‘...this has few buyers in the country at large because most voters understand that they benefit from the wealth and inheritance of their older relatives.’
Of course, the young wouldn’t need to benefit from all these wealth transfers if housing policy hadn’t been ruined by their parents’ generation... Something they didn’t have to deal with when they were buying their first properties on much smaller deposits and earnings ratios. And we then wouldn’t need to answer the wealth taxation question.
FWIW I did a large piece of analysis on how a Land Value Tax would work while I was a data scientist at DWP back in 2016-17. It was very obviously a massive win for at least 70-80%+ of households assuming we raised £200-300bn from LVT and cut the same from PIT and NI. I assumed we would abolish NI and the higher and additional income tax rates and raise the nil rate band to about £16k. All of the objections to LVT (such as excess admin) are just completely idiotic, especially once you look at the data. And it has a huge number of positive spillover effects such as encouraging more bank lending to business by supressing land speculation. I shopped it around the dept and got told it was a good, interesting piece of analysis but it was very obvious it would never go anywhere while the Tories are there
Fantastic article as usual. How would you suggest approaching the issue of people with high property wealth but low income (to pay an annual land value tax)? It’s seemed to me that inheritance tax was always more workable than LVT for this reason. Could it work to give people the option to either pay LVT annually or defer until they die and the property is sold?
Feb 22, 2023·edited Feb 22, 2023Liked by Sam Freedman
A side-benefit of LVT is that it would make homeowners far less invested in maintaining the overvaluation of their homes. Right now, falling house prices is seen to be the end times for homeowners, but in a world where LVT exists, falling house prices would mean a lower tax bill, they would be seen to be a good thing.
Good point. That seems fairly sound, though I wonder if it might sometimes work in the opposite direction at a local level. Why let your neighbour build upwards when it risks increasing your own land’s valuation?
We think of LVT as a "Thatcher beneficiary'" tax. But what about the phenomenal landowners, eg Duke of Westminster? Won't they just mobilise their network to ensure this can't happen? An LVT policy needs to seed the ground very carefully. I love the idea, but I fear it's doomed to fail. Maybe a tax on transactions above 100k would resonate more with the electorate?
As we exempt first time buyers from its effects to a reasonably significant degree, it's not unreasonable to argue that STP duty functions as a form of capital gains tax on a main dwelling. It's not perfect but everyone buying a family home in London is handing over north of 30k which is a non trivial tax on wealth. If you said to them that actually, we are going to reduce the up front cost but instead you will pay an additional council tax precept of 0.25% of your estimated property value each year , I suspect they would take you up on that.
In his book, Capital in the twenty-first century, Thomas Picketty shows (if further proof was need) how on a national and global scale Wealth earns more money than Labour. The argument for a Wealth Tax is overwhelming. The challenge of how to do it. A couple may live in a house valued at over £1 million, but I would argue they are not the problem. Nevertheless, shifting the tax burden so they pay property tax instead of income tax might be acceptable if people believe it's just a shift rather than an increase. The problem is that most wealth is hidden or put in places where it remains untaxed. This is what we need to tax.
No, a decrease in national insurance. It's completely unjustifiable that working people pay 12% more tax than retired people. But abolishing it would be insanely unpopular so the only way to reduce the unfairness is to cut NI
Great article as always. I’m not sure though that the generation angle is politically the best one, as this really is about real estate inheritance, isn’t it? (Well, and the legal boxes you out them in…)
Being a millennial myself, renting, as I live abroad, it’s crushing to see prices skyrocketing for years, now mortgage prices rising as well, and the market just freezing as people try to hold to obviously-too-high-evaluations given CB rates. Taxes would be a nice way to more the sell-side…
I’m also confused by the widespread images of “pensioners being forced out of their homes” - I mean, we are talking about inheritance, so they are literally dead, no? What’s so bad about taking a mortgage if you get a house for free? We’ve build this fascinating financial system all those years and now that there are a real problems we suddenly cannot use it?
Overall, the whole debate is so obviously bad-intentioned. The emotional appeal and lack of economic data in most parts of it (and the trigger-escapes to issues of generational stereotypes and migration, of course) should tell us everything.
