Mansion tax loss

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The mansion tax might just end up adversely affecting some “grannies”, but its real problem is that it wouldn’t get to the heart of the issue of wealth and inequality.

Ed Miliband has run into trouble over Labour Party support of a mansion tax. In a TV confrontation with Myleen Klass, pop person latterly of Hear’Say, claimed that the proposed measure would affect the innocent bystanders of the housing market. Klass spoke in the infuriated tones only reserved for discussion of the insanities of the housing market in London and the South East, and Miliband responded as best he could. His best defense for someone so plainly not going to be won over was to say he was going to have to make unpopular decisions. This is Miliband’s big pitch for stateman-like status; I’ll take on vested interests [like Murdoch] and do unpopular things.

Klass claimed that a mansion tax – about £250 a month on a home worth £2M or more – would affect “little grannies”, potentially kicking them out of their homes. It is not their fault, she argued, that the happen to have been living in a home which has appreciated so much in value. Taxing them is unfair was the gist of her objections, and therefore a kind of regressive taxation.

There are several immediate and glaring issues with Klass’s argument. She no doubt has an interest in this as one of the wealthier members of society. An emotive plea about defenseless old ladies is not only rather patronising, but also probably only a small issue in the grand scheme. I would hazard that the proportion of grannies to executives affected by any new tax would be fairly low.

But never mind, because Ed Miliband had planned out solutions to her objections, if only he’d been allowed to elucidate them. There would be mechanisms in place to defer payments until sale of property so no-one without an sizeable income would be forced out of their homes. The reason Labour presumably like this as a policy – or at least that Miliband does – is that it is a simple, populist tax. Hence the ‘mansion’ moniker.

As ever, the debate outlined above misses the point entirely. The mansion tax is meant to be a wealth tax. We all know that the inequality gap is growing day by day. Slapping a tax on property would seem a bold and money-spinning ruse. If only it were so.

Housing prices are a poor indicator of wealth in themselves. A ‘price’ is only a price once it is realised as a sale price. At that point it can be converted into real currency and be placed in a bank account. Most of the time however, that money will go towards another kind of dwelling, the price of which will have been subject to the same distorted market forces moving the value hither and thither. (This is less true for property used for investment, so at the very least making the tax target second property ownership would be a start.)

The next issue is that house prices fluctuate and it’s no secret that what is being stoked – thanks George Osboure! – is a housing bubble of potentially mammoth proportions. So Miliband could end up taxing people now on an asset that will massively depreciate in the future. And it’s therefore not even a good revenue raising measure – at best it’s a headline grabbing short-term splurge for the treasury.

The most serious flaw is the last one, however. quote2

A wealth tax is a good idea, in principle. Asset prices have risen as wages have fallen. It’s one of the main reasons that the rank inequality now staring everyone in the face came about in the first instance. A land tax would be a much better idea than a mansion tax, because it is much more likely to be levied on those using their capital as rentiers.

Here comes the crunch though. House prices have risen because of the way banks create and then lend out money, not because of anything concrete in the housing market. Inflated bank lending on mortgages pushes up prices and then stokes further speculation by property businesses. This illuminates both sides of the Klass/Miliband argument. From Myleene’s point-of-view it explains why the housing market makes no sense and how the ‘grannies’ are sitting on a gold mine that in the ’70s was a simple 2 bed-semi.

For Miliband the conclusion is more worrying. That a potential leader of the country doesn’t understand why the housing market is so distorted is even more serious an issue than his ability to eat a bacon sandwich / give money to the homeless / insert looming PR disaster here.

There isn’t the space to expand on the bank-created-money idea further for the time being. Go to the genuine gold mine of information over at Positive Money for the complete 411.

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