Sunday, January 18, 2015

Mansion Tax to pay for the NHS? It’s poppycock


According to HMRC

“Income Tax was introduced in 1799, as a means of paying for the war against Napoleon. The cost of war had drained Britain’s resources, and run up a considerable national debt. William Pitt the Younger was Prime Minister and Chancellor of the Exchequer from 1783, and he needed greater aid and contribution for the prosecution of the war. It was a (temporary) solution - a tax to beat Napoleon.”

Well we all know what happened next! Roll forward to Labour’s proposal for a “Mansion Tax” the revenues form which will go specifically to the National Health Service. This is so much poppycock! The idea of such a tax is a bad one anyway – as I argue here. And the politics are so blatantly opportunist that they are almost fraudulent. Taxes raised for specific purposes always get consolidated into general taxation – Income Tax the obvious example. If a Mansion Tax is introduced its revenues will go into the the Treasury coffers along with all the other taxes and duties we raise. Like Road tax (Vehicle Excise Duty) - which no more goes directly to improve the roads than a Mansion Tax would to improve the NHS!

The Mansion Tax is also proposed because it is seen as an easy sell. The logic is “Only rich people live in mansions and rich people can afford to pay more taxes – and they aren't going to vote Labour anyway so let’s make these pips squeak!” It’s a pretty squalid bit of logic really. The rich already pay more income tax than the less rich anyway. If you want to squeeze them a tad more do it with the tax rate. But be careful – diminishing returns can set in. So get your boffins to work out the rate of income tax and the cut-off points for the tax bands that maximises revenues in the fairest way possible. It shouldn't be difficult to do that. Alternatively (or additionally) raise the VAT rate for real luxury goods and services. It wouldn't be the first time that we’d done that as a nation (remember Purchase Tax ?)

There are some basic rules about tax that need restating. Firstly, as we have seen, all taxes etc. go into one pot. Second VAT is a regressive tax because it applies at the same level to rich and poor alike. If you want consumption taxes to be fair then VAT is long overdue for reform. Third Council Tax is also regressive in that the property valuations are out-of-date and arbitrary. The principle of ability to pay is not entrenched in determining the level of Council tax which can be a major burden for poor families. Fourth Income Tax is a progressive tax and mostly fair, but it has its limitations.

No tax is levied to punish the rich – or it shouldn't be. That the rich pay more tax, and arguably should pay more still in our current economic circumstances, is fair and just. But we are surely not punishing the rich for their success - they are entitled to expect Government to try and reduce their tax burden in time just as less-wealthy citizens are. The level of tax required is determined by the level of expenditure that the State makes. If we decide to improve our NHS all to the good, but we have to pay for it, as at present, out of general taxation. It is frankly phoney to predicate the allocation of tax income from a totally unrelated source (property) to the NHS - or to anything else. I'm sure that William Pitt was sincere in the rationale he thought of for introducing Income Tax to beat Napoleon. Is Ed Milliband being equally open with us about the Mansion Tax? You decide!


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