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.

David Cameron speaks at a press conference following an EU summit in Brussels. Photograph: Getty Images.
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Cameron's EU concessions show that he wants to avoid an illegitimate victory

The Prime Minister is confident of winning but doesn't want the result to be open to challenge. 

Jeremy Corbyn's remarkable surge has distracted attention from what will be the biggest political event of the next 18 months: the EU referendum. But as the new political season begins, it is returning to prominence. In quick succession, two significant changes have been made to the vote, which must be held before the end of 2017 and which most expect next year.

When the Electoral Commission yesterday recommended that the question be changed from “Should the United Kingdom remain a member of the European Union?” ("Yes"/"No") to "Should the United Kingdom remain a member of the European Union or leave the European Union?" ("Leave"/"Remain"), No.10 immediately gave way. The Commission had warned that "Whilst voters understood the question in the Bill some campaigners and members of the public feel the wording is not balanced and there was a perception of bias." 

Today, the government will table amendments which reverse its previous refusal to impose a period of "purdah" during the referendum. This would have allowed government departments to continue to publish promotional material relating to the EU throughout the voting period. But after a rebellion by 27 Tory eurosceptics (only Labour's abstention prevented a defeat), ministers have agreed to impose neutrality (with some exemptions for essential business). No taxpayers' money will be spent on ads or mailshots that cast the EU in a positive light. The public accounts commitee had warned that the reverse position would "cast a shadow of doubt over the propriety" of the referendum.

Both changes, then, have one thing in common: David Cameron's desire for the result to be seen as legitimate and unquestionable. The Prime Minister is confident of winning the vote but recognises the danger that his opponents could frame this outcome as "rigged" or "stitched-up". By acceding to their demands, he has made it far harder for them to do so. More concessions are likely to follow. Cameron has yet to agree to allow Conservative ministers to campaign against EU membership (as Harold Wilson did in 1975). Most Tory MPs, however, expect him to do so. He will be mocked and derided as "weak" for doing so. But if the PM can secure a lasting settlement, one that is regarded as legitimate and definitive, it will be more than worth it. 

George Eaton is political editor of the New Statesman.