Here is a brain-teaser for you: who pays more in council tax on their property, the one-person occupant of a huge home in Kensington and Chelsea, the richest borough in the country, or a homeowner in a semi-detached family house in Hartlepool?
That you already know that the answer is the homeowner in Hartlepool just shows you how unjust the current property taxation system is in this country.
It is a long-running scandal that Dr George Dibb, associate director of economic research at the Institute for Public Policy Research, calls an “absurd situation… that is fundamentally very unfair”. It is also a major contributor to the difference in wealth between London and the south-east of England and the rest of the country, a gap that is increasing all the time.
In short, if you want to level up the UK then you have to change the system of taxing its property.
This is, of course, not an easy sell. The people who would end up paying more are going to complain that they are losing out. And since they are mainly homeowners in London and the South East, they are noisier than many of us – more likely to work in or have direct access to the mainstream media or parliament.
But then, as George Dibb explains, “The current system creates winners all the time and those winners are the wealthiest landowners in the country… and they have been winners for a very long time”.
The fact is that under our current system, many property owners have got lucky and made vast amounts of money on which they pay far less tax than others in poorer parts of the country. No one expected house building to collapse and house prices to continue to soar, especially in London and its overspills.
This is just one of the aberrations of the UK’s property taxation system and it is becoming increasingly obvious that something will have to change.
The economic distortions caused by the current system are huge and damaging. People put increasingly large amounts of money into property because it is a guaranteed winner rather than investing in more productive parts of the economy.
High property prices and stamp duty on transactions mean people do not take the jobs they are qualified for because they cannot afford to move. Productivity is damaged, the economy becomes sclerotic, ambition dies as people hold on to property wealth. Pensioners won’t downsize as they would have to pay stamp duty on their new home.
As Stuart Adam, a senior economist at the Institute for Fiscal Studies, told me: “We shouldn’t be taxing transactions… if you want to find something that is bad for growth in the UK, stamp duty on property would be near the top of the list”.
Then there are the consequences of a completely out-of-date rates system. Property has not been revalued since 1991, which is a scandal and leads to ridiculous distortions.
Not only that but single people living in a house get a 25% discount. This means, Adams says, that “you get a bigger discount if you live in a more expensive property, which encourages single-person households to live in bigger houses than they would otherwise. “Consequently, larger families have to live in smaller houses.
The business rates system is also such a mess that it is making the high street an increasingly expensive place to do business just as it is facing an existential threat from online rivals. It also discourages investment in property by taxing improved property more. That is the exact opposite of what you would really want to achieve.
So, what is the solution? Well, there is an obvious one, with a surprising amount of support from both sides of the political debate and many very serious economists too: A tax on the value of land.
This would most likely come in two forms. There would be an annual tax on the value of the property and land of domestic homes, say of 0.5% a year. Then there would be a tax on commercial properties’ land value, to encourage development. Stamp duty and rates would be abolished.
The number of people moving house would increase, people would live in houses more suited to their needs and productivity would increase. Businesses would have a great incentive to invest, whereas now companies large and small complain that if they build a new office, improve a factory, or expand a shop they are rewarded with a higher rates bill. Just taxing the value of their land ends that problem overnight.
The new tax on land value would also help enormously in redistributing wealth around the country. The millions of people sitting on or inheriting vast amounts of unearned property wealth would have to pay more; the rest of the country would pay less.
You could also make the whole thing revenue-neutral; it would not cost the chancellor a penny. You just work out how much money stamp duty and the rest bring in and then devise the new system to bring in the same amount.
Fairer Share, the charity lobbying with cross-party support to bring in a land tax, has a calculator which will show you how much you would gain or lose, at fairershare.org.uk/counciltaxcalculator.
Its chairman Andrew Dixon told me that “77% of households would benefit from a tax cut with an average saving of £450 a year. Obviously, most of the gainers would be in the poorer communities of the country and the regions. Those in London and the South East may see a slight increase, but we are planning to mitigate that by having a maximum increase of £1,200 a year.”
Rachel Reeves could announce this in the autumn budget and start to settle in a new system that would increase productivity and growth. She could not do it this year – a database of property values would have to be created first – but she could signal a start. And she would need to be cautious about implementation to lessen the risk of a big drop in house prices in affluent areas that might destabilise the market; but Reeves is a cautious person.
The winners would far outnumber the losers, although history tells us that winners tend to be ingrates and losers neither forget nor forgive. That is a terrible reason for ignoring sensible, balanced, fairer, well thought-out reforms. Land tax is one of those.
