Ben Chu: Dinner Party is wrong about mansion tax

Boris Johnson is so worked up over the idea that one begins to fear spontaneous combustion (Photo: Jeremy Selwyn)

13 October 2014

America has the Tea Party. But in Britain the job of obstructing sensible reform of our taxation system falls to the Dinner Party.

The talk at the tables in the smartest homes used to be soaring house prices. But now, thanks to the Liberal Democrats and Labour, it’s the “mansion tax”.

The Dinner Party might be more genteel than the Tea Party, but it’s a no less formidable force, as recent months have shown. Its media arm, the right-wing press, is firing incessantly against the policy of imposing an annual levy on expensive homes, with any scrap of anti-mansion tax propaganda that estate agents can cobble together turned into front-page news.

The Dinner Party’s political wing, also known as the Conservatives, is busy at the barricades too. Their great blond hope, Boris Johnson, is so worked up over the idea that one begins to fear spontaneous combustion. Never has such a consensus of opprobrium been assembled against what we’re informed is an “unfair”, “vindictive”, “envious”, “counterproductive”, “impractical” proposal to levy an annual charge on the homes of property millionaires.

Yet never has such a vociferous consensus been on such crumbly economic ground. The details of Labour’s tax remain hazy. But under the Liberal Democrats’ blueprint, which has been floating around for years, homes would be subject to a 1% annual levy on the value of any above a £2 million threshold.

For a house worth £2.5 million that would translate into a taxable liability of £500,000, resulting in an annual bill of £5000. The owner of a house worth £3 million would face a £10,000 annual bill. And so on.

Is that grotesquely unfair? Not in historical terms. Under the old property rates system the annual levy charged on a property was determined by how much the owner could expect to receive in rent. Left in place that would have resulted in a steady increase in the annual charge over the years as house prices and market rents have shot up.

Indeed, if Margaret Thatcher had not detonated a bomb under her premiership by replacing rates with the Poll Tax, the liability for expensive homes under the old system today would probably be similar to what people would be required to pay under the mansion tax. The mansion tax would remove an unwarranted tax break for the wealthiest families in the country, correcting a 25-year-old mistake.

Should we be worried about old people with low incomes in multi-million pound homes? This can easily be dealt with through encouraging these individuals to borrow some of the value locked up in their expensive homes. Equity drawdown was, after all, one of the few services that our banks did well in the years before the financial crisis. The worry-wracked heirs of these asset-rich grannies will surely help them fill in the necessary paperwork.

One objection that has been raised to the mansion tax is that property is overtaxed in Britain relative to other peer economies, with Britain raising 4.2% of GDP in this way versus an OECD average of 1.8%. Yet those cross-country comparisons are distorted because they include taxes on business premises. And the plain fact is that in the UK residential property is privileged relative to other assets. Most residential homes, for instance, are not subject to capital gains. That’s quite a subsidy considering prices in London are up almost 20% in the past year alone and 12% nationwide.

Would a mansion tax prompt a house price collapse? One would certainly expect to see some of the froth blown from the top end of the market as the levy is factored into market prices. But that would hardly be a disaster. And is it really necessary to add that high house prices are not an appropriate target for ministers? Some assert it would result in less housebuilding. Yet while the tax is no answer to the chronic housing supply shortage there is no good reason to believe it would make building rates worse.

The real problem with the mansion tax is it is not ambitious enough. The most logical reform would be to get rid of the scandalously regressive council tax and the disastrously distorting stamp duty and to impose an annual progressive tax on the entire stock of homes, not just mansions.

It’s depressing that Labour is promising to divert the proceeds of the mansion tax to more spending on the health service. So-called hypothecation of taxes is always unwise and especially so in this case because property taxes are a naturally efficient source of funding for local governments. There is even a case for a revenue neutral tax shift, with the income from the new levy merely offsetting flows from those that are scrapped. But let the Dinner Party be warned: under any economically rational overhaul of the property tax system those in expensive homes would end up paying considerably more each year than they do now.

The politics of introducing the levy should be simple. The economic case is strong and winners would outnumber the losers by a huge margin.

According to estimates from those websites that enable us to value our homes in real time there are around 100,000 homes in Britain worth more than £2 million, 80% in London and the South-east. That’s 0.4% of the UK’s 27 million residential dwelling stock. Under a progressive overhaul of property tax the majority of households would benefit financially. That should mean more votes gained from winners than lost from losers.

But, of course, that ignores the political clout of the Dinner Party and the diabolical ability of the media to mislead people about the numbers who would lose out from the reform. Yet for whom is this country run? The majority of Britons? Or the Dinner Party? With Labour and the Liberal Democrats pushing for a long overdue overhaul of property taxes the next election may help to provide an answer.

Ben Chu: Dinner Party is wrong about mansion tax

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