“What I need is what I think the Liberal Democrats are proposing” says Labour’s Peter Mandelson on Mansion Tax

Well, well. Who would have thought Peter Mandelson of all people would back a Liberal Democrat policy over a Labour one?

The Guardian has the story:

Speaking on Newsnight on BBC2, Mandelson said he favoured finding new ways of taxing property in Britain. But he added: “I don’t happen to think that the mansion tax is the right policy response to that. I think it’s sort of crude, it’s sort of short-termist.

“What we need is what I think the Liberal Democrats are proposing and that is the introduction of further bands that relate to different values of property within the council tax system. That’s what I would like to see. It will take longer to introduce, that’s true, but it will be more effective and efficient in the longer term than simply clobbering people with a rather sort of crude short term mansion tax.”

Mandelson is the latest senior Labour figure to criticise the party’s plan to impose a tax on properties worth more than £2m to help raise £1.2bn towards the £2.5bn costs of a new “Time to Care” NHS fund. This is designed to support 20,000 more nurses, 8,000 more GPs and 5,000 more care workers by 2020.

You can watch the interview on BBC iPlayer here.

We are chuckling at the BBC’s Norman Smith who has just said on the News Channel that Ed Balls and Ed Miliband won’t be too worried about this because Mandelson is “Beelzebub” to the Labour establishment these days.

Those of us who fought Mandelson in places like Littleborough and Saddleworth way back in the 1990s will feel slightly uncomfortable to have his approval. His open criticism of a key Labour policy, though, is interesting. It certainly gets the policy into the headlines again, but it makes Balls and Miliband look weak and foolish. They don’t really need more of that.

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52 Comments

  • Of course the Mansion Tax was our idea first, and a bad idea it was then too IMO. Some people thought it was a possible way of gently introducing people to Land Value Tax (for some unfathomable reason) but it was never really constructed as such – no distinction between land and improvements and so on. However when we made our U-turn on it, we should have improved its LVT/SVR credentials, rather than simply going back to Council Tax Plus. But to have Mandelson supporting it, in my opinion, just goes to show how wrong we are 🙂

  • Adding extra bands to council tax would be preferable to the administrative mess of grafting a completely new property tax with a uniquely narrow base onto the existing hotchpotch of highly unsatisfactory property taxes (council tax, business rates, stamp duty), and looks less like a gimmicky populist raid than a ‘mansion tax’.

    But if we are going to keep council tax at all, let alone tinker with it by adding new bands, it really makes no sense to keep skirting around the need for a full revaluation of the housing stock. There is little point in a property tax based on valuations that are 24 years out of date. Most practitioners and policy experts regard it as a joke.

    Of course, Lib Dems who claim to want to tax the unearned windfalls that owning property generates should really not be seeking to increase property taxes per se. If targeting economic rent is the objective it would make more sense to scrap all the existing property taxes and replace them with a land value tax.

    If the objective is only to tax windfalls when the owners actually realise them, then the answer would be to charge capital gains tax on all property sales, ie remove the exemption for primary residences. This would have the disadvantage of taxing the rise in value that has occurred due to improvements as well as the (typically larger) element attributable to rising land values, but it would solve the ‘liquidity’ problem by only taxing at the point of realisation.

    Of course, it is notable that very few countries tax capital gains on people’s homes, and there may be a political lesson in that. But in pure policy terms I find it very hard to see why stamp duty on the purchase of a home is preferable to CGT on its sale.

    The policies of both Labour and the Lib Dems in this area suggest that aren’t really interested in thinking about these questions or coming up with a regorming agenda based on first principles, nor are they bothered overmuch by the equity and efficiency of the tax system. Gesture politics seem to be the order of the day.

  • It is (one hopes) that ‘stopped clock moment’! 🙂

  • I should add that few countries charge stamp duty on anything like the scale we do in the UK, either (if indeed they charge it at all). And it is a highly distorting tax with a poor economic rationale. Osborne’s recent reforms were welcome as far as they went, but merely improved it (in the IFS’s apt observation) from a very bad tax to a bad tax.

  • Peter Watson 20th Jan '15 - 12:04pm

    With Council Tax being a local tax, how do we ensure that money raised by adding extra bands is redistributed from parts of the country with expensive houses to those without?

  • SVR for business rate replacement is already policy, isn’t it? Or has that too been dropped? Land/location would be easier to revalue than location + improvements. And there is quite a lot of evidence from towns in the US where they have introduced “split rate” property taxes so they can gradually increase the land/location element and decrease the capital element over time that even introducing it that step-by-step way can make a big difference to inward investment and efficient use of land. Land/location value is the unearned bit, caused by monopoly, not the capital investment in improvements. This is also usually introduced as split rate so as not to cause huge changes to tax bills immediately. Initially in fact they are the same, but as you increase the land proportion and decrease the capital proportion it starts to become more progressive, but without having to sell a big scary change to the electorate. I would like Oxfordshire to be a pilot. It’s the only way we can hope to reduce the earnings multiples on our house prices IMO.

  • Peter, with it being a local tax (and still a relatively small proportion of local government revenue) why would you? Somewhere like Oxford would have plenty of houses in these higher bands, but to be fair, we need that revenue to make life more tolerable for those at the lower end with still enormous housing costs to reduce their tax bill and therefore their housing costs.There already is a great chunk of redistributable revenue is there not from NNDR?

