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An overlooked argument for property taxes

More sensible taxation of property could reduce the problem of unaffordable house prices.

The trouble with talk about taxes is it's all bluster. The Daily Mail talks with glee of Eric Pickles discontinuing a database that could have allowed the revaluation of council tax bands. Yet the article fails to mention some key points, not least those 3.7 million households worse off as a result of our failure to revalue council tax, or that hard-pressed homeowners in London effectively pay a much lower proportion of the value of their homes in tax.

There's something about the value we attach to our homes that seems to generate an especially strong emotional response when the words "tax"and "property" are used together. Which is odd, as council tax fell from 0.7 per cent of a property's value in 1993-94 to 0.5 per cent in 2006-07. And that brings me to my next point - fairness. Most of this difference in how much of a property's value was taxed will have been capitalised into higher house prices. This benefits existing owners at the expense of first-time buyers, bringing us to a situation where 80 per cent of first time buyers get assistance with deposits. We also have a government-backed mortgage indemnity scheme to allow people to buy property with a higher loan-to-value ratio, targeted at new-build homes which are generally more expensive to buy.

So, despite the noise everyone makes about housing affordability, especially in London, you'd be hard pressed to find much discussion about how more sensible taxation of property could help our problem with unaffordable house prices. Discussion tends to focus more on why unearned house price gains aren't homeowners "fault" - but there lies the main argument for taxing property (or for that matter, land). Anyone who bought their property in 1994 didn't earn that 250 per cent increase in the value of their home between 1994 and 2008.

A mansion tax would be aimed at £2m-plus properties. But without a revaluation and extra council tax bands between £320,001 and £2m, it wouldn't solve this fairness problem. It would just mean £2m-plus mansions get a bit cheaper for the rich to buy. At the moment those with a property at the lowest point of the top band (£320,001) are liable for twice the tax of a Band D property (£68,001) even though their property's value is actually 4.7 times more. Now, even allowing for subjective definitions of fairness, does that sound fair to you?

So how do you make the system fairer? Well, you could regularly revalue council tax so that it more accurately reflected property prices, moving to a tax based on a percentage of the property's value. Of course, whilst you would hope such a tax might avoid the hoarding of housing highlighted by The Intergenerational Foundation, it wouldn't have to force pensioners out of their homes. To deal with any hardship faced by the asset rich but income poor, taxes could be deferred until the property was sold, or we could have a rebate system as we do now for those who can't afford to pay their council tax bills.

A growing number of commentators including the Institute for Fiscal Studies and the Joseph Rowntree Foundation, suggest we need to reconsider property taxes. If we need to raise revenue to pay off the deficit and keep the economy growing, property taxes are well worth a look. And with a potential £10.6bn in missed revenue in 2009, which could have been ring-fenced to fund new homes, let's hope the plight of all those locked-out first-time buyers isn't ignored.

Kathleen Kelly is a Programme Manager for Place at the Joseph Rowntree Foundation

25 comments

Richard Dillon's picture

Tax can be reasonable, but it is difficult to determine what kinds of policy is fair as everybody will surely want the best deal for themselves at the expense of others.

Jackson's picture

@ Franks, you are right. I just got my new council tax bill through the post and it clearly states it is for services, not land.

As someone who cannot afford to buy a property even with the new 5% scheme and lives in a private rented house, I completely object to the idea of paying a tax on a property I do not own and that is exactly what will happen, it won't be the landlords paying it that's for sure. While I don't completely object to paying council tax, my other gripe is if your bill is calculated on the basis of two adults occupying the property, than why do we only receive a 25% discount for one? Is this an example of the much debated English inability to do basic maths?

Kathleen's picture

Thanks for your comments. Franks and Jackson whilst it is true that council tax is currently required to raise a fixed sum to fund local services; it is still a quasi property tax as it is based on the (albeit out dated) value of the property you live in whether you own it or not and not on your individual consumption of local servcies. Neither does it fund all your local services, funding only around 25% of local government revenue spending since the late 1990s. I'm not sure why you feel services are cheaper to provide in expensive housing areas or more widely used in lower value areas which seems to be the implication of your argument? There are examples of property taxes that do work and can help to address the housing affordability problem. With the right reforms property taxes can act as an automatic stabiliser on house price inflation. Land tax is a similar but different proposition to property tax as it is based only on the value of the land itself, not the value of any buildings that might be on the land.

Property Tax Reduction Services's picture

Wow such a nice blog. This information is very good and informative. Thanks for sharing it.

matthew fox's picture

Another long winded no Bozo555, don't worry.

You will find for the record, George Osborne actually changed his name from Gideon.

If you want me to get a copy of this birth certificate, I will try my best.

Your the last person on god's beautiful earth, to question the relevance, old bean.

I will repeat, this cold hard fact, the Nationwide Consumer Confidence survey came in at a record low for Oct 11.

At no stage, have you ever, ever commented on this fact.

Instead, you wanted to play happy talk, and ask why Professor Blanchflower he didn't mention the uptick in the Nationwide Consumer Confidence Survey, is it coming back to you, do you remember asking a question that didn't need to be asked?

matthew fox's picture

Poor Bozo555, Retail Sales down in Feb 12, Consumer Confidence down in Feb 12, the madness seems to be spreading.

http://www.telegraph.co.uk/finance/economics/9162123/Consumer-confidence...

http://www.guardian.co.uk/business/2012/mar/22/uk-retail-sales-what-econ...

