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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Former Home Secretary Jacqui Smith: Theresa May is the Tory leader Labour should fear

George Osborne is not inevitable as the next Tory leader – and Theresa May could be the one to see him off.

Some people believe that Theresa May has had her day as a Tory leadership contender, but she is a woman who has been underestimated throughout her career. Furthermore, as Angela Merkel, Tessa Jowell, Margaret Hodge and Harriet Harman will tell you, we are in the day of the (slightly) older woman politician. And, while Margaret Thatcher was certainly not an advocate for more Tory women, her legacy is a Conservative party who would not find it impossible to countenance another woman in charge. Could that be May?

Throughout her political career, May has never been seen as “a rising star”. She was involved in politics at Oxford University having gained a place from her grammar school, but was not particularly pushy or sparkling future leader material. She worked in banking for a period and was a councillor in Merton. She fought two unwinnable seats before finally getting elected to parliament in 1997. So no easy, gilded rise through the party for her. Being on the receiving end of some of the misogyny found in all parties’ selection procedures may have been the spur which led her to declare the Conservatives the “nasty party” in her famous 2002 conference speech as party chair under Iain Duncan Smith’s leadership. She is a bit of an outsider, willing to argue that her party had to change and to reach out beyond its natural supporters. She is no Robert Halfon-style, blue-collar Conservative, but nor is she a “posh boy” – perhaps the perfect positioning for a future leader.

Thatcher prided herself on being an ‘honorary man’ – no feminist solidarity for her. However, May is much more comfortable supporting other women – she is an advocate of the Tory party’s efforts to find more women candidates. As party leader, she might well find ways to appeal to the older women who tend to vote, but have not always been attracted by the “calm down, dear” machismo of the current  Tory leadership.

A winning party leader will have to command the political centre-ground. May is no rightwing ideologue. She shows little passion for eye-catching policy announcements and has rarely, in recent years ventured beyond her Home Office brief to express strong views or a sense of the direction she would like to take the country in. The British public may not be attracted by demagoguery, but they will need a clear idea of what a May leadership would believe in and do. This could be an even greater barrier to actually getting elected within the Conservative party to begin with. For example, May has largely avoided the issue of Europe. She did make a speech last year criticising the stifling effect of European Union regulation, but the context was interesting. Some saw this as an attempt to broaden her appeal within the party, but it was also made at the time when she was attempting to win support to opt back in to a range of EU justice and home affairs measures including the European arrest warrant, which the government had opted out of in a grandstanding gesture. She may have to make ideological gestures to win  Tory support, but is fundamentally pragmatic.

However, that is not to say that she is not willing to be brave in taking on those who she feels need challenge. Her “nasty party” speech was one such example, but more recently she was willing to offer some home truths to the Police Federation at its conference. This was certainly at a time when the Fed was already weakened by internal divisions and the police was dogged by scandal. But, as any Home Secretary knows, the conference can be an unpleasant and surly event and it shows mettle to take them on in this arena.

Her time as one of the longest serving home secretaries is a double-edged sword for an aspiring Conservative leader. Being Home Secretary is a serious and difficult job – holding onto it for as long as she has means that nobody could doubt her credentials to take one more step up the ladder. Dealing with the security, cross-government issues and “events” which are the bread and butter of Home Secretaries is possibly a better qualification to be Prime  Minister than the more controlled environment of the Treasury. However, the all-encompassing seriousness of the role also makes it more difficult to win support as a future leader or prime minister. Being Home Secretary with the current policy portfolio is essentially about stopping bad things from happening. It does not leave a lot of time to make the wider political arguments or to engage in the “hopey, changey’” thing which many would look for in a future leader.

She has made mistakes – alienating the civil service in a particularly cavalier shifting of the blame onto senior Border Force official Brodie Clark for supposed weaknesses in border security when the fault was in her policy decisions. She has shown bad judgement and a lack of imagination in sticking with a crude immigration cap which achieves the double whammy of being impossible to deliver and perverse in the impact of trying to.

There is no doubt that May is not a clubbable or particularly warm person so has not built up a cadre of enthusiastic supporters. She has lost some good ministers from the Home Office, like Nick Herbert and Pauline Neville-Jones, suggesting that she may not excel at building the sort of team spirit needed to win a leadership bid and maintain the ‘machine’ necessary to be a successful leader.

However, she has built her career so far on not being a “natural” for each of the political jobs she has held. She has outperformed expectations and has some of the ingredients necessary to move the Tory party on from the dilettante gentleman, amateur approach of David Cameron. It is a record and an approach which just might attract both the party and those voters who Labour so desperately needs to win back. Don’t write her off yet.

This essay is from Face-Off, a series of linked articles on the next Conservative leader.