How the mansion tax will work, and who it will hit

If you're planning to own a mansion in the future, the tax isn't as bad as it seems…

Let's clear up one myth about the mansion tax straight away: it is not going to work the way Tim Montgomerie suggests in his Times column today. Montgomerie writes:

Last week Ed Miliband joined Nick Clegg in proposing a mansion tax so that the people who live in London’s parallel universe — many of whom come from overseas and pay little in the way of income taxes — might make a greater contribution. It was a perfectly reasonable intervention but, in a sign that the Conservative Party still hasn’t understood why it can’t win elections, many Tory MPs reacted with fury. Such a tax was, they complained, unfair on the person in a £2 million home who didn’t have the necessary £20,000 to spare.

A person with a £2m home would pay nothing in tax under any version of the mansion tax previously suggested. A £20,000 tax bill implies a house worth £4m. That's because the tax Miliband eventually produces is near certain to follow the same lines as the Lib Dems' desired tax, and be set at 1 per cent of the value of the home above £2m.

The reason why is obvious: if the tax was set at 1 per cent of the total value of any home above £2m, then there would be a huge incentive to depress, either artificially or actually, the value of the home. If your house was worth £2,010,000, it would be worth paying someone up to £10,000 to come round and do £10k worth of damage to it.

More practically, the lack of a cliff-edge at which the tax comes in is also likely to prevent it doing too much to property values. It will have a depressive effect, getting stronger as the house gets more valuable, and will likely knock quite a bit off the price of a £4m house. But the changes will be about pricing in the expected future cost of the tax to the sale price, not about avoidance. For much the same reason that no-body ever says "no thanks, I'd rather earn just £8,104 and not pay tax on my income", houses aren't going to start being sold at £1.99m in any real numbers.

But that example does reveal one of the bigger problems with the fairness of the tax. No, it's not the ridiculous example given by Toby Young of someone who finds themselves living in a £4m house without the money to pay the tax bill. If you can sell your house, buy a £2m one, and pocket the lifetime earnings of someone on the median wage as the difference, you do not really get to plead poverty.

Instead, it's that the vast majority of the incidence of the tax will be on the people who own the houses today. The depressive effect it will have on house prices will be pretty much instantaneous, and will then sit there forever. The tax will also slightly dampen the rate at which house prices above £2m increase — because every £100 increase in price imposes a £1-a-year increase in tax liability — but that is small fry compared to the initial hit.

That quirk explains why the suggestion of a tax provokes such vociferous outrage amongst those owning £2m+ houses. It really is unfair on them; but it's not a matter of unfairness against the rich, so much as unfairness against this generation of the rich. And really, for a government which has done so much to harm the cause of intergenerational fairness, that's a small hit in return.

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Why are boundary changes bad for Labour?

New boundaries, a smaller House of Commons and the shift to individual electoral registration all tilt the electoral battlefield further towards the Conservatives. Why?

The government has confirmed it will push ahead with plans to reduce the House of Commons to 600 seats from 650.  Why is that such bad news for the Labour Party? 

The damage is twofold. The switch to individual electoral registration will hurt Labour more than its rivals. . Constituency boundaries in Britain are drawn on registered electors, not by population - the average seat has around 70,000 voters but a population of 90,000, although there are significant variations within that. On the whole, at present, Labour MPs tend to have seats with fewer voters than their Conservative counterparts. These changes were halted by the Liberal Democrats in the coalition years but are now back on course.

The new, 600-member constituencies will all but eliminate those variations on mainland Britain, although the Isle of Wight, and the Scottish island constituencies will remain special cases. The net effect will be to reduce the number of Labour seats - and to make the remaining seats more marginal. (Of the 50 seats that would have been eradicated had the 2013 review taken place, 35 were held by Labour, including deputy leader Tom Watson's seat of West Bromwich East.)

Why will Labour seats become more marginal? For the most part, as seats expand, they will take on increasing numbers of suburban and rural voters, who tend to vote Conservative. The city of Leicester is a good example: currently the city sends three Labour MPs to Westminster, each with large majorities. Under boundary changes, all three could become more marginal as they take on more wards from the surrounding county. Liz Kendall's Leicester West seat is likely to have a particularly large influx of Tory voters, turning the seat - a Labour stronghold since 1945 - into a marginal. 

The pattern is fairly consistent throughout the United Kingdom - Labour safe seats either vanishing or becoming marginal or even Tory seats. On Merseyside, three seats - Frank Field's Birkenhead, a Labour seat since 1950, and two marginal Labour held seats, Wirral South and Wirral West - will become two: a safe Labour seat, and a safe Conservative seat on the Wirral. Lillian Greenwood, the Shadow Transport Secretary, would see her Nottingham seat take more of the Nottinghamshire countryside, becoming a Conservative-held marginal. 

The traffic - at least in the 2013 review - was not entirely one-way. Jane Ellison, the Tory MP for Battersea, would find herself fighting a seat with a notional Labour majority of just under 3,000, as opposed to her current majority of close to 8,000. 

But the net effect of the boundary review and the shrinking of the size of the House of Commons would be to the advantage of the Conservatives. If the 2015 election had been held using the 2013 boundaries, the Tories would have a majority of 22 – and Labour would have just 216 seats against 232 now.

It may be, however, that Labour dodges a bullet – because while the boundary changes would have given the Conservatives a bigger majority, they would have significantly fewer MPs – down to 311 from 330, a loss of 19 members of Parliament. Although the whips are attempting to steady the nerves of backbenchers about the potential loss of their seats, that the number of Conservative MPs who face involuntary retirement due to boundary changes is bigger than the party’s parliamentary majority may force a U-Turn.

That said, Labour’s relatively weak electoral showing may calm jittery Tory MPs. Two months into Ed Miliband’s leadership, Labour averaged 39 per cent in the polls. They got 31 per cent of the vote in 2015. Two months into Tony Blair’s leadership, Labour were on 53 per cent of the vote. They got 43 per cent of the vote. A month and a half into Jeremy Corbyn’s leadership, Labour is on 31 per cent of the vote.  A Blair-style drop of ten points would see the Tories net 388 seats under the new boundaries, with Labour on 131. A smaller Miliband-style drop would give the Conservatives 364, and leave Labour with 153 MPs.  

On Labour’s current trajectory, Tory MPs who lose out due to boundary changes may feel comfortable in their chances of picking up a seat elsewhere. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog. He usually writes about politics.