The case for a “Mansion Tax”

Richard Carr

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Nearly eighteen months after the General Election, Labour, it seems, finally has an economic argument beyond vaguely opposing the scale of the cuts. By proposing a repetition of the tax on bank bonuses, bringing forward long term investment projects, reversing the VAT rise (temporarily overall, and reducing it to 5% in the case of home improvements), and urging a one-year National Insurance tax break for small business, the party has put some meat on rhetoric that was certainly pro-growth, but light on specifics.

With some much publicisied shadow reshuffles at BIS and the Treasury, Ed Miliband has injected some impetus back into party policy. Yet, like all parties of the global left, Labour has a more philosophical problem: in essence, whilst capitalism led us into the current economic mess, it will also have to lead us out. As Ed Balls pointed out in the Evening Standard (31/10/11), ‘whilst no wonder people are angry’ at rapacious bankers still demanding tax breaks, ‘we must be careful not to throw the baby out with the bathwater.’ The City – albeit with much tougher regulation – is still, says the shadow chancellor, ‘vital’ to the economy of this country.

People’s righteous anger at previous financial malpractice must be effectively channeled. The traditionally Conservative argument that if Britain takes too aggressive a lead on taxing the rich they will all flee abroad is often overplayed, but it is not without a modicum of truth. This has, after all, long been a thorny question: how to appease capital whilst not falling under its thrall.

The key may be in stressing the more positive ends government can use the money for above and beyond directly paying down the deficit. In May 2010 the Coalition assumed office with a £156bn budget deficit, and pledged to pay it off within the lifetime of the current parliament. In October 2010 the Treasury published the National Infrastructure Plan which suggested the nation needed £200bn worth of infrastructure over the next five years.

For Labour, there is a pressing need to form a coherent strategy for both these issues and, ironically, part of the solution may come via a policy most readily associated with the Liberal Democrats: a mansion tax. In their 2010 election manifesto the Lib Dems proposed that a 1% tax on the value of properties over £2 million would raise £1.7bn. Of late, there has been much talk of instigating this policy as compensation for removing the 50p tax band on earnings over £150k. Yet, whilst David Miliband made it a key policy in his leadership bid, the issue has rather been put to one side in Labour’s public discourse of late.

A tax on wealth is a politically risky strategy, even for Labour, and particularly with elements of the press out to get ‘Red Ed.’ Yet there may be a way to do it without alienating capital, and helping to deliver growth. Whilst public-sector workers are facing pay freezes and everyone has to deal with high inflation, it would undoubtedly produce a short term boost in the polls to “hit the rich.”

Importantly however, there is a way to implement the policy without alienating capital – either in reality, or simple (media) perception. They may wish to go further than the Lib Dem proposals but, regardless, Labour could make two pledges which the coalition would find it hard to rebut and which, crucially, would help drive a Keynesian multiplier effect:

  • Firstly, invest half the proceeds of a new one off mansion tax into a new round of the regional growth fund.
  • Secondly, localise the other 50% of monies raised and pump them into local enterprise partnerships with the remit of investing in new infrastructure in or near poorer areas. The coalition’s recent Growing Places Fund has sought to revitalise currently stalled projects, but there is room to stimulate a wave of new investment.

This would produce additional growth, feed into the longer term debate about taxing wealth, and, from a pragmatic point of view, appeal to the type of voter Labour will need to gain a working majority in 2014/15. Pledging to capitalise two coalition institutions rather than offering, say, the recreation of the RDAs or a directly populist measure such raising the personal allowance, would certainly pose a problem for the Coalition that could not be battered away with the usual refrain of Labour’s fiscal recklessness – if we really are all in it together, then more hands need to be to the pump. This may well mean, for the very wealthy, surrendering a little to help retain overall economic stability.

A more overarching aim could be to capitalise a National Investment Bank, and the monies raised by a 1% mansion tax would could easily constitute a fifth of the capital Robert Skidelsky has estimated such an institution would conceivably require (New Statesman, 18/10/11). If Labour went further than the Lib Dems in 2010 – say, a 2% tax on properties over £2m – they could alternatively double the size of the Green Investment Bank, and bring forward its borrowing powers.

A mansion tax is not without controversy. Yet, by using its proceeds to lever in private sector capital (either via the Regional Growth Fund or an investment bank), its effect could be substantial. It would plant Labour firmly in the centre ground, show that they can be both a party of business and of fairness, and help offer a dynamic strategy for growth. For reasons of principle and pragmatism, it is worth due consideration.

Richard Carr is a Research Fellow at Localis and writes here in a personal capacity

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