The Rich, The Poor, Tax and Land Wealth

People on the Left often come up with the statistic that poorer people pay more tax the richest in society. This is true to an extent, but it masks the fact that the poorest in society also receive money back from the state via benefits and tax credits. I made this point in a video:

However, since making this video, I came across a chap called Fred Harrison who has written an excellent blog and made a couple of videos on how the richest in society derive huge wealth from their land wealth. And this wealth has nothing much to do with their own efforts and everything to do with public investment.

“PEOPLE whom they brand as “benefit scroungers” are routinely ridiculed by sections of the media. Television companies even make documentaries about people who should not qualify for tax-funded benefits. But the luckiest scroungers of state largesse – I am one of them – are never held to account for the money they pocket from the public purse. That is because the scam is lawful.

The scam is a legacy of a bygone age of irresponsible governance. We do not talk about it because the debate about the housing crisis is distorted by notions such as “hard-working middle class home-owners”. But if we continue to advocate the need to “get on the housing ladder”, there is no chance of solving the problem of unaffordable housing.

At the heart of the crisis is the way government raises and spends our money. Let’s examine the covert way in which tax policy interfaces with the housing market, and one of the techniques for distracting us from the biggest financial scandal facing the nation.

The Taxpayers’ Alliance (TPA), a libertarian champion of taxpayers, wants government to reduce its tax-take. To argue its case, it points out that the average household in the top 20% of income earners will pay more into the public purse than any other group of people. And we are expected to believe that this is “progressive taxation”. It’s fair that the rich should pay the most into the public purse – right? An individual within the top 20% bracket will pay, on average, £1,686,970 in tax over his working lifetime.1 The calculation is based on Office for National Statistics data for 2016.

But the TPA does not reveal that high-tax payers are the nation’s biggest winners from the State’s handout of benefits. By following the money trail, we discover that the public services they enjoy are funded out of the pockets of low-income families. I will illustrate this tax-scam with an example taken from London.

According to the estate agency Rightmove, terraced properties in London’s Kensington had an average sold price of £4,507,685 in the 12 months to August 2016. Semi-detached properties averaged £7,633,846. What does that mean for the owner of a (say) £5m residential property, who would be in the top 20% income bracket? With house prices rising at conservatively estimated rates of increase between 2017 and 2021 (with a weakening of prices in 2019), I estimate that the value of that £5m dwelling will increase by about £1,700,000. In other words, the average high-income taxpayer will be reimbursed for his whole lifetime tax liabilities in five years flat!

Who reimbursed him with those windfall capital gains? Father Christmas? An alchemist holed up in a cave in the Swiss Alps who splays out the riches that come cascading down from the heavens and into the pockets of the owners of residential property?

No. Capital gain measures the value of the location occupied by the house, the value which government fails to collect to defray the cost of the services it delivers. It is the subsidy to property owners for which there is no means test.

The family occupying that £5m house in Kensington will enjoy access to public services which are funded, in part, by low-income taxpayers who live in rented accommodation.

This State-sponsored device for making the rich richer (and the poor, poorer) means that, for most of their lives, rich folk enjoy public services without paying for them. I first spelt out the economics of this scam in 2006. Governments turn a blind eye to the injustice while wringing their hands in despair at not being able to deliver affordable housing to people on the lowest incomes.”

The truth about housing wealth is that most of us didn’t earn it

The Independent carried a thought provoking article recently which argued that wealth deriving from land value is essentially unearned, and should be taxed:

“In a new report by the Resolution Foundation one statistic stands out. According to the think tank around 80 per cent of net property wealth growth since the early 1990s has been a consequence of a housing boom, rather than active savings decisions by households.

This equates to around £2.3 trillion of windfall property value appreciation. For homeowners born in the Forties and Fifties the average “passive” benefit is around £80,000. For those born in the Sixties the average windfall is £60,000.

Property prices surge not so much due to anything the owner does, but because of other people's activity and public investment
Property prices surge not so much due to anything the owner does, but because of other people’s activity and public investment

The Resolution Foundation report makes it clear that UK overall wealth accumulation is considerably driven by property, which has been largely inflated by a housing boom. If we’re serious about tackling high UK wealth inequality (which seems to be rising still further) we can only do so by tackling housing.

There are a multitude of reasons why UK house prices are so high relative to incomes and homeownership rates are falling. Excessively rigid supply-restricting post-war planning controls, particularly the misnamed “green belt”, around big cities, are a major culprit. Indefatigable nimby campaigns of opposition by existing homeowners when new developments are proposed also harmfully suppress supply.

Sclerotic local authorities that no longer build social housing, big corporate builders with little interest in constructing new homes in sufficient volume, a financial system set up to lend for residential property purchases but not business investment, politicians who offer cynical subsidies to demand: all these contribute to the mess.

But a significant driver is our irrational and grossly distorting property taxation system. The council tax is inexcusably regressive. Stamp duty is only levied on transactions, discouraging people from moving when they otherwise would. There is no VAT on newly built housing.

High-value property is undertaxed. Homeowners face no capital gains tax. And David Cameron and George Osborne removed family homes worth up to £1m from the inheritance tax net.

Bank of England chief economist Andy Haldane got into trouble last year for pointing out what everyone knows to be true: that you’ll tend to get better returns from property than from a pension.

Given such obvious financial incentives, it should come as no surprise that so many of us are obsessed with property as an asset class, that we are so prone to boom-bust cycles, where we bid up prices ever higher and stretch the link with economic fundamentals to breaking point.

As Resolution shows, while residential property wealth has been spiralling as a share of GDP, property taxes have been flat. The problem with Ed Miliband’s mansion tax is not that it was unfair, but that it wasn’t fair enough. The regressive council tax system should be reformed so that all property – not just £2m houses – is taxed at a flat rate on its market value.

The Grenfell Tower disaster has pushed housing to the top of the political agenda in the UK.
The Grenfell Tower disaster has pushed housing to the top of the political agenda in the UK.

The Grenfell Tower tragedy has exposed the property inequality gulf that exists in modern Britain with brutal clarity. We see unsafe, overcrowded and oversubscribed social housing lying next to under-occupied multi-million pound Kensington townhouses whose value has exploded in recent decades.

Ed Miliband’s 2015 crucifixion over his mansion tax proposal seems an aeon ago. In the wake of the conventional wisdom-scrambling General Election, there appears to be a healthy new willingness among the political classes to consider solutions that were for so long written off as economically logical but electorally impractical.

But as the “dementia tax” property-based backlash showed, the argument still needs to be made, the case laid out persuasively. “You didn’t build that,” cried Barack Obama during the 2012 Presidential election, making a point about the degree to which private US businesses rely for their economic success on state-provided infrastructure such as roads and bridges.

“You didn’t earn that,” could be an equivalent progressive rallying cry when it comes to the long-overdue reform of the taxation of British housing wealth.”