Taxing property is not just a clever way to hurt the rich: it's inherently fairer – Telegraph Blogs

Thursday 13 March 2014 | Blog Feed | All feeds

Daniel Knowles



This is Saif Gaddafi's house in Hampstead. He doesn't pay much tax on it

I want you to consider two young people, both living in London: me, and a friend. We both earn reasonable salaries, living in fairly modest accommodation in Zone 2. The difference between my friend and me is that whereas I rent my flat, he owns his outright, having inherited it. Though we earn roughly similar amounts, he is vastly better off than me. I pay something like a third of my income in rent and another third in taxes. Since he doesn't have to pay rent, after tax, my friend has twice as much money as me.

I only raise this, because I think it illustrates why a tax on property is not as stupid as its opponents make out. Plenty of eloquent writers, such as the ConHome editor Tim Montgomerie, or the Conservative MP Nick Boles, have made the economic case for taxing wealth instead of income. Their argument, put simply, is that mansions cannot move away to Switzerland. As a recent OECD report on tax reform made clear, property taxes are far less damaging than income or corporation taxes, and so it makes sense to raise the former to cut the latter.

But I think there's an argument about fairness too – and not in the Left-wing sense of "anything which squeezes the rich is fair".

What I mean is that people on similar incomes are not necessarily equally well-off, and it is silly to tax them as though they are. This is obvious when you think about it. On my salary, I can live very comfortably; if I had children to support too, my life would be far more difficult. This is why we give tax credits and child benefit to those who have children: we recognise that their income has to stretch much further, and so we should take less of it away. We don't have a single person's tax credit; it is obvious that their needs are less.

The principle should also clearly apply to people with different amounts of wealth. My friend, with his house, is far better off than I am; he could afford to pay an awful lot more in tax. I don't resent him personally because he doesn't – he buys me an awful lot of drinks instead, for a start, and if I resented friends who have more money than me, I'd have no friends at all. But it is fair that those who can afford to pay most ought to pay most. My friends who work in banking, or in law, contribute a lot more to the exchequer than I do, and they still have to pay rent out of what is left.

Economists call this difference "imputed income". Anyone who owns a house outright earns, simply by living in it, the value of the interest he could earn by selling the house and putting the money in the bank. In theory, if house prices are stable, this amount ought to be roughly equal to the rental value of the house. In a perfectly free market therefore, there ought to be no reason for anybody to own their own house except for sentimental reasons: you would do just as well to put your savings into the stock exchange and use the returns to rent somewhere to live.

Of course, anyone who lives in Britain would find that idea absurd. The reason why is that by leaving alone "imputed income", but taxing real income, which includes investment income, we inadvertently subsidise home ownership over other investments. The result is that since the 1950s, the number of people owning their own home has rocketed – indeed, this has been deliberate policy since Anthony Eden adopted the term "property-owning democracy" in the late 1940s.

But this hasn't made us any better off; houses do not generate any wealth in themselves, after all. Rather, it has redistributed wealth from those without property to those with it, which is why my generation cannot afford to buy homes built by people on a tenth of our salaries a century ago. Think about it; a house built in 1912 has housed people for a century, but it is still the same house, the same bricks and mortar. A business set up in 1912 will have expanded and innovated. The rise in house prices since then is completely illusory "wealth creation", whereas the growth of a business is real.

If we want the British economy to grow – and real investment to be rewarded – then we ought to be taxing existing wealth instead of new wealth. At the very least, we ought not to be subsidising home ownership. It is not fair that ordinary people struggling with a mortgage, or with rent, have to pay the same amount in tax as someone who earns the same income, but simply by virtue of having had wealthy parents, or even grandparents or great grandparents, happens to own an enormous house in Hampstead.

And finally, there is no reason why anyone should have to move out of their house, as Joan Bakewell worries in today's paper: it would be perfectly possible for the taxman to take the money out of the proceeds from the sale of her house when she dies. This distinction between "income rich" and "wealth rich" is nowhere near as simple as she makes out: the whole point of wealth is that it provides you with an income. Is it really so unreasonable to think she should pay some tax on it?

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