I wonder if Prof Blanchflower will mention these facts in an article.

Fraziel1's picture

Council tax should be abandoned anyway. It was introduced by the tories and structured so that those at the bottom pay a far higher proportion of their income and in effect subsidise those in larger more valuable properties, who in the main vote tory and earn more. It should be replaced with a local income tax.

Rupert's picture

Please watch this film and repost - it needs to go viral.

http://realestate4ransom.com/

mike555's picture

@Matt

It looks like this is another thread I'm going to have to spend answering your petty and irrelevant questions. It's a shame for other readers, but so be it.

"Do you remember writing that my simple minded friend?."

Yes.

"You only want to talk about economic data when it helps Gideon."

No. I've lost count of the times I've told you I'm not a Tory. I've long said rates are too low and I've read articles which point out just the bad economic data, which is why I've pointed out some of the good ones and explained why I think rates are too low. As far as I know Gideon as you call him doesn't think rates are too low, I even criticized the Coalition in my first post.

It appears you can't see anything other than Labour v Tory, and you call me small minded? I dislike both as I've told you many times.

"Why did you want to talk about Consumer confidence, when the numbers ticked up"

How many times do you want me to answer the question? I read articles which pointed out this survey when it was down, then it went up and it didn't get a mention, I asked why not. Why you keep asking this irrelevant question is very strange.

Oh, and are you going to answer any questions yourself for a change? I very much doubt you can.

matthew fox's picture

I see Bozo555 is a modern day Cassandra. " Ordinary People " what a pompous phrase to use.

For someone who ignores bad economic data, I take he is being ironic?

Bill's picture

If council tax was abandoned, the government would have some real power over the self-replicating bureaucrats. As it is the big society is turning into the big farce. It has clearly now become a case of them and us, in regard to both councils and police. In fact the rats appear to be backing into a corner, but taking all the cheese as they go.

Stuart Eels's picture

No Hugh Markey

Lets lose the bloke entirely, how does it fit wuith his "mansion" when he won't even give up his Winter fuel allowance, some democrat!

mike555's picture

Oh look it's Matt Fox with more ridicule and no answers as usual.

matthew fox's picture

Do you mean Matthew Fox Bozo555?

I leave the ridiculing to you,old bean, economy of effort and all that.

It is not my fault your not one for facts or your ability to ignore bad economic data.

Didn't you get the email, the UK economy shrank by 0.2% in the last quarter of 2011?

Do you understand the term " Shrank " Bozo555?. Is this going to be " All your saying " on the matter?

I see fuel prices are still powering ahead Bozo555, more pain at the pump old chap.

I could go on about the effect this will have on inflation, however, that is another topic, you know so little about.

Mark Wadsworth's picture

Kathleen, well said! I trust you're aware that Joseph Rowntree's original Memorandum saying that maybe land value tax was the solution to a lot of problems, and that it deserves a closer look.

mike555's picture

@Matt Fox

What effect do you think the housing boom under New Labour had on the poor? Funny how you can't answer that one.

No ignoring bad news from me.

mike555's picture

The problem here is house prices - which tripled under New Labour, despite ordinary people warning for many years about the problems of lax lending and low interest rates.

You have to ask what those in power were doing, apart from encouraging property as an investment?

With our population rapidly growing , with monetary policy continually favouring those who borrow, and with the Coalition picking up where New Labour left off with daft shared ownership schemes etc. I'm afraid there is no hope of truly affordable housing.

A rise in interest rates would sort the housing market out, but apparently we must keep rates at 300 year lows for a few more years, despite not even being in a recession and inflation being well over target, you couldn't make it up.

mike555's picture

@Matt Fox

No answers I see.

What are you talking about now? I don't use the Nationwide Consumer Confidence Survey to back up my points, I asked why it didn't get a mention on another topics when it was up because it gets a mention when it's down, as you well know.

matthew fox's picture

Thanks for the long no Bozo555.

What am I talking about now? Are you that stupid.

Please try to understand what you have wrote yet again.

" No ignoring bad news from me"

Do you remember writing that my simple minded friend?.

You only want to talk about economic data when it helps Gideon.

Why did you want to talk about Consumer confidence, when the numbers ticked up. They hit a record low for Oct 11, yet not one word from you.

Is it all coming back to you?

Franks's picture

This article is flawed. Surely council tax is related to the amount of council services you consume not the day to day fluctuations in the value of your home!
Why should someone in a one bed flat in Mayfair pay substantially more council tax than some northerner in a 5 bed detached house just because of the disparity in land value when presumably the one bed consumes far less council services. i mean fairs fair right?

Steven Clarke's picture

I completely agree that better taxation of property is vital to make housing affordable and deal with wealth inequality. A land value tax would be the best the way, as it deals only with the unearned portion of the houses' value (that benefit from sitting on a particular location whose value is given by the quality of nearby schools, hospitals, jobs aka wider society)and not the value of the improvements (houses, factories etc) which the owner can lay claim to. In fact an LVT would have considerable benefits in a whole variety of areas. I hope the New Statesman continues to make more of this progressive issue that has lain dormant too long.

matthew fox's picture

It looks like Bozo555 has cried off.

matthew fox's picture

Really Bozo555, you don't ignore bad economic news, really, are you super sure?

Don't forget, when consumer confidence hit a record low for Oct 11, you didn't have the intelligence to make a comment.

Is that coming back to you?

Hugh Markey's picture

A bit of advice, Vince. Lose the hat!

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