A mansion tax would be equivalent to feasting on our economy’s seed corn
THE CHANCELLOR has a problem. People do not much like paying taxes, yet there is rising demand for welfare and state services, and politicians fear taking the tough decisions needed to reallocate spending. Into this unenviable situation steps the worst of all possible solutions: the wealth tax.
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. 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.
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.
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. 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.
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. Reduce the value of a home through a mansion tax, and you reduce the ability of small businesses to borrow. 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.
James Sproule is chief economist at the Institute of Directors.