A wealth tax on the value of property is a bad idea
The government would raise a multitude of problems if it were to introduce any new wealth or property taxes on top of the taxes we already have. Here's why.
Back in January, I wrote a blog called Will the wealth tax never die? It rather looks like the answer is no. We aren't against land taxes, property taxes or location taxes in general at Moneyweek. Far from it.
If we were building an economy from scratch we'd probably base our new tax system on location values. But we aren't starting from scratch: any new wealth taxes or property taxes will come on top of the taxes we have already.
I'm having a week of lists (see my last blog for a list of reasons why the Lib Dem property to pension scheme can't possible do any good), so here is a list of the reasons why a wealth tax or a new tax on the value of property is a bad idea.
We already have wealth taxes. We have stamp duty and we have inheritance tax(IHT). The latter could be considered more of an income tax on the heir rather than a wealth tax on the deceased but the former is most definitely a wealth tax. So if we get a wealth tax, do we dump stamp duty (so infuriating any recent purchasers), or do we add to the misery of our tax system by keeping both?
It would bedifficult and expensive to collect. If a wealth tax simply means an extension of the existing council tax bands (new big ones for million plus-pound houses), it isn't the end of the world. But if it means all wealth, it is another matter altogether. Which is why most countries end up abandoning wealth taxes that move beyond property.
It adds yet another layer of double or even triple taxation to an already unfair and complicated system. Nick Clegg keeps referring to unearned wealth by which I assume he means inheritance and capital gains adjusted for inflation. But the taxes he is so keen on will hit earned wealth too. After all, what is wealth for most of us but income earned in previous tax years and saved?
With fiscal drag, it will be no time at all before it is not a wealth tax, but an everyman tax - just like the 40% rate.
Redistribution has to have its limits. In an article in the FT today, Janan Ganesh claimed that a wealth tax on property would be "a correction of the vast and unequal accumulations of wealth left behind by a rigged housing market". But once you start down that road where do you end?
Is everyone to be compensated for money made anywhere else in any non-pure market (ie, all markets) by another economic actor? As a cross reader emailed today "The Eskimos weren't involved in the London property market either and so didn't benefit. Are we supposed to compensate them too?"
IF we want the state to have a share of the gains made in the property market, we are surely better doing what we constantly suggest at Moneyweek and charging an indexed capital gains tax on the sale of primary homes. I've written about this before. You can read it here: Two steps towards solving the housing 'crisis'.