Thursday, 14 February 2013

Thoughts on 10p tax rate (I like) and mansion taxes (I don't)...

Okay, so Labour's announcement regarding some actual policies that I posted about earlier has made me want to analyse the actual policies, irrespective of party involvement (given half of the announcement was stealing a Lib Dem policy that I'm not overly sold on).  Anyway, here are my comments about each:

10p Tax Rate

The potential reintroduction of this depends on what your objectives are for a tax system.  If you are looking for a simple system that as many people as possible can understand then adding another band makes for added complications.  If you are looking to make it as progressive as possible then adding a lower band above the level of the personal allowance makes the system more progressive.

In a mutually exclusive case, increasing the personal allowance or introducing a new lower tax band, the former benefits lower earners more than the latter.  However, if you do both at the same time or if they are just being compared to sticking with the status quo then each change would be progressive.  This is one criticism that is being thrown at it, that it doesn't benefit people as much as a personal allowance increase would, however my personal opinion is that it doesn't go far enough.  My ideal tax system would have 10p, 20p, 30p, 40p and 50p rates.  

The thing with tax simplification is that tax bands don't really add too much additional complications, especially when most people are earning through the PAYE system.  The complications come in with all of the exemptions and special cases - it is there that governments should be looking to simplify the system, not with the rates.  In addition, they should scrap the other confusing complication - National Insurance contributions, rolling them into the income tax rates.  It is crazy that the basic rate "20%" tax payer effectively pays 32% tax whilst the higher rate "40%" tax payer effectively pays 42%, the money just goes into the same pot anyway.  I know not everyone or every transaction that is taxed includes NIC's, however this could be adjusted.  

The key of course is to make sure that nobody is paying more tax than they can afford to pay, whilst those who earn the most contribute the most.  

It was Gordon Brown who, in 2007, scrapped the 10p tax to help pay for the reduction in the basic rate from 22p to 20p per pound from April 2008.  This was regressive at the time and rightly he faced a backlash, however he corrected it in September 2008 for the 2008/09 tax year meaning that nobody actually lost out from this change.   This change did therefore simplify the system, but as discussed it probably wasn't the area that needed simplifying.  If this comes in, as long as it's not at the expense of increasing the personal allowance, then I'll be for it, if it doesn't correspond with a raise in the personal allowance as suggested by the Lib Dems, well it's a poorer alternative.

Mansion Tax

I've said a few times now that I'm yet to be convinced about a mansion tax.  I can see the potential desirability of a wealth tax, there is even worse equality with wealth than income in the country and it is desirable to strive for less inequality but I am not sure that this is a one size fits all, or even a good solution.  I have reasons...

Firstly, there is the practical aspect, how often will properties be reassessed?  The current Council Tax bandings are totally out of date where as this will be much more specific than that so much harder to keep up to date (Council Tax doesn't claim to be an exact science, this is an exact calculation).  Granted the complexity of implementation shouldn't be the major consideration but it should be taken into account.  Prices fluctuate, and you know any assessment will be open to debate and appeal - which will probably be lost.  Also, if a house is worth £2.1m without the tax, simply adding a tax to it will reduce it's value.  Also, every single house in the country will need to be revalued and this will have to happen regularly!

Secondly, and for me more importantly, houses are very illiquid assets.  There are many people who buy a house and expect to live it all of their lives.  Now I know we are talking about really high value houses so one assumes that the owners were well off enough to buy it, but that doesn't mean that they'll necessarily have the disposable cash/income to cover an increase in their annual tax bill just because their house's value has risen in such a way.  I've heard a lot of comments saying that if they don't have the cash then they could downsize, but how is that fair?  Forcing someone to leave the home that they purchased is hardly what I'd call a fairer tax.

I think the main reason I struggle with it is that it is effectively a double tax.  Basically any tax such as this is saying, we don't think we taxed you enough when you earned your money, so we are coming back for another crack at it.  I also don't like the way that the discussion is framed, it always seems to imply that those who live in expensive houses don't deserve to be there, they lucked into it and didn't work hard to get there. 

My final criticism is though that it only looks at one asset a person (or persons) owns.  If you want to target the wealthiest in society how does this help?  A rich person could own 10 houses all worth around £1.9million each and avoid the tax all together, where as if this was all tied up on one £19m property they'd be paying an annual tax of £170,000.  I feel that it penalises a person for a particular lifestyle choice/the way that they chose to use money that they had previously had left over from their income after already paying tax, for me the discussion in favour of this always seems to sound like it stems from jealousy.

I am fully aware that I am in the minority of my party (and probably now the Labour party) here when I say this, but the arguments for it just haven't sold me - after all, personally I'd replace council tax with a small local income tax and multiple property taxes, maybe in time though I'll come round to the idea.

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