Tom Spencer: Why Council Tax should be replaced by a proportional property tax

17 Jul

Tom Spencer is an associate contributor with Young Voices and a Don Lavoie Fellow at the Mercatus Center.

When looking at the history of taxation, it isn’t hard to see that legislators are worthy of ridicule. We have a history of taxing everything from dogs to windows, helping accidentally to trigger dramatic events from the signing of the Magna Carta to the Protestant Reformation. Yet these mistakes are not behind us. The tax follies of the past, as excellently described in Slemrod and Keen’s Rebellion, Rascals & Revenue, mirror those of today.

No tax makes this quite so clear as Council Tax, which was rushed through Parliament to try to excuse the Major Government from the Poll Tax fiasco. This tax, banded locally, is based upon property valuations conducted 30 years ago. This means that homes which have had the highest amount of price growth will be paying based on an undervaluation of their property. And, of course, those in areas of poor growth end up paying based on a gross overvaluation.

Effectively, this means the rich are getting a free pass and those on low and middle incomes are getting a rough deal. After all, the areas with high price growth over the last 30 years all happen to be the richest areas. 

Take the example of a £8,000,000 townhouse in Westminster and a home in Middlesbrough valued at £150,000: you’d expect the former to pay a lot more. That’s not the case. The house in Middlesbrough ends up paying £142 more council tax every year.

The failures of the council tax aren’t new: it’s actually like a much older tax imposed on windows between 1697 and 1851. As Jean Baptiste Say, the tax led to less enjoyment in one’s home (through the decreased natural light when people bricked up their windows) without yielding any benefits to the Treasury. Yet the silly look of a bricked-up window and the loss of light is only part of the issue.

The problem, as observed by Adam Smith in the Wealth of Nations, was that “a house of ten pounds rent in a country town may sometimes have more windows that a house of five hundred pounds rent in London; and thought the inhabitants of the former is likely to be a much poorer man than that of the latter, yet so far as his contribution is regulated by the window-tax, he must contribute more to the support of the state”.

This anachronistic attempt to tax wealth, based on the assumption that those with more windows must therefore be wealthier, manifested in outcomes that were regressive, and unfair. And yet, it seems unfair to call these mistakes a consequence of historic stupidity when one looks at the consequences of council tax. Just as in times past we undertax those in the wealthy cities, and overtax those everywhere else.

The most popular alternative, as advocated by at least eight Tory and nine Labour MPs as well as such think tanks as the Institute of Fiscal Studies, IPPR and Bright Blue, is a proportional property tax.

Instead of letting each council impose the tax at a different rate based on valuations older than this author, this will use modern technology to revalue properties annually, and tax everyone equally at 0.48 per cent based on the valuation.

Whilst this will mean some people would have to pay marginally more tax, the increases would hit only the richest people, would be capped at £1,200, and 75 per cent of people would see a tax cut. Upon closer inspection, these figures should make interesting reading for both Labour and the Conservatives in the run-up to the next general election, with 80 per cent of households in swing seats seeing lower bills. In Batley and Spen, the scene of Labour’s recent by-election hold, some 99 per cent of of households would see tax cuts under the proportional property tax.

Mark Twain famously said that “history doesn’t repeat itself, but it often rhymes”. The folly that is council tax famously echoes past mistakes we’ve made as a country, and previously rectified. If the Government wishes to be remembered as the reformers who ended this folly (and also secure more votes), then it must abolish council tax in favour of the proportional property tax.

Tom Spencer: A one-off wealth tax is not the way forward – but a proportional property tax might do the job

20 Feb

Tom Spencer is a Young Voices UK contributor. He is also the lead organiser for the London Neoliberals and sits on its Steering Committee as Vice-Chair of International Chapters. 

Mel Stride, Tory MP and chair of the Treasury select committee, has just proposed a one-off wealth tax as a way of addressing the increasing national debt.

Why is Stride concerned about national debt at the moment? In theory, higher levels of debt should cause a rise in the real interest rate as investors demand a higher return in response to the greater risk of their loan. If this were to happen, then it could risk what is known as a debt-interest spiral – a state where governments accrue debt faster than they can afford to pay it back.

However, this is only problematic when the economy is not growing. Like anyone else, a Government should only view debt in regards to its ability to pay it back. If your profits are rising faster than your debt, then you’ve got nothing to worry about. The same logic applies to the Government – where nominal growth rate is greater than the rate of interest on that debt, then the debts value as a percentage of total wealth (or GDP) is actually decreasing.

Since the 1950s, the UK’s growth has almost always been greater than its interest rate. Indeed, the only exception was in the 1980s, when interest rates were increased instrumentally as a tool for fighting inflation under the Thatcher Government. Given we’re currently exiting one of the worst economic disasters in a century and interest rates are extremely low, it’s safe to say that we’re not at risk of entering the feared debt-interest spiral.

But even if we were, a wealth tax is a rather poor way of addressing this problem. Although some variants of the wealth tax are said to raise as much as £260bn, this is a very inefficient and distortionary way of taxing individuals. In recent history over a dozen countries in the OECD have implemented wealth taxes. Today, only three still have them in place. If these taxes were so effective, why would almost everyone abandon them?

The reason is they simply don’t raise enough revenue normally to justify the administrative and political costs. Looking at wealth taxes in Switzerland, a 2016 NBER working paper found that for every 0.1 per cent rise in the tax, the value of reported wealth falls by 3.5 per cent. This creates a system whereby those more savvy with their creative accountancy end up avoiding the tax en-masse, to the detriment of honest wealthy people.

Indeed, Britain is no stranger to this phenomenon. Denis Healey, former Chancellor of the Exchequer, famously explained his experience with the policy as follows: We had committed ourselves to a wealth tax; but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle.” This is a Labour chancellor admitting that wealth taxes are not necessarily the way to go; so, why does Conservative Mel Stride disagree?

Of course, the plan proposed by Stride aims to get around these perennial problems with wealth taxes; rather than aiming to tax future wealth year on year, his plan is for a one-off tax applying retroactively. But this abandons one of the most basic principles of good tax policy given by Adam Smith in his Wealth of Nations: certainty. Regardless of the economics, from an ethical perspective it’s paramount that the individual should know their tax obligations at any one point, for this is the only way to ensure that the system is fair. To abandon this principle and retroactively seize wealth from someone gained before the tax existed is pernicious and unjust.

However, there is another tax that could help address wealth inequality and that is the proportional property tax (PPT). The Government are currently rumoured to be looking to replace stamp duty and council tax with an annual 0.48 per cent tax on property value. Given that the largest reason for rising wealth inequality is the housing market, taxing property values would help reduce inequality by reducing the incentive to take advantage of the housing crisis.

Excessively strict planning laws have gamed the housing market so house price inflation will always rise above earnings; this means those with the capital to get on the ladder are at a privileged position over less well-off individuals who cannot afford the initial investment. What a PPT would do is create an incentive for those holding multiple houses to sell off their excess, freeing up new homes for other individuals; therefore, spreading the housing wealth more equitably.

Whilst this plan may not raise the additional £60bn that Mel Stride hopes to get out of his one-time retroactive wealth tax, the country does not need £60bn at the moment. With debt as cheap as it is, we should instead focus on how we can generate the most growth possible. Taxing wealth in the way he suggests is baleful and will only act as a barrier to our economic recovery.

Instead, to help address wealth inequality the Government are better off pursuing a proportional property tax; this would reduce the incentive for wealth to be hoarded in housing, simultaneously reducing council tax bills for 76p per cent of households.