Shadow Chancellor Ed Balls wrote in today’s Evening Standard about his alarming Mansion Tax plan. So, Mr Balls, can you answer these nine questions:
1. What bands and how much?
You said that those in homes valued between £2m and £3m will have to pay an extra £3,000 a year. But what would the other bands be, and how much would be payable in each band?
2. How many homes will drop out?
Having to pay a Mansion Tax will mean buyers won’t pay as much for a home as they would have done. Have you estimated the impact on prices of the Mansion Tax, and how many homes would fall a band or fall out entirely because of the tax?
3. How much less from Stamp Duty etc?
A Mansion Tax will reduce house prices, which means the Treasury won’t collect as much in taxes such as Stamp Duty and Inheritance Tax . Have you estimated the impact that lower prices will have on overall revenues from Stamp Duty, Inheritance Tax and other taxes?
4. How many widows will defer?
Have you estimated the impact on revenues from allowing low-income homeowners such as widows to defer payment, also known as the “death tax”?
5. How will the “death tax” trap affect the housing market?
Some low income homeowners will avoid moving so they don’t have to pay their deferred Mansion Tax when they sell. Have you estimated the impact on the housing market from the “death tax” trap of deferred tax bills building up, keeping larger homes out of the market and restricting associated economic activity?
6. Will it really raise £1.2 billion?
Even without modelling for deferment, the impact on prices reducing the numbers and the loss of other revenues such as Stamp Duty and Inheritance Tax, our estimates assuming charges ranging from £3,000 to £30,000 a year would yield only £830 million. How have you calculated your estimates?
Using estimates from Knight Frank last year on the number of homes in each of the bands below, we guessed some charges you might introduce for bands over £3 million. These charges range from the £3,000 a year you mentioned for homes in the £2m-£3m to £30,000 for homes over £10 million. As you’ll see, the total revenues add up to £415 million. Since then, Knight Frank have confirmed that the total number has risen from 55,000 to 110,000. Even if you assume the revenues double, too, this only yields £830 million, well short of your £1.2 billion target.
|Band||Monthly charge||Annual charge||No. of properties||Revenues, £m|
7. How will you avoid massive cliff-edges?
Our estimates suggest an annual Mansion Tax of £14,400 for a home valued at £9.9 million but a £30,000 bill for a home valued at £10 million. That creates a huge cliff edge with a substantial distortionary impact. These amounts will have to be even bigger if the tax is to raise the £1.2 billion you claim, meaning even bigger cliff edges. How will you avoid these cliff edges?
8. What if a future Chancellor freezes thresholds?
So many taxes, like Stamp Duty, Inheritance Tax and Income Tax started out as taxes only for the rich. You say that this time it’s different. But how will people be sure that a future Chancellor won’t freeze the thresholds?
9. Why not add Council Tax bands instead?
We don’t need higher taxes, we need to cut waste and cut taxes. People who have bought expensive homes will typically have paid vast sums in Stamp Duty to buy them and Income Tax, Capital Gains Tax or Inheritance Tax to raise the money to buy them. But if you really must tax these people more, couldn’t you have chosen a simpler way that wouldn’t make our tax code even more complicated than it already is? Why have you chosen to campaign for a whole new tax with new thresholds, valuations, rates, bands and rules instead of simply adding new bands to Council Tax?
A new report from the Centre for Policy Studies has called for National Insurance to be abolished. The report, NICs: The End Should Be Nigh, recommends replacing employee’s National Insurance Contributions and Income Tax on earned income with a new ‘Earnings Tax’. It also calls for employer’s National Insurance to be abolished altogether, with higher consumer taxes to make up the revenue shortfall.
The TaxPayers’ Alliance has long campaigned for National Insurance to be abolished, not least as part of our major campaign to simplify the tax system with The Single Income Tax and our 2020 Tax Commission. We even made a giant payslip to illustrate how abolition would make taxes simpler and more transparent. So this thoughtful proposal deserves close attention and consideration.
The proposals on the employee’s side are entirely sensible and would restore some much-needed transparency and honesty to taxes on income. However, the proposal to increase consumer taxes to balance the revenue shortfall from abolishing employer’s National Insurance is regrettable. The main options are VAT, alcohol and tobacco duties, Fuel Duty and Air Passenger Duty.
But increasing any of these taxes would be regressive. While that is not itself always a reason to oppose a tax reform, it should always cause us to pause for thought. As the Institute for Economic Affairs recently pointed out in their Aggressively Regressive report, consumer taxes, particularly lifestyle taxes on fuel, tobacco and alcohol, hit the poorest hardest.
