September 22, 2009
Mansion Tax
A shorter version of this piece is posted here.
So Vince Cable has announced Lib Dem policy to introduce a “Mansion Tax” targeting the very wealthiest. The tax would be paid at a rate of 0.5% on the value of properties over £1m, and would affect around 250,000 people who would pay an average of £4,000 a year.
Cable – unlike the Tories – has apparently been reading his Adam Smith:
“The luxuries and vanities of life occasion the principle expense of the rich; and a magnificent house establishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be any thing very unreasonable. It is not very unreasonable that the rich should contribute to the public expence, not only in proportion to their revenue, but something more than in proportion” (The Wealth of Nations, Book V, Ch II, Pt II, Art 1).
Those Smithian sentiments are certainly captured by the new Lib Dem plans. But it’s also a shot across Tory bows: “You want to give millionaires a tax break? We want to reel them in and help ordinary people”. Not only is this the right thing to be saying in a country where inequality has increased (with all its attendant evils), poverty remains a fact of life for many, social immobility is getting worse, and middle-class families are now struggling to keep themselves above water – it may also be electorally wise.
Whilst south-east Lib Dems like Susan Cramer (facing millionaire Tory opponent Zac Goldsmith in Richmond Park) may well suffer, the Lib Dem leadership has likely calculated that in the rest of the country, taxing the rich will play well. After all, Labour have got more seats to lose than the Tories and disillusioned Labour voters are likely to be highly responsive to a “Mansion Tax”.
But then, if one was being cynical about Lib Dem tax policies, one might well be significantly less generous about the latest announcement.
Until 2006, the Lib Dems had a long-standing commitment to a 50% tax for those earning over £100,000. Then, under Ming Campbell, the party dropped that position in a 2-1 vote. Many of the stated reasons for opposing the 50% tax were highly respectable (if debatable): that it was “totemic”, “symbolic not substantial”, and that anyway top-rate taxes don’t bring in all that much money so don’t help the worst-off, who need a tax break.
Unfortunately, what nobody in 2006 saw coming was the financial crisis and ensuing recession, with New Labour dropping its core Blairite (and formerly Brownite) pledge never to increase top-rate taxes, promptly introducing a 50% rate in spring 2009. Suddenly the Lib Dems found themselves in a squeeze. By September 2009 the 50% tax is attracting broad popular support – yet the Lib Dems would look like fools if just 3 years after making a fanfare over dropping commitments to such a tax, they switched to supporting it again with equal gusto. Accordingly, they’ve had to fudge the issue by condemning the tax-hike when it was announced as “counter productive”, but quietly accepting it now as a fiscal necessity.
The party thus finds itself stuck between a rock and a hard place: they can’t openly support the 50% tax to make a pitch for their progressive credentials, but they recognise that increasing the social burden on the wealthy is not only flavour of the month, but also likely to play well with disillusioned Labour voters and those worried about Dave’s sharp public spending axe (which is conspicuously not being blunted by promises of increased revenues from the rich).
The Lib Dems have been playing around with some (good) ideas to target the rich whilst not falling-back on increased top-rate taxes for a while (local income tax and scrapping council tax obviously spring to mind). Yet the new “Mansion Tax” could do a lot to get the Lib Dems from the rock to the hard place: it is claimed to increase revenues, targets the ultra-rich, and would apparently reduce the tax burden on lower-earners too.
So maybe being cynical is to miss the point (this is politics, after all). The Lib Dems are in something of a bind over progressive tax (not least because it’s an open secret that the party is riven by division on tax-and-spend issues). Yet the “Mansion Tax” could be a shrewd move indeed. On the one hand it puts clear blue water between them and the Tories. On the other, it adds substance to recent Lib Dem claims that they are the natural home for British “progressives” and are ready to supplant Labour. Of course, one policy alone won’t be enough to “break the mould” of British politics – but more like this, and who knows?
Jock said,
September 22, 2009 at 1:55 pm
Nevertheless, Smith in the passage you quote very much subordinates taxing the “house-rent” to taxing “ground-rent”. As a party we have decided that our aim will be to tax “ground-rent” not “house-rent” because of the espoecial, non-revenue, benefits of taxing ground-rent (Land Value Tax). We should not be muddying the water by now proposing to tax particular “house-rents” – and you will notice that Smith does not talk about taxing one level of house-rent, merely that by taxing all house-rent you are bound to have a system that falls more heavily on those whose houses are more luxury than necessity.
So I for one think this is a bad move.
Paul said,
September 22, 2009 at 2:25 pm
Jock,
I used the Smith quote more as a way of introducing the idea of taxing the rich more, and targetting their houses. And also of having a dig at the Tories.
I didn’t really mean to get into the technicalities of ground rent vs house rent.
Though if you check the Wealth of Nations, Smith thinks it is fine to tax both – though you are right that he subordinates one to the other.
Neil said,
September 22, 2009 at 4:14 pm
I don’t think anybody is disputing Smith’s point that the rich can afford to pay disproportionate taxes, but therein lies the problem: Everyone accepts the principle, so we’ve had a progressive taxation system in place for decades. The people who own million-pound houses have already paid taxes on the income they earned to buy those houses, and they’ve paid at a disproportionate rate. If we are to retrospectively decide that the rate wasn’t high enough and we want more from them, are we not engaging in legalised theft?
If that wasn’t bad enough, consider the incentive effect on savings: A waster who blows all his cash on cars and women is unaffected by this new tax, but someone who saves responsibly to buy their dream house is. Will this tax make people more or less inclined to save? This seems to go against everything else Cable has said about the need to encourage responsible behaviour.
I thought we’d gotten to the point in this country where we recognised that taxing income is a far fairer approach than taxing assets. This policy belongs to another century.
The Lib Dems have lost my vote on this one.
Practical problems with the Mansion tax « Freethinking Economist said,
September 23, 2009 at 9:36 pm
[...] Paul on Bad Conscience (and also on Liberal Conspiracy shorter) likes it for spelling out a progressive vision against Tory inheritance tax cutting. Lib Dems were wrong-footed when abandoning the 50p higher rate just when it was about to become popular and actually enacted. [...]
David said,
September 25, 2009 at 11:45 am
The American state of New York instituted a Mansion Tax under Governor Mario Cuomo in 1989, at 1% on properties over $1 million. Approximately 5,440 properties in New York State were affected by the mansion tax in the last fiscal year, raising $141.5 million in taxes. Whereas Cable’s proposals are more akin to council tax the NY mansion tax is a bit like stamp duty, nevertheless, the principle of taxing high value properties is the same, and it works.
Real estate brokers, say the mansion tax has been little deterrent for buyers of such homes. ”They don’t like it, but they know they have to pay it,” according to Benita Cohen, a vice president for the Corcoran Group. The main complaint about the mansion tax is it needs recalibrating; a $1million property in 1989 would now cost about $2.5 million.