Why do we tax property?

Tenements

Allan Faulds

The Scottish Green Party have today launched proposals on taxation including a replacement for council tax. Described as a “Residential Property Tax” (RPT), individual councils would set the tax rate as a % of property values less a £10000 tax free allowance, with a recommended rate of 1%. Labour are proposing a property tax with a flat starting point of £450 added to 0.35% of the value of a property under £180,000 and 0.9% for the value above that threshold, whilst the SNP intend on retaining Council Tax with some tweaks, meaning most parties are going into this election arguing for property taxes at local level.

Unsurprisingly Labour’s proposals were met with derision from SNP quarters, some even remarking it was “replacing council tax with the council tax” – an odd accusation for people barely even tweaking council tax! Bizarrely, even having dropped their local income tax policy, there still seems to be suspicion of any replacement that isn’t income based. We all know that council tax is broken, and dismissing alternatives out of hand isn’t good enough. It’s important to understand why property taxes are being proposed.

What is a Property Tax?

Property taxes come in a number of forms, but can be broadly categorised based on exactly what type of property is taxed. More traditional forms of property taxation, like the council tax and the above mentioned proposals, are taxes on “Real Estate Value” – that is, the combined value of the land, the buildings and resources on that land. Another prominent form of property tax is “Land Value Tax”, where only the value of the land is taxed. Land Value Taxation remains the long-term goal of the Scottish Green Party for all property taxation, and has been proposed outright as the replacement for Non-Domestic Rates (“Business Rates”).

Many people instinctively dislike property based taxation, viewing income based taxation as inherently fairer due to the direct link between earnings and how much tax they pay. By contrast, it isn’t an absolute certainty that a more expensive house is inhabited by a better off individual or family, although as a general rule that tends to be the case. In spite of the weaker link between property values and income, property taxation is a commonly used and valuable contributor to government revenues the world over, and for good reason.

Why Not Local Income Tax?

Taxes based on income are particularly susceptible to (usually legal) manipulation and avoidance, primarily by wealthier individuals, using clever schemes to get out of paying tax they’d otherwise be liable for. Over the past few years, the public have grown used to stories about wealthy people effectively passing some of their income through tax havens such as the Cayman Islands or Jersey so that they can pay a lower rate of tax on it.

Additionally, not all of what your average person would consider “income” is liable for income tax. For example, income from dividends is taxed at a lower rate than income from employment. Notionally this is because as a distributed form of a company’s profits, the dividend has already been subject to corporation tax but from a perspective of individual ability to pay and afford the cost of living, it hardly seems fair that it’s possible to tax two people with identical income at different rates.

What are the Benefits of Property Taxes?

Property taxation is by and large immune to such manipulation. If you own a house, it’s a house – it’s difficult to argue that it’s a special kind of house that should pay less tax. Likewise, if that nice plush house is in Morningside, no one can claim that the house is actually located in the Cayman Islands and should be liable for tax there.

Local government is also particularly well suited to property taxation. In a Scottish context, the administrative burden of levying an income tax in 32 different local authorities is ridiculous – especially if, as should be the case, each of those authorities has the ability to alter the tax rate. It’s enormously difficult for local and national tax authorities to correctly identify what rate each individual is liable for, then deduct that from their pay each month. Well-designed property taxes can instead build on already existing processes for valuation of residential properties, and in Scotland, continue to utilise much of the existing mechanisms used for council tax.

Finally, these proposals form part of a more balanced tax system, shifting some weight away from income towards wealth, whilst cooling off the housing market. Although successive governments wouldn’t dare admit it, the UK has an unhealthy relationship with home ownership. Increasingly, homes are viewed as financial investments rather than places to live, contributing to sky rocketing prices and huge mortgage debt. If people become wary of buying property at a price that will be liable for a significant amount of RPT, then prices will eventually stabilise at a level that’s more affordable both to purchase and to live in.

Whether we like it or not, property is a form of wealth – and a form of wealth that it is increasingly hard to redistribute. We’re rapidly approaching a point where home owners are, in the main, either rich or old (or both), whilst those who are poor and/or young are increasingly unable to even aspire to home ownership. If we aren’t careful, we’ll reach a point where the only way to own a home will be if you are lucky enough to have inherited one. Sensible yet robust taxation of property will help us avert that nightmare scenario.

So in spite of understandable misgivings, we should be clear that property taxation has an important role to play in any progressive tax system. What makes council tax such an unfair system is not that it’s based on property, but that it’s poorly designed. If we want a fairer, more radical Scotland, this kind of reform of local taxation is a good starting point.

Further Reading

https://greens.scot/sites/default/files/Policy/Fair%20Funding%20For%20Public%20Services%202016.pdf
https://www.mygov.scot/business-rates-guidance/
http://www.gov.scot/Topics/Government/local-government/17999/counciltax
http://localtaxcommission.scot/download-our-final-report/

Image Credit: Originally from National Trust for Scotland

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2 thoughts on “Why do we tax property?

  1. Kaz Lokuciewski says:

    Kind of misses the main point. It’s fair. We do not allow people to build their home wherever they like. We impose restrictions on construction and we enforce boundaries or private control. The protection of these private boundaries from being used by those who would like to make personal use of them, and enforcement of non-contruction comes with two costs. the legal and political and police framework that enforce the rules, and the social costs of the inflated shelter rates all must pay in the presence of a the protected landlord, therefore, it is only fair that, if society is not simply to move into unused / excess accommodation, contruct on any piece of land they can fine, or stop paying rent but not move out..then those who in many cases inherited the right to own for nothing more than an insider trade or local council planning committee deal, pay fair taxation.

    How much they should pay is relative to their land holdings..so it’s simple so you simply tax the assets.

    The only question is one of the person with a mansion but little capital. My thoughts.

    1. Many people downscale into what they can afford. You should be happy that you live in a mansion for a while and not begrudge however has a turn next.

    2. I would support a motion that allows the state to take a % of the property equal to the tax so that they can choose to live there but when they die and IHT is due is has not been transferred to the kids 7 years before and evaded (I know it’s avoided but I call any avoidance that is only there because of a corrupt government evasions.

    Like

    • Allan says:

      Kaz,

      Your first part there is a good explanation of why people should be taxed on property as a general principle – unfortunately, there’s only so long you can make a post before it becomes unreadable, so I was going more for the sort of income vs property mechanics of it all!

      Re; 1, there’s a careful balance to be struck. It’s always going to come off really, really badly to suggest people should leave their homes – people do have a very strong emotional attachment to them. That’s why, in particular, pensioners are offered a deferral until death or sale of the house on the new RPT under Green plans, whilst others have a five year period to adjust.

      Not entirely sure I follow 2 – is that a suggestion for the part ownership of the property by the state (specifically, the local government) which is then held by the state as sort of “security” to ensure payment of inheritance tax?

      Like

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