Comment: We don’t need the 50p rate OR the mansion tax
Ahead of the Budget later this month there is much discussion about how we make the rich pay more tax. Vince Cable has now suggested that he would trade the 50p income tax rate for a mansion tax. But we shouldn't feel constrained to a choice between two awful ideas.
By Emma Boon
If you tax high incomes at the 50p rate (more like 60p once you include national insurance) you will find there are fewer high incomes around to tax. Politicians can try to clamp down on tax avoidance but they can't stop people employing the avoidance strategy of last resort: don’t earn a lot of money in the UK.
Britain has one of the highest top marginal tax rates, and one of the highest combined top marginal income rates (including national insurance contributions), in the developed world, and the highest of the major developed economies. With the 50p rate in place we can't compete with other world economies and there is a powerful incentive for people to leave or not come here in the first place. Scrapping the 50p rate makes economic sense, there is no point continuing with a measure that independent estimates from organisations like the Institute for Fiscal Studies and the Centre for Economics and Business research finds loses money. It deters people from working harder and earning more money, and no successful economy has ever grown by soaking wealth creators. The rest of us have to pick up the slack and pay more for the luxury of spiting those who are successful.
We were initially told that 50p was a temporary measure, so if it is replaced with a mansion tax will that be temporary too? And will it really remain a tax just on high value properties? Income taxes were introduced to pay for the Napoleonic wars in 1799. Two centuries later we are still paying and more and more people have been caught by lower and lower thresholds as they have not been increased in line with inflation. In April many basic rate taxpayers will suddenly find that they are now higher rate taxpayers as those thresholds change again. Taxpayers shouldn't be mugs and believe that a mansion tax is really just for the rich. The middle classes will end up paying, as they always do.
It is deeply unfair to tax people for investments they made years ago, and which they can't change without selling their homes (and paying huge amounts in stamp duty). Some people who bought quite modest homes decades ago, and who can't afford to pay substantial annual taxes, will suddenly be landed with a big bill.
Grant Shapps has described it as a "granny tax" because it will unfairly hit property rich but cash poor pensioners, whose main asset is their home. My grandfather has lived in his house in Kent for more than 50 years. In the garden there is a mature tree that grew from a seed planted by my father. Grandpa is a bit wobbly on his feet and we put in a stair-lift a few years ago, moving would be difficult for him. He won't be hit by a mansion tax if the threshold is set at £2 million. But what if the threshold moves down and he finds himself caught up in it?
The tax will also treat different people very unfairly. Someone could have a £3 million property with a big mortgage and be worse off than someone with a £1.5 million property and no mortgage. They could have a single family home in London and be worse off than someone with a number of properties all over the country, none of which individually qualify for the tax. Or they could own billions in other assets but only own a small property in the UK, keeping their main house somewhere else. They would be very well off but not caught by a mansion tax. All those inequities will drive demand to replace a mansion tax with a general wealth tax but the experience of the British government in the 1970s and European countries today shows that is invariably a messy economic disaster; the Swedes just abolished their wealth tax as a result.
Let's not forget that property is hardly lightly taxed already. Britain raises more tax from property than any other developed country. Buyers pay stamp duty when they acquire the property and their relatives pay inheritance tax if they want to pass it on. More than that they pay council tax every single year. The mansion tax is a misguided policy that will again fail to meet the objective that most of its advocates hope it will achieve. Austria, Denmark and Germany scrapped wealth taxes in 1997 and several other European countries have followed suit, it seems bizarre that in Britain we are considering swimming against the tide. We don’t even know what type of mansion tax we will get. It could be a one off payment annually for those who live in houses worth over £2 million or it could come in the form of extra, higher council tax bands. If it's the latter then the coalition will have to worry about a nightmarish revaluation of every home in the country.
50p and the mansion tax are not the only two options on the table. We don't have to choose between raising personal allowances for basic rate tax payers and cutting the 50p rate, George Osborne can afford to do both. After all, as I mentioned earlier it looks like the 50p rate won't raise revenue over time and research for the Centre for Policy Studies suggests the mansion tax could raise a maximum of £1 billion. He could spend half what we currently do on business subsidies and that would be worth more.
There is no sense trading one bad policy for another. If we want economic growth and, over time, more tax revenue out of the rich then the best policy is lower tax rates so that more people get rich in Britain, creating new businesses and new jobs.
Emma Boon is communications director for the Taxpayer's Alliance.
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