I’ve been raging all morning about the proposed mansion tax. I can’t understand for the life of me how anyone can think it is a sensible – or, to use the word that I hate, fair – policy.
Imagine you did very well in business, and earned £10m. You might do it in a year in a bank; or you might help build a business which created a couple of thousand jobs over a decade. Let’s assume, to keep the numbers simple, that you earned it in a year and you were paid it in salary. After income tax and NIC, you would be left with roughly £4m.
If you invested the whole lot in a house, then again, keeping the numbers simple and assuming 5% stamp duty and no other fees, you would be able to buy a house worth £3.8m and the balance would be paid in tax. Anyone who lives in west London knows that you wouldn’t actually get a mansion there for £3.8m – in One Hyde Park, I think you’d get a three-bed flat – but I’m sure it would be very nice; and yes, it could be a castle in Scotland with thousands of acres. What you buy is academic really: the point is that you buy what suits you and your family with what is left of the large amount you earned, on which you had paid all your dues.
Let’s also assume you do this by the age of 40, which is not an unreasonable assumption; and that you therefore live in the house, or one that is comparable to it, for the next fifty years.
If a mansion tax were introduced at 1% of the value of your property, and that property went up by a very marginal 3% a year in value, then over the rest of your life, without earning a bean, you would have to fork out just over £4,450,000 in mansion tax.
That would mean that the total amount of tax you had paid on the £10m you earned in the first place would be £10,650,000 – more than you had actually earned. On what basis is that sensible?
You might think that if you earned £10m over any relatively short period – a year or ten – you might think you could go and do something else with your life other than the job that brought you your wealth. You might want to go and work for a charity, or write a book; or even just put your feet up for a bit. But all this tax would do is force people who had made money to keep their nose to the grindstone, trying to eke out the same earnings that they peaked at. The idea that you could make money and, say, go and become a teacher to give something back to other people would be fanciful. Unless you said, having earned a lot money, that you were not going to do anything with that money in terms of improving your lifestyle and living in a larger house, and instead you were just going to put it in the bank. In that instance, you would lose a percentage of whatever your subsequent gain was, which is fair enough – without it eating into your capital.
Can anyone explain to me what makes it a good idea?
I suppose the question you might want to start with is who should pay tax in the first place? One would hope that in a civilised society everyone would recognise that it should be some system that charges based on the relative amounts people can afford to contribute. Who would possibly argue otherwise (i.e. for a system that demands that those less able to afford it pay a greater proportion of tax)?
That’s the basis of income tax, corporation tax, capital gains tax etc. I think it’s worth discussing whether people with far-above average wealth (rather than income) can afford to contribute on that basis too, and in any rational analysis the answer would be “yes”. To cite just one example: people with enormous wealth obtained abroad (Russia as an obvious example, but there are thousands of people from dozens of countries in the same category) via dubious means or otherwise, choose to live in London because of our society and laws. They profit from living in our country, because the wealth they obtained can’t be equally easily confiscated. They can easily afford to contribute in return, but typically don’t because they continue to accrue their income outside the UK. So in answer to your question it’s trivial to show that you get unfairness without a mansion tax too. Show me any tax system and I’ll find you something unfair about it. That doesn’t tell you much.
It’s interesting in the example that you chose, that you’ve missed out the biggest number, which is why you end up with the seemingly silly situation where you’ve gained by £10m pre-tax yet paid £10.65m tax on it. As an aside, I suspect you’ve got your numbers wrong. I suspect you’ve got to £4.45m+ with 51 Mansion tax payments rather than 50. The right number would be £4.29m, but that’s splitting hairs. Could I point out that you’ve conveniently forgotten the £12.86m gain that you’ve made over the same period on the value of your mansion, an amount of money that you’ve “earned” by simply occupying the building. So viewed in the round you’ve paid £10.49m tax on a total gain of £22.86m, or a bit less than 46%, and you’re quids in to the tune of an eight figure sum.
I’d recommend not telling that particular sob story for sympathy in Greece or Spain, or any of the communities around the UK where people are experiencing actual hardship.
I’m not telling it as a sob story – the numbers don’t relate to me. I’m telling it as a logical argument. it makes no sense to me whatsoever to tax people on something that has ben taxed.
Your point about the increased value of your house is all very well, except that the house you live in is not bought on the basis that you sell it when you have made money on it. It is the house you live in. What possible help is it that a house has risen in value if you can’t sell it?
As it happens, I have got the numbers wrong, because although this is being talked about (and headlined in the papers) as a ‘levy of 1% on houses over £2m’, it is actually a levy on the value over £2m, which is a very different number. That raises questions about a failure to communicate a policy, but it doesn’t change the principle.