The other problem is the scale of the rises required. The report says:
HMRC should model the net effect of no longer collecting employer NICs receipts, offset by higher Corporation Tax, dividend tax, Earnings Tax and VAT receipts. Any projected shortfall should be made up by additional consumer taxes.
It is true that abolishing employer’s National Insurance would lead to a considerable rise in receipts from other taxes, but increasing consumption taxes will have the same effect in the other direction, reversing the bulk of the dynamic effect on other receipts. The difference between the two would essentially derive from a combination of two effects.
The first effect is redistributing the tax burden from workers to non-workers, such as pensioners, artists who live off royalties and benefit recipients. The question this poses is should these groups suffer a tax rise and should the last group be given a increase in benefits to maintain their real incomes?
The second effect is the supply side one of transferring the tax burden from more economically sensitive employment taxes to relatively less sensitive consumption taxes. This effect is likely to be marginal. With employer’s National Insurance receipts totalling £61 billion in 2012-13, this equates to a substantial rise in other taxes. This is approximately half the receipts collected by VAT, meaning that if the entire burden were to be transferred to that tax, the main rate would need to rise by approximately that proportion, from 20 to 30 per cent while the reduced rate would need to rise from 5 to 7.5 per cent.
These difficulties are why we proposed the slightly different approach to employer’s National Insurance: namely, increasing paychecks and adjusting the combined earnings tax to suit, together with tax cuts to ensure almost nobody loses out and most groups enjoy a tax cut. Still, the report is a useful addition to the debate and well worth considering.
I wrote for the Telegraph on the implications of the Prime Minster’s tax announcement at the Conservatives’ conference in Birmingham:
The big announcements in David Cameron’s conference speech were a commitment to raising the personal tax allowance from £10,000 to £12,500 by 2020, and the level that people start paying the 40p higher rate from £41,900 to £50,000. Here, we explain the impact – both on the Government’s finances and your own.
After the No vote on Scottish independence, the TaxPayers’ Alliance (TPA) is calling on Westminster politicians to urgently address the substantial constitutional and financial issues thrown up by the referendum result.
As the polls tightened towards the day of the vote, the leaders of the three main parliamentary parties in London promised to protect the Barnett Formula, which since the 1970s has been used to allocate British taxpayers’ cash between England, Scotland, Wales, and Northern Ireland.
However, there is a substantial public spending gap that exists between England and the three home nations with devolved powers – with even Lord Barnett himself, who designed the formula, calling it a “terrible mistake” and “national embarrassment”.
In 2012-13, public spending per head in each of the home nations was:
In an era of devolved government, such spending gaps have become increasingly difficult to justify. Should higher public spending in some home nations be subsidised from taxpayers elsewhere? Why shouldn’t those areas pay for their own promises through higher local taxes?
The Barnett Formula cannot possibly survive. Little more than a crude back-of-the-envelope rule for splitting annual increases in public spending, back in 1978 it was a short-term expedient. It was never designed to last for thirty years and to bear the public scrutiny and resentment it now engenders.
Reform is essential – but politicians have promised to maintain unequal shares.
Jonathan Isaby, Chief Executive of the TaxPayers’ Alliance, said:
“The people of Scotland have spoken, but in their last-ditch attempt to save the Union politicians have also saved the unfair Barnett Formula. It is outdated and has spectacularly failed to address the extremely inequitable situation of taxpayers from one home nation heavily subsidising others. English taxpayers want an end to subsidising Scotland and the Scottish Government wants financial control devolved to Holyrood, so now is the ideal time to abolish the Barnett Formula entirely.
“Furthermore, as even more power is set to be handed to the Scottish Parliament, the time has come to end the anomaly of Scottish MPs voting on policy for other parts of the UK where Westminster MPs have no such say North of the border. English votes for English laws is the only fair way to proceed.”
In 2008, TaxPayers’ Alliance Research Fellow, Mike Denham, authored Unequal Shares, a paper examining the Barnett Formula and public spending across the UK. You can read it in full here.
Dia Chakravarty wrote for the Conservative Home website this morning, slamming the proposals to implement a new tax on supermarkets.
Twenty councils, led by Derby City, are calling for the right to impose a tax on large supermarkets, supposedly to be reinvested in the community and help small businesses. Retail outlets with a rateable value of over £500,000 would have to pay an extra business levy of up to 8.5 per cent.