  • A couple of thoughts:
    -we believe in localism. And yet any council wanting to raise tax by over 2% has to fund a referendum. Why don’t we give councils much more freedom over bands – they can set ratios, thresholds, have flexibility over any new high rate bands.
    -Using 1991 house prices is a joke, but every party seems terrified of a revaluation. Wimps the lot of them.
    -Land Value Tax seems a good idea in principle, but I’m sure that if we float it potential losers will be as vocal as they have been over the mansion tax.

  • “it would make more sense to scrap all the existing property taxes and replace them with a land value tax”

    Something that has been known for years yet ignored.

    “I find it very hard to see why stamp duty on the purchase of a home is preferable to CGT on its sale.”

    I would say that both are terrible as they add friction to the housing market where we really need fluidity to make best use of supply. However on that basis CGT would be worse as those who will have lived in houses longest therefore seen the highest capital increase will be the older generation, they are the people who we need to be moving so giving them a disproportionately larger bill will add to the reluctance to move.

    Basically neither is defensible but CGT would be more indefensible. I will leave aside the experience of CGT having its indexations and tapers abolished over time therefore making it even more politically unsellable.

  • tpfkar

    “Land Value Tax seems a good idea in principle, but I’m sure that if we float it potential losers will be as vocal as they have been over the mansion tax.”

    Which is why it seems odd how there is very little discussion about how to make introduction work, simply some stating how much better it would be (which it would) and some saying it is politically unachievable.

    It seems a very under considered area. Only a few people making the ludicrous claim that the “Mansion Tax” would be a good introduction when it would collapse in chaos and discredit LVT for a very long time.

  • Helen Dudden 20th Jan '15 - 1:37pm

    If Labour went into partnership with your Party……….bye.

  • Julian Tisi 20th Jan '15 - 1:38pm

    For what it’s worth I think Peter Mandleson is right. Our replacement “mansion tax” is I think much simpler and fairer than our old policy which Labour have now adopted.

    One other thing needs to be mentioned however – the recent changes in stamp duty are a mansion tax in disguise. For purchases under £0.5m, you now pay less stamp duty and over £0.5m you pay more than before. But for the most expensive properties the rise in stamp duty is huge – and effectively a mansion tax in all but name.

  • Peter Watson 20th Jan '15 - 1:47pm

    @Jock Coats “Peter, with it being a local tax (and still a relatively small proportion of local government revenue) why would you? … There already is a great chunk of redistributable revenue is there not from NNDR?”
    But why should revenue from some version of a mansion tax be retained locally? And how local is local? Recently Jim Murphy was being criticised for suggesting that some of the money raised from taxing mansions in London could be used to fund extra nurses in Scotland, but what is wrong with that?
    P.S. NNDR wossat? There seem to be a lot of acronyms in this topic but IMO is the only one I recognise 😉
    Is there a good primer somewhere for the alternative approaches, a sort of “Wealth Tax for Dummies”?

  • Malcolm Todd 20th Jan '15 - 2:07pm

    Peter
    It’s “National Non-Domestic Rates”, i.e. business rates, which are collected locally but set nationally and redistributed by government.

  • Alex Sabine 20th Jan '15 - 2:11pm

    Psi – I agree that CGT would add friction to the housing market. I am not recommending it, certainly not on top of stamp duty.

    But I don’t agree that it would be worse than stamp duty. For one thing, stamp duty is an upfront charge “on the way in” when we know that homebuyers, especially first-time buyers and those trading up to larger properties, don’t have enough capital to pay for deposits without Help to Buy or the bank of mum and dad. (Admittedly the stamp duty charge affects the purchase price but not in a stable or predictable way.) By definition, CGT “on the way out” does not present the same liquidity problem, since it simply takes a slice out of the gains realised by the seller.

    It is also unclear from an economic standpoint why we would want to tax gains arising from investment in businesses but not from property ownership. The effect of doing this is obviously to make housing a more attractive investment proposition (which is how many people see their homes), thus contributing to property price bubbles and diverting investment away from productive enterprise.

    Economically it would be better not to tax savings and investment at all (on the expenditure/personal consumption tax model which James Meade advocated in his late 1970s report and which the IFS Mirrlees Review would move towards). We certainly don’t want to be taxing the returns to business investment even more heavily. But given that we do tax them – not least as a backstop to the income tax system, ie to prevent income being disguised as capital gains – the differential treatment of housing is distortionary.

    You are right that older people would be affected more than younger people by a CGT on home sales. The reverse is true under the current system. It is not clear that this is fairer, especially when we look at the bigger picture of intergenerational equity and wealth transfers.

    There would be a disincentive to sell if it were expected that a future government would restore the CGT exemption, and obviously the gains from selling would be smaller, though in the UK housing market they would still be considerable. Clearly reforms to housing supply and planning law are important here too, probably more important than tax changes.

    The bottom line is that tax is distortionary, period, and the higher a tax is the more distortionary it is. But some taxes are worse than others. LVT scores highly on this basis, and is clearly preferable to an annual property tax because it targets economic rent and not improvements. There is a liquidity problem (asset-rich, cash-poor) which in practice can make it a surrogate – or indeed supplementary – income tax. Proposals to roll up the charge so that it would be payable upon sale of the property or through a person’s estate bring their own problems, notably in terms of the predictability of revenue streams.

