Politics and Economics

Labour’s Mansion Tax – too good to be true?

The left-leaning UK Labour party plans to raise a tax on all UK properties valued at over £2 million if it wins the next election.  This is socialist economics at its best.  A promise of  “free money” from the old mythical sources – closing tax loopholes, reducing tax evasion and increasing tax on somebody else.

In the Labour mind this somebody else is the “rich”, a vague, nebulous collection of immoral capitalists who are just sitting around waiting for Labour to increase their taxes.  A group that can always find more money whenever a bill is presented. The ultimate, infinite ATM.

Unfortunately, the “rich” are very few in numbers and highly mobile. They can live wherever they want.  And pay tax wherever they want. Consequently Labour’s numbers never add up. Perhaps they should ask Francois Hollande why not?  He has recent practical experience.

According to Labour the mansion tax will only hit those that can afford it and will raise £1.2 billion of somebody else’s money.

There are just over 108,000 homes in the UK valued at more than £2m. Of these, 85,461 are in London (88% of the total), and a further 14,261 are in the south-east. In Wales there are just 87 homes that would be liable for the tax. One London borough, Kensington and Chelsea, would pay about 35% of the tax in total.  As this policy is half-baked Labour has not revealed the precise rate it would charge.  But if the party reckons it will raise £1.2bn, then that sum spread equally over 108,000 homes suggests an average of around £12,000 per household.   Labour also promises to reintroduce the 50p tax rate, so a top-rate taxpayer would have to earn an additional £22,917 gross to cover the mansion tax.

My parents taught me that if something is too good to be true then it probably is.  The mansion tax is too good to be true and a dangerous distraction.

Here’s why:

In the UK we have an annual £100,000,000,000 deficit which is bloating our £1,400,000,000,000 + debt.

The current interest payments are greater than the defence budget.

This type of policy can only be considered as “tinkering” by a government with much bigger problems.  The maximum revenue would be a  £1.2 billion without accounting for the law of unintended consequences.

For example, the UK is desperate to attract high net worth individuals to the UK who will spend their money in our high streets, in our art galleries, in our car show rooms, on our housing market and in our private schools.  They employ builders, plumbers, decorators, teachers and domestic staff.  These purchases provide income, employment and in many cases VAT at 20%.

The type of people who would be caught by this mansion tax are exactly the people who are rich enough to live anywhere they like.  Dubai, Switzerland and numerous other countries world-wide will accept these people with open arms if we are clumsy in our attempts to unilaterally implement a mansion tax in a global market.  The only alternative is to convince the vast majority of the world’s countries to adopt a similar policy.  A global State with a global tax regime.  Good luck with that.

Those that can’t leave will be mostly forced to sell their property if Labour wins power next May.  These people are generally asset rich but cash poor and won’t be able to afford the £12,000 per year additional tax. The Institute for Fiscal Studies (IFS) estimates that one in four of those affected by a mansion tax are pensioners.  But who will buy a property at between £2 to £3 million if there is a huge hike in tax?  Better to buy something slightly cheaper.  In my case I’d buy a small comfortable flat in London and spend the rest on a nice cosy cottage in the country.  I’d have the best of both worlds and Labour wouldn’t raise any additional tax.  There would be a huge distortion in the housing market with nobody wanting certain properties because of the extra costs.

Labour is spending time and energy on a policy with very little financial upside and vast potential financial downside.  They should be racking their brains on how to pay down our £100,000,000,000 annual deficit so we can eventually start paying down our £1,400,000,000,000 + debt.