Daniel Freeman is Managing Editor of the Institute of Economic Affairs.
It was all kicking off on tax wonk group chats across Westminster on Monday morning.
The i newspaper had reported the night before that Andy Burnham’s team were ‘actively considering’ scrapping Stamp Duty and Council Tax and rolling both into a new annual property tax charged either as a fixed value of the sale price of the property (known as a proportional property tax), or on the value of the land on which the property stands (a land value tax, or LVT).
Arguments raged back and forth over exactly how the proposals could be implemented, their political consequences, and whether this showed Burnham was more of a bold, detail-oriented reformer than many had taken him for.
Unfortunately, Number 10 soon spoiled all this fun. Around noon, Burnham’s team announced that they were ‘not actively considering’ scrapping Stamp Duty or Council Tax. By 17:00, Burnham himself came out with an even more categorical denial of any plans to reform either property tax.
This is a pity. Ruling out any real reform to property taxes so early in his premiership is a missed opportunity for Burnham. The way we tax and mistax property is a significant component of Britain’s growth problem.
The UK raises more in property taxes as a proportion of GDP than any other OECD country. This is, of course, not welcomed by property owners. But it does not necessarily need to be something that holds back the British economy. There is actually a broad degree of consensus among economists that well-designed property taxes are less economically harmful per pound raised than taxes on income, corporate profits or consumption.
“Does the UK have a well-designed system of property tax?” I hear you ask.
Oh goodness me, no. The opposite.
In England and Wales, we raise property taxes in three main ways: Stamp Duty, Council Tax and Business Rates.
Business Rates were not being rumoured to be abolished, and we don’t have the space to get into them here. But basically, they are an overly complex mess of exemptions, reduced rates, and distortions, and let’s leave it at that.
Stamp Duty is the worst. I don’t mean out of the three, but in general. In a competitive field, it has a very strong claim to being the UK’s most economically damaging tax.
Stamp Duty is a tax on property transactions, not property wealth. You get whacked with a substantial bill every time you buy a house. This disincentivises people from moving house or downsizing. If we saw moving house as a terrible, sinful activity that we want to discourage, Stamp Duty would be a pretty good Pigouvian tax. But people moving house is absolutely not something we should be discouraging.
We want people to be able to move to job opportunities or into houses that more closely fit their needs. For example, if they need extra space for children or an elderly relative. Stamp Duty instead gums up the housing market and leaves people in less suitable properties while reducing labour mobility, which in turn undermines economic growth.
Stamp Duty is so bad that abolishing it is one of the few issues you will get tax experts on the left, right and centre, to agree on.
Council Tax is much less damaging than Stamp Duty. But it is also weirder.
Rather than being based on current values as with a proportional property tax, houses are fitted into tax bands based on their estimated value on 1 April 1991. In England, these bands have not been updated since 1991.
This can benefit taxpayers in some areas. Walthamstow, which is now sufficiently gentrified to not only have a Gail’s but also a residents’ petition against the Gail’s, only has 30 top band properties as its reward for being fairly unfashionable in the early 90s. Nearby Islington, which had the misfortune to be gentrified during the 1980s, has 960 top band properties.
Council Tax is regressive by design. Top band properties pay no more than three times what bottom tier properties pay. This is a common criticism of Council Tax, but in my view it falls flat.
It is reasonable to want the tax system overall to be progressive (it already is and has become much more so over the last 20 years), but that does not mean every individual tax should be contorted to be progressive. Council Tax is designed to ensure that everyone who uses council services contributes, which is not the case in some proposed property taxes that would fall exclusively on property owners, and could exclude entirely those in social housing.
Despite the absurdity of Council Tax and the all-round awfulness of Stamp Duty, the proposals being floated to abolish both at once left much to be desired. The proportional property tax proposal would see a flat rate of 0.48 per cent on the present value of property.
There would be many winners who ended up with lower bills but also some heavy, and concentrated losers. The average Band D property in Wandsworth would go from paying £998 per year in Council Tax to £2,212 in property tax. A land value tax could have an even more dramatic effect, with one proposal modelled by tax expert Dan Neidle seeing a similar Wandsworth property’s tax bill increasing more than fourfold to £4,421.
So, what could Burnham have done?
He didn’t ask me, but if he had, I would have suggested focusing on getting rid of Stamp Duty, the smaller but more damaging tax, rather than trying to reform Council Tax simultaneously.
The total value of residential property in the UK is estimated at £9.2 trillion. In order to entirely cover the annual receipts on residential Stamp Duty, you would need to raise about 0.12 per cent of the value of all UK residential property. That would amount to £349 per year for the average house in England (price £291,000) or £663 per year for the average house in London (price £553,000), charged on top of Council Tax that would remain unchanged.
The best way to make this politically palatable would be to phase it in gradually by only charging the new property tax when houses are sold without Stamp Duty. Someone buying a £600,000 house is never going to be thrilled with paying an extra £60 a month in property tax, but it will go down much better if they’ve just dodged £20,000 Stamp Duty.
This approach would see the government lose in the first year much of the roughly £11bn it receives from residential Stamp Duty, but this would recover over time as properties change hands and transition to the new system, and the economic benefits from a tax that does not punish moving house would be considerable.