    But as Jock notes, the mansion tax would present this same problem while failing miserably as an ambitious tax reform – a kind of AV of tax policy rather than full-blooded STV, if you like!

    Council tax likewise acts as a (regressive) supplementary income tax, but was not envisaged as a pure land/property tax in the first place but a sliding scale of charges for local authority services loosely based on property values but with other characteristics (hence the single occupancy discount, council tax benefit etc). If it makes sense to add extra bands then why not simply charge it a single flat rate proportional to the property value, which would prevent cliff-edges at the boundaries between one band and another and potential legal challenges over valuations?

    My point is that none of the proposals from the main parties in this area suggest they are even interested in asking these questions, let alone answering them satisfactorily. This is particularly depressing from the Lib Dems, given the number of tax commissions you have had in the past decade…

  • Council Tax Band A payers are charged the equivalent to 1%(probably higher), on average, of property value.

    A flat 1% of property value, fixed into 26 bands would bring in around £60bn in revenue at today’s prices.

    That’s enough to scrap Council Tax, Inheritance Tax, CGT, SDLT, ATED, T.V licence and still knock a % point off VAT.

    Flat, fair and simple. It would help unstick the property market. Particularly if we apply it to all land with planning permission.

    Don’t the Tories like better functioning markets, and flat, simple taxes? Someone only needs to pose the question. It’s an open goal for a savvy LibDem or Labourite to knock one in.

  • Alex

    “It is also unclear from an economic standpoint why we would want to tax gains arising from investment in businesses but not from property ownership”

    We do tax property ownership just not people’s homes. If I buy and rent out a holiday cottage I will pay tax on the income and any capital gain.

    “The effect of doing this is obviously to make housing a more attractive investment proposition (which is how many people see their homes)”

    Most people make changes to their houses as they want to enjoy them, often people say things like ‘it will really enhance the value’ but in reality it is just a form of self justification. If someone adds a conservatory they want to have somewhere warm to sit in the sun. People change the wall paper as they like the pattern.

    I see the ‘bidding up’ of prices in rising bubbles (when done by peoeplm buying as a primary residence) as more of a rush to not get priced out of the house they are looking at rather than a speculative accumulation. Speculators are a different matter but not really significant compared to other factors like monetary policy, supply restrictions, etc.

    “You are right that older people would be affected more than younger people by a CGT on home sales. The reverse is true under the current system. It is not clear that this is fairer, especially when we look at the bigger picture of intergenerational equity and wealth transfers.”

    You misunderstand my point, I wasn’t criticising it on an equity basis. You can argue one or other is fairer, and the answer of someone will probably come from peoples personal circumstances.

    My point was the impact on incentives, we want to minimise the disincentives to older under-occupiers selling and downsizing. We need to do all we can to make it very attractive for people to regularly move property as their circumstances change so that we get the best use of the stock we have and people are in accommodation that suits their needs.

    The young would benefit from more downsizing. The old often find it hard enough psychologically without the additional charge of 40% on the accumulation in value on a house they perhaps brought in the 1960s for a couple of thousand and would sell now for hundreds of thousands.

  • lol the vampire Mandelson comes out in your favour now he your darling LOL shallow lot

  • tez

    How is he a darling on here? Several paople arguing for LVT which he wouldn’t approve of. Agreeing that a someone is right an idea is bad is not making any commnet on them at all.

  • Alex Sabine 20th Jan '15 - 5:15pm

    Psi: “We do tax property ownership just not people’s homes.”

    Homes are a rather large category of property to exempt! This may well be justifiable on equity or other grounds. And as I noted, there is nothing unusual about doing so: few countries that I am aware of charge CGT on primary residences. CGT would be no more popular than stamp duty, indeed it might be more of a vote-loser given the age profile of voters.

    But it does perpetuate a culture that is anyway very strong in Britain whereby investing in bricks and mortar is seen as safer and more financially rewarding than investing in wealth-creating companies.

    I agree with you about the reasons people do up their homes. But when they come to decide whether to buy a house in the first place, or perhaps delay buying and invest their capital in the stock market, there is a widespread perception hat making highly leveraged bets on house prices is a kind of tax-free saving.

    Of course there are many other factors behind the strong appeal of home ownership that have nohing to do with the tax regime. I was just pointing out that the tax regime reinforces this appeal. I agree that things like monetary policy, the availability of credit and supply restrictions are bigger factors in creating price bubbles.

  • Alex Sabine 20th Jan '15 - 5:24pm

    On your other point, I don’t recognise the figure of 40%. On current CGT rates the top rate payable would be 28% if homes were taxed on the same basis as other assets.

    Personally I also think that for CGT to be fair there has to be an allowance for inflation, otherwise HMRC is not taking a slice of the gains but potentially helping itself to the underlying capital. (Actually I would probably exempt the ‘normal’ rate of return, as per the Mirrlees Review proposal, but that’s another discussion.)

    I agree we need to remove disincentives to mobility and that it would be desirable for older owner-occupiers to downsize if they no longer need large properties. But the would-be young buyers face a whacking great stamp duty charge to buy said properties.

    And a large number of people are not looking to upsize or downsize but move sideways – for family or work reasons they will be looking for a similar house elsewhere. Having to pay stamp duty each time acts as a major barrier to mobility and jams up the labour market.

