Deputy Prime Minister Nick Clegg has outlined in a newspaper interview his proposed plans for an emergency 'wealth tax' in order to generate funds to boost the economy. In particular, the plans focused on the value of people's assets rather than income, and more specifically outlined a proposed 'mansion tax' on properties worth more than £1m or £2m.
I disagree with this proposed temporary raised level of tax, on a number of levels. I believe the calls are short-sighted and could lead to long-term damage to the UK economy. During such a time of austerity and economic stagnation, such a move will discourage growth and stifle innovation.
Primarily, there is a misconception that those who live in expensive properties - particularly in central London where Banda Property is based - have more disposable income, which is in itself a fallacy. Most of those who own these properties have worked extremely hard to be able to afford a family home in the city.
Indeed, due to significant rises in property prices in central London over the past few decades, many of those that own a property worth over £1 million are by no-means the ultra-wealthy and will not necessarily be boasting high levels of disposable income. Many of these individuals and families will have chosen to live in London due to its employment opportunities, but will find themselves struggling in an extremely expensive city where salaries are not rising in line with inflation and property taxes are proportionately higher in terms of GDP than any other country in the OECD.
That such a tax could have a devastating impact on the UK economy is by no means an understatement. We need to be focusing on encouraging growth, not discouraging people from working and running businesses in the UK. People will no doubt find creative ways around the system. They will look to move their assets offshore, transferring into alternative structures such as trusts, foundations and partnerships and the only people to benefit from this will be tax lawyers. Ultimately, the worst case scenario will be that people will leave the UK. We have recently witnessed a significant increase in the number of French people looking to purchase in property in London for the same domestic reasons: a result of Francois Hollande's 75% tax rate for 'wealthier' individuals.
Regardless of this, there is little evidence of the effectiveness of implementing a 'wealth' tax. Sweden used to have a form of this, and it raised only £427 million from 2.5% of taxpayers, but was estimated to have driven £142 billion out of the country. Likewise, in France it is estimated only 20,000 out of 20m households pay their wealth tax, rendering it as virtually ineffective.
This proposition is nothing short of foolish. Growth in the UK is already considerably stifled due to a combination of high taxes and over-regulation and therefore we need to be encouraging people - including foreigners - to purchase property in London and invest their money in our economy.
By encouraging people to the city to invest in property, and the development of these homes, jobs will be created and more contribution made to public funds. Not only will property development lead to the employment of UK based contractors and construction professionals, but additional money will be raised for the government via Stamp Duty Land Tax and VAT.
Alienating those that already living in London, and discouraging those who are not from moving here will inevitably create more hardship, unfairness and economic disruption. The ultimate response from the public, particularly if the test for the new tax is residence-based would be to move out of the country, driving money out of the UK and not in, defeating the primary objective of the proposals.