It seems to me that there is no more sense in taxing this than there is in taxing turnover rather than gross profit on gaming. I can’t see how you can tax someone who has not got a means of paying out of cashflow. You surely have to tax based on what is coming in. Personally, I have no interest whatsoever in seeing a tax system which means people have to keep earning banking salaries. I’d rather see them taxed while they are earning them, and then when they are doing something else, taxed on whatever the other thing they are doing is. I can’t see what the incentive is in trying to move up into increasingly attractive surroundings – surely everyone’s aspiration, however high or low they start – and then forcing them either to drop out and back down, or to continue at that same flat out peak rate that they have achieved for the rest of their lives.
As regards both those who don’t pay tax, and people in hardship: both are daft arguments. The way to get people out of hardship is to raise them out of the tax net. And the way to tax people who have not paid tax is to introduce a tax on people who have not been taxed. It’s not to go to people who have been taxed, and tax them again.
So I agree entirely with your opening paragraph, and with none of the rest of it: the question you might want to start with is who should pay tax in the first place, and in a civilised society everyone would recognise that it should be some system that charges based on the relative amounts people can afford to contribute. Taxing people on the basis of something that they have bought out of taxed earnings is not taxing them the amounts they can afford to contribute. Rather, it is a means of ensuring that what they once could contribute must be what they must continue to be able to contribute – tying them in to what they did previously. It makes no sense at all.
HI Mark,
I should perhaps have used the correct “one” in my previous comment rather than the ambiguous “you”. I’m not accusing you personally of having coined £10m a year working in the City – I am well aware that you have a watertight alibi against any accusation that you’ve been trousering cash working in a bank these last few years!
There are a few points you’ve made that don’t stand up to any sort of scrutiny:
1. that wealth, like turnover, is a nonsensical thing to tax because it’s unrelated to ability to pay. You’re right about that being correct when describing turnover. You can’t pay a bill with turnover. That’s obviously the total opposite of wealth, which renders your comparison meaningless. You can pay for something from your wealth. Try this example: I used to work in a bank and I’ve stashed £1m away over the years, some in cash, some in shares, some in property. This year I’ve been working for a charity and have no income. My wife suggests we go on a family holiday which will cost £5,000. I tell my wife we can’t, because, according to your argument, I have no income so we cannot afford it. Is that last statement true, or is it false? I’ve not met Mrs. Davies so I cannot comment on what would happen if you tried that, but I would expect a battering from her indoors if I tried that one on her. Of course there is one special situation where it would be true:
Maybe I worked for Northern Rock and I’m as useless at managing my own liquidity as I was mismanaging the bank’s liquidity position. I am totally financially inept and I have put every single penny of my wealth into illiquid assets like property, rather than having a more sensible mix of property, shares, bonds, cash etc. Then it would actually be true to say that I couldn’t afford to take the family on holiday. But that’s a bit of a contrived special case isn’t it? Most people who would be affected by such a tax would have a sensible proportion of their wealth held in cash or other liquid assets that could be sold to pay a tax bill. Typically they will already plan the timing of taxable events (selling of assets etc.) and set aside the money to pay the tax bill, so the idea that a mansion tax creates some unmanageable personal liquidity crisis for those affected is a bit weak. And even if you are in a situation where you’d be liable and you only had property to your name there are all manner of methods of raising cashflow to pay for anything (holiday or tax bill). Joe Bloggs who doesn’t have £10k in spare income but who has equity in his house, and who wants a £10k extension built just remortgages. It’s hardly the bleeding edge of financial engineering.
So I would hope that puts any nonsense about not having the ability to pay to bed. The next question is whether its fair. As I said before it’s unfair, just like the existing system or any other system you could mention. But what I can say for sure is that your reasons why it wouldn’t be fair don’t stack up.
If keeping my family costs £30k a year and I earn £100k a year then I too am tied to the wheel. I can’t afford to retrain as a teacher or work for a charity on a lower income and keep paying the bills. If I didn’t have to pay income tax on my previous income, and none on my new lower paid job then maybe I could afford it. Your argument that we shouldn’t have taxes that force people to keep earning at a particular rate and prevent them from doing something perhaps more worthwhile is an argument against almost ANY tax. If I hadn’t had to pay fuel duty over the years and continued to be exempt maybe that would make the difference and I could take that teaching job. It works for anything. Why should I pay fuel duty or VAT on things I buy when “that money has already been taxed”?
It’s all well and good working from the concept that money flows in straight line and should be taxed once on its journey. The only problem with that is that it isn’t true, and that’s not a concept on which the tax system is built. If I earn money and pay income tax, that doesn’t mean that money has now been taxed and can never been taxed again. If I pay someone with it, buy goods and services etc. then that causes more tax to be incurred. Round and round it goes, with tax being collected over and over again.
