Should Britain have a wealth tax?
When I look at the scale of the UK's budget deficit, I just can't figure out how the coalition government will ever fill the black hole at the heart of our nation's finances.
A £122 billion hole
While some Brits may believe that the UK's debt is coming down, in fact it is rising by more than £10 billion a month. At present, this is the amount by which government spending exceeds its revenues. The Office for Budget Responsibility forecasts government spending of £711 billion and revenues of £589 billion, producing a £122 billion shortfall for the 2011/12 tax year.
A big problem is that raising taxes in an attempt to narrow this gap can be counter-productive. When taxes rise or new taxes are introduced, we change our behaviour in order to minimise our tax bills. As a result, the actual return from tax changes is often lower than first predicted.
How could we close this gap?
One high-profile tax under review is the 50% top rate of tax for those earning over £150,000 a year. Tory party members are urging David Cameron and George Osborne to scrap this tax, which they see as penalising entrepreneurs and wealth creators. However, many Brits broadly welcome the 50% tax rate, seeing it as a way for the wealthy to 'pay their share' and 'share the pain'.
However, Liberal Democrat members of the coalition government do not want to scrap the top rate of tax without replacing it with a different revenue from the rich. Hence, Business Secretary and Liberal Democrat MP Vince Cable favours the introduction of a 'mansion tax' on those with substantial property assets or wealth.
How would a wealth tax work?
One way to raise more money from wealthy homeowners would be to introduce a new, higher band of Council Tax above Band H (which currently applies to properties in England which would have been valued above £320,000 in April 1991).
Alternatively, Dr Cable has previously proposed a direct mansion tax on properties worth more than £2 million. With perhaps 75,000 properties in this category, he estimates that this new tax could raise £1.7 billion a year for the country's coffers. What's more, it would mean millionaire non-domiciles would contribute more tax towards the UK's upkeep.
However, critics of a property-based tax -- including London Mayor Boris Johnson -- claim that Londoners and residents of the South East would pay the lion's share of this tax. This is patently true, given that these two regions are home to the UK's richest residents and highest property prices.
Supporters of a mansion tax argue that it will be harder to dodge than income-based taxes, as it will be based on a tangible asset which cannot be spirited abroad for tax purposes. What's more, they argue that property assets are hugely under-taxed. For example, there is no Capital Gains Tax to pay on the unearned wealth made from the sale of your main residence, no matter how large your gain. In addition, any tax on homeowners with properties worth £2 million or more is likely to go down well with both voters and politicians.
However, collecting any mansion tax would be a logistical nightmare, given that it might involve the yearly revaluation of all properties in or near the tax threshold. This expensive exercise -- perhaps costing hundreds of millions of pounds a year-- would take a big bite out of the tax collected.
Are you pro or anti?
There are many arguments for and against introducing taxes based on property or wealth. Indeed, in many other leading economies, citizens cough up a small percentage of their wealth each year in order to contribute to the upkeep of their states.
I'm keen to hear our readers' views on property and wealth taxes.
1. Do you think that the 50% top rate of tax should be scrapped, benefiting Britain's top 320,000 earners?
2. Are you for or against new taxes on property, land or personal wealth?
3. Should owners of very expensive properties pay more Council Tax?
4. What alternative tax-raising measures would you favour?
Swiss tax deal criticised by MPs
Tax on state pensions to be abolished?
Scrap the 50p tax rate, say bosses