    Moreover, unlike CGT, stamp duty is double taxation in that it is paid out of money on which income tax or CGT has already been paid.

    Overall I think we can agree that both taxes have major disadvantages. I stand by my view that stamp duty is worse, and if we have to have one or the other I would prefer CGT. Ultimately, though, neither is desirable.

    We do need revenue from some form of tax on residential as well as business property, but I’m not wholly convinced that an annual charge – even LVT, which in principle is clearly the best variant because it targets economic rent – is the answer. However I do recognise that, unlike the mansion tax, it would be a serious reform proposal with a clear rationale; and, unlike ‘Council Tax Plus’ it wouldn’t just be papering over the cracks of an outdated structure.

  • Liberals talking about taxing land…I am hearing echoes from another time…

    What an odd position to be in where I agree with Peter Mandelson, though his memoirs do mention how we was tempted by the SDP. The whole notion of a ‘mansion’ tax is indeed right, with accepted cavaets for the elderly etc, and I am glad we have moved to the current version of the policy than the one Labour has, for some reason, decided to pin to themselves..

  • Peter: “But why should revenue from some version of a mansion tax be retained locally? And how local is local? ”

    I might agree on a national tax – in such a case it’s little different from NNDR. If it’s centrally set it can be centrally distributed. Maybe.

    However as I understand it our current proposals are to allow local authorities to extend the top bands of the Council Tax, which is a local tax (at county and district level to answer your “How local is local”). What that would allow us to do in somewhere like Oxford/shire, which has as many problems as any poor area in the country really owing to its high housing costs I’d argue, would be to relieve the pressure on our own least well off who are spending every spare penny on rent and mortgage just to enable them to participate in an economy that includes people paying sod all in (up to) £10m homes. I’d guess we have as high proportion of homes above the £600k top band or whatever it is than almost anywhere in the country.

    Is the intention of ours to create a new revenue stream? Or to enable local authorities to be more progressive with their current one? In other words, are we asking them to set higher tax takes in order to send some money somewhere else, or to be able to better spread out the current tax take?

  • Peter Watson 20th Jan '15 - 6:24pm

    @Jock Coats “Is the intention of ours to create a new revenue stream? Or to enable local authorities to be more progressive with their current one?”
    I guess answering that question is more fundamental than choosing the best mechanism. My gut feel is a preference for a system that takes money from the wealthy and redistributes it to the poor (Robin Hood, Robin Hood, Riding through the …) regardless of geography, rather than what could be more of a postcode lottery. If every county or district had a similar degree of social polarisation perhaps it would not matter, but looking out of my office window at Runcorn I don’t see too many mansions.
    It sounds like I’m closer to Labour’s policy than the Lib Dem’s, and I find disagreeing with Mandelson somewhat reassuring!

  • Stevan Rose 20th Jan '15 - 9:26pm

    Since property values go down as well as up, and the swings are highly volatile, CGT on people’s homes would be a dreadful idea. I can’t see how a mansion tax on £2m homes would generate anything but a pile of loopholes and schemes for next to no income.

    To generate revenue reverse the Corp Tax reductions on big companies. Tax business on where the income is generated not where the head office is located for tax reasons. Redesign business rates and the way they are assessed. If you need to then increase income tax rates by 1% at each band. Look at VAT zero rating. E-books are subject to full VAT so time to tax print versions and papers and magazines. Why zero rate on cakes and high fat foods. You are far more certain of getting the revenue needed whilst retaining the moral high ground and not losing any more votes.

  • Alex Sabine 21st Jan '15 - 3:03am

    Stevan: To repeat, I’m not advocating CGT on people’s homes, merely pointing out the disadvantages of the current system where instead we are becoming increasingly reliant for revenue on a singularly bad tax in stamp duty.

    The argument that CGT on homes would be a bad idea because property values go down as well as up is rather odd. The same is true of other investments, notably share prices, yet these asset classes are subject to CGT. By definition tax is only charged on gains not losses, so people only cough up if and when they realise gains.

    As a result, clearly revenues from CGT are more volatile than, say, income tax or VAT. But that’s true of all capital taxes, and of stamp duty in particular. The swing in stamp duty receipts from peak of the housing market in 2007 to the trough was pretty dramatic.

    For this reason is unwise to rely on capital taxes for a large proportion of government revenue, but this is not unique to CGT.

    It is not clear that reversing corporation tax cuts would raise revenue in the medium term; certainly the assumption behind the nationalist parties’ demands for control of this tax is that by attracting more taxable profits they could get more revenue from a lower rate. Corporation tax revenue seems to have held up relatively well through this parliament notwithstanding a series of rate cuts. There isn’t a straightforward predictable loss of revenue as there is with, say, increasing the income tax personal allowance. And you have to consider the effect not just on corporation tax revenue as such but the associated revenue streams (income tax, NI, VAT etc).

    In any case we should be clear that it is workers, consumers and shareholders who ultimately pay corporation tax in the form of lower wages, higher prices and lower returns (with research suggesting workers bear the brunt of it). All taxes are paid by real people not bogeymen called corporations.

  • Alex

    “On current CGT rates the top rate payable would be 28% if homes were taxed on the same basis as other assets.”

    You are right I wasn’t paying attention to the rates detail at that point.

