Vince pushes the ‘mansion tax’ – could the Tories yet be persuaded to take tax reform seriously?

by Stephen Tall on January 22, 2012

Shock! Horror! Lib Dem business secretary Vince Cable advocates Lib Dem manifesto policy!

The Telegraph today reports that Vince’s policy — which would levy a 1% annual charge on all properties valued above £2 million — is still on the table as the Coalition writes its second budget:

Vince Cable, the Liberal Democrat Business Secretary, is pushing for a mansion tax to be introduced on properties worth more than £2million in this year’s Budget. While the policy is likely to be opposed by George Osborne, the Chancellor, Mr Cable said that he had spoken to Conservative MPs who backed the plan.

“A mansion tax is still very much on the agenda – it is a very good idea,” Mr Cable told The Sunday Telegraph. “It is good for two reasons,’’ he said. ”It would constitute a tax on wealth rather than income, which we believe to be right, and also in economic terms it creates the right sort of incentives for the property market.”

Mr Cable added that it was “perverse” that rich “foreigners” could buy expensive properties in Britain and contribute just £1,000 a year in council tax towards the public finances.

3 ways of reading Vince’s comments

There are a couple of ways of interpreting this fresh pitch. First, it may simply be a case of ‘differentiation’, reminding voters that the Lib Dems and Tories have different views, different priorities, different ambitions. Just because we are in Coalition does not mean we have merged.

Secondly, it could be tactical, with Vince pushing the mansion tax as a negotiating position with his Tory colleagues — ‘Okay, I’ll drop the mansion tax, but only if you guys drop [select Tory policy which seeks to entrench further privilege among its core constituency]‘.

But there is a third possibility: that there is a genuine chance the Coalition could opt for a more radical tax package in this budget, one which genuinely seeks to shift the tax-burden from income to wealth (while leaving the overall tax-take neutral).

A Lib Dem / Tory tax compact: could it happen?

It may be an absurd flight of fancy. After, all Tory tax preoccupations tend to revolve around inheritance tax and the top rate of income tax. It has normally been left to the Lib Dems to push for tax-cuts for low-earners and polluter taxes.

Yet only a few months ago, Tory MP Mark Reckless advocated a version of Vince’s mansion tax on ConservativeHome:

Conservatives should not rule out a ‘mansion tax’ or similar proposal in the context of a package which cuts unjustifiably high forty to fifty pence income tax rates. Perhaps the threshold could be set nearer £5million than the £1million or £2million that Vince Cable has floated.

Such a tax would be far harder to avoid than high income tax rates. UK housing, unlike the talents of the highest earners, cannot be taken offshore. A mansion tax targeted at the very wealthy would depress spending by less than the current high taxes on income and, unlike those, would not harm work incentives. It could therefore be pro-growth.

We should also recognise that UK property taxation is almost uniquely generous to owners of high value property. The international norm is for property tax to be levied as a percentage of capital value. In the UK the council tax regime means that property tax is capped at what, for very high value properties, is internationally an extraordinarily low rate. For instance, the owner of a £20million property in prime central London would pay only £1,375 of council tax annually if in Westminster, or £2-3thousand in other boroughs.

And ConservativeHome’s editor Tim Montgomerie has also advocated the underlying principle:

… [we should] rebalance the tax system in a way that will be less comfortable for some Conservatives. Britain taxes income quite highly and wealth hardly at all. In other words we are taxing job creation more heavily than we are taxing inequality. … on taxation of “mansions” I believe the Lib Dems are correct. We shouldn’t, however, be increasing taxes on high-value properties in order to increase the overall tax burden. Britain’s tax burden is one of the reasons why so many parents are working long hours outside of the home. We should be increasing taxes on wealth and pollution in order to afford cuts in taxes on families and employers.

There are Tories prepared to think outside their traditional preoccupations of ensuring the well-to-do do a little more well, and instead start to tackle the inequalities that underpin many of society’s deep-rooted problems.

The ‘mansion tax’ is no silver bullet, but if Vince can shape the debate so the Coalition gets serious about taxing wealth rather than income there could be far-reaching consequences. It would offer the Coalition a radical, and shared cause. It would also leave Labour bewildered: it’s decades since the party thought seriously about the distribution of wealth as opposed to knee-jerk high-income taxation as a panacea for all ills.

* Stephen Tall is Co-Editor of Liberal Democrat Voice, and also writes at his own site, The Collected Stephen Tall.