The 50p rate is a silly tax and raises little if any money, so needs to go. Osborne appears to want this. Both the Tories and Lib-Dems want to raise the income tax threshold to £10,000. This makes sense too. Why tax people earning less than a “living wage” and make them beg for some of it back? This seems perverse. This tax cut offsets any benefit cuts suffered by low-waged workers and makes a great deal of sense and seems fair. Politically, I can see why “the rich” need to be seen to pay more, even if I disagree they do.
Economically speaking cutting the 50p rate is a free win for the exchequer because it’s raised a great deal less than expected and may actually raise more money at 40% (the jury’s still out on this one, though I suspect the IFS will show the 50p rate has cost the exchequer…). Raising the tax threshold however is a genuine tax cut. As such, we at this blog are not punk-Keynesians who believe that more deficit is any form of “stimulus”. This means a raising of the tax threshold to £10,000 either needs to be matched by spending cuts (the best option) or a tax raise elsewhere.
Given that further spending cuts are not on the table, the question is what to tax. I am in favour of cutting income and payroll taxes, as well as those on capital and profits in order to raise taxes on consumption. I am also persuaded by the economic rationale for land value taxation, which is why council tax doesn’t get much abuse on this blog.
According to the BBC news, the options are extra council tax bands at the top, an increase of stamp duty, or a mansion tax on properties worth over £2m. A Mansion tax is silly. Why introduce a new tax, when there are land value taxes in place which could be modified? Although this was in the manifesto of the wooly-inbetweens and will probably be the most politically easy to implement, it’s not the right option. It’s distortionary, creating an arbitrary cut-off at £2m and will hardly raise any money at all, and with an additional bureaucracy for a new tax, is gratuitously inefficient.
There are not enough of these to make a “mansion tax” pay
An increase in stamp-duty on the most expensive homes is probably the next most politically likely. After all, you only pay it when you sell or buy which for most voters is far enough away to be ignored. Gordon Brown did this, and the result was a much less efficient market, one we’re still suffering now. Transaction taxes like this reduces liquidity in the housing market. A Tobin tax is a silly idea for shares, and houses are no different. Such a tax will encourage people to hang on to homes they rattle around in, thus increasing prices of four bedroom family homes for those, young families, who need them most, but can’t afford them. They’re paying income taxes, effectivly subsidising grandma’s three spare bedrooms in which nick-nacks gather dust. Transaction taxes are stupid. They decrease liquidity and predictability of markets, and therefore increase volatility. These are not good things in a market as central to an economy as residential property.
By far the best, most economically efficient tax, with the fewest economic side effects and one or two positive effects too is to simply increase the number of council tax bands, increasing the council tax on the biggest, most valuable homes. This will encourage empty-nesters to move down the property ladder, freeing family homes for, well, families who need them. It will encourage a more liquid, and therefore less volatile and more predictable property market. The act of downsizing your property will free vast amounts of capital currently tied up in property, to be redeployed elsewhere in the economy. It will increase incomes for pensioners who downsize.
One of the biggest structural flaws of the UK economy is the love affair with bricks ‘n mortar. By taxing property to pay for an income tax cut you replace a damaging tax (high rate income) with a less damaging tax (property value), and improve the liquidity and assortiveness of the UK property market into the bargain. You also increase the amount of tax raised locally, increasing the power and prestige of local government, which fits the Government’s localism agenda.
However. This isn’t what will happen. The arguments in favour of raising council tax are too difficult, the tax too unpopular to be the vehicle to replace the taxation of income between £7,000 & £10,000. What will happen is that a “mansion tax” on “the rich bugger down the road” will be levied and an opportunity to reform council tax will be lost. There will be a tax cut. There will be a replacement tax, which won’t raise as much as income tax on income between £7,000 and £10,000 and therefore the deficit will go up. The property market will be made a little more complicated and a little less liquid.
The Tories are half right. (actually a bit more than half). The Liberal Democrats are half right (actually a bit less than half). Half times a half, is a quarter, so I suspect the coalition will be a quarter right. This is why tax systems should not be designed by a committee.