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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Will Euroscepticism prove an unbeatable advantage in the Conservative leadership race?

Conservative members who are eager for Brexit are still searching for a heavyweight champion - and they could yet inherit the earth.

Put your money on Liam Fox? The former Defence Secretary has been given a boost by the news that ConservativeHome’s rolling survey of party members preferences for the next Conservative leader. Jeremy Wilson at BusinessInsider and James Millar at the Sunday Post have both tipped Fox for the top job.

Are they right? The expectation among Conservative MPs is that there will be several candidates from the Tory right: Dominic Raab, Priti Patel and potentially Owen Paterson could all be candidates, while Boris Johnson, in the words of one: “rides both horses – is he the candidate of the left, of the right, or both?”

MPs will whittle down the field of candidates to a top two, who will then be voted on by the membership.  (As Graham Brady, chair of the 1922 Committee, notes in his interview with my colleague George Eaton, Conservative MPs could choose to offer a wider field if they so desired, but would be unlikely to surrender more power to party activists.)

The extreme likelihood is that that contest will be between two candidates: George Osborne and not-George Osborne.  “We know that the Chancellor has a bye to the final,” one minister observes, “But once you’re in the final – well, then it’s anyone’s game.”

Could “not-George Osborne” be Liam Fox? Well, the difficulty, as one MP observes, is we don’t really know what the Conservative leadership election is about:

“We don’t even know what the questions are to which the candidates will attempt to present themselves as the answer. Usually, that question would be: who can win us the election? But now that Labour have Corbyn, that question is taken care of.”

So what’s the question that MPs will be asking? We simply don’t know – and it may be that they come to a very different conclusion to their members, just as in 2001, when Ken Clarke won among MPs – before being defeated in a landslide by Conservative activists.

Much depends not only on the outcome of the European referendum, but also on its conduct. If the contest is particularly bruising, it may be that MPs are looking for a candidate who will “heal and settle”, in the words of one. That would disadvantage Fox, who will likely be a combative presence in the European referendum, and could benefit Boris Johnson, who, as one MP put it, “rides both horses” and will be less intimately linked with the referendum and its outcome than Osborne.

But equally, it could be that Euroscepticism proves to be a less powerful card than we currently expect. Ignoring the not inconsiderable organisational hurdles that have to be cleared to beat Theresa May, Boris Johnson, and potentially any or all of the “next generation” of Sajid Javid, Nicky Morgan or Stephen Crabb, we simply don’t know what the reaction of Conservative members to the In-Out referendum will be.

Firstly, there’s a non-trivial possibility that Leave could still win, despite its difficulties at centre-forward. The incentive to “reward” an Outer will be smaller. But if Britain votes to Remain – and if that vote is seen by Conservative members as the result of “dirty tricks” by the Conservative leadership – it could be that many members, far from sticking around for another three to four years to vote in the election, simply decide to leave. The last time that Cameron went against the dearest instincts of many of his party grassroots, the result was victory for the Prime Minister – and an activist base that, as the result of defections to Ukip and cancelled membership fees, is more socially liberal and more sympathetic to Cameron than it was before. Don’t forget that, for all the worry about “entryism” in the Labour leadership, it was “exitism” – of Labour members who supported David Miliband and liked the New Labour years  - that shifted that party towards Jeremy Corbyn.

It could be that if – as Brady predicts in this week’s New Statesman – the final two is an Inner and an Outer, the Eurosceptic candidate finds that the members who might have backed them are simply no longer around.

It comes back to the biggest known unknown in the race to succeed Cameron: Conservative members. For the first time in British political history, a Prime Minister will be chosen, not by MPs with an electoral mandate of their own or by voters at a general election but by an entirelyself-selecting group: party members. And we simply don't know enough about what they feel - yet. 

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