The Liberal Democrat’s mansion tax: the unintended consequences

September 28th, 2009

The Liberal Democrats have proposed what is now being called ‘The Mansion Tax’, where each household that is valued at one million pounds or over will be taxed at .5% annually.

As is true with all taxes, there will be unintended consequences to this idea. Lets go through some of them.

This tax, should it ever be passed, will create a virtual city of limbo houses that no one wants to buy, no one wants to repair and which will fall into dilapidation.

Anyone who is going to buy a house and has a budget of one million will opt for a house that is less than that amount. Any owner of a house with a value of one million will find that property harder to sell. Even though one million pounds is ‘alot of money’, most people do not lay out cash, but instead, get a mortgage. The .5% tax will be enough of a disincentive to getting one of these houses; why go for a house that costs 1M when you can get one for .950k and avoid an annual bill of £5,000?

Anyone owning a house that is worth almost 1M will have no incentive to do any sort of repair or improvement on it. Anything they do that might increase the value of the property will immediately put it in the new category, which will mean that not only will they instantly be liable for this new tax, but the prospects of selling the house in the future will be significantly decreased.

Anyone owning a house that is currently worth 1M will have an incentive to devalue the property. They will demolish a garage, remove a glass extension, pull out insulation – do anything they can that will reduce the value of the house whilst not making it uninhabitable.

The building trade will be affected by this tax. All work to improve houses that have the potential to approach 1M in value should repairs or improvements be done on them will be cancelled permanently. This lost work will probably offset the money that the LibDems want to raise with this tax.

No architect will design a house believing that its price will fall on or near 1M. Houses that are much bigger than 1M will continue to built, houses that cannot by improvement ever reach 1M will continue to be built, but that ‘sour spot’ (as opposed to sweet spot) will not be built in. This tax will exert an aesthetic pressure that will distort the building and architecture trades. There will be more sub 1M houses, more ‘big’ houses, and a gap where all the 1M houses used to be.

These are just a few of the unintended consequences of this idea. It is a bad idea. It has been put forward by people who have clearly never read or heard about the parable of the broken window. The money that they raise from this will simply be diverted and not ‘raised’, while causing widespread destruction as people deliberately destroy their property in order to get in under the wire.

There are many properties in London that bear the scars of this sort of ‘thinking’. In the 1680s a ‘window tax’ was imposed on all properties. To get away from it, property owners bricked up windows on their homes to lessen the tax burden. They had to have light and air, and so they could not brick them all up; look at all of these properties, and imagine the amount of light that would have entered at each place a window is lost.

The Liberal Democrats have a limitless capacity to drink from the well of stupidity. They consistently propose policies that are out of line with reality, economic laws and the public mood (no matter what the polls say), and in the case of this millionaire tax, they demonstrate once again that they do not know anything about economics.

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