Why a wealth tax is a very bad idea
EVERY few months, when the going gets tough for the Liberal Democrats, Vince Cable renews his call for a “Mansion Tax.” With the LibDems slumping to a disastrous 9 per cent in a YouGov poll, against 41 per cent for the Tories and 36 per cent for Labour, it was no surprise to see him unveil yet another incarnation of his scheme.
The idea is to appeal to the green eyed monster in those of us for whom owning a £2m home is little more than a dream. Waging war on the rich is popular – but that doesn’t make it right or economically sensible. Even people with no assets should reject Cable’s scheme, as well as all other proposals for wealth taxes or land value taxes. They are the thin edge of a long wedge and will make everybody worse off in the long run.
A key reason the UK, for all its unattractive characteristics, remains a safe haven of sorts for global investors, is its history of legal stability. Foreigners know the UK takes property rights seriously and that their wealth will be protected – that is why they spend so much here and why Greeks fleeing crumbling banks are converting euros into London homes. This is great for our current account deficit, means we remain at the heart of capital flows and that the world’s entrepreneurs and financiers will look at the UK kindly when they decide where to create jobs. It helps preserve London’s role as a global city. Sure, foreign buyers push up property prices – but that would have happened anyway as a result of our scandalous planning rules that make it so hard to build new family homes. If the government wants to hike a tax, it should get rid of the loophole which means some foreigners don’t pay stamp duty. It is a flawed tax but should apply equally.
A wealth tax is even more destructive of the core principles of private property than an ultra-graduated income tax. It breaches the core principle that once someone has earned money (and paid tax on it) it is then theirs to keep. Wealth taxes are designed to reverse asset accumulation and to ensure that only those currently in work can remain wealthy; they are biased against pensioners. An entrepreneur who made a few million building her company, sold out, bought a large house and retired early would eventually see her wealth dwindle. Her total tax payments would shoot up to well over 100 per cent of her income and she would be forced to sell assets (on which she already paid tax) to survive. Guess where she would retire? Not in the UK.
The practical flaws are crippling. Someone who owns a £1.9m house with no mortgage will not pay the tax; someone in a £2m house with a £2m mortgage (and no wealth at all) will pay it. Someone with one house worth £2m will pay but someone with twenty £1m properties won’t. Given these flaws, within a couple of years, there would be pressure for the threshold to be cut drastically. There would be calls to shift to a broader wealth tax on all net assets. Within a few years even pension pots would doubtless be included.
A wealth tax is the best way to destroy our most vital asset: Britain’s historic respect for property rights. It must be resisted.
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