By Madsen Pirie
The proposed mansion tax is a wealth tax, and wealth taxes are among the most pernicious and damaging of all taxes. The proposal is not to tax people for doing anything with a house such as buying it or selling it, but simply for owning it.
One of Adam Smith's canons of fair taxation is that it should be levied in a way that is convenient for the person paying it. A tax on rents should fall when the rent has been collected, he said.
In general we tax transactions so that a little of the money changing hands makes its way into the state coffers. We tax money when it is earned, or when it is used to buy things. We do not tax it simply because people have it, otherwise we are simply confiscating it from them in installments, undermining the very basis of property rights.
People generally react to wealth taxes by moving their wealth abroad, or into areas not subject to the tax. If a mansion tax is levied on homes valued in excess of £2m, fewer of them will be bought. Some of the talented high achievers and high earners who might have come to the UK to live in them will decide not to do so, depriving the country of the economic activity their wealth would have generated here.
Experience elsewhere shows that people challenge valuations they do not like, and the cost of valuations and revaluations must be factored in to any hypothetical revenues the tax might yield. The relatively small sums the tax might produce from homes whose value is just above the threshold, the majority of likely challenges, could easily be swallowed up in this way.
Most of the homes in question generate no income from which the tax could be paid, and some of their residents have insufficient earnings from which to pay it. It seems to bear the hallmarks of taxing rich people because they deserve to be punished.
Those who advocate this should note that the richest 0.5% pay between them over a quarter of all income tax collected. A generation ago the top one per cent paid a far lower proportion, 11% of the total.
Wealth taxes have created problems for countries that have introduced them. Germany and Austria got rid of theirs in 1997, Finland and Iceland in 2006, and Sweden in 2007. The French wealth tax caused a massive capital flight within a year of its introduction and has cost France hundreds of billions since in lost capital that could have been creating jobs and growth there.
It should also be noted that property taxes in Britain, 4.2% of GDP, are highest among OECD countries, where they average only 1.8% of GDP. It is not serious real-world economics to suppose that more revenue would be gained by raising them even further. People would simply turn to put their money into other things instead and revenue would decline.
We have come a long way since we had a 15% surcharge on investment income, then called "unearned income," to punish people for being foolish enough to invest in Britain's growth and future employment. We do not really want to revisit that territory and put a surcharge on people who have the temerity to live in expensive houses.
The value of those houses represents a capital pool which can be borrowed against or passed on at some stage to the next generation. Anyone who seriously thinks that capital pool will be better used by governments than by private citizens should take a look at some of the many things government spends our money on.
The proposed mansion tax, like the Tobin tax, is economically illiterate, damaging and divisive, and designed only to punish the rich. We should toss it out of the window and devote our energies instead into finding ways of making it easier for rich people to back or to undertake new ventures that can boost economic growth.
Madsen Pirie is co-founder and president of the Adam Smith Institute, a free-market think tank.
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