Two of the most unpopular taxes in Britain are stamp duty and council tax, property taxes both, seen as economically damaging and unfair. So it is not surprising there is a noisy campaign, gaining widespread coverage, to abolish them both and replace them with a simple 'proportional property tax'. The more your home is worth, the more you pay — what could be fairer and simpler?
Although well intentioned, this new property tax is a genuinely bad idea. To be revenue neutral for the Treasury, campaigners estimate it needs to be set at 0.48 per cent of the value of the property per year — so that someone with a £1 million home will pay £4,800 a year in this tax. In other words, you would have to give about 5 per cent of the value of your home to the government every decade.
The obvious losers are the asset rich and cash poor, who live in a valuable home but don’t have much income. That covers not just pensioners but downshifters who have paid off their mortgage and taken a lower income job and those who inherited and moved into a family home. Others will be workers on a steady income — such as teachers — who happened to move to an area that then experienced property price rises. These are people who will simply be taxed out of their family homes. One possible solution is to allow them to roll over their tax debts until their home is sold or until death, but it is seriously unfair for the government to impose a tax that it knows is unpayable and force people to build up huge tax debts.
Such a tax would be powerfully anti-aspirational: if you improve your home to increase its value, the government would punish you by charging forever bigger tax bills. It would undermine local democracy and accountability, effectively nationalising the revenue raising abilities of local authorities. It would be introducing Corbyn’s class-envy mansion tax for him, alienating the Conservative base and convincing Labour supporters they are right. Campaigners say there would be more winners than losers, but it is always the losers who are loudest, and people forced out of their homes shout very loud indeed.
There are fundamental flaws with basing a regular tax payment on the value of a speculatively-driven illiquid asset. A new train station or cuts in interest rates could push up the value of your property but you would have no extra money to pay the increased taxes. If it was set at a national rate but collected locally like business rates, those councils with high property prices would get huge tax incomes they don’t need but cheaper areas would get less than they need. One solution is to have locally set rates, but that would mean that high price areas would have low tax rates, and poorer areas would have higher rates — the epitome of unfairness. These sort of taxes are common in the US and have destroyed many towns by pushing them into a downward spiral with taxes so high no one wants to live there, so property prices plummet, and their tax revenues fall, so they have to push up the rates, so more people leave. They provoke such constant heated political outrage in the US they make the UK’s stamp duty seem loved. By contrast, the design of the council tax leads to predictable revenue for councils and bills for residents.
Such a 'proportional property tax' is clearly a form of wealth tax but imposed on the most sensitive asset that people own — their own home. Normally wealth taxes exclude people’s homes because it is too toxic. It is likely that this wealth tax would be expanded quickly to less sensitive assets, such as people’s savings and investments. But wealth taxes are disastrous. We have been taking evidence on them on the Treasury Select Committee, and the most striking evidence is that almost all countries that introduce wealth taxes end up abandoning them after they have wrought economic carnage. Even the UK’s Wealth Tax Commission, set up to recommend a wealth tax, ended up recommending against them — except possibly as a one-off never-to-be-repeated event to limit the damage.
The reason that wealth taxes (which should really be called asset taxes) provoke such anguish is they break a fundamental covenant between individuals and government: work hard and pay your taxes, and what savings and assets you build up in your life you can keep and the government won’t take from you. It is a fundamental right in a liberal property-owning democracy.
Council tax and stamp duty do need to be reformed. But when you read more about this proportional property tax, just remember: it is not the answer.