Let's take a look at why the Labour Party’s latest property policy will not work!
As expected, Labour leader Ed Miliband used his party conference to announce that if his party was to gain power after next year’s General Election, he would introduce a Mansion Tax. This disastrous is not only badly thought out, it simply won’t work. Why? A simple grasp of economics and an understanding of how people react to incentives will be suffice.
In theory, the levy would be imposed on properties worth more than £2m. But in prime London this amount doesn’t get you very far. Take Belgravia, for example. For £2m, you’d only be able to pick up a nice two bedroom flat on a popular residential street, or a slightly larger property in a less sought-after part of town.
But neither properties will to be a mansion. Not only that, it’s been estimated that the tax would fail to raise the £1.6bn Labour predicts it will bring in, rendering the policy futile unless the threshold is lowered.
And therein lies the problem. We all know that once taxes are introduced they are likely to fall victim to fiscal drag. Just take a look at what happened with inheritance tax and the 40% income tax band.
There are other reasons why Miliband’s mansion tax will not work.
1. Property value disputes
Like all objects of subjective value, a home is only worth what someone is willing to pay for it. And this can be open to debate. So once the policy’s introduced, everyone will be keen to demonstrate that their property is not worth £2m – especially those with homes just on the threshold. Every surveyor, after all, has a different opinion – one could put a property at £1.9m; another at £2.1m. Who is right?
This is where the idea becomes somewhat self-defeating. Say everyone in Zone 1 in London with properties around £2m decided to get them revalued. Who would be tasked with the job? If it was a government department, this would make this task absurdly expensive. And then you will have a backlog of cases as people contest the findings in tribunals. Already the policy has become time-consuming and costly.
On top of this, the tax would cause prices to shift as no one would buy properties around the £2.1m mark. Instead, property value in this price bracket would have to be slashed until it was well below the taxable rate, therefore having a downward pressure on house prices.
2. Tax avoidance techniques
Homeowners seeking to avoid a mansion tax would find a way around it. It is likely that many homes would be divided into flats, pushing the value down. Bizarrely, if you own ten £1m flats you would not have to pay the levy: but if you have one small family home in a popular part of London you could be liable. The long and the short of it is that there are so many ways the system could be gamed and investigations would need to be carried out – all costing cash and resources.
3. Source of social injustice
Miliband’s mansion tax is not about raising the money, it is an ideological move to tax people who are perceived to be rich in the name of social justice. However, more often than not people living in these types of properties in London are not rich. Many of them will have purchased their relatively modest semi-detached properties in the 1980s or 90s and will not necessarily have the spare cash to pay the amount required annually.
The idea that your property makes you wealthy is another questionable assumption. The nominal value of house prices may be high but the people living in these homes do not have that money, it does not exist. If they sell and move on, they will just swap one amount of equity for another. The only way they can benefit from their property amounts is by downsizing – which some may believe to be fair. But what will happen to that property in such an event? A super-rich oligarch who can afford it and will not object to paying the tax will simply swoop in and buy. This is not fairness. It punishes the modestly well off and the only winners will be those much higher up the wealth chain.
The Mansion Tax is class warfare at its very worst. It is tit-for-tat politics – likely a gesture to populist ‘soak the rich’ leftism after the Conservative Party introduced the so-called bedroom tax in 2010. As with all these kind of badly thought-out policies, they soon become exposed as being pointless, time wasting and expensive. The same will happen this time.