The Cable-Montgomerie-Balls tax: bottom of the worst-buy list of tax policies

I do not agree with taxes on wealth as a matter of principle. In general, increases in wealth come from two sources. It is saved from income that has already been taxed, or it arises as a result of capital gains made in anticipation of future income that will itself be taxed (in the case of shares) or a future valuable service flow (in the case of houses). Indeed, in the case of shares, capital gains tax is essentially double taxation and should be abolished.

But what about taxing wealth per se? A decision to tax wealth is, quite simply, a decision to treat unfavourably the income that people choose to save. It is an attack on property rights. Pope Leo XIII put it well in the ‘workers' encyclical’:

‘If one man hires out to another his strength or skill, he therefore not only expressly intends to acquire a right to the remuneration, but also to the disposal of such remuneration as he pleases. Thus, if he lives sparingly, saves money, and, for greater security invests his savings in land, the land is only his wages under another form. Socialists, by endeavouring to transfer the possessions of individuals to the community, strike at the interests of every wage-earner.’

Pope Leo was talking about the ‘little man’ and not the wealthy, but a tax on wealth is extremely unwise. Like the temporary income tax it will become permanent; like the income tax it will start on very high levels of wealth and creep down the scale. The non-confiscation of property bought from after tax income is a principle worth preserving. The main tax avoidance strategy would, under proposals to tax wealth, become frivolous consumption.

Should we tax wealth on death? Again, the argument is very weak here as we are taxing the capital that people have not consumed during their life more highly than any frivolous consumption. This is not good economics. An argument in justice – though, again, not a very strong one in economics – can be made for taxing inheritances that people receive. If I receive income, I am taxed. If I am lucky enough to receive an inheritance it is not taxed. Of course, the income that was saved to provide the inheritance has been taxed, but, as far as justice towards the recipient is concerned, he has been lucky enough to receive a sum of money and some would argue that he should be taxed on receipt. I do not accept that argument, but those who would make it have an arguable point. That is why I think that our current inheritance tax (which is actually, in practice, an estate duty) should be rapidly turned into a proper inheritance tax system that taxes lifetime gifts received over a threshold as an interim measure before being abolished. That should be a reform that would appeal to both parties in the coalition.

However, the main policy proposal on the table at the moment – proposed by Vince Cable, Ed Milliband, Tim Montgomerie and Ed Balls - is a property tax for people who own properties over £2m. This falls right at the bottom of the ‘best buy’ list when it comes to wealth taxes. The justification for it – certainly from the Conservative side – is that those who live in such houses have obtained their wealth through rigged markets: housing markets with planning constraints and so on. However, many people obtain wealth in many ways through luck or rigged markets. Leaving it to politicians to judge whether somebody deserves their wealth or not and taxing it if they are judged not to would lead to the elimination of any form of justice within the tax system. To retrospectively tax wealth using the justification that people have not deserved it would lead to an insecurity of property rights that any believer in even the most basic freedoms should be concerned about. Let’s set about and unrig the markets. Indeed, if planning controls were liberalised and Tim Montgomerie is correct that house prices are high because of rigged markets, the wealth would disappear as house prices fell. 

But, in practical terms, the proposed mansion tax on houses worth more than £2m is a minefield. What about the person with a £2m house and a £1m mortgage? What about the ex-Liberal Democrat MP with eight houses none of which is worth more than £2m? What about the person who bought the house at an inflated price? And so on … The bizarre situation would exist under the Cable/Milliband/Montgomerie/Balls tax whereby somebody who bought a house for £1m and sold it for £2m and invested the money in paintings and a wine cellar (or in two houses worth £1m each) would not be taxed, whereas the person who bought the house at an inflated price would be. If Tim Montgomerie really wants to deal with inflated house prices in markets rigged as a result of a planning system, then the answer would be a capital gains tax on houses.

In my view even this is not the way forward. It can be argued that we need a complete reform of property taxation. Our property taxes are very high but not coherent. We could tax the imputed rental income from owner-occupied property as we once did and such a tax would take care of the problems and anomalies cited above as well as taxing owned property on the same basis as rented property. Of course, if we did tax imputed rental income again, we would have to bring back mortgage interest tax relief (because a mortgage is financed by taxed deposits). Such a system would probably lead to property owners with properties over £2m paying more tax, but they would do so in a way that was just and economically coherent.

If it is decided that such a tax was not practical for a variety of reasons, then that is just hard luck. There may be second-best options – reform of council tax and so on. However, the proposed property tax on single properties over a certain value has no justification. Unjust, badly designed and arbitrary taxes are not good alternatives for taxes we would like to levy but cannot. Indeed, the whole proposal reminds me of the most desperate measures of Dennis Healey as he tried to squeeze yet more money out of a failing and strangled economy.

I'm very nervous about 'lifetime taxes', even with an intention to abolish them in due course. One technical difficulty is allowing for the effects of currency debasement. You can't just add together amounts of money received at different times if the pound's purchasing power varies significantly over time. That is like adding apples and oranges: it is nonsense. Even if that obstacle could be overcome, in principle I think it is highly undesirable to have to keep a lifetime record for tax purposes. Should I now, at the age of 72, be expected to be still keeping records of financial transactions entered into fifty years earlier?
As I say, I would prefer no such tax at all, but it is worth a thought experiment about how it might work in practice. If you had a lifetime allowance, I would suggest that it had statutory indexation at (say) rpi plus 2% (to allow for real wage increases etc). There would then be an annual allowance (as there is now). So there would be very few recordable gifts except on the winding up of an estate and the tax office would keep the record. The number of people going over the lifetime allowance would be small. For many reasons it would be preferable to current inheritance tax. Taxes in practice could be much lower (as a result of small dispersals not being taxed and any inheritance spread across more than two children would hugely reduce the tax. I would also suggest that recipients receiving gifts that were immediately saved in pension funds or donated to charity were not counted (whereas at the moment, if I receive an inheritance and donate it to charity the IHT is already paid and it cannot be reclaimed). So you could, I think, have a situation that was far better than the current situation.
Why not just have a land value tax instead of all property taxes? we could replace stamp duty, coucil taxes, rates etc. Then deregulate the planing system to allow construction where it is needed. This idea of taxing properties worth a certain amount just makes the tax system perverse, unjust and more complicated than it needs to be.

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