(Things are much worse here in Germany, where even more people are renting and ownership is even more concentrated. Klein & Pettis cite a ridiculous number that while you still pay 14% if you inherit your parents’ home, the effective inheritance tax is under 1% for inheritance crossing a million-or-something-threshold. Guess you move it into a GmbH and then it’s a “Mittelständischer Familienbetrieb”…)
I think the generational thing is entirely accidental. But it still has a very powerful effect in polarising the electorate into a defined "us and them". In some cases it's unfair, but the overall impression is perhaps what matters more . This gets back to Sam's original point: the generation that benefitted from Thatcherism has bequeathed an anti-Tory electorate?
I agree, but isn't this political framing part of what makes the issue so hard to address? It's so easy to counter a generational framing with the poor-pensioner argument - which is totally valid and true! - but that distracts from the actual point which is - as Sam rightly identified - a general question of burden-sharing, especially in an economical downturn, and the fact that we haven't adapted policy to market forces especially when it comes to wealth tied to real-estate.
Maybe the idea of general prosperity has been tied to wealth through real estate and stock market valuations for too long and we now have to face the fact that that cannot go on forever and this model is introducing a lot of inequality between generational just as one generation was able to pay into the game earlier (all this on a very high level, of course). That the whole market moved up like that is in a way to be expected when you move CB rates from the level they were during boomer times to the zero-to-negative-levels they were in the 2010s. In a way it just means to adapt returns to risks. (Money doesn't cost anything but you don't get anything for it either as the house you could buy and rent is too expensive given rents.) That way you can see rising prices as a secondary consequence of it, which is nice for everyone buying into the game, but creating wealth by taking free morgages without taking entrepreneurial risk was never meant to be the solution for everyone. (If you think I'm describing a ponzi scheme here, well...)
This is where I really like Sam's point: Where Thatcherism might have something going for it is where it asks for personal agency and an entrepreneurial mindset. Growth is tied to risk and assuming there are positive-sum-returns for society, you want some people to take risks and it's not wrong when they also profit from it - i.e., from the risk itself, not only from their work. (This of course means many people earn more than they earn on skill/hard work alone.) While I am in favor of this approach, I think the problem is that it's made and applied too often by zero-sum-game-players. This is how I understood the "entitlement" Sam refers to. And with rent seeking so high, entrepreneurial risks are even higher (as the consumer economy is even weaker), which is bad for everyone.
One reason why the percentage of pensioners owning their homes outright is up from 1993 is that in the 30 years since 1993 many older pensioners who did not own their homes will have died. I recall the Ryedale byelection in 1986 where pensioners deserted the Conservatives in droves complaining about how youngsters were being helped to buy their own homes while their rents were going up (they were cross about a very small pension increase as well). All of these pensioners would have been born before 1926. One advantage of pensioners owning their own homes as their properties is that they are generally well maintained. The problem is that far too few of the under 50s and under 40s and between 15 and 30 are owning their homes.
On the level of unemployment expected in 1978, I worked for the British Chambers of Commerce at the time, and I recall that while a 3 million figure was not mentioned, a 2 or 2.5 million figure was discussed in the Department of Employment owing to demographic factors. The 17 year duration of a Conservative government was not anticipated, but nobody could have anticipated the Labour split, the Foot leadership, Galtieri giving Margaret Thatcher a huge boost in credibility as a leader or the Labour 1983 manifesto ("The longest suicide note in history")
There’s an argument about trust here. Do we trust the government to use our taxes equitably? I’d suggest we can’t - the current administration is corrupt. At the moment I’m working FT at 70 yrs old mainly to support 4 adult children being fleeced by rents, and to pay for medical stuff the NHS has given up on. My property is a modest flat but Band D because Surrey. I can’t downsize and in my case the most likely outcome of greater taxation would be that I can’t afford to subsidise my kids. I’d probably retire, move out of London, pass on any equity, and the economy would lose a 40% taxpayer.
This is a libertarian argument against taxation of any kind. I don't accept it because the alternative - even if government does waste money - is a deeply unfair society. If we are going to tax at roughly the current rate or a bit higher then making the split between wealth and income fairer seems worthwhile. One reason your kids are getting fleeced by rent is because property is treated so favourably in our tax system.
As I understand the argument, it’s mostly about shifting the burden - and it sounds like your family carries already much of it. A good policy should make it easier for you, not harder - even when doing so indirectly, e.g. by less “fleecing” of your children.
That’s where my total lack of trust in good policy making comes in. As a boomer, I am actually worse off than my late and modestly employed (teacher and police sergeant) parents were. (Also large family so inheritance was nowhere near enough and I gave it to the kids anyway).
