In Britain, wealth is concentrated in even fewer hands than income. The fourfold increase in property prices since the early 1990s has enriched homeowners at the expense of younger generations. For decades, however, politicians have refused to tax this unearned windfall. Remarkably, the council tax bands even now are based on property valuations made when the levy was announced by the Major government in 1991.
It was the Business Secretary, Vince Cable, who broke the taboo over taxing wealth when he proposed what became known as the "mansion tax", a modest 1 per cent levy on properties worth more than £2m. When the policy was announced in September 2009, it was denounced by the Financial Times, among others, as a "batty idea". But few are now so dismissive. As the state seeks to reduce tax avoidance and identify new sources of revenue, increasing numbers of politicians and commentators recognise the merits of such an approach. In his interview with George Eaton on page 20, Tim Montgomerie, editor of the influential ConservativeHome blog, argues for a "much more progressive" system that taxes wealth creation less and unproductive assets more.
The New Statesman has long argued for the burden of taxation to be shifted from income towards wealth and assets. Following the abolition of the 10p tax rate by the Brown government, individuals pay a marginal rate of 32 per cent (20 per cent income tax and 12 per cent National Insurance) on all earnings above the personal allowance of £7,475. This, combined with VAT of 20 per cent, record petrol prices and road tax, higher train fares and pension contributions and, for the young, student loan repayments, has squeezed real incomes at a rate unknown at any other point in modern times.
If taxes on income are to be reduced, as they must be, either through a significantly higher personal allowance (as the Liberal Democrats suggest) or through a reduction in the basic rate, then taxes on wealth should be increased. In an age when capital is so mobile and the rich are so adept at avoiding taxation, property taxes have the merit of being easy to collect. Even the most determined tax avoider cannot move his or her mansion to Geneva. In addition, as a recent report from the Organisation for Economic Co-operation and Development noted, property taxes benefit the economy by shifting investment away from housing and into wealth-creating industries. Consequently, they are seen as less economically harmful than taxes on consumption, income and corporations.
Opponents of a mansion tax complain that it would penalise the equity-rich but income-poor and force some pensioners to sell their family homes. Yet this is little more than sentimentalism and special pleading. There is no good reason for the elderly to occupy valuable houses that are far too large for them and that they cannot afford to maintain.
Ahead of the Budget on 21 March, there has been discussion about introducing a mansion tax, or scrapping pension relief for high earners, in exchange for the abolition of the 50p income-tax rate. Now would be the wrong time to remove the top rate. The Treasury, which is due to complete its review of the rate in time for the Budget, may conclude that it is failing to raise significant revenues. This is an argument for reducing tax avoidance, however, not for cutting taxes for the highest earners. In the longer term, as Jason Cowley argued in a New Statesman cover report in October 2010 ("The coming battle over land and property"), the government should introduce a tax on and reduce subsidy for land, 69 per cent of which is owned by 0.6 per cent of the population. For now, a mansion tax would begin the essential transformation of our tax system from one that rewards asset accumulation to one that rewards effort, enterprise and innovation.