Tuesday 6 March 2012 7:06 pm

A so-called mansion tax will not achieve fairness and the revenue gain will be modest

LIBERAL Democrats are pushing for a mansion tax, in the form of an annual levy on houses worth over £2m. They claim this would raise significant funds for the Treasury, would “target” the super-rich and would be more economically efficient than taxing people’s incomes. It’s depressing that some consider it the function of the tax system to “target” certain groups, rather than to raise funds for the provision of public services. That aside, the other arguments outlined above were busted in Taxing Mansions, a paper released by the Centre for Policy Studies on Monday. Examining Savills’s data book, we found that the tax would unsurprisingly penalise those whose property value happened to have substantially increased during their period of ownership, those often described as “income poor, asset rich”. It would mainly be paid by people in London, many of whom are not foreign oligarchs with huge property portfolios, but have lived in the city for decades and may be cash-poor pensioners. Administering the valuation of the properties would be a nightmare. And the maximum it would raise in revenue would be around £1bn, when taxation of property already occupies a higher proportion of GDP here than in any OECD country. A common response from the advocates of the mansion tax to this weight of evidence is to simply state that the policy is fair or the right thing to do. Fairness is the buzzword of politicians across the board, and it usually comes in the context of wanting other people to pay more tax. Whether the richest in our society should pay more is a debate in itself. But let’s take for granted that the Lib Dems think that wealthier people should pay more tax than they currently do, which appears to be the principle underpinning this policy move. Is the mansion tax fair? Let’s suppose there are two people, Person A and Person B. Person A lives in a house valued at £5m, but has a £4m mortgage, meaning his net wealth is £1m. Person B lives in a house worth £1.9m, but without a mortgage. Person B’s net wealth is therefore £1.9m. Under the principle of the more wealthy paying more tax, one might think that B should pay. Under the Lib Dem proposals, however, it’s Person A who is liable. Instead, imagine Person A owns a London property worth £3m. Person B owns two properties, each worth £1.9m. The principle underpinning the policy would suggest that B should pay more. The Lib Dem proposals, again, would see only Person A as liable. Evidently, the tax is poor at determining who is wealthy – it judges wealth by single property values, ignoring mortgages and multiple home-ownership. It also ignores the history of your investment. Person A might live in a house worth £5m, for which he paid £2m 10 years ago. Person B, on the other hand, might live in a house worth £5m, having paid £6m last year. The Lib Dem policy would see both paying the tax, even though B has lost on his investment. Or take the case of a rich couple, both currently living in £1.9m properties, but who decide to move into a £3.8m home together. The policy suggests that neither partner should be considered wealthy if they live in houses below the £2m benchmark – but by virtue of moving into a new home, they become wealthy, even though their incomes and the combined value of their housing assets remain unchanged. In all of these examples, it’s clear that the policy fails to live up to its desired principle of taxing the wealthy more, partly because it is incorrect in identifying what wealth is. Why is someone living in a £5m home considered any wealthier than someone holding £5m in cash, or £5m in shares, for example? Then there are the unintended consequences, in the form of the scope and cliff-edge effects: What happens if the £2m+ property is also a place of business, such as a bed and breakfast or a care home? Would these businesses face an increase in their cost base? And if not, why not? Why would any sane homeowner with a property value of just under £2m ever do anything to improve its value, creating a future tax liability for themselves? Equally, why wouldn’t anyone with a house valued over £2m simply engineer a deterioration in their current house to reduce the value below the threshold? The truth is, this mansion tax proposal is ill thought-through, unfair and illogical. Squeezing people to obtain higher yields after they’ve met their income and consumption tax duties in order to fill the public purse is just a clear abuse of tax-raising authority, with little link to the concept of fairness, even on the proponents’ own terms. Ryan Bourne is head of economic research for the Centre for Policy Studies. It would penalise those whose property value has grown in their ownership

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.