Dr Kristian Niemietz is Editorial Director and Head of Political Economy at the Institute of Economic Affairs (IEA). He is the author of the report ‘Fool’s Gold: The case against the wealth tax, and suggestions for alternatives’.
Imagine you are a politician who does not personally believe in wealth taxes, but who wants to be popular with people who do.
You know that wealth taxes don’t work. You have economic advisors who tell you so. You know that they have been tried before, and usually turn out to be more trouble than they are worth. More to the point, you know that they would take years of preparation, and you want revenue sooner rather than later.
But at the same time, you believe that Gary Stevenson and Zack Polanski have won the argument, and that there is nothing that can be done about that. You believe that this is their country now, and the rest of us are just living in it.
What would you do?
You would probably come up with all sorts of policies that mimic aspects of what a wealth tax is supposed to do, without being a wealth tax proper.
I don’t know if this accurately describes the current government’s thinking, but it would explain a lot if it did. A lot of otherwise seemingly random fiscal policy measures start to make sense if we assume the above mental model.
We have seen increases in Capital Gains Tax rates while tax-free allowances have been cut. As of next year, we will see higher tax rates on savings income, while thresholds have been frozen. Landlords will face higher tax rates on rental incomes, and higher stamp duty land tax rates. The upcoming ‘mansion tax’, a council tax surcharge for properties worth more than £2m, falls into the same category. All of these can be thought of as roundabout ways of taxing wealth.
Electorally, it makes sense. YouGov recently ran a poll on the popularity or unpopularity of different possible tax reforms. It turned out that the most popular fiscal measure any government could take would be the introduction of a wealth tax, supported by 75% of the public, and opposed by only 12 per cent. The runner-up, though, was the mansion tax, supported by 69% and opposed by 20 per cent. When the mansion tax was actually announced in last year’s Budget, it turned out to be one of the Budget’s most popular components.
These changes will most likely decrease savings, investment and wealth generation, while only raising minor amounts of additional revenue. But that’s not what I’m writing about today.
This week, the mansion tax has generated some negative headlines, as several newspapers have reported on government plans to send tax inspectors around the country to value homes in that price range. Since that valuation cannot always be carried out on the basis of publicly available information alone, these tax inspectors will be given powers to demand entry into people’s homes, to carry out valuations of the interiors.
Critics have branded this as an intrusion into people’s private sphere, and a violation of civil liberties. They are right. But why is anyone surprised by this?
The mansion tax can be thought of as a miniature version of a wealth tax, and as such, it suffers from many of the same problems, if on a smaller scale. If you want to tax assets, you have to value them. That process is inevitably often bureaucratic and intrusive.
In some cases, it is easy enough. Suppose someone has bought a property for £2.2m last month. In that case, we know that their property is worth £2.2m. We know that, because that is the sum they have just paid. That person is liable to the mansion tax. We know that, and need no further valuation or inspection for now.
But the vast majority of properties in that price range will not have been sold last month. They may not have been sold in years, or decades. Nobody knows exactly how much they are worth, and a valuation is the only way to find out, with all the bureaucratic hassle and intrusion this entails.
There is a further problem. We cannot limit this process to properties that are worth more than £2m, because until we have carried out the valuation, we don’t know which ones those are – that’s the whole problem. Thus, we also need valuations for properties that might plausibly be worth more than £2m, even if many of them will turn out not to be, upon inspection.
If this sounds like a terribly inefficient way of raising money to you, just imagine what an actual wealth tax, which does the same thing for assets across the board, would be like.
