Our founder, Andrew Dixon, welcomed this excellent contribution to the debate. “It is exciting to see The Daily Telegraph highlight so many of the problems with existing residential property taxes. Wonderful to see the references to Sir Winston Churchill and Sir James Mirrlees. Russell mentions the flawed nature of stamp duty – a tax on how much something changes hands. And he goes on to point out the unfairness of council tax. Russell writes about the benefits of a proportional property tax and challenges the Government to be bold.”

The following article originally appeared in Daily Telegraph on January 19th, authored by Economics Editor, Russell Lynch.

With a big majority and Brexit secured, the Government has no excuses for being timid.

In 1909, Winston Churchill – then a Liberal serving in Herbert Asquith’s Cabinet – had this to say on the subject of property and land: “Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains – and all the while the landlord sits still.

“Every one of those improvements is effected by the labour and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived.”

I’m not sure if the Prime Minister, as a biographer of Churchill, came across the above extract, quoted approvingly in Nobel laureate Sir James Mirrlees’ comprehensive review of the UK tax system back in 2011. But perhaps he should take heed of the sentiment as the Government begins to plot its way out of the fiscal mire left by Covid-19.

Back then, Sir James pointed out the “mess” of our economically inefficient system of property taxes which ignore land values, stifle the number of transactions and fall disproportionately hard on the poorest. The scandal is that nearly a decade on from his study, hardly a thing has changed. Political calculation and the vocal complaints of the losers has always sapped the courage of ministers, meaning that perpetuating the absurdity is always the path of least resistance.

Take stamp duty. Communities Secretary Robert Jenrick is promising new laws to protect statues from woke militias but stamp duty – a supposedly temporary effort dating back to 1694 to fund a war with France – is one historical taxation edifice which needs toppling in quick time. After all,  any tax levied on how much something changes hands, rather than its value, is by definition flawed. As countless studies have shown, it saps mobility in the housing market, particularly at a local level where moves are less likely to be driven by longer-term factors like a new job.

LSE economist Christian Hilber estimated in 2018 that the old “slab” system of stamp duty, where a £250,000 house bore 3pc duty on the entire value compared to 1pc at £249,000, cost almost as much in lost transactions as it made in revenues for the Treasury. While that bunching effect is now gone, the drag – or the lost “welfare” in the economic jargon – still remains due to the impact of the mismatch in the market and forgone transactions, he says.
The Telegraph is campaigning for the current stamp duty holiday, which expires on March 31, to be extended permanently. Better still would be to scrap the damn thing altogether, for the reasons above. The inefficiency of the tax means that the cost won’t be as much as the £11bn in pre-Covid revenues it raked in, although from a “levelling up” perspective selling a tax cut disproportionately benefiting buyers in London and the South-East may be difficult.

One thing is certain though: stamp duty can’t be considered in isolation. A proper approach would see a comprehensive review of all property taxes announced in March’s Budget, with a pledge that any agreed changes would be phased in over several years to ward off the threat of short-term market dislocation.

Top of the list would be replacing the manifest unfairness of a council tax based on 1991 property valuations. This admittedly could be expensive news for a lot of people, including myself. But how long are we going to maintain the absurdity of charging people on the basis of prices 30 years ago? What happens when it gets to 50, or even 100 years? Surely we have to somehow get out of this ridiculous taxation corner we’ve painted ourselves into by ducking regular revaluations.  Hence he needs to consider other options.

A housing services tax of the type proposed by Mirrlees would see renters or owner-occupiers pay a small annual share of the rental value of their properties, with 0.6pc seen as revenue-neutral for replacing council tax. This is not a “mansion tax” or anything like it: it is effectively how much you pay for “consuming” the property you are living in. There would be no reductions for single occupants or empty homes to extend the inefficiencies in the market, for example.

Admittedly the potential losers will include older, retired owner occupiers in larger homes, which is a constituency few governments of any colour like to upset. But it would address the unfairness baked into the current system where those at the top are paying proportionally less. In fact, an HST would look a lot more like one of the predecessors of council tax, domestic rates, which were also charged as a percentage of estimated rental values.  If the Chancellor wanted to scrap stamp duty on housing transactions altogether, the tax could potentially be set at a higher level to make up the revenue.

If Sunak wanted to go further still, his review might also look at options such as a land value tax, targeting the land which a property sits on. Such a move, based on the rental potential of the land, would capture the unearned “betterment” that landlords have accrued from their surroundings, to take us back to Churchill.

Countless economists from Adam Smith onwards have argued for one and even Milton Friedman – never a fan of tax – said it was the “least bad option”. The reason that they aren’t more common, however, are the practical difficulties of valuing the land separately from the buildings, and the potential for legal challenge that it brings, while the politics also gets in the way again.

Even allowing for Covid, the Government has yet to lay down a real marker on tax despite symbolic gestures such as scrapping the tampon tax when we left the EU’s orbit. Certainly the current crop of headlines about a vindictive raid on homeowners won’t do anything to bolster the Chancellor’s nerves, especially after the Government gave Labour a chasing over its “garden tax” in the build-up to the 2019 election.

Asquith, it has to be said, dropped the land tax that Churchill spoke in support of a year later after opposition from landowners in the House of Lords. But with a majority of 80, the Government has the chance to be bold, and to take some steps towards sorting out a shambles that has lingered for decades. The real question is whether ministers have the nerve to do it.

© Russell Lynch / Telegraph Media Group Limited 2021