It is normal for politicians, when living standards are falling, to channel the public’s discontent towards those who can be called rich. When the cause of that discontent is that the politicians have been unable to run a sound budget and thus need to cut expenditure, this has the added benefit of deflecting the public’s rage away from Westminster. It is not really about raising money to reduce the national debt. It is about making the public think less ill of the government, or, if a pledge made in opposition, of the would-be government.
Last week’s call by the Labour leader Ed Miliband for a so-called mansion tax was redolent of Denis Healey’s promise, back in 1974, to squeeze the rich “until the pips squeak”. The then Labour shadow Chancellor had also drawn up plans for a wealth tax, over and above existing income and capital gains taxes. Fifteen years later in his memoirs, Healey admitted that: “We had committed ourselves to a Wealth Tax: but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost.” He concluded: “You should never commit yourself in Opposition to new taxes unless you have a very good idea about how they will operate in practice.” In particular, Healey had discovered that the flight of capital would actually have resulted in a loss of revenue to the Exchequer.
I somehow doubt that Miliband bothered to consult the 95 year old Labour ex-Chancellor before coming up with his own version of squeezing the rich. It was not so much a suggestion of what he would do in government as a cunning plan to exploit the divisions within the Coalition: the Liberal Democrats have long advocated what they call a “mansion tax”, but have been thwarted by David Cameron.
Just how much Clegg and Co have been thinking of this was revealed at the weekend, with leaked reports of an internal policy document drawn up by two of the party’s MPs, suggesting that a wealth tax should include all assets: jewellery, for example. In furtherance of this, it said: “HM Revenue and Customs, in policing the system, will have to visit homes to test whether asset values of jewellery, paintings etc., were correct.” The thought of widows being shaken down by Tax Inspectors on a jewellery hunt (“Show us yer old wedding ring, now”) was one of the things that caused Healey to back down. Not nearly as quickly, though, as Vince Cable, who, within hours of this policy document emerging, declared that the idea of jewellery and paintings being included was “wacky”.
Why is that “wacky”, but a mansion tax not so? After all, the homes that people live in are arguably more essential for their families than any item of jewellery or painting. This only demonstrates that politicians advocating a wealth tax are not really interested in the principle, but only in the noise such a policy makes – and if it seems discordant, they will drop it.
There are, in fact, some good principled – rather than political – objections to what the Liberal Democrats and Labour propose (an annual tax on properties worth more than £2m). When someone buys a property, it is out of income that has already been taxed. He will pay stamp duty on that transaction – up to 7 per cent for the most valuable houses. If he then takes on builders to improve it, he will pay an additional 20 per cent of that cost in VAT. And if he sells the property, and it is not his primary residence, he will have to pay capital gains tax of 28 per cent. Finally, there is inheritance tax at 40 per cent on estates above a threshold of £325,000 – although great Labour dynasties such as the Benns and the Milibands have used Deeds of Variation to pass property down through the family in a way that avoids the full impact of inheritance tax.
The point of principle here is that tax is generally paid on property when income from it is available – for example, on rent accruing; and the reason why stamp duty works is that in the great majority of cases a person has cash available from the sale of an existing property, when buying a new one. Therefore, if there were to be an additional property tax, it would be much fairer to decide that capital gains tax should also be charged on the primary residence, when it is sold, rather than levy a tax simply on the fact that someone – whether or not a little old lady – happens to be living in a home above a certain value. Such a change, however, would affect all home owners making a profit on sale and would, therefore, not meet the politicians’ objective of seeming to be nasty only to rich bankers.
And, while we’re discussing equity in taxation, it should be noted that, according to the Institute for Fiscal Studies, it is not until a standard family with two earners and two children is earning just over £25,000 that it begins to become a net payer of any income tax at all. Meanwhile, the HMRC’s own official figures show that the top 1 per cent of income earners paid 24.8 per cent of all income tax collected in 2011-2012: the same people’s earnings represented 11.2 per cent of the total. In other words, the tax system in this country is already highly progressive.
It is true that some of the very richest have become adept at avoiding the state’s claims on their income, which is partly why the so-called mansion tax has gained traction. Yet, as the firm Property Vision points out, this is also a function of the remarkable recent growth of prices within a narrow band of central London: “If you had said to anyone only five years ago that a two-bedroom flat on Victoria Street would sell for a tad under £2m you would have been asked to stub out whatever you had been smoking.”
In other words, there is a windfall element. But if it’s windfalls you’re after taxing, Ed, Nick, Vince, here is a helpful suggestion: there is a group of 3,000 millionaires who, over the past 20 years or so, have had a total windfall of £8.5bn – that’s an average of £2.8m each. None of them did a stroke of work for that sum and yet, when it landed in their laps, entirely at random, they were not obliged to pay a penny in either income or capital gains tax on it. I am referring, of course, to Britain’s Lottery Jackpot winners.
When Labour and the Liberal Democrats address this anomaly, we will know they are serious about the principle of a wealth tax, rather than merely playing the politics of envy.