Smile! We’re taxing your house!

800px-Nick_Clegg_-_World_Economic_Forum_Annual_Meeting_2011I don’t quite know why it is, but somehow Nick Clegg’s periodic demands for a Mansion Tax remind me irresistibly of the Jack-in-the-Box.  Every so often the lid pops open, and up jumps the deputy Prime Minister, demanding money with menaces.  But this is not economic policy.  At best, it’s a transparent attempt at populism, seeking to exploit general discontent, and our resentment of those who have more than we have ourselves. http://www.telegraph.co.uk/news/politics/nick-clegg/9855049/Nick-Clegg-bring-in-mansion-tax-or-raise-council-tax-on-top-end-properties.html.

The truth is, it would be an appalling tax.  The costs might well outweigh the revenue.  It would involve extensive (and disputed) valuations, tribunals, reassessments and what-all.  It might well introduce price changes and distortions in the housing market.

But worse than that, it would of course impact on wealthy individuals, who might (though Clegg can’t see it) change their behaviour to avoid the tax. People in £2m houses tend to pay lots of taxes already.  They also frequently have the ability to move.  If London gets too expensive, there’s Los Angeles.  If we tax their socks off in St. John’s Wood, there’s Switzerland, or Singapore, or Sidney.

More generally, we’re on the wrong side of the Laffer Curve.  In the UK, the government is spending around 50% of GDP.  That’s comparable to Italy, and well above Germany.  Many economists accept that for optimum growth and prosperity, government spending should not be too much more than 33%. Higher taxes cannot solve the problem.  Higher tax rates will drive us further beyond the Laffer Peak, and will actually reduce revenues.  They will also block growth and economic recovery.  They are exactly the wrong thing to do.

I was surprised to see the Institute for Fiscal Studies, usually on-the-ball on tax issues, stating that George Osborne’s higher-than-planned borrowing will require higher taxes to repay it. http://www.telegraph.co.uk/finance/economics/9853901/Taxpayers-warned-of-rises-after-Osborne-borrows-extra-180bn.html. Same argument applies.  It may be that George will try raising taxes to fund higher borrowing and interest payments, but if he does, it will make matters worse, not better.  Sadly (and it won’t be popular to say so) we’re so far in the hole that the only way out is lower spending, not higher taxes.

Some commentators understand this, Jeremy Warner for one http://www.telegraph.co.uk/finance/comment/jeremy-warner/9853666/George-Osborne-has-one-effective-growth-tool-left-cutting-taxes.html.  But the loudest voice calling for lower taxes is perhaps Allister Heath.  He chaired a thing called “The 2020 Tax Commission”, organised by the Taxpayers’ Alliance and the IoD.  http://www.2020tax.org/  He argues that taxes should be cut to 33% of national income, that top marginal rates should not exceed 30%, that many “odds-and-sods” taxes, including National Insurance, the Death Tax, Stamp Duty and Air Passenger Duty should be abolished, and that the system should be dramatically simplified.  I won’t go into more detail — you can read it on the web — but he makes a very cogent case indeed.  If we go on as we are, there is no way out.

His booklet answers a question that’s been bothering me.  In an earlier blog I pointed out that we’re already taxing the rich till the pips squeak, so we really don’t need a mansion tax.  After all, the top 1% of earners pay 27.7% of the income tax.  But on the comment thread, someone pointed out that if they also earned 27% of the income, it would be just fine for them to pay 27th% of the tax.  Touché.  I didn’t have the figures, but the 2020 booklet has.  The top 1% of taxpayers receive 12.6% of the income, but pay 27.7% of the tax.  And the next tranche — 1% to 5% of the population — get 12.7% of the income, but pay 19.3% of the tax. The broadest shoulders already bear much more than their fair share.

But the point, of course, is not to be nice to the rich, but to make the UK an attractive — or at least tolerable — place for the entrepreneurs, job-creators and wealth-creators, who will otherwise go elsewhere.

I just hope that George Osborne is paying attention.  This country was sold down the river by one Mr. Heath.  It would be a wonderful irony if it were to be rescued by anther Mr. Heath.

Roger Helmer is UKIP’s spokesman on Industry and Energy

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