Why Osborne is wrong to reject property tax reform

The Chancellor has missed another opportunity to make our tax system fairer and more economically efficient.

Ahead of Wednesday’s Autumn Statement, the Chancellor is eager to show that the wealthy will contribute to the on-going process of deficit reduction. Although the Liberal Democrats have repeatedly called for a ‘mansion tax’, this will almost certainly be achieved by further restricting the tax-free amount that individuals can pay into private pension pots. Opposition to raising taxes on property-owners from within the Conservative Party has been too great, indicating that the coalition will fail to deliver serious reform of property and wealth taxes in this Parliament. 

This is a missed opportunity given the endemic weakness of the current system. Inheritance tax is deeply unpopular and raises little money, while the ‘wealthy and healthy’ can avoid it with judicious tax planning. Stamp duty is easy to collect but lacks any economic justification and unnecessarily distorts people’s decisions about moving house. Council tax raises the most revenue among the three, around £26bn a year, but is regressive and levies the same amount of tax on properties of hugely different value. This is the result of the unwillingness of successive governments to revalue domestic properties since the introduction of council tax in 1993.

Properly designed property (and land) taxes make economic and fiscal sense according to the OECD, particularly if levied annually on regularly updated property values. These taxes tend to have the smallest negative impact on incentives to work or invest, provide a relatively stable tax base and could improve the use of land and property. This suggests that reforms to council tax could seek to increase the amount of revenue raised over the long-term, as well as increasing fairness and efficiency in the tax system. This could help to pay for the extra public services we want as we get older and richer, or offset cuts in business or labour taxes that might help boost jobs and growth.

There is no shortage of ideas about how Britain’s property taxes could be reformed, with sensible solutions put forward by the authoritative Mirrlees Review, the Joseph Rowntree Foundation and Shelter. For example, a flat rate tax of 0.6 per cent on current property values would raise roughly the same revenue as council tax but with lower bills for people living in homes worth less than £250,000. In the long-term, stamp duty could be scrapped entirely and the revenue found elsewhere, but reformed in the medium-term to lessen its impact on house prices at particular price points. More radical would be a land value tax, popular with economists but operated in relatively few countries. As a first step, the economic and fiscal impacts of a tax on high-value but undeveloped land should be assessed. This could help free up underused land for house-building.

The biggest block to reforming property taxes is the fear that large numbers of middle class families will end up paying more tax. However, the UK’s devolved administrations have shown that these political constraints can be overcome. The Welsh Assembly Government re-valued properties in 2003 and added an extra council tax band, while in Northern Ireland, which runs a system of domestic rates rather than council tax, the administration successfully updated the valuation base in 2007. An initial revaluation would probably be controversial but this would lessen over time if properties were regularly re-valued, which many countries do every one or two years without much fuss. And let’s not forget the removal of mortgage interest tax relief, a massive subsidy to middle class homeowners, which was gradually phased out by 2000 with little public outcry. Incremental change coupled with some off-setting of losses among those paying more seems to have been important. We can’t expect new proposals on property and wealth taxes in the Autumn Statement, so learning the political lessons from these reforms will be crucial to making further progress in the next Parliament.

Kayte Lawton is senior research fellow at IPPR.

Chancellor George Osborne and Danny Alexander, the Chief Secretary to the Treasury leave 11 Downing Street on 4 December, 2012 in London. Photograph: Getty Images.

Kayte Lawton is senior research fellow at IPPR.

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Commons Confidential: Fearing the Wigan warrior

An electoral clash, select committee elections as speed dating, and Ed Miliband’s political convalescence.

Members of Labour’s disconsolate majority, sitting in tight knots in the tearoom as the MP with the best maths skills calculates who will survive and who will die, based on the latest bad poll, observe that Jeremy Corbyn has never been so loyal to the party leadership. The past 13 months, one told me, have been the Islington rebel’s longest spell without voting against Labour. The MP was contradicted by a colleague who argued that, in voting against Trident renewal, Corbyn had defied party policy. There is Labour chatter that an early general election would be a mercy killing if it put the party out of its misery and removed Corbyn next year. In 2020, it is judged, defeat will be inevitable.

The next London mayoral contest is scheduled for the same date as a 2020 election: 7 May. Sadiq Khan’s people whisper that when they mentioned the clash to ministers, they were assured it won’t happen. They are uncertain whether this indicates that the mayoral contest will be moved, or that there will be an early general election. Intriguing.

An unguarded retort from the peer Jim O’Neill seems to confirm that a dispute over the so-called Northern Powerhouse triggered his walkout from the Treasury last month. O’Neill, a fanboy of George Osborne and a former Goldman Sachs chief economist, gave no reason when he quit Theresa May’s government and resigned the Tory whip in the Lords. He joined the dots publicly when the Resolution Foundation’s director, Torsten Bell, queried the northern project. “Are you related to the PM?” shot back the Mancunian O’Neill. It’s the way he tells ’em.

Talk has quietened in Westminster Labour ranks of a formal challenge to Corbyn since this year’s attempt backfired, but the Tories fear Lisa Nandy, should the leader fall under a solar-powered ecotruck selling recycled organic knitwear.

The Wigan warrior is enjoying favourable reviews for her forensic examination of the troubled inquiry into historic child sex abuse. After Nandy put May on the spot, the Tory three-piece suit Alec Shelbrooke was overheard muttering: “I hope she never runs for leader.” Anna Soubry and Nicky Morgan, the Thelma and Louise of Tory opposition to Mayhem, were observed nodding in agreement.

Select committee elections are like speed dating. “Who are you?” inquired Labour’s Kevan Jones (Granite Central)of a stranger seeking his vote. She explained that she was Victoria Borwick, the Tory MP for Kensington, but that didn’t help. “This is the first time you’ve spoken to me,” Jones continued, “so the answer’s no.” The aloof Borwick lost, by the way.

Ed Miliband is joining Labour’s relaunched Tribune Group of MPs to continue his political convalescence. Next stop: the shadow cabinet?

Kevin Maguire is Associate Editor (Politics) on the Daily Mirror and author of our Commons Confidential column on the high politics and low life in Westminster. An award-winning journalist, he is in frequent demand on television and radio and co-authored a book on great parliamentary scandals. He was formerly Chief Reporter on the Guardian and Labour Correspondent on the Daily Telegraph.

This article first appeared in the 27 October 2016 issue of the New Statesman, American Rage