Adding further bands to this locally raised tax would be fair and effective. But our politicians lack the guts
Vince Cable, Liberal Democrat hero, is most odd. He quotes Keynes on boosting demand, yet serves in a government that suppresses it. He wants to lend to business, yet pours money into banks that simply hoard it. Strangest of all, he calls for a “mansion tax” when there is one already. It is called the council tax, and in Wales it even has a ”mansion” band I. Has Cable never heard of it? Is Wales too far from planet Twickenham? Or do local taxes just not count?
In principle a levy on property is sensible. It taxes the nation’s scarcest and most wastefully used asset. It honours the leftwing goal of taxing the rich more than the poor and the rightwing goal of taxing inert assets rather than dynamic income. Property is immovable. Taxes on it are all but unavoidable. They also promote what the government claims to want, housing market fluidity.
England’s property-based council tax stops at the present H-band. This means that the same tax is paid on all houses valued at more than £320,000 at 1991 prices (roughly £950,000 today). In parts of London, this means half the houses pay the same. Nick Clegg is right to protest that “it cannot be right that an oligarch in a £4 million palace in central London pays the same council tax as someone in a four-bedroom family home”. It is ludicrous.
So what is the problem? The answer is no politician dares change it. All are cowards. They bid the rest of us to show spine, come to the mark, tighten our belts and take cuts without complaint. Yet faced with an equitable fiscal reform that could net billions in revenue, they cringe and whimper and protest it is all too hard. Like tackling drug illegality or the criminal justice system, politicians who think that something is politically toxic end up making it so.
Wales had more guts. In 2005 it introduced its modest mansion tax, with a higher I band for properties valued above £424,000. Mansions come cheaper in Wales. As a result, an I-band house in Gwynedd this year paid council tax of £2,870, which is £720 more than was paid by a Saudi prince on his palace in Kensington. Yet I am not aware of any uprising among the Welsh rich, let alone a flight of serious money from the Welsh borders into the lush tax havens of Shropshire, Cheshire and Herefordshire. The Welsh assembly is not known for innovation or courage, but it just got on with it.
Why does Cable make it so difficult for himself with his crude mansion tax? He wants it to start at £2m which, outside west London, is more a palace tax than a mansion tax. Levied at 1% of the extra value of any property above £2m, it means that every step up of £100,000 would cost the occupant an annual £1,000. A property valued at £3m would incur £10,000 a year, requiring marginal earnings, at present, of £20,000. That is over and above the council tax paid.
The Liberal Democrats say such a tax would hit an estimated 74,000 people and, at face value, raise £1.7bn, less the administration. It has the advantage of being a “steep” top-end tax, thus pressing down on house prices. But this in turn makes it punitive on income-poor residents. However, the mooted possibility of rolling up the tax liability until a house is sold – in effect making it a capital transfer tax – might prove so attractive as to yield little short-term revenue.
For the Liberal Democrats, Cable’s tax looks suicidal. By apparently targeting a wealth tax on the suburban rich, its chief electoral victims will be Liberal Democrats such as himself, in the prosperous London suburbs of Richmond, Kingston, Twickenham and Hornsey, where house prices have defied the recession. This would suit Labour and the Tories fine, especially if they could blame it all on the Liberal Democrats.
But why go to the trouble of inventing a completely new tax that is sure to evince the fury of a minority of voters, when there is already a mansion tax in place? The obvious solution is simply to roll out the Welsh example, with new tax bands above H, perhaps triggered at half-million pound steps. Higher payment would thus start at roughly £1.5m, covering more people but with lower annual amounts. It would make council tax more progressive, in a way no reasonable person could object.
The old rates, levied on domestic property, were far fairer than council tax. The valuation ratio from bottom to top was about 1:100, whereas the council tax, to appease anger over the poll tax, has a ratio of a mere one to three. As a result, while council tax on lower-value properties has increased in real terms since rates abolition, on expensive ones it has plummeted. I remember some Kensington and Westminster residents paying more than £8,000 a year in rates in the late 1980s. They pay little over £2,000 today. That is in money terms. For a Labour government to leave such a regressive tax unreformed for over a decade is a tribute to Britain’s pusillanimous conservatism.
So what is Cable on about? I can only assume that his overriding objection to reforming council tax is that it is local.
The ever-centralist Liberal Democrats once wanted to abolish all council taxes, as at various times have their opponents. Then they had the bright idea of a local income tax, but funked it. The virtue of a mansion tax for them must be that the money will go straight to the Treasury, with no risk of any new revenue stream being made available to hated local democracy. Cable’s anti-local prejudice, like his fascination with banking, is so visceral that he prefers a politically toxic central tax to a reformed and progressive local one.
In education, health, planning and taxation, this coalition has shown that it has not a localist bone in its body. Yet by going down the Welsh route it could reform an outdated impost and raise new revenue – without incurring the odium of the mansion tax. It would need partial redistribution from richer areas to poor ones, but could give councils a new cash base to relieve local services in time of present distress. Extra council tax bands would be progressive and fair. Only properties worth more than £1m would need valuation. It would invigorate local democracy. Why do the Liberal Democrats not go for it? No guts.
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