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THE GUARDIAN |
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COMMENT
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The richest
homeowners are now ripe for
plucking
Property tax is a sensitive issue, so Brown is choosing his targets carefully Larry
Elliott It's just as well that Gordon Brown has had a new baby to cradle this week. Otherwise the papers would be out for his blood. If the screaming headlines are to be believed, the chancellor is now so hard-up that he is considering removing the God-given right of every Briton to make a tax-free mint out of rising house prices. Were the headlines to be true, the chancellor would have ditched the advice drummed into finance ministers from day one, and which dates back three centuries or more. "The art of taxation," said Jean-Baptiste Colbert, the man who looked after Louis XIV's money, "consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing." Slapping capital gains tax on bricks and mortar - the proposal Brown is supposed to be toying with - would have Colbert spinning in his grave. We're not talking about a few noisy geese, here; we're talking a farmyard. The vehemence with which the Treasury issued its rebuttal reflected the political sensitivity of the story. If the poll tax did for Margaret Thatcher, CGT on first homes could do the same for Tony Blair. Labour strategists know this. They can imagine the reaction in all those suburban marginals, where perusing the local paper to calculate the notional gain from soaring house prices has become, like pornography in Victorian times, a delicious private vice. The public finances would have to be in a much worse state than they are, with Brown scouring the Treasury on his hands and knees for the last groat, before Labour would consider a policy tantamount to committing political suicide. Let's get serious: CGT on first homes is not going to happen. But something else might. The government has been using its series of technical studies into whether Britain should join the single currency to take a long, hard look at the way it taxes housing - and quite right too. Some clue as to Treasury thinking is contained on page 85 of Fiscal Stabilisation and EMU, one of 18 support documents on the single currency but not a candidate to make the shortlist for Britain's best-read works. It concludes that "tax instruments affecting the housing market have some immediate appeal for a number of reasons". These include the way in which boom-busts in property have been a source of economic instability; the fact that rising house prices skew the economy by allowing individuals to borrow and consume more; and, finally, that "investment in housing is relatively lightly taxed compared to other investments". All of this is true. To that list could be added that it is illogical for a small, crowded country to have a planning system that restricts the supply of housing, while the tax system increases demand for it; that the absurd nature of the market benefits those who have a foothold on the property ladder to the detriment of those who do not; and that the long-term health of the country would be better served were the billions that are poured into real estate invested in something more productive. A saner tax system would see property speculation taxed more heavily, with the money raised used to cut national insurance contributions or to boost research and development. Privately, some officials think CGT on housing is a wizard wheeze. The Treasury approved wholeheartedly of phasing out mortgage interest relief, and now sees the kid-glove treatment of the property boom as another glaring anomaly. However, even if the government sought to minimise the political fallout by imposing CGT initially only on top-of-the-market homes worth upwards of £1.5m - then extending the scope of the tax - it still looks like a non-starter, given the moral, economic and technical problems to be overcome. For a start, it would be unfair to change the tax system now, thereby penalising people who have owned their homes for 20, 30 or 40 years, and are relying on the capital gain to help finance their retirement. And it would be potentially expensive for the Treasury to boot. The collapse in share prices has meant smaller pension pots, making people even more reliant on houses as a source of wealth. The government could find that any money raised through CGT would have to be paid out again to support a new group of impoverished pensioners. The technical objection to CGT is that it would be hard to administer and open to wholesale evasion. There would undoubtedly be a thriving black market in builders' fake receipts, which would allow people to offset some of the capital gain on their home against supposed "improvements" made over the years. Policing the system would be a nightmare. Finally, there is the concern that the introduction of CGT on all houses would be too great a shock to the economy, stifling growth as consumers adjusted to what would inevitably be a fall in prices. All in all, it's quite clear that Brown - who thought through every stage of the increase in national insurance contributions to pay for the NHS - has not the slightest intention of introducing CGT. What the current feverish speculation has done, however, is open up the debate. With Brown keen on urban regeneration and efficient use of resources, this might be the time for advocates of a land tax to propose a levy on those who seek to make speculative gains out of leaving prime sites vacant or derelict. More likely, however, is that the chancellor will intensify the use of stamp duty, targeting the top end of the market. As the Treasury notes in its euro document, it "might be possible to use stamp duty as a discretionary instrument to dampen housing market fluctuations by varying the rates in relation to the house-price cycle". The other advantage of stamp duty is that there is no way of avoiding it. A more radical option would be to rethink the thoroughly regressive nature of the council tax, which discriminates against the less well-off, poor regions and those in the rented sector, while favouring the rich, the affluent parts of Britain, and those with second homes. John Muellbauer of Nuffield College, Oxford, says the government should copy the Danish system, in which a flat-rate 1% property tax is levied on the market value of owner-occupied property, which is assessed on an annual basis. Denmark's system operates in a diametrically opposite way to Britain's: here, rising house prices fuel extra consumption; there, rising house prices trigger higher property taxes, dampening consumption. For Brown, the advantages of this approach would be that it would help cement economic stability while at the same time favouring the less well-off. Make no mistake, there would still be hissing, and plenty of it. But only among the plumpest and best-fed geese. · Larry Elliott is the Guardian's economics editor mailto:"larry.elliott@guardian.co.uk"
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