  • Alex

    ” I’m not wholly convinced that an annual charge – even LVT, which in principle is clearly the best variant because it targets economic rent – is the answer.”

    I agree it still suffers from many weaknesses but it is still the best option, it just seems odd that in any discussion I have eve seen not much time is spent recognising these and considering how to address them.

  • Matthew Huntbach 21st Jan '15 - 1:20pm

    Psi

    It seems a very under considered area. Only a few people making the ludicrous claim that the “Mansion Tax” would be a good introduction when it would collapse in chaos and discredit LVT for a very long time.

    Why would LVT be any better received?

    The main argument against “mansion tax” is the “little old lady in a big house” one of the person living in a property they don’t have the income to pay the tax on. Wouldn’t that apply just as much to LVT, only affecting a much larger range of people since LVT would apply to all properties?

    By the way, were the original proposals ever called “Mansion Tax”? I seem to recall this was just a nickname for it, invented to try and persuade people to accept it by seeing that mostly it would not apply to them. It is being attacked now on the grounds some properties affected are not “Mansions”, but whoever said this was what it was really about in the first place?

    Wasn’t one of the points of this to act against the way geographical factors and the property system tend to lead to a concentration of wealth in a few places? So doesn’t it rather go against that point if it’s done as part of a Council Tax, where the revenue raised stays in the location it came from?

  • Geoffrey Payne 21st Jan '15 - 1:56pm

    I remember that conference passed a motion supporting the mansion tax. So that simply has to be our policy which goes into our manifesto, I do not see how anyone has the authority to decide that is no longer our policy.
    Anyone who thinks it is a bad idea should have spoken out at the time.
    Personally I prefer LVT, but if that is not in the manifesto then let’s stick to the mansion tax.
    As for Mandalson, his politics represent everything that was bad about the last Labour government, please let’s not become Blairites.

  • Alex Sabine 21st Jan '15 - 2:10pm

    Psi – I’m on board with LVT  for business property. We really shouldn’t be taxing business property (as distinct from the land it sits on) at all, since it is an input into the production process with the same economic properties as other forms of physical capital. It is a basic tenet of the economics of taxation that we should avoid taxing these.

    As high-street retailers (among others) have justifiably complained, one of the main effects of Our current business rates is artificially to skew economic activity away from property-intensive production. So I support replacing business rates with LVT, which I believe is Lib Dem policy?

    There are still considerable practical hurdles for it to be implemented successfully, in particular valuing land on a sufficiently disaggregated level and separately from any buildings on it. In most areas and sectors, the number of transactions in land specifically is low, and given the lack of a sizeable market the market price for the value per acre of land is difficult to determine.

    As we would be taxing a rent, in theory each plot of land could be taxed at an arbitrarily different rate without compromising the efficiency of the tax – but manifestly this would be unfair between taxpayers, so reasonably accurate valuations would be required. And given the volatility of land prices, these would have to be regular.

    Currently the information regarding land ownership and land values in the UK is insufficient to operate an LVT, but there are some successful international examples: Denmark operates a system of nationwide land taxation, and various US and Australian states have something similar.

    I agree with you that there is a striking lack of interest in studying and resolving these practicalities given the impressive economic credentials of LVT as an idea. If these can be solved adequately then LVT for non-domestic property makes sense.

  • Alex Sabine 21st Jan '15 - 2:12pm

    Residential property is a knottier problem in my view. The issue is that owner-occupied housing is both an asset and a consumption good, ie one that provides a flow of services to the occupier. Unlike with other consumption goods (say a fridge or car) there is no VAT charged at the point of consumption, and stamp duty is a rotten proxy for one.

    As the IFS noted in its Mirrlees Review: “The distinction between these two attributes is explicit in the case of private rented property, where the landlord invests in the asset while the renter consumes (and pays for) the flow of services. But these two attributes are just as surely present in owner-occupied housing: in effect, the owner is both landlord and tenant simultaneously. At present, the tax system treats rented and owner-occupied properties differently, creating a distortion in favour of owner-occupation.”

    They acknowledged that treating all housing consistently as both a form of consumption and a type of asset would be difficult in practice, but concluded that – unlike with commercial and agricultural property – there was a case for taxing buildings as well as land, and therefore not bothering with the extra complexity involved in valuing and taxing them separately.

    This area is both conceptually and practically more difficult than the case of business property, and I’m not sure anyone has come up with a particularly satisfactory answer even in terms of tax/economic/administrative efficiency, let alone a politically ‘sellable’ one.

    The potential advantages of any tax reform need to be weighed against the uncertainty and costs of implementation associated with a new tax – which is one reason I dislike the mansion tax: for projected revenue of little more than £1 billion (itself highly uncertain) it’s not worth the candle. But then it was always designed as a ‘bash the rich’ piece of gesture politics, not a serious means of raising revenue or reforming our ramshackle system of property taxes.

  • Matthew

    The greatest weakness of the “Mansion Tax” isn’t the argument against isn’t the case of the little old lady in the big house.

    It is the failure on the basic tests of a tax:
    – it won’t raise any revenue,
    – it will just result in lots of cases where valuation re challenged; and
    – (most importantly) the way it skews incentives in the property market resulting in lots of perverse behaviour which has lots of efforts putting properties in a different position to put them just below the threshold.