I guess the argument is distorted by the blatant corruption of the post-2016 Conservative Party? Corruption has always been inherent in our system, but the Conservatives have been ever more blatant and unashamed. Like the 1990s but with money more than sex, at a time when financial scandals are the we worst possible scandals to have? The 90s sleaze was primarily about sex, at a time when the economy was going well current sleaze is about money, when most people are struggling. Is this a significant difference?
"And increasing house supply will only have a marginal impact on prices."
Fantastic article as usual but I disagree with this quote, and I'd argue this is the only valid argument Chris Giles makes. Given the extremely high cost of housing to buy and as a percentage of household income (either mortgage or rent) a genuine long term fix to housing supply would make a huge difference to wealth inequality.
We could, to dig up an old nonsense, eat some landlords.
I understand the point about adding more homes not being the solution as being based on the impact that our financial systems have on house prices, in that not restricting who may buy could mean extra homes are then purchased by wealthy citizens and used as second (or more) homes, or as rental properties, which if used as STL also impacts on wider societal problems, such as loss of high streets and seasonal employment challenges.
Fantastic piece as always, and I like how you take the responses and criticism and address them. Another good reason keep subscribing as its fascinating to see the debate evolve.
I read both the articles you address and, whole I agree with some points, I don't think anything invalidates your basic argument: the beneficiaries of Thatcherism have unwittingly led to an anti-Thatcherite electorate. While there are points of detail in every area, that can be argued over indefinitely, it's impossible to dispute the fact that inequality has both widened and deepened. In a way, we're seeing something similar to the US theory that their "middle class" no longer really exists, due to inequality and the monetisation of practically everything. The key question is whether a 2-term Labour government (if it happened) could or would address some of the fundamental factors via significant policy changes, or whether they will tinker at the edges for fear of electoral and media unpopularity.
Do you think a significant Labour majority (again, if it happens), and the possibility of a second term would make them bolder on policy solutions?
Perhaps before we jump to the ever more tax (as long as it’s not me) approach to transfer wealth through the generations consideration should be given to explaining the rise of personal indebtedness at a time of super abundance and cheap (historically speaking) goods and services. Then again Where would property prices be now if there were fewer single adult households and mortgages rates had stayed nearer to the 10% plus levels of the seventies and eighties? Maybe someone could explain too why the claims made at every general election to pay for increased services through efficiency savings never materialise. The problem of the widening in income disparity is much more complex than simply the boomers having all the wealth (which I’m not sure they do). Let’s look at really eliminating tax breaks and harmonising the essential ones across all incomes. Standardising Pension payments relief is one to start with. Scrapping the NI ceiling is another. And a much more banded income tax system a third. Sadly the solution is much wider than simply taxing the boomers indeed I suspect, on past evidence, to do so would not materially improve the lot of the just about managing.
Is the monetisation of pretty much everything since 1980 skewing society in ways that need to be reversed? Is the "boomer" generation really an accidental beneficiary of a model that's now running on fumes?
‘...this has few buyers in the country at large because most voters understand that they benefit from the wealth and inheritance of their older relatives.’
Of course, the young wouldn’t need to benefit from all these wealth transfers if housing policy hadn’t been ruined by their parents’ generation... Something they didn’t have to deal with when they were buying their first properties on much smaller deposits and earnings ratios. And we then wouldn’t need to answer the wealth taxation question.
FWIW I did a large piece of analysis on how a Land Value Tax would work while I was a data scientist at DWP back in 2016-17. It was very obviously a massive win for at least 70-80%+ of households assuming we raised £200-300bn from LVT and cut the same from PIT and NI. I assumed we would abolish NI and the higher and additional income tax rates and raise the nil rate band to about £16k. All of the objections to LVT (such as excess admin) are just completely idiotic, especially once you look at the data. And it has a huge number of positive spillover effects such as encouraging more bank lending to business by supressing land speculation. I shopped it around the dept and got told it was a good, interesting piece of analysis but it was very obvious it would never go anywhere while the Tories are there
V interesting - thanks
Fantastic article as usual. How would you suggest approaching the issue of people with high property wealth but low income (to pay an annual land value tax)? It’s seemed to me that inheritance tax was always more workable than LVT for this reason. Could it work to give people the option to either pay LVT annually or defer until they die and the property is sold?
The Resolution Foundation report I link to makes some suggestions on how you could manage edge cases. This seems like a reasonable idea too.
Thanks, Sam!
