Sunday 29 March 2015

Is the 'Mansion tax' a good idea?

Firstly, the name is wrong.  (It was the Lib Dems’ name before Labour got hold of it.)  The word ‘mansion’ in this context is a pejorative term, smacking of the envy of ‘rich’ people.  A divisive ‘them and us’ attitude, which is not a sound basis for introducing a new tax, especially not a tax from a socialist party that is supposed to treat all as equals.

But if we get beyond the name, we need to be sure what we think it is intended to achieve:  

I am very concerned that a tax based on the current 'value' of properties could well hit many people who have lived in an area for years, who happen to own a house that has gone up in value by a factor of 10 or more, who are not necessarily rich themselves.  People who could not afford to pay the tax, who are mildly insulted to be suddenly told their home is a 'mansion', who do not aspire to that type of lifestyle,  and in a lot of cases, in Islington at least, are Labour supporters.  Knight Frank report that eight out of ten homes likely to be hit by the Mansion Tax are situated in Windsor, Sevenoaks, Islington, Wandsworth and Guildford.  Some Labour and Conservative MPs are concerned that the tax will hit “cash-poor homeowners, rather than rich overseas investors”. The tax in its present form is targeted at the wrong people.

I would argue that the main purpose of this tax, which should bear the neutral term ‘Property Tax’ should be, obviously, to raise some more revenue from those that can afford it, but that it should also be structured in such a way as to try and counterbalance rocketing property prices, particularly in London and the South East.
 
A recent commentator from the financial sector stated that he thought the London property market has become completely decoupled from the basic market functions of supply and affordability.  The London property market has become its own investment market, that has floated free from the low interest and low-inflation economy that is otherwise the current economic climate, and has become, in the words of Andrew Neil, a “global reserve currency”.  This situation is driving away ordinary people who want to live in or around the city, both aspiring buyers, and anyone trying to rent.  There can often be a big difference between the means of those that can afford to buy into the current market, compared to those that have lived in an area for years, and live there because that’s where they like to live, and not because they want to make money out of their homes.
  

I think the Property Tax should be based on a similar system to that in New York State, where the tax is levied as a percentage of the value of the property, but with the difference that the ‘value’ of the property should be based on the most recent price paid for the property, not a valuation.  This approach has the advantage that there can be no arguments about whether a property is correctly valued, since the price paid is the best valuation you can get.  It will not require valuations to be carried out, because the information will be readily available from the Land Registry.  And assuming that the tax is set at the right level, it will hit those that pay high prices hard, and not those who paid significantly less and just happen to be caught in the price spiral.  This should have an immediately deflationary effect on house prices, as purchasers will be thinking hard about the ongoing cost of owning a property if they pay too much for it, since they are effectively setting their own tax bill with the offer they make for the property, and it will ensure that only those that can really afford the tax have to pay it.  

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