    An LVT would need to scrap any frictional taxes (stamp duty) to make moving more common, and be gradually introduced over a long period of time so the charge of the old lady in the big house would be “they knew that they would have to pay the tax and chose to do so.”

    A LVT would not have the arbitrary threshold that would create the odd incentives for perverse behaviour for avoidance. The “Mansion Tax” doesn’t have the positive incentives for underutilised land as it will only end up hitting streets in Kensington and Chelsea once the rest of London (and a few other high value areas) have started implementing new avoidance techniques.

    The scrapping of the cliff edge in the stamp duty was very long overdue to recreate an even more extreme distortionary tax so soon after will be rightly seen as economic illiteracy by voters. I suspect the reason Osborn waited until just before the election to “fix” stamp duty was so that the memory of how bad these cliff edge taxes are was fresh in the mind on his target voters when he was expecting both Labour and the LibDems to propose implementing one in their manifestos. Thankfully the LibDems haven’t walked in to the trap, Labour has.

  • Alex Sabine 21st Jan '15 - 7:14pm

    Further to Psi’s point about a mansion tax with a threshold of £2 million creating perverse incentives, note that a homeowner with a property worth £2.5 million would be liable for a large amount of tax, while an investor or rich individual with a property portfolio of £10 million comprising multiple properties each worth less than £2 million individually wouldn’t have to pay a penny.

    Until his legal difficulties intervened, Chris Huhne would have been a case in point if accounts of his property portfolio were anywhere near the mark. The fact that he would have been liable for little or no mansion tax should give its proponents pause for thought.

  • No problem with updating council tax bandings but that will hit renters hard. I cannot understand why anyone would argue against a mansion tax, but then I don’t live in a £2M+ property.

  • Alex Sabine 21st Jan '15 - 7:57pm

    Jimble – I don’t own a property, but that is beside the point. If you “cannot understand why anyone would argue against a mansion tax” there are some clues in the comments above.

  • Matthew Huntbach 22nd Jan '15 - 10:12am

    Jimble

    No problem with updating council tax bandings but that will hit renters hard

    That is to misunderstand how the free market works. The levels at which rent is set, when set by the market, is at what people are willing and able to pay. If they have to pay more in council tax, they have less left to pay in rent, so the market level falls accordingly.

  • Neil Sandison 22nd Jan '15 - 11:00am

    One of the postive things thats coming from this stream is that we are looking at a wealth tax rather than an income tax
    Thats not to say we shouldnt do so there are good arguements for a better tax escalator than is currently in operation.
    But i do think there would need to be some kind of Barnet formula for redistribution to areas with less valuable properties .We should also take into consideration that the better qaulity of housing you have the greater the longevity of life expectancy you have .This will mean that the aged population will increase in higher qaulity areas and the demand for sheltered housing and support for health provision at home will also increase so that people dont flood the NHS with ailments and bed block because they cant be assessed due to demand as they currently do.
    So that any additional income from council tax revaluation should be held locally with small amount going to the centre for redistribution.

  • Matthew

    “That is to misunderstand how the free market works”

    Which is a common situation when discussing LVTs peoeple who in other circumstances understand markets start using static (non-market) assumptions to criticise LVT. I always find those arguments funny to see who leaves their logic behind when the don’t like the “feel” of a proposal.

  • Alex Sabine 22nd Jan '15 - 1:12pm

    @ Neil Sandison
    “One of the positive things thats coming from this stream is that we are looking at a wealth tax rather than income tax.”

    Sensibly, no one in this thread has proposed a wealth tax in the traditional sense of a tax on someone’s total assets net of any liabilities (a ‘net wealth’ tax). When one was briefly floated a couple of years ago it was swiftly disowned by the Lib Dem leadership.

    A net wealth tax is a madcap idea that would be likely to lead to administrative paralysis, a valuations nightmare, a flood of legal challenges, large-scale capital flight, liquidation of marginally profitable small businesses and the inhibition of capital formation. As a form of direct asset collection by the state and double taxation (unlike capital gains tax), it is also wrong in principle.

    What has been proposed instead is taxing a particular stock of wealth, that tied up in property, which is already taxed in a number of ways and is comparatively easy to tax and hard to avoid. It also differs from other stocks of wealth in that a large part of the value is derived from land, a natural resource of fixed supply (actually planning regulations mean there is some elasticity in the supply of land, but let’s pass over that here) that generates economic rents.

    This characteristic means there is a strong case in principle for taxing land value (and indeed other scarce natural resources) but not assets or wealth more generally. On the contrary, capital ownership, investment and accumulation – the foundation of future economic growth – should be taxed as lightly as possible on efficiency grounds, though this has to be balanced by the need to prevent gaming of the tax system and the desirability of keeping taxes on earned income reasonably low.

    As I mentioned, the IFS’s case for a recurrent (ie annual) tax on residential property rather than merely the land it sits on is not that it would be a ‘wealth tax’ but that owner-occupied housing is an untaxed consumption good which strikes them as an unjustified departure from a neutral tax system and bias against renting.

    They propose replacing council tax and stamp duty with a ‘housing services tax’ which would be charged at a flat percentage of the property’s value. In essence their proposal is a substitute for VAT, not a wealth tax (ie instead of charging VAT on the construction and sale of residential property, you are charging it on consumption of the stream of services that housing provides). If done on a revenue-neutral basis they indicate this would be charged at about 0.6% of property value.

