Stop the Fiscal Arms Race

Jeremy Hunt has pledged that he would not make any changes to property taxes and has attempted to bait Rachel Reeves in matching his commitment. For two very clever people this would be a very stupid thing to do and Reeves needs to turn down Hunt’s offer of a free bottle of Kool-Aid.

We’re seeing a fiscal arms race where both the Tories and Labour are attempting to out-compete each other as to who can make the biggest promise when it comes to not raising taxes. As I wrote on Monday, this is dishonest and dangerous. Whoever forms the next government is going to find the money to meet their spending commitments somewhere and so the danger will be that they will go after politically unpopular groups which would be economically damaging and add even more complexity to the tax system. 

The tax system is far too complex and it is in dire need of reform and the starting point for the next government should be property taxes.

Let’s start with Council Tax. Not that this should be the main reason for reform but it is truly hated by the public. Recent polling has shown that it’s the top tax that people want to see cut. As such, making reforms to it have the potential to be hugely popular.

More importantly, Council Tax is based on property values from 1991 (this is only in England, as the system is different in the rest of the UK). This is an absurd position for politicians to attempt to defend. Given we’ve seen property values shoot up in London and the South East over the past few decades this represents a subsidy to often much wealthier households at the expense of poorer households in other parts of England. As such, this means it is a regressive tax with the burden falling on lower income households.

Then there are Business Rates. You often see politicians promising to lower Business Rates in order to provide relief for small businesses and rejuvenate the high street. While well intentioned, such a move would be a mistake. Cuts to Business Rates are paid by the owners of the land, not the businesses themselves. Given that successive governments have failed to reform the planning system, such a move would likely see rents increase in the short to medium term, providing no relief to firms.

Finally, there is Stamp Duty Land Tax. Stamp Duty has to be the most damaging tax on the books. It gums up the country’s already dysfunctional housing market and hits economic growth by preventing people from moving to areas where they could work in roles where they would be most productive. It is a very inefficient revenue raiser given the damage it causes to the economy. Although on paper it may look like a significant revenue raiser it is like the horse owned by the washed up drunken cowboy actor in the Simpsons which has been taught to use a broom: ‘He soils as much as he cleans’.

In an ideal world we’d see the government commit to abolishing Council Tax, Business Rates, and Stamp Duty and replace them all with a Land Value Tax. Such a move would not only be a fairer and more efficient way to raise revenue it would also – coupled with a liberalisation of the planning system – help to end the housing crisis while stimulating the economy.

At the very least, Council Tax needs reforming. The government should base rates on an up to date value of homes. This would tackle much of the unfairness of the current system and make it more progressive. 

What is more, even if replaced with nothing then Stamp Duty should be scrapped completely. The boost to economic growth this would lead to would see an increase in revenue from other taxes and if this move was part of a larger package of tax reforms including levying VAT on everything then the new Chancellor need not worry about it creating a fiscal black hole.

Yesterday I wrote about why the next government needs to make tackling poverty a priority. I wondered why it wasn’t higher on the agenda of politicians and if this reflected the attitudes of the public. The excellent Aveek Bhattacharya of the Social Market Foundation helpfully pointed out that polling shows that measures to alleviate poverty are popular with the public.

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