Monday, November 27, 2006

MSPs and their mortgages

Last week, as a result of disclosures in this paper, the Scottish Parliament agreed to review the system of living allowances which has permitted MSPs to make large gains on the Edinburgh property market at public expense. None of the MSPs involved had done broken any rules, or acted improperly.

And that is precisely the problem. Making tens of thousands of pounds in capital gains on property, tax free, is considered just a normal part of middle class life. Is it their fault that property prices are daft? It’s just funny money anyway, isn’t it? Not as if anyone handed them tens of thousands of pounds in used notes.

Well, I’m afraid it is real money, and if any of those parliamentary property magnates were to find themselves in the position of a first time buyer in Scotland, average age 35, then they would realise that there's nothing funny about it. When a house says it is worth £300,000 on the estate agents schedule, it means exactly that.

Now, I’m not trying to hound MSPs. They inherited a system from Westminster, where MPs have been building property empires on the basis of their living allowances for many years. What I am more concerned about is the way that property ownership conditions their approach to public policy. We have all been corrupted by the property market.

The Burt Report on replacing the council tax was rejected out of hand by the Scottish Executive last week because it would involve the top 35% of property owners paying a bit more. Instead of a clumsy and regressive council tax based on anachronistic 'bandings' that haven’t been properly revalued for 15 years, owner-occupiers would start to pay local tax on the basis of the real value of the property. Shock! Horror!

The First Minister, Jack McConnell, simply dismissed the Burt findings at FMQs as if they was the ravings of the loony left. But Sir Peter Burt is no Tommy Sheridan. He is the former head of the Royal Bank of Scotland. His committee was set up by the Scottish Executive and spent two years studying the problem from all angles.

Sir Peter was treated appallingly by ministers, with his report leaked and rejected even before he was allowed to explain the reasoning behind it. This will make public figures much less willing to accept these tasks in future.

The reason that Jack McConnell felt there was no need to justify his rejection of Burt is this: to most middle class people in Scotland - the ones who tend to vote in elections - the idea that they are sitting on massive untaxed capital gains is anathema. They just don’t see it that way. And this fiscal myopia afflicts politicians of all parties in the Scottish Parliament.

I mean, the very idea of poor me having to pay £3,500 a year for my house in Kelvinside just because it has tripled in value in the last ten years... This is the kind of perverse reasoning that left Labour - supposedly the party of the underdog - prepared to continue with a system in which the poorer households subsidise the richer ones.

For let’s be clear: that is exactly what is happening under the council tax bands as they exist at present. Burt warned that trying to manipulate the bandings to reflect changes in property values would also provoke outrage from the middle classes.

Now, it is probably true, as the SNP say, that local income tax could be more progressive. Since it is based on income, this is, by definition, the best way to ensure that a tax is based on ability to pay. However, there is a strong argument against putting too much of the burden onto one form of taxation, quite apart from the problem of two-earner households and the likely growth of tax avoidance schemes.

The size of your house is a pretty good indication of overall wealth, and council services - lighting roads etc - are mostly related to property. Property tax is fair because capital gains on houses are not taxed by the state. They are harder to evade, because houses can’t be relocated offshore, and they can sensibly be raised locally. Local income tax is really a contradiction in terms because it would inevitably fall to the centralised Revenue to collect it.

But property taxes aren’t just fair, they encourage the most efficient use of housing space, by discouraging people from living in houses that are far too large for their needs. Right now, we desperately need to release space for a generation that cannot afford any kind of home at all. Yet, we have half a million ageing baby boomers, sitting in large houses they don’t need, but which have turned into cash machines they won't sell.

Of course, there is the problem of the older person living in a large house on a small income. But if they had a large bank-balance, they would be expected to pay tax on the earnings it yields. Why should a house be any different? There are numerous ways in which equity can be withdrawn to pay for tax, or later though a deferred fund.

And what if prices fall? Well, then people would pay less - obviously. The problem is that we all pretend to ourselves that the value of our houses isn’t real money, and that somehow we should be allowed, like the MSPs on the allowances scam, to keep tens, even hundreds of thousands of pounds of unearned income without paying any tax on it. There is only one word for that: greed. And that isn’t the basis of a fair taxation.

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