City AM On the Mansion Tax

From City AM:

The total UK tax take has been remarkably stable at 35 per cent of GDP since at least 2000. When governments spend more than this, it is because they borrow the difference. But there is increasing pressure to run balanced budgets and this has left politicians scrambling to think of new ways to find additional revenue. One particularly bad idea is wealth taxes – levied on the value of an asset, rather than on the income it produces.

At the moment, we have just one of these: inheritance tax(1). It’s widely disliked and people will go to great lengths to avoid it, which is why the inheritance tax code has to be so comprehensive and complex. In a sign of just how unpopular it has become, the Conservatives’ revival in popularity can first be dated to George Osborne’s 2007 pledge to raise the inheritance tax threshold to £1m. Gordon Brown postponed an election so that he would not have to fight on this issue.(2)

But we are now facing a new wealth tax – the so-called mansion tax, which proponents would like to levy on houses worth £2m or more. It is, of course, not really a mansion tax. You can easily get a true mansion – with rolling acres, a tree-lined avenue, and house with ten bedrooms – for less than £2m in most parts of the country. Yet there are parts of London where three bedroom Victorian workers’ cottages will be classified as “mansions”. This is really a London tax, of course, which is why it is so popular in the rest of the country.(3)

The problem is that wealth taxes are not only widely hated, hated even more than income and consumption taxes, but are extremely damaging to our long-term economic prosperity. They are equivalent to feasting on our economy’s seed corn.

Wealth taxes take long-term investment in an economy and consume it immediately. Those who have to pay the tax are either going to have to sell assets to pay the tax, or pay for it out of their earnings, earnings which would have gone disproportionately into longer-term investment(4). Having mortgaged the future by running up massive debts, we now see politicians determined to undermine our economy’s ability to earn the money necessary to pay back those debts.(5)

But the harm to business and the economy does not stop there. Looking specifically at the mansion tax, many small businessmen need to use their homes as bank loan collateral to fund their businesses(6). Reduce the value of a home through a mansion tax, and you reduce the ability of small businesses to borrow(7). The full details of the proposed mansion tax have not been made clear, but a 10 per cent reduction in capital values in affected homes is a reasonably conservative estimate.

It is a measure of how blinded our political classes have become to what creates a successful economy and society that they would even consider wealth taxes. Wealth taxes send an message to entrepreneurs and businesses that nothing is out of bounds: look elsewhere if you want to invest, innovate and earn.(8)

James Sproule is chief economist at the Institute of Directors.(9)

1. Incorrect. How does the chief economist at the IOD not know about business rates?

2. Funny. Damian McBride never mentioned it. And as IHT only affects a few thousand people, mostly rich, solid Tory voters, I really doubt it.

3. And as London seems to be very rich, while also having the most money spent on it of any region of England (http://en.wikipedia.org/wiki/Barnett_formula), that seems fair enough.

4. But if we didn't have money going into expensive homes "as an investment", we could perhaps instead have spent it in real investments instead.

5. Buying land doesn't earn money. It's pure rent-seeking. The country doesn't get richer as the result of someone "investing" in a piece of land.

6. Maybe if we lowered the amount that people were taxed on their incomes, they'd have a lot more left over to invest in a business without having to go to the bank. If we're talking about people creating a new business, we're talking about productive people and the beneficiaries of a Land Value Tax are productive people.

7. And in terms of borrowing, what banks like to lend against is assets, and mostly solid, easy to sell assets like premises rather than patents. The people who invest in hi-tech companies like ARM or Mind Candy are venture capitalists and other companies. So, reducing the values of land would make these assets cheaper. 

8. Like Hong Kong? Somewhere that had LVT for a decades and went from poverty to being one of the wealthiest places in Asia in 30 years?

9. And apparently a professor of economics. Jesus.