Thursday, 4 December 2014

Osborne Shoots His Own Fox

The headline item in Osborne's Autumn Statement, was his announcement on Stamp Duty. It was supposed to be a clever political manoeuvre to undermine Labour's popular policy on the Mansion Tax. In fact, as with his previous supposedly clever political ploys it turns out to be nothing of the kind.

Over the last few weeks the Tories and their friends have had basically two lines of attack against Labour's Mansion Tax proposals. Firstly, they argued that the tax would hit all of the London grannies who have been so desperately unfortunate as to find themselves living in a house worth more than £2 million, but who have little or no income out of which to pay the annual tax. The heart bleeds for them. Someone, living in a run down council flat, surviving on ESA and DLA, who has just had the bedroom tax imposed on them by the Liberal-Tories, must have every sympathy with such downtrodden grannies!

Over the last few weeks, a range of cosseted one time celebrities have been wheeled out into TV studios to purvey this nonsense, and to whine about how unfair it is, that they as millionaires should have to pay a reasonable amount of tax on their accumulated wealth. We have had Angelina Joley tell us that she would not come to London, because it might mean having to pay £3,000 a year in Mansion Tax, out of the millions of pounds of income she receives every year. Griff Rhys Jones said he would leave the country if it was introduced, which in itself seems a very good argument for its implementation. Myleen Klass, opined that people of her standing could only find garages in a price range of £2 million, and the latest in this sorry bunch to appear was former footballer Sol Campbell, who claimed on the Daily Politics, that he had invested his earnings into property, but had no sizeable income. Whoever gave him that financial advice you would think has some questions to answer!

But, no one would be any more likely to have sympathy for his plight than for any of the other whiners, because as the Labour MP on the programme pointed out, Campbell in fact is listed as having £125 million in property, not just in one property, but in several dotted across the country! With people like these pleading the Tories case, Labour was home and dry in winning popular support for the mansion tax.

In fact, as I've pointed out before the Tories arguments over the mansion tax in this regard were in any case nonsense. Only 0.5% of properties in the UK would fall within the remit of the tax. About two-thirds of properties in London that are affected are owned by people who have lived in them for less than ten years, a far different picture than of grannies who have lived in them since Adam was a lad.

Moreover, as I pointed out before, if you have a £2 million house in London, you could simply sell it and buy a mansion almost anywhere else in the country for a fraction of that price. £500,000 would buy you a mansion in North Staffordshire, probably better than a £2 million property in London. With the balance of £1.5 million from the sale of your London mansion, even with today's pathetically low saving rates, you could with just a 1.5% rate of interest obtain £22,500 a year in unearned income. That is quite an income, on top of any other pension income, for any granny to be able to use, alongside being able to draw down on their £1.5 million in savings!

The second line of argument the Tories had against the mansion tax was, more substantive. It is the argument of “fiscal drag”. This is the argument that any tax that is introduced always has a tendency to be extended so as to cover a wider tax base than was originally intended. So, although the current proposal is to only tax properties over £2 million, once introduced, it would become possible for that limit to be reduced. But, in fact, this is no argument either. Income tax was originally introduced as a one-off, temporary tax, but is still with us. Yet few people would argue that Income Tax should never have been introduced. On the contrary, as far as taxes are concerned, Income Tax is a better form of tax, because as Marx points out, it is more transparent. Secondly, the proposal over the Mansion Tax, is to include within it the automatic uprating of the tax in line with property prices.

But, to the extent that fiscal drag was any kind of argument the Tories could use against the Mansion Tax, Osborne's proposals over Stamp Duty have blown them away, because now that Osborne has introduced this scaled Stamp Duty, which in its current form hits the most expensive properties the most, the door is wide open for the upper rates of stamp duty to be increased repeatedly, and for the bands at which these higher rates of stamp duty apply to be continually lowered. In other words, Osborne has created precisely the conditions he objected to as regards the Mansion Tax!

The decision to scrap the slab tax arrangement for Stamp Duty, in itself, is a sensible move, if you consider Stamp Duty to be a sensible tax. In fact, there is little reason for having Stamp Duty on property transactions as opposed to simply applying VAT to house purchases in the same way it is applied to other purchases. In fact, it would remove an anomaly. If you are having a house built, or having an extension built on an existing property, you pay VAT already. There seems little rational basis for having to pay VAT in that situation, but not paying VAT if the same house is bought directly from a builder – possibly even the same builder, using the same materials and so on. Similarly, if you are selling a second house, it is subject to Capital Gains Tax, and there is no logical reason why this should not apply to the sale of any house. That would bring Britain into line with the situation in nearly every other country in Europe.

The talk about the effect of the Stamp Duty also shows just how London centric all commentary is, and how far removed from most people the political class and chattering classes are. For the majority of people outside London, the change will have no impact at all, because the houses they buy fall below the lower limit for the tax.

When I sold my last house, a three bedroomed detached, with a large garden in a desirable location, at the start of 2010, it went for £150,000. A couple of months ago I saw that an identical house, possibly slightly better, because it was on a corner plot, in the same road, sold for £114,000. That reflects the fact that here in North Staffordshire, selling prices have fallen in the last five years by around 30%. The fall for more expensive houses has been proportionately greater than for cheaper houses. The point being that my old house would not now be subject to Stamp Duty, and that is for one of the more expensive houses in the area. Osborne's changes, therefore, are irrelevant to the vast majority of people here buying even detached houses let alone, cheaper semis, town houses and terraced properties.

But, even in respect of houses that would have come under the Stamp Duty umbrella, the comments of pundits shows a remarkable lack of understanding of how things work in this respect. The reason that no one sells a house for £126,000, is because it is £1,000 over the lower limit. A potential buyer immediately says to the seller, drop the price by £1,000 so it escapes stamp duty, and I'll buy it, or else they say to the seller, I'll buy it, if you pay the Stamp Duty. Given that in such a case, the Stamp Duty would be more than is gained by keeping the price above the limit, the seller has every incentive to reduce the price.

But, now, far from Osborne's move reducing prices, and saving buyers money, it does the exact opposite. Now the seller will simply annex the money that would previously have gone in stamp duty to the government to themselves, and the buyer ends up paying the same price they would have done anyway. Its just like when the government reduces the tax on petrol. For a day or so, the petrol stations reduce the pump price, then they raise it again to its former level. Then the money that would have gone in petrol tax is simply appropriated in extra profits by the petrol company.

Osborne's proposals on Stamp Duty seem to be as much a back of a fag packet policy as his undefined proposals for savings on future spending, which have now been criticised by the IFS, and which have even prompted Vince Cable to demand that the OBR detail publicly where these cuts are to come from. Already Osborne's mini Budget is decomposing, into another omni-shambles, reminiscent of his proposals for the Pasty tax.

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