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12 March 2013

A council tax isn’t a wealth tax

How should the government settle the inequalities in property wealth?

By Alex Hern

Very important, this one: the council tax isn’t a wealth tax. That’s a claim I’ve seen repeated around the place with relative frequency recently, most notably in Polly Toynbee’s Guardian column today. She writes:

Wealth taxes only deliver 5.9% of revenues, mostly in council tax (which often falls on renters, not owners). Inheritance tax brings in just 0.5%, only paid by 3% of estates, halved since Labour unwisely doubled couples’ exemption: it’s the most avoided of all.

As she says, the incidence of council tax falls on the occupier, not the owner. If you have very little wealth but high income, you may rent a Band-H house and end up paying the same council tax as someone with very high wealth and very low income.

In practice, then, council tax is a tax on residency, not on property wealth and certainly not on wealth overall. (Legally, it’s not quite that simple. A lease is still a form of ownership, so it’s not quite the case that non-owners are taxed.)

It may be the case that, at the top end, that doesn’t matter. If we were to introduce the “mansion tax” by adding a new band on top of council tax for properties over £2m, for instance, there would be few renters hit. But even then, there would still be some.

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The distinction is important to make, because as the movement for a true mansion tax—or better still, a land value tax—grows, the opposition will try to claim that what we already have is good enough. It isn’t.

The inequalities in property wealth are astronomical. A chart put together by researcher Andy Whightman makes that astoundingly clear. He writes:

This data was obtained from the Office of National Statistics by Faiza Shaheen of the New Economics Foundation and shows the average net property wealth for each 1% of the income distribution. The top 1% of the population has net property wealth of £15,040,000 whilst the bottom 33% has nothing. The top 1% own more net property wealth than the rest of the 99% combined.

But there’s another way the government could take advantage of the discrepancies in property wealth to earn some income, settle the housing market and reduce inequality. Michael Darrington, former CEO of Greggs, writing in the Telegraph today, suggests a £100bn housebuilding programme funded by quantitative easing. But in focusing on the revenue source, he’s missed the most impressive part of his plan, because he also suggests that:

While there are plenty of suitable sites for building already available, a programme on the scale I envisage would clearly require more.

One way to achieve this would be through the compulsory purchase of farmland at a sensible multiple of its agricultural value—say three or four times—which would give farmers a very good profit but not the lottery-winning values currently ascribed to development land.

But rather than the expensive and illiberal procedure of compulsory purchase, there’s a more radical option available. As Darrington implies, land with planning permission is worth more than land without—a lot more. Frequently well over 20 times as much, in fact. And the institution with the power to convert land without planning permission into land with planning permission is the same one trying desperately to build houses.

In other words, an entire housebuilding program could probably be funded on the difference between the purchase price of agricultural land and the sale price of land with planning permission.

Councils could buy up agricultural land, award themselves planning permission, build houses, and sell some off while keeping the rest for social housing. In fact, such is demand for land with planning permission, they wouldn’t even need to build them; they could just sell the land without houses, but insist that part of the sale price be that some houses built on the land be used for social housing.

In fact, councils wouldn’t even need to buy the land. They could just grant planning permission with the same requirements on more land than they have been now. Because the real bottleneck is there, and not really with housebuilding at all.

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