As I said, there are lots of arguments why it’s unfair to have a mansion tax, and why it’s unfair not to have one. It’s just that if there are good arguments for not having one, then “welathy people have no means to pay”, and “the money has been taxed already” aren’t among them!
I disagree that you can pay out of “wealth” so easily, but it depends on how you define wealth. Of course, in your example of having stashed away £1m in various different places, you can afford your holiday. But in the event that you are not in liquid means, then you cannot. You may argue that it is foolish to put all your “wealth” into something illiquid, but this assumes that you held the value of your “wealth” in cash. Say, for example, you bought a house in Kensington in the 1960s. It would have cost you, as it did my grandparents in Peel Street, W8, £8,000. It would now be worth over £2m. But what of it? How does it help pay for a holiday? Worse, since you can rightly decide not to have a holiday, how does someone get hold of £20,000 to pay a Mansion Tax on it?
You argue that getting a new mortgage is not the cutting edge of financial engineering. Perhaps not in some instances; but in others, it is impossible. I just tried to remortgage myself, as it happens. I was turned down: I have no income at the moment (I am back in my own start-up). The bank described me as “asset rich and cash poor” and said that while it could see on paper that I could sell shares, it would not lend me money when it could not how I could service the interest payments through income. If that is true of a man in my position, aged 41 and, like in your example, with my wealth such as it is split between liquid and illiquid assets, what would it be to people in their 70s, whose single asset might be their house and only income, their pension? Who would give them the mortgage that is so easy to come by? And if they aren’t considered good for the interest payments by a commercial organisation, how can they possibly be deemed good for the capital payment by the government?
You make the assumption that everyone who would be hit, would have acquired recent wealth, and would have managed it to account for a sudden hit of this sort. The reality is that many haven’t, and understandably won’t have done. They will have no alternative but to sell, and move. That seems iniquitous to me. Far from being “nonsense”, the basic fact is that some will simply not be able to pay, and in my view it is not “weak” to argue that it will indeed create personal liquidity crises, because in some cases I know of personally, it definitely will, and will require some to make major changes which are not as simple as deciding not to go on holiday. Personally, I regard it as wrong that people should be forced out of their houses by the tax system; and I think it is too easy to smirk knowingly, as many do, about what people are deemed to be able to afford or not.
Your point regarding the tax system as a whole is compelling, but to me, not conclusive. Sure, tax is levied twice in some instances; but only ever with a renewed transaction. You buy something, and there is tax on it; you sell something, and there is tax on it. The Mansion Tax taxes you again and again for simply continuing to live. Again, it seems grossly wrong to me.
Finally, as regards your case that I am effectively arguing against any tax at all…. Of course, if you keep expanding your lifestyle and raising your cost of living to match your developing salary, you get into a cycle. But under all other taxes, you are freer to choose to halt that cycle, and get off the treadmill. You can say that if it cost you £30,000 a year to support your family, then you know what number you needed to put away, knowing that as the money in the bank grew, you will lose part of the growth in tax, and you can access the remainder. Or you can shrink your lifestyle if you can bear your job so little that you decide to get out economically prematurely. In the case of the Mansion Tax, though – again because it is simply not as easy as you suggest to keep remortgaging in order to access the gain in value of the underlying asset; and unless you take the nuclear option and move out – you can do this only at a far higher – to the extent of being unobtainable – level. I accept that many (most) people around the country see £2m as a big and unobtainable number and therefore think the threshold is properly set, but the fact is that in west London, £2m means 2,000 square feet or less – which hardly constitutes decadence. If your counter to that is “well don’t live in west London then”, I’d say fair enough; but it might just happen to be where you were born. While I understand that you can be priced out of any market, I don’t believe that the tax system should be among the things that might force people to move from where they live.
It is always easy to look at someone wealthier than you (one) and say, “well he/she is rich – he can afford it”. But I think that most people look at their houses as something they live in, rather than as an investment – the basis on which your principle residence is not liable for CGT. I cannot understand why the same principle does not apply for a Mansion Tax. By all means charge second homes (not houses that are let because those are effectively the single home of the tenant, unless you want rents to rocket; but “lifestyle” homes where you have a house in the country and a flat in London); and by all means capture tax from non-tax-payers who contribute nothing but have lifestyle houses in the UK because they want to enjoy some of what Britain brings. But to tax people on the building they live in, when they are fully contributing to the tax system in other parts of their lives and have been able to plan their lives around some fairly clear principles as to what gets taxed in this country and what doesn’t, is in my view not consistent economics, but policy based on the politics of envy: a very poor system upon which to base anything, but increasingly, it seems to me, the populist basis on which many decisions are made.