Friday, July 27, 2007

Tax and house prices

Property prices are in the news. In the US, they are falling, spreading worry into other financial sectors. In the UK they are not falling - though that may well still happen. What has happened in the UK is that people are beginning to wake up to the social consequences of a recent huge rise in property prices. While many owners of housing are delighted with the rise in value of their properties, some of the more enlightened ones feel uneasy about their being granted what seems like free money, and wonder who is picking up the tab. The answer is: this process involves a huge transfer of wealth to older people (who bought before prices soared) from younger people and poorer people without housing (who face paying huge sums in order to get onto the "housing ladder.")

The UK government has tried to address the supply side of the housing crisis, but is curiously timid to look into the demand side. Could this be because one of the factors driving crazy house prices is London's status as a global tax haven, attracting wealthy property speculators from around the world who are attracted by the tax advantages of London property? And the authorities are scared of confronting the financial-services industry and the enablers?

A new FT comment piece written by Martin Weale, director of the UK's National Institute of Economic and Social Research, provides an interesting perspective. It is written for the UK, but the message would have wider relevance .

Given that most house prices can be estimated relatively straightforwardly, a (good) idea is to levy a property tax on the capital value. If one assumes a notional return of 4 per cent per year, a tax at 1 per cent of the capital value would amount to a tax on notional income at 25p in the pound. Such a tax levied last year on the basis of 2005 values would have delivered revenue of £33bn, compared with council tax of £22bn and about £5bn from stamp duties on residential property. So a change to a 1 per cent tax would allow room for a cut in other taxes, such as a cut in the standard rate of income tax by 2p in the pound.

The redistributional effect of the tax would be substantial. Current council taxes do not tend to rise in proportion to the value of the property, whereas a property taxes would. What is more, property taxes would be collected from Britain's controversial and privileged "non-domiciled" taxpayers who significantly escape the UK tax net - many of whom own UK property.

In a country where 70 per cent of the population are owner-occupiers it is easy to see the obstacles to serious reform of housing taxation. But a few years ago rising house prices were seen as unalloyed good news; now there is much more understanding that they create very real economic problems for young people.

Britain's housing market is broken. Part of the reason is that the UK is a tax haven. Here is an interesting idea that could provide a way to limit the damage.

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