Politics

The mansion tax: Ed Miliband house of horrors

September 23, 2014
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Ed Miliband today announced the worst policy that he has yet thought up. In his speech to the Labour Party Conference, he said that, if he wins the next General Election, then he will introduce what he calls "a mansion tax," a levy on homes worth more than £2m. It is a wholly ideological policy suggestion, that is riddled with holes and which will be entirely counterproductive. There are several reasons for this.

1 Valuations Who is going to value all of these houses? It would be impossible to implement a levy like this without first knowing which houses were eligible for it, so how would the Government establish this? Take London, which would the primary target of this new tax. A Miliband government would have to ascertain the market values of every domicile within Zone 1 and a fair chunk of Zone 2. Councils have certain data on the values of homes which they already use for setting council tax, but these are decades out of date. New valuations would need to be carried out. By whom? The first option would be to set up and hire staff for a new Government Department of Home Valuations. This would then be tasked with inspecting every house from Shepherd's Bush to Aldgate and from the Elephant to Battersea, and everything in between: an area of roughly 15 square miles. A new department specially created to conduct these inspections would very quickly start to look prohibitively expensive. An alternative solution to the valuations question would be for the government to outsource the process, and the best candidate for that job would be the estate agents. But then would this be any cheaper? No it would not. One economist with whom I have argued about this before assured me that Councils would be perfectly capable of carrying out valuations of this sort. This is such obvious nonsense that it does not even warrant a response. All values of all homes in central London, the posh bits of Manchester, Bristol, Edinburgh and others would have to be established at market values, which are constantly changing. That is a job far in excess of the abilities and capacities of local councils. Someone would have to be paid to do it. The cost of this first step alone would be vast.

2. Changing valuations Ed Miliband's own home is in Dartmouth Park, a very nice part of North London just near Highgate. But if the man from the Government Department of Home Valuations were to come along and tell Ed that his four bedroom Victorian house were eligible for the mansion tax, what if Ed were to object? What if he were to show a different, much lower valuation, carried out by his own assessor? In a case such as this, which value would be believed? Would the government be willing or even able to manage the number of challenges of this sort that it would inevitably face?

In addition to which there will be a strange market distortion at work under the mansion tax scheme, where the tax itself would cause values to shift. Consider a house worth £2.1m. It is liable for the new tax. But then who is going to buy a house that is marginally over the taxable rate? Nobody. For this reason, the house would go unsold and the price would have to be reduced by the vendor until it was below the taxable rate, as only at that point would anyone ever want to buy it. So the mansion tax will have a perverse effect whereby its introduction will cause home prices to drop. The knock-on effect of this downward pressure, combined with next year's expected rising interest rates, is alarming to consider.

3. Gaming the system People who do not want to pay taxes on their homes can be very resourceful in their methods of avoidance. In Greece, the fonset origo of European financial "innovation", there is a property development law stating that all home owners will pay tax on their completed properties. It turns out that the most efficient response to this is for developers simply not to complete their projects. Greece's islands are littered with roofless villas. The mansion tax would provoke a similar upsurge in evasion. People whose homes qualified might chose to divide the place into two flats, both of which they happen to own and neither of which qualifies for the tax. Or they might sell their one large home to buy two smaller, both below the taxable threshold. Or they simply might not cooperate in allowing a valuation to take place. There are myriad ways in which the system would be gamed, and again, these would all require investigation by some government department or other, costing yet more time, and money.

4. Social justice The ideological reasons for the mansion tax are all to obvious. The evil Tories have their bedroom tax, so we will hit back with a mansion tax. In the coarse punch-up of political combat, this trading of ideological blows makes some sense. Britain went through a financial crunch and recession, so why should the poor be the ones to suffer? The rich should do their bit too. And we will start with their homes. But the whole idea for this tax is based on a mirage: the idea that the money value of people's homes is real money. It's not. The nominal value of house prices is absurdly high, certainly. But those people who own those homes do not have that money. That money does not exist, and never will. What value it has is only present in its exchange value, such that when one house is sold and another is bought, the value is effectively swapped for the equivalent equity in another home. Eventually, when the home owner dies, the value of the home is emitted in full, but then almost half is instantly taken in tax by the Revenue. So though Labour looks at the housing market, licks its lips and sees piles of cash, what they think they see is just not there. As for social justice, consider this: large numbers of people in their 70s and 80s who have lived in their houses for 40, even 50 years and who have seen the values rocket will be forced to move out of their homes because, though they own an expensive house, they do not have the cash to pay the new tax. At this point, a quite understandable reaction is: "so what? They'll be fine." This is true. But consider the overall effect of the mansion tax: it will force some moderately well off people out of their homes, and replace them with very well-off people. Add to this the immense costs of overseeing the levy, and you have a revenue-neutral tax that barely pays for the bureaucracy required to oversee it and yet more neighbourhoods that are no-go areas other than for the ultra-wealthy. It is a struggle to detect any social justice in that.

5. It's bad politics One of the things Ed has going for him is that London is still a Labour city. Stuffing the many thousands of people in the capital with a new tax is phenomenally stupid, because he will lose the good will of the metropolitan elites who hated Thatcher, bought homes in the 80s and 90s and voted for Blair. They will not take kindly to being told that their Islington semi is now adjudged to be a "mansion". Most awkwardly, Ed will have to deal with the fact that he is a member of this set. He too owns a multi-million pound Highgate home, a point that will now attract substantial attention and which would be eligible for the mansion tax. Ed has become the target of his own political gesture. Could there be a better description of a political failure than that?