Shocking new research conducted by our team over recent months demonstrates that Britain’s local authorities have long-term liabilities of more than £180bn, saddling future generations with today’s debt burden.
We found that local authorities in the UK had more than £180 billion in long-term liabilities on 31 March 2013, an increase of 8 per cent on the year before. Worryingly, this is almost seven times the amount raised in Council Tax in that year, meaning that those revenues are being used to service debt interest, rather than paying for essential frontline services.
On the positive side, some 214 councils decreased their long-term borrowing between 2012 and 2013, but some 105 councils increased their borrowing. 62 local authorities had long-term liabilities greater than or equal to their long-term assets. This is a real worry; it’s hard to see how those liabilities, often in the form of pensions, are going to be paid without increasing the amount that local authorities borrow. That means more of your council tax being spent on servicing debt interest rather than crucial frontline services.
Unless local councils take a hard look at their finances, and are honest about what they can afford, too many of our children and grandchildren are going to be left with a substantial bill. There is also a desperate need to wage a war on waste; with these huge liabilities to pay, councils can’t continue to fritter taxpayers’ money away. As if we didn’t need reminding, our debt clock offers some sobering numbers on the national debt – it’s terrifying to think that local councils are digging themselves into a £180bn hole as well.
Among the key findings of the research are:
Full data for each local authority across the UK can be found here.
Public finances data released this morning shows continued but slow improvement in the state of government accounts. Net borrowing in 2013-14 was just £107 billion, down from the £107.8 billion estimated in March for Budget 2014, the £111.2 billion in December last year for the Autumn Statement and also the £119.8 billion estimated in March last year for Budget 2013.
This £12.8 billion improvement, however, is put in perspective when contrasted with the June 2010 projection of £60.1 billion. Last March the Government thought the finances would be £59.7 billion worse than it expected them to be when they took over in 2010. Now we know they are only £46.9 billion worse than expected. An improvement but still very bad.
And all this borrowing has added up. At the end of April 2010, just before the May election, net debt excluding financial interventions stood at £834 billion. By the end of last month it had risen by an enormous £451 billion and now stands at a staggering £1,285 billion. See how our debt clock shows it rising every second!
We are still struggling under the weight of a ridiculously complex tax system that takes too much from our pockets, diverting our cash from the things we want to the things that politicians and bureaucrats want. These taxes gum up our housing markets, destroy jobs, lower our wages and kill off investment. Yes, the economy is growing again. But we should have been growing long ago and productivity and wage growth still disappoints.
Business projects are still not going ahead because tax makes the difference between profitability and loss. Personal taxes still act as a barrier between taking a job and not, especially for many who might be contemplating low paid work. And beyond that unnecessary complexity makes it all much worse than it needs to be. So tax reform is a necessary component of restoring incentives and therefore growth and prosperity we need.
And while we need to cut taxes, we also need to shrink the deficit harder and faster. That can only mean one thing. Politicians must join our War on Waste, root out unnecessary spending and put a stop to it.
A tiny room in Islington crammed with a kitchenette, dining table, wardrobe and double bed has hit the headlines due to its advertised rent of £170 per week. The alarmingly cramped appearance of the room combined with the high rent has been described as “sickeningly small” by Huffington Post and “depressing” by Time Out.
Perhaps inevitably, it has led to people saying that the landlord should be ashamed and that the politicians should ban people from being able to let out properties that they think are too small.
— XtraspecialOnesies (@Xtrasomething) June 4, 2014
— Mary Lane (@MrsMaryLane) June 4, 2014
One Guardian writer has even called for “the Thatcherite model” of private renting to be banned. Just like that.
The Thatcherite model of private renting. End it, now. http://t.co/aVPrNJgqf1
— Nadia Khomami (@nadiakhomami) June 4, 2014
Sadly, these commentators completely miss the fundamental point underlying what the sky high rents are telling us. The high price is a signal, it tells us that there is too little space relative to how much space is wanted. It does two things: it tells people to reduce the amount of space they use and it tells people to increase the amount of space available. Instead of addressing the problem (inadequate supply) they’re shooting the messenger (high prices).
The problem is that planning is getting in the way of the supply signal. Property owners know they can make lots of money by building more and bigger homes in places like this, where people really want to live. But the planning system stops them. That means all the pressure to match supply and demand is left to the demand side. Prices just rise until the number of people who are prepared to pay enough is whittled down to match the number of available homes.
