Even if you want higher taxes, Labour’s mansion tax is a really stupid idea

Here’s what our politicians think the thoughts of the average voter are reduced to in the UK: loving the NHS and hating the rich (definitions of whom vary).

How do I know?

Look first to Scotland. Alex Salmond’s separation campaign focused on ‘fairness’ – for which read wealth redistribution. Last month, he went big on the idea that only a ‘yes’ vote could stop David Cameron from contracting out obesity services to private company WeightWatchers, and so save the NHS.

This week, Labour leader Ed Miliband launched a remarkably similar campaign. His super-unimaginative conference speech told us at trying length that the rich aren’t safe on his watch – they’ll be too busy worrying about the rise of schoolboy socialism – and that only a vote for him will save the NHS.

So much for justice, capitalism, educational excellence and peace. Our politicians reckon the only way to win our votes is by promising shorter waiting lists in A&E and higher taxes for other people.

Which brings us neatly to the ‘mansion’ tax… 

If the mansion tax is introduced, one day we’ll all be paying it

The mansion tax is a new tax on expensive houses that Ed Miliband promises will raise the £11bn he intends to spend (regardless of the fact that the UK is still running one of the biggest budget deficits in the Western world) on the NHS.

It is referred to as the ‘mansion tax’, rather than the ‘house tax’” to make it clear that only the extremely wealthy will pay it. That’s why people like it – 42% of people told YouGov that they ‘strongly support’ the idea.

But this is, of course, absolute nonsense. Miliband talks of it being payable on houses worth £2m or more. But others talk of the limit being £1m, and still others of it being as little as £400,000 in the north.

In other words, this tax will fast go the way of all taxes in the history of overspending governments. It will start off being paid by other people, but all too soon will be paid by everyone. My guess is that if Miliband gets his way, in 20 years’ time we will all be living in a ‘mansion’.

Still, this dishonestly aside, the real question is whether the new tax will raise the money Miliband thinks he needs. It seems unlikely.

Firstly, it is entirely impractical. We have no current valuation for most houses. So we don’t really know which ones are worth more than £2m.

And even if we did know which houses might have sold for £2m-plus last year, we also know that even the threat of a mansion tax means they are not worth £2m today. You want to a buy a house that comes with a guaranteed liability of somewhere between £5,000 and £20,000 a year? Me neither.

I’ve written on the mathematical ridiculousness of this here. But thanks to the possibility of the new tax, you can easily argue that a house which swapped hands for £2m six months ago is now actually worth less than one that sold for £1.9m six months ago.

So one unintended side effect of the tax may be that it hits the currently asset-rich hard, but is kind to those on their way to being asset rich. Own a £2.2m house now? Bad luck. Looking to buy a house once worth £2.2m for £1.9m in two years’ time? Ed’s on your side.

Creating a world of fun for creative tax dodgers

Still, let’s try and enter the minds of politicians and assume the valuation bit is possible. What of collecting the tax? That’s tricky too. It is popular to say that property taxes are unavoidable, but it simply isn’t so.

Take a look at this video. It shows a French marquis blowing up his house to avoid paying taxes on it. Drastic, yes. But not uncommon.

We all remember learning about how the British preferred to live in darkness than to pay the window tax. Architecture buffs regularly upset themselves by remembering the destruction of hundreds of country houses in the UK in the post-war period when death duties hit 65%.

You might also note that a huge number of the UK’s largest remaining houses are owned by the National Trust. Would they have to pay? It seems unlikely. So charities would have to be excluded from the mansion tax. Cue massive avoidance via “a rash of new property-owning charities,” says Natalie Elphicke of Million Homes, Million Lives.

There will also be a move to subdivide properties. Families would choose to formally make big houses into a couple of flats, all below the £2m limit. People would also sell big houses, and split the wealth into a portfolio of smaller homes instead (putting more homes out of reach of the average buyer).

We’d also see big gardens separated from houses and sold as amenity meadows. And moves to have homes reclassified as business properties in some way – B&Bs, artists’ studios, tourist attractions, and offices for the self employed  – which we can assume will have some exemption from the tax.

So if Labour really wants to collect the money it will mean a tsunami of new legislation: bad policy will force more bad. Elphicke looks at it here. She reckons it will take a good 500 pages of pointless legislation to even begin to Elphicke looks at it here.

But even if they manage this, they will still be in line for some disappointment. Because introducing this tax will cut the revenue from other taxes.

Stamp duty is the obvious one, given that the price of top-end houses will inevitably fall sharply with the introduction of the tax (ask a London agent and he will tell you it already has). Savills have put the losses at around £1bn, which makes quite a dent in the sum Labour hopes to raise from the tax.

What the electorate really wants

If politicians insist on raising more money from property without introducing a proper land value tax (see my previous writing on this) and cancelling a few other taxes first, there are more obvious ways to do it.

Either introduce capital gains tax on primary properties (nothing could be simpler), or introduce a couple of new bands of council tax. Politicians standing for election don’t like the latter, as council tax is locally, not centrally, collected and spent. But if they reckon they are capable of running the entire country, simply reallocating tax revenues shouldn’t be beyond them.

But there’s another point that Miliband might like to note as he dreams of a new life in Downing Street. The general public he is so keen to please don’t want to pay more tax towards the NHS.

A Populus poll a few weeks ago showed that most people think the NHS needs reform more than money: 72% of people agreed with the statement – “If the government reformed public services and cut waste, it could make services better and cut taxes at the same time”.  

Look at what the voters keep saying that they want, rather than what they keep being promised. It might just be worth some politician, somewhere, humouring us by offering proper reform – along with a guarantee of no new taxes.

• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.

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