There’s a report in the Guardian that the Liberal Democrats are willing to consider scrapping the 50p tax rate in exchange for a mansion tax. I’ve written before about why the 50p tax rate should remain and why I don’t believe it has any impact on investment and entrepreneurship. I’ve also had a bit of an issue about taxing wealth. To a certain extent this is money that has already been taxed. I will admit, however, that if wealth is accumulating then some form of wealth tax may be necessary to maintain public spending. My main issue is that I don’t see how they can sensibly implement a mansion tax.
What they seem to be proposing is a 1% or 2% tax on houses with values above £1 million or £2 million. Straight away it seems that this will be another example of what seems to be known as “cliff edge”. If they implement the tax at £2 million and your house is worth £1999999 you pay nothing, but someone with a house worth £1 more could pay £20000 a year. These type of boundaries always seem nonsensical to me. Furthermore, do you pay the tax if your house is worth more than £2 million or if your equity in the house is more than £2 million. If its the former, then someone who has just bought a house worth £2 million by putting down a £200000 deposit and borrowing the rest will be effectively taxed at 10% of their realisable wealth. If the latter, then anyone with a house worth less than about £3 million would never let their equity rise above £2 million. They would be better off borrowing £1 million against their house at a rate of 4 % and putting this in a savings account than paying 2 % tax on the value of their house.
What would make more sense to me is to change the council tax system so that you pay an annual council tax that is some small percentage of the value of your house. In fact, this is what was the case when I was living in the US. We paid, I think, 1% of what we paid for the house. The rate could also increase smoothly with house value. Starting at about 0.25% and rising to 2% for houses with values in excess of £2 million. The problem, I suspect, is that council tax is a local tax, while the proposed mansion tax would go to the treasury. If council tax were to change to some percentage of the house value, I suspect that it would need to be centralised and then redistributed, something that is probably politically difficult. I still think that the proposed Mansion tax is a bad idea, although some form of wealth tax may well be necessary.