Why the Lib Dems' new mansion tax-lite is just as ugly

Alex Wild

SOME Liberal Democrats seem to have finally conceded that their “mansion tax” pet project is a bad idea. Chief secretary to the Treasury Danny Alexander has gone off the proposal to levy a 1 per cent charge on the value of properties above £2m, preferring higher council tax bands for expensive properties instead. But given continued support across the parties, the mansion tax isn’t dead yet. And Alexander’s alternative could be just as ugly.

A so-called mansion tax would – like the rest our tax system – be an administrative nightmare. Reliable valuations of expensive properties are difficult to arrive at for a multitude of reasons, and owners of properties deemed eligible for the tax would likely dispute this in court.

The revenue-raising potential is also questionable. The Liberal Democrats have previously claimed that it would raise £1.7bn annually, but this is hopeful in the extreme. The Centre for Policy Studies estimated the potential take at £1bn, but even this static analysis is probably optimistic. A new charge would reduce property prices and have a distortionary effect on the market for high value properties.

The 7 per cent stamp duty rate on properties over £2m, introduced by George Osborne in 2012, is a case in point. In the five months after the rate was introduced, the number of properties sold by Savills between £1.8m and £2m increased by 37 per cent compared to the same months in the previous year. Yet the number of sales between £2m and £2.2m, just over the new threshold, fell by 29 per cent.

Some of this distortion was exacerbated by the clumsy slab basis on which stamp duty is calculated. But a new tax on high value properties would have much the same effect.

It would also be fundamentally unfair. Why should people who purchased properties that have appreciated in value be subject to an arbitrary annual penalty? Perhaps those in all three parties who still support a classic mansion tax are also in favour of a windfall tax on owners of Apple shares, which have increased in value by 4,000 per cent in the past ten years?

And new plans for higher bands of council tax would retain many of the ugliest features of a mansion tax. Their introduction would almost certainly require a costly, full revaluation of all residential property in England. Without substantial reform at the same time, this would push even modest properties in less desirable areas of London into higher bands and higher bills. Many of those hit by bigger tax bills would be renters.

There is a plethora of evidence that wealth taxes do more harm than good. They are obsolete and that’s why they’ve been scrapped in so many other countries. Furthermore, we already have by far the highest property taxes in the OECD (worth 4.1 per cent of GDP, compared to 0.9 in Germany), so the thought of more is particularly unappealing.

But this has never been about sensible fiscal policy or fairness. It is a political ploy targeted to hurt a particular section of society to win votes in 13 months’ time. Sadly, these votes would come at a considerable economic cost.

Alex Wild is a policy analyst at the TaxPayers’ Alliance.

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