Prof Ken Gibb reflects on a recent IFS podcast tackling housing taxation, exploring key debates on council tax, stamp duty, and landlord taxation.
Before Christmas, the IFS did a provocative ‘zoom in’ podcast on housing taxation. This featured a lively debate between Paul Johnson, Stuart Adam and Tim Leunig. Well worth listening to.
The main discussion areas were council tax, stamp duty land tax (and its devolved equivalents) and the taxation of owners versus private landlords, in addition to a lively disagreement about how bad the problems were and what to do. A recurring theme was that tax is not the only housing problem with housing supply constraints deemed more important than taxation.
IFS covers property taxation within their mighty Tax by Design comprehensive review and reform agenda for the UK tax system, chaired by James Mirrlees. Tim Leunig has recently published his own reform package, a fairer property tax, for council tax and Stamp Duty Land Tax (SDLT). Tax by Design contrasts a tax neutral efficient and progressive neutral tax benchmark with the existing dog’s breakfast of UK taxation, before considering 2nd best practical and credible ways of getting close to the optimal preferred outcome for each cluster of taxes. Leunig’s approach is idiosyncratic, and highly pragmatic, and deals with council tax and SDLT.
It is important to note that other views are available. Among others, John Muellbauer and Fairer Share have both presented important housing tax reform proposals recently connecting council tax and SDLT.
What did they say in the podcast? The established problems with the council tax were laid out in the form of the increasing unreality of the 1991 tax base as a basis for property taxation, the consequences of the single adult discount, the regressive nature of the tax by income but especially in terms of the incongruity of paying more on council tax if living in lower value regions in the North than in London and the home counties. There was also recognition that one cannot wholly separate the Council Tax from the grant and funding system of local government and that more holistic reform, though clearly much more complex and difficult politically, would be preferred.
The SDLT debate was interesting in that IFS made the case against the tax on the grounds that, while it raises a lot of revenue that needs to be covered, it reduces mobility and thereby reduces economic opportunity and perhaps growth, too. It was also stressed that SDLT is higher and arguably punitive on landlords who pay a higher additional tax payment on all purchases. Although Tim Leunig acknowledged these concerns, he made the unexpected argument justifying the landlord supplement on the basis that tenancies turn over frequently relative to one-off purchases [I am not sure of the merits of that argument!].
I liked the slightly off-topic discussion about the relative taxation of home ownership and private landlords. This is in part about incentives and the economic as opposed to political justification for lower taxes facing homeowners. The discussion also covered the consequences of the adverse tax changes facing private landlords since the tax changes introduced first by George Osborne. The tax changes such as SDLT and especially reducing tax relief on mortgages seem to be accelerating landlord exit and reducing new investment. But what is happening to their properties- are they staying in the rental market (landlord consolidation), or are they returning to the homeownership sector? Different responses will clearly impact the demand-supply imbalance we all see in the contemporary rental market.
My other reflections on the podcast are
- I instinctively lean towards Stuart Adam’s position at IFS but there are certainly questions begged for all the proposals discussed (or implicit) concerning the credibility of reform politically, as well as the detail of design, implementation and deliverability
- I agree that tax reform is but one part of what ails the housing system, but it is surely a necessary, if not sufficient, condition of reform more holistically considered, which also includes supply, mortgage regulation, homelessness, housing stock improvement and other things besides.
- Economists love talking about incentives but also tax capitalisation, that the future stream of tax payments impact on property values. Both incentives and capitalisation are part of this story, but they do need to be specifically evidenced and not just asserted.
- I should also declare an interest. CaCHE has a report coming out soon on the reform of Council Tax and LBTT in Scotland, the two devolved housing taxes raised in Housing to 2040. We will cover much of the same ground in detail in that report. I am also writing a book about housing taxation; expect more to follow on this topic.
