

A house is an asset, but one that does not, in general, create an income – and can even be a liability when maintenance costs are taken into account. This means that some people who have lived in the same place for a very long time may have a property of high value, compared with their income, which would make paying a Mansion Tax difficult. But this may partly be because the entire burden is borne by relatively few people.

The alternative of a more flexible income tax system might generate greater revenue for the government to cover the cost of important and necessary spending, especially on the NHS but, for the better off, it can be relatively easy to circumvent by sophisticated tax planning. Raising higher rates of income tax can also be counter-productive, if some research is to be believed.

One solution might be to abandon a specific Mansion Tax, but instead modify the Council Tax system so that it more accurately reflects the value of property; a property worth £320,000 should no longer be in the same band as one worth, say, £500,000, £750,000 or £1 million or even more.

Potential benefits:
• This would be fairer than the current system; and
• It would provide more revenue directly to local authorities so that the central government subsidy would be of less significance, greatly enhancing local democracy.

Clearly there are issues relating to ability to pay, particularly for the asset rich/income poor. However, a local system could be adjusted to allow for individual circumstances such as these. For example, those unable to pay the additional Council Tax might be able to defer payment of part, or all, of it until the property was eventually sold, with an interest rate (accruing to the local authority) equal to the rate of CPI, again payable from the eventual sale proceeds.

Assuming that the additional money required to be generated equated to 0.25% of the value of the property, then a home worth £500,000 would face an annual charge of an additional £1,250, while the £2 million property would pay £5,000 and so on – in other words, directly pro-rata to the value of the property. Clearly the figures would require detailed consideration, but the principle remains that people should be asked to contribute towards society based on the value of their assets.

If this appears ‘unfair’ to those whose property values have only risen to such heights due to price inflation, it should be remembered that they have done nothing specifically to earn the rise in the potential price of their property and that the increase on a primary residence is totally free of capital gains tax.

There would need to be a property revaluation throughout the UK, which would be more expensive than simply looking at those homes likely to exceed £2 million in value but, as many in new homes will aver, this is long overdue.

Next to be addressed is the inequities of the stamp duty land tax; but that is a whole other argument.

* Stephen Phillips spent his entire career in financial services, spending the last decade writing on insurance, investments, pensions and mortgages. Latterly, he also wrote a monthly economic review that was issued to the clients of a large number of independent financial advisers. He has been a member of the party since 2013.

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  • ” It is axiomatic of any decent society that those most able to pay should contribute the greatest amount towards the cost of maintaining it; especially in respect of social costs.”

    No it isn’t. People should only be charged for what they use, rather than what they contribute.

    Because of it’s irreproducibility, the only thing people use that we can deprive each other of is Land.

    So, if we use land rent, whose value we create together, to pay for the services we share, we naturally get a fair distribution of income and capital.

    As land value is currently highly concentrated in the UK, the average household who be around £11,000 per year better off from such a change.

    This is what capitalism, and a level playing field looks like.

  • Eddie Sammon 3rd Dec '14 - 4:11pm

    After Osborne’s announcement the Lib Dems should scrap the mansion tax and I would say focus on income taxes, capital gains taxes, balance sheet levies and possibly commission a study into a proper net asset tax.

    It will not seem fair to keep singling out property to tax.

    Member ballots on policies are fine, but in certain circumstances, such as when the government introduces a very similar policy, the Lib Dems need to be able to change policies quickly and member ballots are sometimes not suitable.

    Regards and thanks for the article. I agree abolishing the mansion tax and replacing it with something else that taxes the super rich more is a good idea.

  • Myths about the Mansion Tax

    I note that this article repeats the myth that –“a Mansion Tax…… Immediately enrages those in London and parts of the South East who have homes that approach or exceed the magic £2 million level simply by virtue of living in that area.”

    No it does not. The vast majority of people in London know they will never own a £2 million house. They know it makes sense for the rich to pay their share.

    Have a look at the facts from the excellent Diamond Geezer blog —

    It has a handy little map to illustrate just how small and localised the ownership of £2m houses is even in the poshest boroughs of London.

    Let’s be honest 99% of these folk never have and never will vote for us.   

    There is no political downside to Liberal Democrats supporting a mansion tax, unless you think that upsetting Jeremy Browne is a bad thing.

    I recommend Diamond Geezer especially for those with even a marginal interest in London Buses, Tubes and Trains.

