A Taxing Issue

The United Kingdom is richer today than it has ever been, both in the material sense of stuff (the conversion of natural resources into useful things) and in the accounting sense of the ratio of measurable wealth to GDP. It is estimated that household wealth is now six times GDP, having risen from four times before the millennium. There has been a clear trend since 1980 of rising household wealth, to a large extent property and to a lesser extent financial assets (shares, savings etc). This rise has mainly been passive - i.e. the result of rising property and asset prices rather than any increase in direct productivity or trade. Average household density is actually in decline. Together with rising rents and mortgage costs, this means that "housing services" now cost much more, even allowing for inflation. Meanwhile, houses and flats are exportable only in the sense that a foreigner can buy one, but this does not lead to the production of more houses over-and-above domestic demand, because those properties are typically recirculated into the rental market. 

It is generally accepted among economists that we should tax wealth more than income, essentially because the one is potentially inactive (if not invested in productive use) while the other is invariably active (you must be producing value to command a wage). In other words, wealth may be a wasted opportunity and tax is a way of incentivising its productive use. The problem arises because wealth is also a way of building financial reserves for future use, whether in the form of anticipated capital projects or a fund for future expenditure. This is why we give tax-breaks for certain types of saving as well as for investment. The problem that bedevils the discussion of the taxation of property is the extent to which it represents a simple store of value, like gold, versus a savings account. In other words, is your house (in whole or in part) a luxury good or is it your pension? 

The foundation of popular neoliberalism has been the financialisation of both domestic property and precautionary savings. The first has meant treating your home as an investment in the hope of rising property values, which has inexorably led to a political consensus that has constrained housebuilding while loudly claiming to be in favour of more homes. The second has meant excising the role of the state in providing collective insurance, instead relying on the individual negotiating with impersonal markets, which at the margin leads to an appetite for high-risk/high-reward shortcuts such as crypto. The two intersect in the idea that your house - or your other house if you're a buy-to-let landlord - is also your pension, though one of the things declining household density tells us is that many older couples, notably those who secured defined benefits pensions before the shutters came down in the 1990s, are in no hurry to liquidate their prime asset and downsize.

Despite this massive increase in the nation's wealth, we are repeatedly told that the current Chancellor of the Exchequer is "desperate to find money". Because of the government's promise not to increase income tax (perhaps the only promise it will keep over the life of the parliament), attention has turned to the taxation of wealth, first through inheritance and now through property. The candidate mechanisms being discussed include the replacement of Stamp Duty Land Tax (SDLT) with an annual levy proportionate to value and the extension of capital gains tax (CGT) to the sale of higher value properties. Inevitably, there is also talk of finally fixing council tax, whether by folding it into the annual levy or simply revaluing the existing property bands to address the current inequities. Many of these ideas have emerged from the centre-right of the political spectrum where there is clearly anxiety that without reform more radical measures may become popular (a land value tax, equalising CGT with income tax etc). But unpicking the Thatcherite dispensation takes delicacy, because of the intersection of property and savings.

Tim Leunig of the think-tank Onward is one of the leading lights of this tendency, proposing a "horizontal split" between local and central government tax receipts. The former would be funded by a local tax based on property values up to a maximum of £500,000 - i.e. a house worth £1 million would be assessed for tax as £0.5 million. Owners (not residents) of properties over that value would additionally pay a national annual levy based on the most recent sale price, the receipts of which would go to central government. This would be immediately advantageous to owners of high-value properties in terms of a lower local tax. In theory, that gain is more that wiped out by the national tax, but that depends on when the property was last sold, leading Leunig to propose a further supplement to balance the tax burden in the case of properties not sold (e.g. repeatedly inherited). At this point it becomes obvious that there are too many potential loopholes, and too much reliance on adjustment by HMRC, which creates opportunities for the tax advisors of the wealthy to exploit.

Leaving aside its chances of adoption, the notable feature of Leunig's scheme is its crude division of society by wealth into two classes. His attempt to justify this by splitting the receipts between local and central government is hardly convincing given that the latter still has to fund the former through grants: no local authority is wholly self-financing. The Thatcherite dream of full accountability to local taxpayers, which drove the Poll Tax, was always in tension with the desire to emasculate ideologically hostile councils through Whitehall diktat. The fundamental problem for our society remains the anticipated decline of income tax receipts as a share of government revenue due to demographic change: more elderly and fewer working-age people in the population. The secular growth in wealth, and the potential to tax it, offers the only real solution to address this trend as further taxes on consumption (e.g. VAT, fuel duty etc.) would be inflationary and hugely unpopular. Worrying about the division of receipts between local and central government is a distraction.

Others have taken a more overtly divisive tack. For example, Phillip Inman in the Guardian sees it in generational terms as the boomers versus the rest. That many boomers are not wealthy, while some millennials are (often due to inheritance), does not lead him to qualify the explicit threat: "If boomers cannot bring themselves to act collectively and patriotically for the greater good, as seems unlikely for many reasons, then it will be legitimate for the government to pursue their lottery winnings with higher property and pension taxes." This is unhelpful because it personalises the issue of wealth ("lottery winners"), though it should be said that Inman's critics fall into the same trap in talking about virtue. The reality is that boomers were simply those in residence when the financialisation of property and pensions took off: some benefited, some didn't. That unearned wealth will now pass down the generations. To address that inequity means addressing the wealth, not blaming the individual.

Wealth can be divided into two classes: land and money. The former is easy to tax because it is immobile and relatively straightforward to value. The latter takes two forms: accumulated money (e.g. a bank deposit) and transacted money (e.g. a payment or a receipt). Accumulated money is difficult to tax because it can be hidden or offshored. Transacted money is relatively easy to tax at the point of the transaction, hence our reliance on VAT, PAYE, CGT, SDLT etc. The problem with this is not the levying of tax but the rates chosen. For example, we levy higher rates on earned income (income tax) than we do on unearned income (CGT or dividends). The rationale for this differential is to avoid discouraging transactions, but that makes little sense in the real world. The reason we don't put VAT on food is not because we think doing so would lead to everyone dieting. Likewise, investors who rely on capital gains to provide an income aren't going to sell up and take jobs instead. After all, who would they sell to?

The obvious solutions to the Chancellor's problem are a land value tax (LVT) and the extension of income tax to all unearned income, e.g. capital gains, dividends and inheritance. The first would give us a more efficient tax system: receipts would be predictable (SDLT is not); avoidance minimal (assuming the government doesn't grant exemptions); and the tax itself progressive (on the reasonable assumption that there is a correlation between land ownership and wealth). The second would also have the advantage of simplicity; would discourage avoidance (e.g. individuals masquerading as a company to treat wages as a dividend); and would also be progressive (the people who make capital gains and earn dividends tend to be wealthier). Neither has any realistic chance of being adopted, precisely because they would shift more of the burden of tax onto the truly wealthy. The most realistic outcome at present remains a revaluation of council tax as this would spread the pain across most of society. We remain trapped in Thatcher's legacy, despite the obvious failures of popular neoliberalism.