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There is a 'very broad understanding' within the coalition that the UK's top rate of income tax will be scrapped, the Business Secretary has confirmed. His hopes to see a mansion tax introduced may however be hit by new research showing that the case for the levy is far weaker than it at first appears.
Business Secretary Vince Cable's comments came during an interview on BBC Radio 4's Today Programme. Asked whether there was talk of a potential deal within the coalition, through which the 50% income tax rate would be replaced with a mansion tax, Cable replied that his colleagues were "not ideologically wedded to the GBP0.50 tax rate".
The rate is charged at 50% on all income over GBP150,000 (USD236,088), and critics, including senior members of the Conservative party, have called into question the rate's ability to raise revenue, and argued that it instead dampens the UK's competitiveness. Cable's concept of a mansion tax has long been a Liberal Democrat favourite, and was first proposed by him at the party's 2009 conference.
Cable initially suggested a levy of GBP5,000 on houses worth over GBP1m, a figure which was later increased to GBP10,000 on those worth over GBP2m. Earlier this year, he called the mansion tax a "very good idea", and called on the Chancellor to include it in his forthcoming Budget. Reports at the time suggested that an annual levy of 1% would be placed on the value of properties worth over GBP2m, with the hope of raising GBP1.7bn a year in revenue.
Cable told the Today Programme that were the 50% rate to be scrapped, it should be replaced by the taxation of wealth. He said this was "because the wealthy people in the country have got to pay their share, particularly in a time of economic difficulty." He did, however, admit that "how exactly that is configured is a detailed matter for negotiation, and that principle must be upheld. And a mansion tax is actually a very economically sensible way of doing it, but there are different ways of approaching it."
Cable was then prompted on the details of any mansion tax scheme, and asked whether it could be incorporated into the existing council tax system, with the introduction of new, higher rate bands. He replied it could be done through local or central government, providing the principle of wealth taxation was accepted. He argued that there are a vast number of high value properties on which little or no tax is paid, with GBP1m houses paying the same council tax as a three bedroomed semi detached property.
Concluding, Cable stressed, "It is one part of a complex set of negotiations which my colleagues are conducting. As you know the Liberal Democrats are emphasising the importance of lifting low earners out of tax, that is one of our key campaigning things, we are making serious progress in that, and we are committed to getting it up to GBP10,000 by the end of this parliament."
Cable's hopes of securing a quid quo pro arrangement may, however, be dashed by new research from the Centre for Policy Studies. A new paper published for the think tank by Lucian Cook, director of Savills research, says that such a tax would be complex and inefficient, raising little revenue at great potential cost. It could hurt the asset rich, cash poor long term owners of high value property, the paper concludes.
The paper argues, in direct contrast to Cable, that top end property owners already make a disproportionately high contribution to tax revenues. It points out that the UK already has by far the highest property tax take of any Organisation for Economic Co-operation and Development (OECD) country, with property taxes contributing 4.2% of GDP, compared to the OECD average of 1.8%.
The think tank also found that the highest 1.6% of residential property sales yielded GBP1.2bn, in 2010, the equivalent of 26% of all stamp duty receipts. Furthermore, last year’s introduction of the 5% stamp duty band for properties over GBP2m will contribute GBP290m a year, while the the top 0.7% of housing stock held at death contributes 36% of inheritance tax receipts from residential property. In addition, the non dom levy already collects revenue from owners of high value property domiciled overseas.
In contrast, the paper found that a mansion tax set at 1% of the value over GBP2m would yield just GBP1bn (or 0.2% of total tax revenues) at most. It will also bring with it significant problems. The Centre believes that the levy would unfairly target the income poor, equity rich. For example, 31% of properties in London worth over GBP2m have been in the same ownership for over 10 years, 15% over 20 years. Price growth has been +89% in the past 10 years and 426% in the past 20 years.
It would also be both difficult and expensive to value all relevant properties, as there is little comparable transactional evidence, while valuations would be vulnerable to extensive legal dispute. The paper is concerned that a mansion tax would serve to undermine London’s position as one of the world’s leading business locations. If only a handful of the new class of international wealthy were no longer to come to Britain, the resulting loss of tax revenue would be far greater than that raised by this tax, the paper stresses.
Analysis by Savills also finds that estimates of the level of stamp duty avoidance - primarily through off shore vehicles - are overstated. Instead, this occurs in only about 10% of prime central London and just 4% in the rest of the UK. Tightening this loophole would only generate around GBP150m, the paper says.
Cook commented: "The common perception is that owners of high value homes pay a disproportionately low level of taxes but this analysis really explodes this myth. A new annual levy such as proposed, with a fixed threshold, would really distort market dynamics and would penalise cash poor long term owners of properties that have passed the threshold by dint of house price inflation."
Tim Knox, Director of the Centre for Policy Studies, added: “A mansion tax would strike at the heart of aspiration and of property ownership. And be sure that it will, over time, spread to include more people as politicians seek new funds for their pet projects. Yes, there is a pressing need for reform to our tax system based around Adam Smith’s principles of fairness, simplicity, certainty and efficiency. Closing the opportunities for stamp duty avoidance would be a sensible measure. But for economic recovery, the UK does not need a new complex tax targeted at the aspirational and successful. It needs lower, simpler taxes aimed at encouraging, not penalising, wealth.”
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