  • Matthew Huntbach 3rd Dec '14 - 4:47pm

    One way of achieving this might be to avoid the use of emotive language such as a “Mansion Tax”, which immediately enrages those in London and parts of the South East who have homes that approach or exceed the magic £2 million level simply by virtue of living in that area.

    But was it ever officially called “Mansion Tax” or was that just a nickname someone used for it which it got stuck with?

    Clearly the idea of calling it “Mansion Tax” to try and reassure most people that it would not affect them.

    As I keep saying, I live in a three-bedroom house in London, and you could buy it six-times over for £2 million pounds. So, come on, even in London, a £2 million pounds property is WELL above the norm.

    Making it a council tax rather than a national property tax rather takes away the point of it, redistribution of wealth. If it’s a council tax it means Kensington&Chelsea and Westminster and a few other boroughs get even more money, but does nothing to spread that money to poorer parts.

  • @ Matthew Huntbach

    The point you make about council tax and national tax is one way you could counter Labour Mansion tax are they going to levy this as a national tax? Will councils play ball with Labour on this using local for national funding if the council wants the money how do Labour use it for the NHS

    My opinion is property tax starts at a level that is too high but the top level is simply so low it is insulting another example of how the wealthy either in money terms or asset terms do far better than the less fortunate

  • Stevan Rose 3rd Dec '14 - 11:31pm

    Why do either. Why not have a sliding scale stamp duty hike at the top end pitched to raise the same revenue. Payable by buyer and seller.

  • Alex Sabine 3rd Dec '14 - 11:38pm

    I think what this article and the comments show is that there are some pretty fundamental questions about the purpose and operation of this proposed new property tax that remain unresolved. For starters:

    – Is the purpose to redistribute wealth (as Matthew suggests), to raise revenue to help tackle the deficit and thus (very slightly) reduce the scale of spending cuts, to raise revenue to pay for a higher income tax personal allowance, to raise revenue for local government, to reduce property prices/cool the property market, to act as a (highly imperfect) proxy for a Land Value Tax, or some other purpose? It cannot be all these things simultaneously, and at the moment the message is extremely mixed.

    – The above are first-order questions, I’d have thought. Another key – and related – issue is whether this is intended to be a national tax or a local tax. The original Lib Dem ‘mansion tax’ proposal was for a stand-alone national tax whose revenue would go to the Exchequer. Now the favoured option seems to be to extend council tax, in which case the revenue will presumably go to councils and not be available for either deficit reduction, a higher personal allowance or any other purpose laid down by national government. If the idea is that the new revenue would go to national government, but the rest of council tax revenue would not, you can bet it will end up as an unwieldy mess with extra admin costs swallowing up whatever paltry revenue is raised.

    – If you go for the national tax opton, what is the rationale for taxing a homeowner with a single property worth £2.1 million but not (say) an investor or rich individual with a property portfolio of £10 million comprising multiple properties each worth less than £2 million individually? (I believe Chris Huhne may be a case in point…)

    – If you go for the council tax option, would you just tack on extra bands or would you go for a full revaluation of properties prior to this? So far the Lib Dems (like the other parties) have ducked the revaluation option, for the obvious reason that it would probably be unpopular. But if you are unwilling to undertake regular revaluations (say every 5 years) then you really have no business arguing for property taxes.

    – We need to be clear what the purpose of council tax is. It came into being as a replacement for the hated poll tax, which itself replaced the unpopular rates system. While the level of the tax depended partly on property values, other factors were also relevant (household size, for example, hence the single person discount; and income level, hence council tax benefit). It was not intended as a property tax per se but as a means of raising revenue for local government services, and the relatively low maximum level of contribution reflects the fact that consumption of those services does not rise in line with property prices.

    Now, of course you can argue (and I would agree) that the ‘hybrid’ that is council tax is thoroughly unsatisfactory. After all, under Charles Kennedy’s leadership the Lib Dems used to want to replace it, not with any other form of property tax but with a local income tax. (Back in 2005 we were told that fairness meant reducing property taxation while increasing income tax…) If, instead, you think council tax should be a pure property tax, then why not levy it at a rate proportional to property value rather than messing around with bands? Would that not be simpler and fairer?

    – The old Lib Dem policy of replacing council tax with a local income tax was misguided in my view. But one valid argument you used to make against council tax was that it bore no relation to ability to pay. Similar arguments apply against taxes on assets that do not generate an income stream, namely that owning a valuable asset and having the liquidity to pay a hefty recurrent tax are two different things. One way of dealing with this problem is to say (as both Labour and the Lib Dems are now suggesting) that the tax owed could be rolled up and paid either through the person’s estate or on sale of the property. But then it looks awfully like a second inheritance tax or a surrogate capital gains tax.

