24 February 2018

Britain’s property taxes are broken


Next month’s Spring Statement – the first such event since Philip Hammond moved the Budget to the autumn – will reportedly be a pared-back event.

The Chancellor plans to further burnish his reputation for excitement and unpredictability by being on his feet for no longer than 20 minutes and doing no more than updating the House of Commons on the latest economic forecasts. According to the Treasury, there will be no spending increases or tax changes.

That is a shame, because one aspect of the tax system in particular is in dire need of reform. I am referring to the various ways in which the government taxes property – which are illogical, outdated, regressive and economically costly.

The most recent tinkering with property tax came in the autumn Budget, with the abolition of stamp duty on homes worth up to £300,000 for first time buyers. Yet there is a strong case for abolishing it altogether. Beyond the general point that you need to raise revenue somehow, there are no good arguments for imposing a charge on moving house.

And the economic harm done by such transaction taxes is significant. An Australian government review of its stamp duty system found that for every £1 of revenue raised, it destroyed 75p of wealth. No tax is consequence-free, but stamp duty is exceptionally harmful. When moving house comes with such a high price tag, labour is less mobile and the economy less productive; it also means people are more likely to stay put in a house that is a bad fit for their needs instead of downsizing or upsizing.

More lucrative, but just as nonsensical, is council tax. The most clear-cut problem with council tax – which is really a hybrid consumption and property tax – is how outdated it is. Your council tax band depends on the value of your home in 1991. Ignoring a quarter of a century of house price changes is unfair, and is a product of nothing more than a desire to avoid controversy.

Updating the valuations would also be an opportunity to make the tax less regressive. At present, residents in low-value properties pay very high effective tax rates; the opposite is true at the other end of the spectrum. Adding new bands above the existing top band would go towards fixing that. A more radical – and sensible – option would be to scrap the bands altogether, and instead charge a flat rate on updated valuations.

The standard rebuttal to such proposals is the fact that Britain’s property taxes are already higher than anywhere else in the developed world. But that isn’t necessarily a problem: there is a strong philosophical case for taxing assets instead of work. Economically speaking, wealth taxes tend to do the least damage to growth. Property taxes also have the practical advantage of being nigh-on impossible to avoid.

The problem, in fact, isn’t that we tax property. It’s how we do so, which at present is both costly and unfair.

Indeed, it they were truly ambitious, the government might be tempted to overhaul the whole system and introduce a land value tax, which is a levy on the value of the underlying land and is paid by the landowner whether or not the land is being used. This is that rare thing: a tax that encourages rather than discourages economic activity, by making landowners pay for property that sits idle. It is also that even rarer thing: a proposal endorsed simultaneously by the Institute of Economic Affairs, the Institute for Fiscal Studies, and John McDonnell. (Though admittedly for McDonnell, a land value tax would be a supplement to existing property taxes, not a substitute.)

Admittedly, this idea, explained more fully for CapX by Julian Jessop, would be complicated to implement, and undoubtedly ruffle feathers. But it would be a genuine upgrade on the current system.

Neither Philip Hammond or Theresa May is predisposed to bold reforms. Even if they were, the political constraints they are operating under make big changes hard to deliver. But Britain’s property taxes fail the common sense test. Reforming them isn’t an ideological hobby horse. It’s a question of good government – and promoting growth.

This article is taken from CapX’s Weekly Briefing email. Sign up here.

Oliver Wiseman is Editor of CapX.