Vince Cable, the Liberal Democrat Treasury spokesman, has unveiled plans to introduce a new 0.5% levy on the value of properties over a £1m threshold. That means that someone owning a house worth £1.5m would pay 0.5% of £500,000 – £2,500 – to the Treasury each year. Cable says the new tax would raise £1bn, helping to fund Lib Dem plans to raise the personal allowance to £10,000 and take four million people out of the income tax net.
The populist appeal of this measure is obvious. And indeed, I support the Lib Dems pledge to raise the personal allowance. I can even see an argument for some long-term rebalancing of the tax system towards property taxes and away from taxes on income and production. But we really need to look at the Lib Dems' property tax idea in the context of the tax increases on the wealthy that are already planned:
- Income tax: From April 2010, people earning between £100,000 and £150,000 will see their personal allowance phased out, effectively creating two narrow income bands (£100,000–106,475 and £140,000–146,475) where tax is levied at 60%. Also from April 2010, a new 50% tax rate will be charged on incomes over £150,000.
- Pensions: In April 2011, the higher rate (40%) tax relief on pension contributions will be abolished. Higher rate taxpayers will only be able to claim tax relief on their pension contributions at the basic rate, 20%.
- National Insurance: Employee and employer National Insurance Contributions will both rise by 0.5% from April 2011. There is no practical difference between this and higher income tax.
- Tax on non-domiciled residents: In the past, non-domiciled residents have only had to pay tax on UK income/capital gains, and on overseas income/capital gains which are remitted to the UK. However, they now have to either pay UK tax on all overseas income/gains or pay an annual £30,000 levy.
One of the results of this is that the City of London would, from 2011, be the most highly taxed financial centre in the world. As Alex Masterly of Financial Crimes puts it:
[With] the new 50% rate of income tax and taking into account social security payments, a banker earning £250,000 in the City of London will keep only half of their gross income. This is a lot lower than other European centres such as Paris (58%), Frankfurt (60%) and Zurich (68%) and far less than Dubai (95%).
Once you throw in the Lib Dems' new property tax, and their plans to tax capital gains as income – which would mean capital gains tax for higher rate taxpayers going up from 18% to 40% or 50% – you can almost hear the pips squeaking. Eventually, people will start to wonder why they even bother.
Leaving aside any economic concerns, my real worry is what this says about British society. It suggests that we still haven't consigned our envy-ridden class-consciousness to the past, and that we are still as ready as ever to denigrate and resent success, rather than celebrating it. In the long run, it is that mentality – and not merely its political manifestations – that will do this country the greatest disservice.