In Defence of Liberty

Driven by data; ridden with liberty.

Miliband’s Mini-bands

With great fanfare, Labour leader Ed Miliband announced that the Labour opposition supports the introduction of a 10p tax bracket for the lowest-paid workers, coupled with a levy on the ownership of housing property valued at over £2m, commonly called the ‘mansion tax’. This announcement had followed months of campaigning by backbench Conservative MP for Harlow, Robert Halfon, for a 10p tax band and the Liberal Democrat’s long support for a wealth tax, pursued by Business Secretary Vince Cable.

Ed Miliband has proposed that mansions should be taxed, in order to fund a 10% income tax rate. (Photo thanks to EdMiliband, found here)

Ed Miliband has proposed that mansions should be taxed, in order to fund a 10% income tax rate. (Photo thanks to EdMiliband.)

Under Miliband’s model, the amount raised by the mansion tax would be used to forge a 10% tax bracket, for income above the current personal allowance, and push up the starting point of the basic rate bracket of 20%. The mansion tax would be a levy of 1% over the value of properties worth more than £2m. For example, a family in a house worth £3m would pay £10,000, and a family in a house worth £4m would pay £20,000. The Liberal Democrat 2010 manifesto suggested that such a tax would raise £1.7bn, and affect 70,000 properties, meaning that the mean average property owner would pay over £24,000.  Labour now believes this tax would raise £2bn, and the tax revenue would then be used to lower income taxes. Mr Miliband said the size of the band would depend on the revenue collected by the mansion tax. This allows the policy to be called ‘fiscally neutral’, since it is not affecting the total amount of tax revenue, only its composition.

Political Cunning

Whilst the announcement demonstrates political cunning by Ed Miliband and Labour’s Shadow Cabinet, as a fusion of two reasonably popular policies, each part of this chimera carries its own complications.

As Chancellor in 1999, Gordon Brown resurrected the 10% income tax rate, a piece of particularly grisly necromancy as the lower rate of income tax had been abolished once before, in 1980. As Prime Minister in 2007, Gordon Brown eradicated this tax bracket for the second time. Its restoration into British income taxes would generate more complexity in an already chaotic system. An initial glance would currently see four different rates: 0%, 20%, 40% and 45%. A second look would reveal that there is a fifth, clandestine marginal rate of 60%, as according to the HMRC: “The Personal Allowance reduces where the income is above £100,000 – by £1 for every £2 of income above the £100,000 limit. This reduction applies irrespective of age.” The size of this secret band depends on the size of the Personal Allowance.

 

Tax remains the key political battleground, both in Britain and the United States. (Photo thanks to 401(K) 2013.)

Tax remains the key political battleground, both in Britain and the United States. (Photo thanks to 401(K) 2013.)

The coalition government has already cut income taxes, by making the personal allowance, the portion of income that is zero-rated, climb from £6,475 in 2010 to £9,440 in 2013. By the end of this parliament, the personal allowance should be £10,000, and there are calls amongst MPs for this trajectory to escape the £10,000 figure. The government has also lowered the upper rate of income tax from 50% to 45%, as it was feared that a 50% tax on incomes was losing overall tax revenue. This is contrasted by the coalition’s increases to VAT from 17.5% to 20%, and the Capital Gains Tax is now levied at 28%. A secondary problem for Labour is that the Conservative-Liberal Democrat coalition currently holds the prized chalice of cutting income taxes for low-paid workers, whilst Labour’s final abolition of the 10% income tax rate still weighs heavily in public memory.

The Wealth of Taxes

Property and wealth taxes also generate their own problems, which can already be seen in the implementation of council taxes. Having a property of high value does not imply that a person can pay a tax on demand. An example of this problem is monetary assistance with the payment of council tax, which is a transfer of money from the central government to local government; when a person is unable to actually pay due council taxes. The British government, thanks to the construction of council tax, already levies one of the highest levels of property tax in the OCED: property tax revenues were 4.2% of GDP in 2010, more than double the OCED average of 1.9%.

Who would pay taxes for living in a house like this? (Photo thanks to Alistair Rae).

Who would pay taxes for living in a house like this? (Photo thanks to Alistair Rae).

Whilst £2bn may seem like a large tax extraction, the UK government tax receipts in 2011-12 were £550.6bn, so this hypothetical amount represents 0.36% of the current total. Despite this imperceptible increase, wealth taxes tend to be highly costly to administer. Such a mansion tax would involve a nationwide, if partial, re-evaluation of houses, as the government would need to investigate every house that could feasibly rest above the £2m threshold. This is the central issue with wealth taxes: they require the state to have unbridled access to their citizens’ lives.

Despite the retort that people in houses over £2m can just sell their property; there is a vast chasm between evaluation and selling price. The government’s evaluation clearly contains a conflict of interest, and even if ‘objective’ evaluation were possible and available, the looming tax deadline pushes owners into selling swiftly, potentially lowering the selling price well below its evaluation.

Monetary Sacrifice

Miliband seeks to use the mansion tax revenue as monetary sacrifice for the resurrection of the 10p rate. The cumulative nature of the British income tax system, that different rates are levied upon income between certain amounts, means lowering taxes this way lowers them for every income taxpayer, including the target of Miliband’s recent ire: millionaires. The cold arithmetic implies that the new tax band cannot be particularly large, even when the upper estimate of £2bn for the mansion tax is used. There are about 25 million non-pensioner taxpayers, and then £2bn represents £80 each. Transposing the revived low rate onto the current tax system would leave the 10p tax band only between £9,440 and £10,240.

Following the Conservative-Liberal Democrat coalition’s strategy of swelling the personal allowance would be much simpler, but politics now thrives in the cracks between government and opposition. I want lower income taxes – this aim should be achieved through ratcheting the personal allowance and cutting the separate rates, and not by inserting mini-bands into a chaotic tax system.

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