    – Speaking of which, it is not obvious to me why it is fair to impose a recurrent annual charge on an asset, yet specifically exempt that same asset from capital gains tax. Surely, if you are going to allow people to roll up the tax for years anyway, then instead of a half-baked new tax it would be fairer and more logical to remove the primary residence exemption and charge CGT on the rise in value at a point where – by definition – liquidity is not a problem. If you were to scrap stamp duty at the same time you could strike a blow for economic efficiency and intergenerational fairness.

    – If you are relying on the revenue from a mansion tax to pay for other things, you are going to need a fairly robust assumption about the number of people who would pay upfront versus those who would roll it up. If it turns out that many more people than you expect take the latter route, your earmarked revenue suddenly disappears and you have uncosted spending or tax-cut commitments.

    – Finally, and perhaps most importantly, even if you think an annual recurrent tax is the way to go, and the liquidity problems can be resolved through provisions to roll up liabilities, then why is a mansion tax the answer rather than a land value tax which properly targets ‘economic rent’? It suggests the motivation is not to shift the tax burden away from productive activity and onto unearned wealth, but simply a ‘bash the rich’ impulse with scant regard for equity or the efficiency and coherence of the tax system.

  • Philip Rolle 4th Dec '14 - 1:04am

    It needs to be appreciated that the only government so far to have brought in a mansion tax is the Coalition. { ATED }

  • Matthew Huntbach 4th Dec '14 - 10:15am

    Alex Sabine

    If you go for the council tax option, would you just tack on extra bands or would you go for a full revaluation of properties prior to this? So far the Lib Dems (like the other parties) have ducked the revaluation option, for the obvious reason that it would probably be unpopular.

    This was said with the old rating system as well. Properties had not been revalued for some time, and with the high inflation since the revaluation, rates seemed to be at a very high proportion of property value. But, quite obviously, a revaluation would mean the proportion would go down greatly. Suppose that rates are at 5% of the rateable value of the property, but the rateable value is 5 times the actual value. Then revaluation would be accompanied by rates going down to 1% of its rateable value to raise the same amount of money. Many people lacked the numeracy to see this, and thus suppose revaluation would be accompanied by rates continuing at 5% of rateable value, or whatever it was.

    Similarly with revaluation for the council tax. If the aim is that the same amount of money will be raised, the overall effect will be neutral. However, some will end up paying more (those whose property has risen in value more than average) and some will end up paying less (those whose property has risen in value less than average).

    The claim that this would be “unpopular” is based on the assumption (probably correct) that those who end up paying more will make a big fuss about it, and those who end up paying less will stay quiet.

  • Thanks Alex for saying many of things I was mulling over. I agree whilst it is logically consistent for the “mansion Tax” to be effectively a new Council Tax band, it does bring with it all sorts of problems.

    As a new Council Tax band, with things as they currently stand, the impact on tax revenues will be minimal – the new band will merely be fed into the formula for setting the amount of Council Tax residents are expected to pay.
    The only real way for it to generate new revenues to government is to extend ATED and hence have the scheme administered centrally via HMRC, leaving the current Council Tax system in place.

    I think we probably need to revisit the local authority funding formula used by central government, as it does seem perverse that some London authorities are able to regularly set abnormally low council tax rates. This isn’t to say that some London boroughs don’t have problems with deprivation, only that if you are living in say a band D and above home, you probably should be paying a similar level of Council tax as people in similar properties elsewhere in the country.

  • Alex Sabine 4th Dec '14 - 2:41pm

    Indeed, Matthew, I agree. It is quite possible to do a revenue-neutral revaluation of council tax. But plenty of Chancellors will attest that revenue-neutral reforms that create large numbers of losers (as well as the less vocal winners) can be politically lethal.

    I’m not arguing against a revaluation; indeed, if we are to continue with council tax or anything like it then a revaluation is essential in my view. I’m just observing that the Lib Dems, as much as the other parties, would rather circumvent this and tinker around with fiddly add-ons to our already ridiculously over-complex tax system instead of grasping this rather thorny nettle.