    Their scheme has its drawbacks but is preferable to council tax as it currently stands, a patched-up council tax with extra bands, or a mansion tax.

    @ Neil
    “So that ny additional income from council tax revaluation would be held locally with small amount going to the centre for redistribution.”

    We already have a system of local government finance in which the bulk of the money comes in a grant from central government and is not raised locally. The result is to break the crucial link between taxes levied and money spent, and the accountability for decisions that goes with that. If Lib Dems believe in localism they should surely be proposing that local councils raise the great majority of the money they spend.

  • Matthew Huntbach 22nd Jan '15 - 10:46pm

    Psi

    Matthew

    The greatest weakness of the “Mansion Tax” isn’t the argument against isn’t the case of the little old lady in the big house.

    It is the failure on the basic tests of a tax:

    Oh, sure, but you have missed my point.

    I quite agree that the “Mansion Tax” proposals are very small-scale, and has the threshold problem, though I’m not quite sure why you think the valuation challenges that would be made are any less likely to made with land valuations necessary for LVT.

    However, my point is that the “little old lady in the big house” and similar lines about how unfair it is to make people pay tax on something they own but don’t get a cash income from apply to a hugely greater extent with full LVT than they do to a property tax paid on only a few very high value properties. So when “Mansion Tax” IS being shouted down by such lines, why do you think people would easily accept a far more thorough-going property tax?

  • Fair point about the political obstacles on the ‘asset-rich, cash-poor’ issue, Matthew. I don’t have a complete answer to that, but would make a few observations:

    – A mansion tax is an additional tax. Proponents of LVT envisage it replacing council tax (and other property taxes), which has the same characteristic of being linked to a stock of wealth but in practice having to be met from income. So looked at in those terms it is less of a hard sell, replacing one unpopular tax with another which may well be unpopular too but happens to be superior from a policy standpoint.

    – LVT is a tax on the unimproved value of the land, so straight away you can defuse the argument about people contributing to the value of their property by doing it up and the mansion tax penalising people for doing that.

    – You’re doubtless right that there would be valuation challenges with LVT as there would be with a mansion tax. But if you’re going to create that aggravation you might as well introduce a proper reform while you’re at it. For a wholesale reform of property tax and business rates it would be worth the candle. For a gimmicky add-on to our ramshackle property tax system that addresses few if any of the underlying weaknesses and raises a paltry £1 billion or so, the gain’s not worth the pain.

    – LVT would not have the arbitrarily high £2 million threshold so would not have the perverse feature of charging homeowners in expensive areas more than property moguls with large portfolios. This alone could discredit the mansion tax. There also wouldn’t be the incentive to artificially keep property values just below the £2 million threshold since the tax liability would increase in a broadly linear fashion with land values.

  • Matthew Huntbach 23rd Jan '15 - 10:39am

    Alex Sabine

    Proponents of LVT envisage it replacing council tax (and other property taxes), which has the same characteristic of being linked to a stock of wealth but in practice having to be met from income.

    As I’ve already said, that takes away an important redistributive aspect of it. For LVT to work well, it HAS to be a national tax. Also, council tax is a relatively small proportion of overall taxation. If all LVT does is replace council tax, then it’s being levied at a fairly low level. The more radical idea would be for it to replace income tax, or at least a significant proportion of income tax.

  • Matthew Huntbach 23rd Jan '15 - 10:44am

    Alex Sabine

    Fair point about the political obstacles on the ‘asset-rich, cash-poor’ issue, Matthew. I don’t have a complete answer to that,

    There needs to be a needs-based allowance, i.e. you only pay it on land you occupy over and above a reasonable need for your family accommodation (we have a measure of that in the so-called “Bedroom Tax”).

    Also a system of payment by equity for older occupants.

    The overall idea is that ownership of land comes with responsibility, so those with the wealth to acquire it DO have a duty to use some of that wealth to pay for the taxation. That is the long-standing principle on which taxation of land – which for centuries WAS the main form of taxation – was based.

  • Matthew

    I think Alex has addressed the points you asked of me but I would expand on the point of the incentives for perverse behaviour, many homes over £2m and even up to £4m could be adapted to provide the owners with the same basic use of them but to structure them to fall outside of the tax. If a Tax would result in wide useless behaviour for tax avoidance then it has to be a bad tax rather like the old Window Tax” of the 17th and 18th Centuries.

    “For LVT to work well, it HAS to be a national tax”

    I would agree but we also need to think about more taxes becoming shared nationally, regionally (assuming we can come up with a working regional devolution model), and locally. I was disappointed that the proposals for Scotland missed the opportunity to start implementing something of tis sort.

    “There needs to be a needs-based allowance”

    That is an interesting proposal a kind of personal LVT allowance, I’ed need to think it through to see what the implications I could see of it were but it is the ideas like this that I think have been missing from some of the discussions around how to make it work. Along matters such as the time period over which it would be phased in to allow people to alter their behaviour if they are likely to be adversely affected.

    “The overall idea is that ownership of land comes with responsibility, so those with the wealth to acquire it DO have a duty to use some of that wealth to pay for the taxation”

    I would also point out it is the natural monopoly that technology will never overcome so this makes it necessary to tax it due to monopolies affect of unfairly redistributing from the powerless to the powerful.

