What’s the solution to the great pandemic debt pile-up? Tax Britain’s housing wealth. According to James Kirkup, head of the Social Market Foundation think tank, writing in the Times, higher property taxes are both sensible and inevitable – and if the Tories don’t bring them in, then Labour definitely will.
Now James is a friend and former colleague – and the paper he’s writing about is by Michael Johnson, one of the most influential and prolific Research Fellows at the Centre for Policy Studies (the thinktank I run, which also set up CapX). So I hope neither of them will take it personally when I explain why I disagree.
The Johnson proposal is for a new ‘Property Capital Gains Tax’ to be levied on the increase in value between when you buy and sell your home. In exchange, stamp duty would be abolished and the family home would be exempt from inheritance tax. He estimates that at a rate of 10%, this new tax would raise a whopping £421 billion extra for the Treasury over the next 25 years – and likely far more, given that he makes extremely modest estimates for future house price increases. Needless to say, the Guardian among others are extremely enthusiastic.
The first and most obvious objection is the point made by Tim Worstall on this site on Monday, in response to other rumours about impending wealth taxes. From a first-principles point of view, it is better (as in less distorting and more growth-promoting) to tax consumption rather than capital: spending rather than wealth.
The second point is that we already do tax property. Quite extensively. Dig into this OECD data and you will see that in 2018, UK property taxes amounted to 4.1% of GDP – just edging out France at the top of the table. In most other countries, they are far lower.
Johnson’s proposal would make the UK even more of an international outlier. To get an idea of the scale of the increase, consider that stamp duty on the main home currently raises £5.1 billion a year. Summed over 25 years with inflation increases as per Johnson, and you get roughly £145 billion. So to get from there to £629 billion – the total projected income from the new tax before you take account of abolishing stamp duty and other exemptions he proposes – represents an extremely hefty increase.
But this move would also make the UK an international outlier in another way. We at the CPS have been studying international property taxes and the truth is that only one country in the OECD – Switzerland – treats the family home as an asset like any other. Not surprisingly, it is one with a rock-bottom rate of home ownership.
Why are tax-hungry governments across the world ignoring this pot of gold? In the UK, the ‘cost’ of private residence relief in 2017-18 was, according to the Treasury, a whopping £27.8 billion – the most expensive single tax exemption apart from the personal income tax allowance and its National Insurance equivalent. Surely Rishi Sunak could claw at least some of that cash back?
Well, he and his international counterparts leave the family home alone for very good reason.
First, the politics. It is impossible to exaggerate voters’ attachment to the family home, or their hostility towards those who try to make it harder to pass it on to the next generation – witness the dismal state of the social care debate.
Second, the practicalities. Switching from a tax on buying a home to a tax on selling it may make theoretical sense (in fact I’ve toyed with the idea myself), but it will be bitterly resisted by anyone who has bought a home within the last decade or so and now faces paying twice. One alternative would be to switch to the new tax now but only apply it to new transactions – but that creates a massive multi-year hole in the Government’s accounts where stamp duty used to be.
Third, the effect on the broader market. The CPS showed in a recent paper, Stamping Down, how stamp duty has choked the housing market – as it has gone up and up, transactions have gone down and down. This shouldn’t be a surprise: it is a basic economic principle that the more you tax something, the less that something happens. Worse, as our research also shows, housebuilding is driven in the UK by transaction volumes – so higher stamp duty hasn’t just been discouraging people from moving, but disincentivising housebuilders from producing the homes we desperately need as well.
This is why, in line with our suggestions, Rishi Sunak introduced a stamp duty holiday as part of his coronavirus stimulus package – one we hope he will make permanent.
Fairly obviously, if taking £5.1 billion out of the property market every year in taxation is having a chilling effect, taking out almost three times that amount (as per the Johnson plan) is going to plunge it into the deep freeze, which is very much not what we want.