  • The Council Tax was set up the way it is – bands and all – because of the circumstances at the time. Poll Tax had caused Thatcher’s downfall when she pushed it through despite massive popular opposition and warnings from many Tories. So, when Major took over, his first order of business was to find a replacement and rescue the Tories electoral chances yet to a large extend his hands were tied by a vociferous right wing that thought Poll Tax the best thing since sliced bread. (Not that any of them could possibly have been influenced by the immense savings compared with the rates on their taxpayer-funded country piles and London mansions. Perish the thought.) The right wingers were really jumping up and down and were quite prepared to vote against Major if he returned to the old rates or anything remotely like them. And since his majority was small this really mattered.

    So what could Major do?

    In the event he pulled off a political masterstroke. The moment his proposals were published the right wingers all shut up and supported him all the way down the line.

    The reason? The Council Tax was – and is – as close to Poll Tax as politically feasible. For instance, the banding is designed to compress the valuation basis of the tax so large properties cost only slightly more than small ones; the duchess and her cleaner pay nearly the same. It’s Poll Tax in drag. The Tory right understood that immediately and hailed it as a triumph.

    While the Tory right got it straight away the combined opposition forces never really did. They ritually opposed it but never to my memory mounted any cogent attack.

    Separately, one of the problems with any property or land tax is the basis of valuation which inevitably tends to get out of date. The more out of date it becomes the greater the rate shock from a revaluation and the more adrift from reality it becomes. There is a possible way round this.

    Use the most recent arms-length sale to establish the base valuation. That works directly for a simple property tax or, with a small adjustment, for a Land value Tax which I would prefer. Revalue every property on every (say) 10th or even 20th anniversary of its sale. This immediately means that the burden of revaluation is reduced by the number of properties that have sold in the last 10 (or 20) years and gives a staggered revaluation schedule for all properties so spreading the work load.

    Finally, as a sweetener, disregard for valuation purposes any improvements made to a property since its last revaluation or sale so giving an incentive to those seeking to improve or extend their property. Although imperfect that begins to approximate to LVT.

  • Tsar Nicolas 4th Dec '14 - 3:58pm

    I love the squeals of pain and anguish coming from those who can afford to pay it, from Myleene Klass to Alan Titchmarsh in the Daily Mirror today, who refers to it as “a jealousy tax.”

    You can always rely on the rich to bring up other people’s envy rather than consider their own greed.

  • Chris Holman 4th Dec '14 - 5:05pm

    I totally agree that reform of the Council Tax system, including an up to date revaluation & extending the bands up to well over £1 million, is by far preferable to the mansion tax. Perhaps the bands should be raised to £5 or 10 million or more to future proof the system.

  • Matthew Huntbach 4th Dec '14 - 7:27pm

    Alex Sabine

    It cannot be all these things simultaneously, and at the moment the message is extremely mixed

    It can do several of them at once though. Raising money from the way wealth gets sucked into pushing up London house prices is both a necessary redistributive balancing, and an income source, and since it makes housing a less attractive investment, helps bring prices down. Far from being an “attack on Londoners” as a few stuck-up rich people suggest, a property tax would be a boon for Londoners as they suffer most from high house prices. It is surely better, given that we have to raise revenue, to do it by taking it from those who have wealth, rather than as with income tax those making wealth.

    Of course, as with income tax, we need an allowance, and it should be needs related. So no-one should have to pay property tax on housing until the housing they have goes above a reasonable measure of their needs. Such a measure has already been established with the so-called “bedroom tax”.

    I have nothing but contempt for those who use phrases like “jealousy tax”. No, as with any tax, the idea is to raise money for the things that the state needs to spend money on. What do those people who call it that want instead? A “poverty tax”, especially on plebs? People dying because we can no longer pay for health services? Crime rising untackled because we can no longer pay for police?

  • Alex Sabine 5th Dec '14 - 1:49am

    Whether it would help the average Londoner trying to afford a house is an open question: conceivably it could do, if it modestly reduced prices or price inflation over the long term by dint of making housing a less favoured asset class.

    On the other hand, its introduction might send the housing market into a tailspin. Even if we disregard the special pleading of estate agents who have a professional vested interest in resisting a mansion tax, a sharp market crunch is certainly a risk given the extent to which the London market is driven by a relatively small number of high-value transactions. In that scenario you would see not only wider economic ripple effects but also implications for the cost and availability of mortgages. Lower house prices would be of little use to prospective buyers if they couldn’t obtain an adequate mortgage.