  • Alex Sabine 23rd Jan '15 - 1:26pm

    I didn’t say all it would do is replace council tax. Obviously there are all sorts of options the supporters of LVT put forward. Some land-tax advocates, like Jock I believe, do envisage it eventually replacing all other taxes. This was Henry George’s ‘single tax’ idea. I can’t say I find that terribly plausible, but that’s one end of the spectrum if you like. At the other we have the IFS, who would like a national LVT to replace business rates (which are centrally set) but don’t think it’s the right answer for residential property and so would in essence modify council tax by conducting a full revaluation and charging a flat percentage of a property’s (actual or imputed) rental value. Even just replacing business rates would be an ambitious and worthwhile reform, unlike a mansion tax.

    An important consideration is that, overall, property taxes in the UK are already high by international standards, among the highest in the OECD. The problem isn’t that we don’t raise enough revenue from property, it’s that we do it in perverse and economically damaging ways (stamp duty is the worst offender here but business rates are pretty bad too).

    I don’t see LVT being ‘sellable’ if it just adds to the existing raft of property taxes; some, or all, of the others would need to go (depending on the ambition and scope of the land tax). As the IFS argued in their Mirrlees review, “it should be seen as an alternative to existing property taxes not as a way to raise additional revenue”.

    If you want LVT to replace income tax you’d be looking at needing to raise £150 billion or so. And assuming you were able to do that you’d still have left some of our most damaging taxes in place. Plus you would still be charging National Insurance, so you’d be taxing earned income but not capital or investment income. Doesn’t make a lot of sense to me.

  • Matthew Huntbach 23rd Jan '15 - 4:04pm

    Alex Sabine

    If you want LVT to replace income tax you’d be looking at needing to raise £150 billion or so.

    etc,

    Oh, come on! I was not giving a detailed and exact proposal as your comments in reply to mine seem to be suggesting. All I meant was the general idea of a shift of taxation away from income and towards property. Isn’t that a bit like what was in our 2010 manifesto, when we wanted to raise tax allowances, paying for it by taxation elsewhere?

  • Matthew Huntbach 23rd Jan '15 - 4:08pm

    Alex Sabine

    An important consideration is that, overall, property taxes in the UK are already high by international standards, among the highest in the OECD.

    Well, I’ve heard that line from several directions, but I find it puzzling given that the only property tax most of us pay regularly is council tax, and that’s quite a small share of our overall tax burden. Are business rates here really at a hugely higher rate than the equivalent in other countries? I ask this as a genuine question.

  • Alex Sabine 23rd Jan '15 - 5:24pm

    “Are business rates here really at a hugely higher rate than the equivalent in other countries?”

    Yes, is the short answer. From the IFS: “Non-domestic rates – business rates – raised £26.1 billion in 2012-13, 4.5% of total revenue. Recurrent taxes levied on business property are higher in the UK than elsewhere in the OECD.”

    In fact, they are markedly higher. £26 billion equates to about 1.7% of national income, compared to the OECD average of 0.5%. Only Israel levies higher taxes on business property than the UK.

    To put that in further perspective, business rates raise a very similar amount to council tax and about two-thirds of what corporation tax raises.

    In 2013-14, a property with the mean rateable value of £32,923 owed £15,507 in business rates, equivalent to an average tax rate of 47.1%.

    This is a problem since, as the IFS argues: “There is a strong case against levying a tax on the value of buildings used for business purposes. A basic tenet of the economics of taxation is that intermediate inputs to production – that is, inputs that are themselves the result of an earlier production process, such as buildings – should not be taxed. The principal effect of business rates is that economic activity in the UK isartificially skewed away from property development and property-intensive production activities. Land, in contrast, is not the result of a production process: its supply is essentially fixed and taxing it (excluding the value of any buildings on it) would simply make it less valuable to its owners without discouraging any desirable activity.”

    That, in a nutshell, is the economic case for replacing business rates with LVT. As I’ve explained, there are more complex issues as regards residential property, but here too reform is overdue.

  • Alex Sabine 23rd Jan '15 - 6:36pm

    Also bear in mind that stamp duty, even though it is not a recurrent annual tax, raises some £10 billion per year. The yield is forecast to rise to more than £15 billion over the next few years, though this will depend on the buoyancy of the housing market. Add that to council tax and business rates and yes the UK government does raise an unusually high proportion of its revenue from property.

    I’m not saying this is unsustainable: in theory property taxes can be better (or less bad) than other taxes, and that is certainly true of LVT for the reasons outlined above. But it is a useful corrective to the idea that somehow UK property is lightly taxed. The reverse is true. The real problem is the deeply flawed nature of our property taxes, with stamp duty being the worst of the lot.

  • Sorry this is a little late, so people may not even see it. But on the thing about it having to raise £150bn to replace Income tax, that’s fine. Remember Ricardo showed that all taxes come out of rent eventually (Georgists use the acronym ATCOR for this). So if you reduce or remove Income Tax rents would rise according and be taxed appropriately by LVT.

    In fact, when you add current rent levels in the economy to current (non-LVT) taxes, we have over half of GDP we could collect in LVT. Sufficient, for example, to give every man, woman and child in the country an approximately £5k citizen’s dividend whilst leaving another £5k per head for the state to decide how to spend (or just give everyone £10k and let them decide how to spend it on competitive versions of current state services).

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