There are few things most of us enjoy more than watching the value of our houses rocket. Every homeowner will have felt the pulse of excitement that comes from a mental calculation of how much has been added to their net worth by the latest bulletin from Rightmove or the Halifax. Yet fast forward two or three years and the same news could make our hearts sink — because by then a mansion tax could well have been introduced, and rising prices will take many middle-class owners over the threshold.
The mansion tax bandwagon has been rolling for several years, pushed enthusiastically by business secretary Vince Cable and his Lib Dem colleagues. The idea is that any home worth more than £2 million would be taxed at an annual rate of 1 per cent of its value above the threshold. In February, Labour leader Ed Miliband embraced the concept — and there’s a growing sense of inevitability about it. If Labour wins power in 2015, either on its own or in coalition with the Lib Dems, the tax looks certain to be imposed. If David Cameron needs to renew his existing coalition, it may be the price of a deal. Indeed, probably the only way it can be avoided is if the Tories win an outright majority. But stuck on 32-34 per cent in the polls, with Ukip splitting the right-wing vote, how likely is that?
In fact, expensive homes are one of the last things left to tax. Most British families have the bulk of the wealth tied up in their ‘primary residence’, which is exempt from capital gains tax. But for a state chronically short of cash — even in a recovery, our government is still running one of the world’s largest deficits — wealth is the only thing left to tax. There’s a lot of it about, and everything else is already taxed to the hilt.
According to a recent study by Thomas Piketty of the Centre for Economic Policy Research, private wealth in the UK has now reached 500 per cent of GDP, a level last seen before the first world war, compared with 300 per cent in 1970. Income can’t be taxed much more: if you put the rates up, revenues go down. VAT can hardly be increased without crucifying an already struggling high street, and neither can business rates. Raising National Insurance destroys jobs. As for fuel taxes: good luck with raising those.
So a government that wants to spend yet more on the public sector will have to tax wealth. There’s nowhere else to go. The trouble is, the mansion tax will be disastrous if it is implemented. ‘Like all bad ideas and especially bad taxes, the impact is seldom immediate and the knock-on effects are not obvious,’ says Graham Wainer, a fund manager with GAM. ‘Mansion taxes will not be an exception.’
Indeed so. The new tax might be sold as easy to enforce. After all, you can’t move your house offshore. But once you get into the detail, it becomes incredibly complex. A mansion tax would require a vast new bureaucracy tasked with valuing every home, as well as a cumbersome appeals procedure as judgments were inevitably challenged.
Worse, all taxes change behaviour, and not necessarily for the better. Once a mansion tax was introduced, homes would start to change. Basement dens will go back to being dank cellars, and that spare room in the loft with its tastefully varnished beams would go back to being a draughty attic. That garage extension will go back to being just a place to park the car.
Far-fetched? Don’t bet on it. When windows were taxed, people bricked them up. More recently, look at the way cigarette sales have fallen since government began taxing them punitively. Householders close to the threshold may find that a few minor adjustments brings the value down below £2 million — and think it worth the inconvenience for a modest tax saving. The building trade will suffer as people stop upgrading their homes, and since construction accounts for 6 per cent of GDP that is hardly to be welcomed.
Foreign buyers, who have kept the London market buoyant and boosted the capital’s economy, will be deterred from coming into a market where they fear they will be punitively taxed. A slice of consumption will be taken out of the economy — after all, that annual mansion tax take is money that won’t be spent on something else. Many private schools will have to shut down — their catchment population is much the same as the mansion-tax demographic, and how many parents will be able to afford both?
In some cases there will be real hardship as elderly people with valuable houses but low incomes are forced to sell up — in a collapsing market for £2 million-plus houses. Homeowners in the bracket below £2 million will fear it will hit them next. Most taxes start with a high threshold, then the net is cast wider and wider. You hardly have to be a plutocrat these days to pay inheritance tax, which starts at £325,000. In a decade or two, every semi in the ’burbs may be deemed a ‘mansion’ and taxed accordingly.
Worst of all, a mansion tax is just a disguised wealth tax. And while that may appeal to egalitarian instincts, it can do huge damage to an economy. Private wealth is the main source of investment in new business — it is family capital or loans against a house that get most new ventures off the ground, and it is those small businesses that generate the new jobs the economy needs.
Wealth taxes don’t even make society more equal. According to the CEPR study, France with its wealth tax now has a higher wealth-to-GDP ratio than we do, even though it started in the same place we did in 1970. The supposedly unequal, low-tax US has a lower wealth-to-GDP ratio than the UK. A mansion tax will make us all poorer and less equal at the same time. The trouble is that Vince Cable and Ed Miliband won’t let inconvenient facts stand in the way of a good political gimmick — or the chance of raising quick cash to keep feeding our bloated public sector.