    Another concern is what would happen to the other revenue streams associated with a buoyant housing market. The OBR is forecasting a large increase in stamp duty receipts over the next few years and this is predicated directly on both continued house price growth and a high volume of transactions. As the IFS pointed out in their briefing today, stamp duty revenue is generated hugely disproportionately by activity at the top end of the market, so a crash in this segment of the market would blow a big hole in tax receipts to an extent that would dwarf the anticipated revenue from a mansion tax.

    Now, as it happens I worry about an over-reliance on stamp duty revenue for several reasons: firstly because (as most economists of different hues agree) it is a peculiarly bad tax, even if one of its major design flaws was remedied by Osborne in the Autumn Statement; secondly because it is a volatile revenue source given the inherent instability of the housing market; and thirdly because it is symptomatic of the fact that the much-discussed rebalancing/diversification of the UK economy is still a long way off.

    But nonetheless the reality is that very large sums of money have been pencilled-in from this source, and if they do not materialise then the job of reducing the deficit will become that much harder.

    Admittedly, any major reform of property taxation runs the risk of causing short-term market tremors in the housing market. That is not necessarily a strong enough reason not to go ahead with it. But in my view it does mean the reform needs to be significant enough to be worth the candle, to have a clear and consistent rationale, to be well-crafted and executed, and to be based on sound economics not gesture politics. It would also be prudent to take a cautious view of the revenue any new tax would be likely to raise, especially given the possible depletion of other associated revenue streams.

    As I’ve explained, I don’t think the mansion tax passes many, if any, of these tests. It is alarming to hear the justification and stated purpose of the tax shift so frequently, and the uses to which the projected revenue would be put multiply so readily.

    You’re right, Matthew, that it could achieve more than one objective, although its proponents are heroically overloading it in my view, especially in committing the revenue several times over. Recently Labour seem to have earmarked it to fund a boost in NHS spending. Previously they said it would pay for the reintroduction of a 10p starting rate of income tax. The Lib Dems want to use it to help fund further increases in the personal allowance. Meanwhile both Labour and the Lib Dems have argued that it would be a fair way of helping to reduce the deficit. Those who want it to take the form of extra council tax bands presumably envisage the money going to local government. These are mutually exclusive and claiming it can work such magic is pure politically trickery, or else dodgy accounting.

    The reality is that the revenue it would raise, particularly in the first couple of years, is extremely uncertain: firstly because of the likely hit to stamp duty revenues, and secondly because it is very difficult to predict the extent to which people will pay upfront or defer their liabilities for years or even decades. Whatever its pros and cons as a tax measure, I cannot see it making more than the most marginal difference to the big fiscal task that the next government will face.

  • Matthew Huntbach 5th Dec '14 - 10:25am

    Alex Sabine

    On the other hand, its introduction might send the housing market into a tailspin. Even if we disregard the special pleading of estate agents who have a professional vested interest in resisting a mansion tax, a sharp market crunch is certainly a risk given the extent to which the London market is driven by a relatively small number of high-value transactions

    House prices crashing? HURRAH! HURRAH!

    The misery and social problems and lack of liberty caused by high house prices, especially in London and the south-east is HUGE. We desperately NEED a house price crash to resolve that.

    Now, of course I am aware of the practical problems that involves, around negative equity, so consider how the last big house price crash was managed. It took place in the mid 1970s. It was hardly noticed. It worked by the price of everything else going up a lot while house prices stood still.

    I am afraid that we may have to get out of the mess we are in regarding housing now by something similar.

    I quite agree with you that a tax on sales is not going to be consistent in the revenue raised, as sales go up and down. That is why is needs to be a regular tax on property value, or inheritance tax, seeing as how the rate at which people die isn’t so volatile.

    I think we might also soften the blow of house prices falling by introducing capital gains tax on house sales, negative if the gains are negative, so a good time to sneak in this much needed reform …

    The point is that so much money in our society now is being transferred through housing, so it is crazy to ignore that while taxing the other ways in which money is transferred. The whole way in which owning housing is a far better investment in terms of money raised than anything which requires work and effort is really damaging. It dominates our economy to the detriment of everything else, with the whole thing increasingly being kept afloat by wealthy foreigners buying us up at the top end.

    Well, maybe we could use that as an argument to scrap Trident – the sort of person we had that for to stop them invading our country has now found another way to invade and take it over, and they’ve already done it, so why do we need it any more?

    You may take your pick as to which of the above is meant to be a joke.

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