Taxing property

Merryn Somerset Webb made a good point in her FT column this weekend:

Finally, a word on the mansion tax. There is a view that we need to have a tax on wealth of some kind, just like many other European countries. But those that do have high property taxes such as Denmark, Sweden and even Israel have very low inheritance taxes (15 per cent, 0 per cent and 0 per cent respectively). We don’t – ours is 40 per cent. Add in a property tax, and we are taxing wealth at least twice. That doesn’t seem right.

I tend to agree. Indeed, the ‘multiple-taxation’ phenomenon is much worse than Merryn suggests. We’re taxed when we earn money. We’re taxed again when we spend it or save it. If we invest, we pay taxes on the purchase (stamp duty), on any dividends, and then on any capital gains. Bear in mind here that dividends are the distribution of profits that have already been taxed, and that capital gains are really just a reflection of an assets increased yield – which has also already been taxed. Then, of course, we’re taxed on it all again when we die. If this is ‘fairness’, I don’t think I like it – from an economic or a moral perspective.

None of this is to deny that a tax on property – or more specifically, a tax on land values – has certain advantages over other taxes. It is less damaging to growth than taxing income or profit. It encourages the efficient use of land – the ultimate scarce resource. It discourages property speculation, theoretically smoothing booms and busts in the housing market, and encouraging people to invest in productive assets instead. It is straightforward to administer and hard to evade. The big downside is that owning a property does not necessarily produce a revenue stream from which to pay the tax, which can make it inconvenient and burdensome.

So yes, property taxes have their place. But any shift towards property/land taxation should be part of an overall simplification/rationalization/rebalancing of the tax system – not just a class war addendum to our current, dysfunctional set up.

One interesting idea is to start by replacing all the current taxes on property (CGT, stamp duties, inheritance tax, council tax, business rates, etc) with a single, straightforward tax on land values – as Mark Wadsworth suggested here and here on the Adam Smith Institute blog. I’ll just add two caveats. Firstly, it should be possible for retirees to roll over their taxes until death, at which point they would be taken out of their estate. Secondly, land taxes should always be set locally, so that tax competition between local authorities can exert a downward pressure on rates.