A couple of scathing pieces on George Osborne’s plan to cut inheritance tax.
Janan Ganesh in the FT (my emphasis):
A Briton sets up a business, risking her savings and employing people on the way. If she makes a profit, it is taxed. If she sells the company, she is taxed on the capital gain.
Another Briton buys a home. Through chronic undersupply in the market, or travesty of a market, the price goes up by half in a few years. The only tax on the property is paid to the local council, at bands set a quarter of a century ago. If the homeowner sells, and it is his only house, he incurs no tax.
Yet another Briton inherits a house worth, say, £600,000, three times the national average. She pays no tax.
One of these capital-rich individuals built their asset from nothing, one bought theirs and watched passively as it grew and the other’s principal talent was the dumb luck to be born into the right family. It takes an obtuse theory of justice to tax them in anything other than ascending order. The British state does the opposite.
And Chris Dillow:
For every pound UK banks lend to manufacturers, they lend almost £36 to home-buyers: £35.3bn vs £1264.8bn (pdf).
If people are looking to get rich merely from rising house prices, they’ll be diverted from productive activity.
“Our rich are job-creating innovators,” said Chris Blackhurst after the Sunday Times Rich List was published. Some of them are but, unless you count investing in an ever-rising property market as innovation, most are not.
Even those great British entrepreneurs who started with next to nothing usually invest in property as soon as they have made enough money. Even the leftie ones do it. And who can blame them? They’d be daft not to. Building a business is hard. Parking your cash in the UK property market is a much easier way of making money than developing new products or services.
But, as that comment in the Mirror’s graphic says, to invest in property you need a lot of money to begin with. You can’t start up with a few hundred quid and make your fortune. Property investment doesn’t take you from rags to riches, it takes you from riches to a lot more riches.
The distribution of property wealth is much more uneven than that of income. The Gini coefficient for household income after tax in the UK is around 0.35. For annual pre-tax income it is up at 0.5. (See previous post.) For property wealth, though, it is 0.64.
That’s not just because of the super rich though. As Janan Ganesh points out, much of the property wealth is the fossilised income of older middle earners based on houses bought when middle incomes were relatively high and which have shot up in value since.
Compared to other G7 and EU countries, the UK has one of the highest levels of property wealth per adult.
ONS data shows that property forms the largest single component of wealth in the fourth to eighth deciles of the distribution. The rich have their wealth spread across a range of assets but for those in the middle, most of it is tied up in their houses.
Which is why, as both Chris and Janan say, taxing it is unpopular and reducing taxes on it gets votes.
For the economy as a whole, this is bonkers. Our tax system penalises those who generate wealth while going easy on those who just sit and watch it grow. If, or more likely when, taxes rise, it would make sense to tax property. A land value tax, for example, would be more progressive than income tax, would collect tax from some people who currently don’t pay it and would help to redistribute income to younger generations. It would also discourage land-banking and encourage investment away from property and into more productive activity.
It is unlikely to happen though. Too many people are too wedded to the idea of watching their property value increase. Our tax system is perverse. It reinforces Britain’s preference for property speculation and rental income over business investment. With his inheritance tax proposal, George Osborne will make it that bit more so.