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UK mansion tax could be Conservative winner

AMID preparations for the UK's first post-Brexit budget, there have been reports that the Conservative Party is considering an idea that many in Prime Minister Boris Johnson's party regard as most un-Conservative - a so-called mansion tax.

The reaction in the conservative press has been one of surprise and outrage, and it could well have been one of the issues of friction which led to Sajid Javid recently resigning as Chancellor of the Exchequer.

Indeed, the Sunday Telegraph reported over the weekend that Mr Johnson had shelved the plan.

Yet the tax is hardly the attack on home ownership, or the wealthy, that it is often portrayed to be. Perhaps its time has finally come.

Ignoring the emotive label, a "mansion" tax is essentially an adaptation of Britain's current system of property taxes, known as council tax, which are levied to finance local government.

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The existing system is regressive, not merely in terms of income but in terms of wealth; that is, occupiers of more valuable properties pay a smaller proportion of the value of their asset than those whose homes are less valuable.

In other countries, property taxes are usually proportional to the value of homes and in some cases progressive.

Ireland, for example, charges 0.18 per cent of value annually up to one million euros (S$1.5 million) and 0.25 per cent on any excess.

Such international comparisons are difficult to make, but one estimate by the Tax Foundation ranks the UK as having the highest property taxes in Europe, averaging 2.5 per cent of the private capital stock (a reasonable proxy for property value).

Only France and Poland are close to that rate, while Switzerland has negligible property tax at 0.1 per cent and Germany not much more at 0.3 per cent. The lesson is that property taxes do not need to be high to be progressive.

In the US, property taxes vary considerably from state to state and within states. On a somewhat different but comparable measure - average tax in relation to the value of property - rates vary from 0.2 per cent in Louisiana to 1.9 per cent in New Jersey and 1.8 per cent in Texas.

In upstate New York, some counties levy much higher rates. There is, however, some offset in the US for those people who have large mortgages, through tax relief on interest.

The British council tax was introduced with little regard for international comparisons or progressive values.

Former Conservative prime minister John Major brought it in almost 30 years ago to replace Margaret Thatcher's hated poll tax (a fixed charge per head, regardless of income or asset wealth, which is widely credited with precipitating her downfall).

Council tax was drawn up based on 1991 property values and such is the political sensitivity of the tax that no government has dared to revalue the properties despite enormous changes in house prices since then.

Resistance to higher levels of council tax led to freezes during the coalition government (2010-2015) in which my party, the Liberal Democrats, governed with David Cameron's Conservatives.

An effective cap on increases of 3 per cent per year now operates, leaving cash-strapped councils little room to raise additional money.

One major source of unfairness within an already unpopular tax is the eight bands - designated by the letters A to H - used to establish property value.

Band D is 50 per cent higher than Band A, and Band H, for properties worth £320,000 (S$578,300) in 1991 prices, is twice as high as Band D. There are no bands above Band H.

The regressive overall effect is compounded by the fact that councils in the most valuable parts of Britain, and especially parts of London, levy low rates of council tax.

Proposals to make the structure more progressive by adding a series of additional bands were seen as an attack on "aspiration" and criticised as causing hardship for the asset rich but income poor elderly.

The first reflects a particularly British concept of wealth creation through housing inflation rather than through innovation and investment.

While there are options for the mainly elderly residents a more progressive tax impacts (from downsizing to smaller property or acquiring financial products which release equity), elderly property owners in Britain, as elsewhere, are a politically powerful group that resist change.

The coalition came close to adopting council tax reform, as part of a compromise package between then-chancellor George Osborne and the Liberal Democrats: trading the mansion tax we wanted for the lower rates of income tax on high earners which the Conservatives wanted.

But at the last moment, Mr Cameron vetoed it, tinkering instead with thresholds and the upper rate of tax. He also increased charges on housing transactions, known as stamp duty, which had the perverse effect of inhibiting sales of property and mobility.

Mr Johnson, then Mayor of London, captured the politics of it in a column he wrote for the Daily Mail at the time, calling the mansion tax a "brutally unfair attack on every homeowner".

The appeal of a tax on higher end properties - perhaps of one per cent annually on properties worth more than £2 million - for a politically secure Conservative Party is obvious.

For a government that has sworn off income tax increases, it could raise much-needed revenue (it is estimated at about £2 billion a year during the coalition period) to fund a major expenditure programme.

It would send a powerful signal of support to depressed provincial towns that do not have much high-value property to tax, and the revenue from the better off south of the country could then be recycled to these less advantaged areas.

If a percentage rate tax is too much to contemplate, simply adding four bands to the existing Council Tax at the top end could have a similar effect, though the revenue would not automatically go to the Treasury.

Either way, this is a tax which cannot be avoided; wealthy residents cannot take their mansions to the Virgin Islands or Switzerland.

Unlike taxes on income, employment and profits, taxing property values does not discourage work or investment (taxing the underlying value of land would be even better, but that is a much bigger story).

Cynics would say that the Conservative Party's donors have paid good money to ensure that such inconveniences do not happen.

But if the idea resurfaces, it would suggest that the Tories were embarked on a genuine attempt to redefine themselves as an inclusive and classless party with a new constituency among the relatively deprived. BLOOMBERG

  • The writer served in the UK Cabinet as Secretary of State for Business, Innovation and Skills from 2010 to 2015.

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