Making it more expensive by tightening up regulations won’t help matters. We need to do precisely the opposite. We need to remove and relax planning restrictions to allow more building in the places where people actually want to live. That means rethinking both the greenbelt and restrictions on how tall buildings are allowed to be as well as scrapping some of the building and environmental rules that increase the cost of construction. The only alternative is ever higher prices and ever more ridiculous property ads.
Joe Hockey, the Treasurer of Australia (the equivalent of our Chancellor of the Exchequer) delivered his first budget yesterday with speedy deficit reduction the clear priority. Australia’s public finances are in far better shape than Britain’s. We have entered the fifth year of George Osborne’s fiscal consolidation and are still on course to borrow £96 billion this year. It’s the first time in 5 years the borrowing number can be written down using fewer than 12 digits.
This year, the UK government will borrow the equivalent of 5.5 per cent of GDP compared to 1.6 per cent in Australia. Even in 2009-10, at the height of the global financial crisis, the Australian government only needed to borrow 4.2 per cent of GDP.
We won’t actually start paying back our enormous debts until the 9th year of Osborne’s plan, and many of his future savings are as yet unspecified. Hockey’s plan will see debts being paid back in four years and there’s a lot less to pay.
Public Sector Net Debt in the UK will hit £1.36 trillion this year, 77 per cent of GDP. Australian Government general government sector net debt is $226 billion (£126 billion) – little more than the UK borrowed in 2011-12 alone.
The fiscal consolidation in Australia will be achieved through a mixture of some ugly, controversial tax hikes and some sensible savings.
Major tax measures:
But despite the generally good numbers, the Australian government has decided that having run five deficits in a row, something needs to change. Their fiscal responsibility is commendable, but some of the methods leave a lot to be desired.
The “Temporary Budget Repair Levy” is a blatant breach of Tony Abbott’s promise of “tax cuts without new taxes” in opposition. There’s no justification for tax hikes with the public finances as they are and growth forecast at 3 per cent this year and 4.75 per cent next year.
Only time will tell how much these broken promises undermine Abbott’s credibility.
Teachers are on strike today. One of the reasons is their anger over pension entitlements becoming less generous after reforms become effective in April 2015. These reforms don’t much affect the rights to pensions they’ve built up already. The changes are primarily about what additional pension rights they’ll be entitled to thereafter.
But there’s a huge problem with the cost of these pensions. As the unions fight for more generous terms and the Government decides how much of the next generation’s money it is prepared to promise them, they aren’t recognising the true scale of how much those promises will cost.
The Government has not put a single penny aside to pay for them and it’s also in denial about just how big those commitments are. Across the public sector, it says that unfunded pension schemes have liabilities worth £1.1 trillion. The problem is that this number is calculated using an artificial measure of the how to value what payments in the future are worth in today’s money.
Instead of using market ‘discount rates’ to account for how money set aside to pay for future commitments should grow, the Government invents its own number and this number makes the size of the liabilities seem a lot smaller than they really are. The TaxPayers’ Alliance asked finance and pensions expert Neil Record to estimate the difference between the real and official size. He found that the Government is downplaying the value of its promises by a colossal £610 billion.
The real value of these commitments is not the £1.1 trillion the Government claims. It’s £1.7 trillion, a figure which has swelled by £1 trillion since 2003-04. In other words, it’s been getting bigger by £100 billion every year, on average. And that’s on top of the £1.2 trillion in the official National Debt.
Private sector pension schemes aren’t allowed to invent their own discount rates to make their liabilities seem rosier. The Government shouldn’t be allowed to, either. It’s time they were a little more honest about how much public sector pension promises will cost taxpayers.
Office for Budget Responsibility economic models replicated by the Financial Times have revealed a new £20 billion black hole in the public finances. The news comes on top of the repeated deterioration in deficit forecasts since 2010 and means that the public sector would potentially continue living beyond its means until 2020.
Our War on Waste spending factbook highlighted the deterioration of deficit forecasts for 2014-15 in the graph shown above (click here to share it on Facebook, and here for Twitter). It’s clear that while the economy seems to be recovering, particularly with respect to private sector employment figures, the public finances are still a mess and tough decisions have to be made on spending.
This isn’t necessary only to close our still huge deficit but also to allow room for the tax cuts the country needs to sharpen economic incentives, boost growth and ease the financial burden on taxpayers. Mr Osborne should look again at spending when he delivers his budget in two weeks. It’s time he declared a War on Waste.