UK mansion tax would be 'grossly unfair'
by Philip Booth
The United Kingdom's 50p top rate of tax on income over £150,000 should be abolished, but replacing it with a so-called mansion tax would also be a mistake
The British government should abolish the 50p top rate of income tax immediately. It raises a trivial amount of money and the long-run effect may be such that no money is raised at all. Treasury calculations suggest that, if there were no behavioural responses to the 50p tax rate, it would yield £6.5bn. However, even the Treasury believes that it will only raise £2.7bn. There are various reasons for this, but they will include less work and less risk-taking by the well off – and that is bad news for all of us. Furthermore, after allowing for other taxes, such as indirect taxes and payroll taxes, those paying the 50p tax rate on earnings actually pay nearly two-thirds of their income in tax at the margin, so it is no wonder they change their behaviour in response.
Eroding the tax base of higher earners is a dangerous game. The group that pays the 50p tax rate in fact pays 28 per cent of all income tax, an astonishing proportion. As shown by a recent Institute for Fiscal Studies report, though the 50p rate is likely to raise some revenue, this will be at the expense of more avoidance activity – something that has costs to both the people involved and the government. It may well be the case that no money will be raised at all if the government's assumptions turn out to be slightly optimistic. At the most, it seems that the additional revenue will be about 0.3 per cent of all government spending. The longer the tax is in place, the less credible the promise that this is temporary, and the more the behavioural effects will diminish the tax base.
It seems that there is talk about a mansion tax to replace the 50p rate. However, this is no replacement. An arbitrary mansion tax would be grossly unfair on those who bought houses many decades ago in areas where property prices have risen, and would also act as a double tax: people would pay tax on their incomes and then tax on the houses that they bought with their income. There is also no clear case for taxing wealth accumulated in houses and not, for example, wealth accumulated in yachts.
The government should, however, consider a complete overhaul of the system of property taxation. This may lead people with large houses to pay more tax but this action should be taken in a considered and coherent way not in an ad hoc, politically motivated attempt to deal with frictions within the coalition. There is a problem with the treatment of property in the tax system. We neither charge value added tax on newly-built property nor do we charge tax on the owner-occupied use of property – that is, on the imputed rent – as we used to. This means that renters or their landlords pay tax whereas owner occupiers living in exactly the same house do not. It means that we pay VAT on washing machines but not on houses. We pay tax on the returns from saving through all investment vehicles, unless specifically exempted, except the house that we live in.
We do, of course, pay council tax which might sometimes be quite a good proxy for the amount of tax we should pay on the imputed rent from property, but there are all sorts of exemptions and nuances in the system. The best thing to do might be to scrap council tax and return to charging tax on the imputed rent from owner-occupied housing, calculated at an arbitrary rate of 5 per cent of its capital value. If the tax were, for example, 20 per cent with no higher rates, this would be quite a big increase in tax for wealthy people. There would need to be transition arrangements as it could be a struggle for people who live in large houses but have small incomes. However, in the long term, this could finance the abolition of the 50p rate of income tax, the abolition of council tax and a range of other taxes and make our tax system more coherent. With our tax code at 11,000 pages and growing, we need considered tax policy and not tax policy developing as ad hoc reactions to political events.
Philip Booth is editorial director at the Institute of Economic Affairs in the United Kingdom
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