A side-benefit of LVT is that it would make homeowners far less invested in maintaining the overvaluation of their homes. Right now, falling house prices is seen to be the end times for homeowners, but in a world where LVT exists, falling house prices would mean a lower tax bill, they would be seen to be a good thing.
Good point. That seems fairly sound, though I wonder if it might sometimes work in the opposite direction at a local level. Why let your neighbour build upwards when it risks increasing your own land’s valuation?
We think of LVT as a "Thatcher beneficiary'" tax. But what about the phenomenal landowners, eg Duke of Westminster? Won't they just mobilise their network to ensure this can't happen? An LVT policy needs to seed the ground very carefully. I love the idea, but I fear it's doomed to fail. Maybe a tax on transactions above 100k would resonate more with the electorate?
As we exempt first time buyers from its effects to a reasonably significant degree, it's not unreasonable to argue that STP duty functions as a form of capital gains tax on a main dwelling. It's not perfect but everyone buying a family home in London is handing over north of 30k which is a non trivial tax on wealth. If you said to them that actually, we are going to reduce the up front cost but instead you will pay an additional council tax precept of 0.25% of your estimated property value each year , I suspect they would take you up on that.
Yes it could replace stamp duty - which is a really badly designed tax.
In his book, Capital in the twenty-first century, Thomas Picketty shows (if further proof was need) how on a national and global scale Wealth earns more money than Labour. The argument for a Wealth Tax is overwhelming. The challenge of how to do it. A couple may live in a house valued at over £1 million, but I would argue they are not the problem. Nevertheless, shifting the tax burden so they pay property tax instead of income tax might be acceptable if people believe it's just a shift rather than an increase. The problem is that most wealth is hidden or put in places where it remains untaxed. This is what we need to tax.
I think the final point is important. It should be coupled with a decrease in income tax to make it palatable.
No, a decrease in national insurance. It's completely unjustifiable that working people pay 12% more tax than retired people. But abolishing it would be insanely unpopular so the only way to reduce the unfairness is to cut NI
Great article as always. I’m not sure though that the generation angle is politically the best one, as this really is about real estate inheritance, isn’t it? (Well, and the legal boxes you out them in…)
Being a millennial myself, renting, as I live abroad, it’s crushing to see prices skyrocketing for years, now mortgage prices rising as well, and the market just freezing as people try to hold to obviously-too-high-evaluations given CB rates. Taxes would be a nice way to more the sell-side…
I’m also confused by the widespread images of “pensioners being forced out of their homes” - I mean, we are talking about inheritance, so they are literally dead, no? What’s so bad about taking a mortgage if you get a house for free? We’ve build this fascinating financial system all those years and now that there are a real problems we suddenly cannot use it?
Overall, the whole debate is so obviously bad-intentioned. The emotional appeal and lack of economic data in most parts of it (and the trigger-escapes to issues of generational stereotypes and migration, of course) should tell us everything.
(Things are much worse here in Germany, where even more people are renting and ownership is even more concentrated. Klein & Pettis cite a ridiculous number that while you still pay 14% if you inherit your parents’ home, the effective inheritance tax is under 1% for inheritance crossing a million-or-something-threshold. Guess you move it into a GmbH and then it’s a “Mittelständischer Familienbetrieb”…)
I think the generational thing is entirely accidental. But it still has a very powerful effect in polarising the electorate into a defined "us and them". In some cases it's unfair, but the overall impression is perhaps what matters more . This gets back to Sam's original point: the generation that benefitted from Thatcherism has bequeathed an anti-Tory electorate?
I agree, but isn't this political framing part of what makes the issue so hard to address? It's so easy to counter a generational framing with the poor-pensioner argument - which is totally valid and true! - but that distracts from the actual point which is - as Sam rightly identified - a general question of burden-sharing, especially in an economical downturn, and the fact that we haven't adapted policy to market forces especially when it comes to wealth tied to real-estate.
Maybe the idea of general prosperity has been tied to wealth through real estate and stock market valuations for too long and we now have to face the fact that that cannot go on forever and this model is introducing a lot of inequality between generational just as one generation was able to pay into the game earlier (all this on a very high level, of course). That the whole market moved up like that is in a way to be expected when you move CB rates from the level they were during boomer times to the zero-to-negative-levels they were in the 2010s. In a way it just means to adapt returns to risks. (Money doesn't cost anything but you don't get anything for it either as the house you could buy and rent is too expensive given rents.) That way you can see rising prices as a secondary consequence of it, which is nice for everyone buying into the game, but creating wealth by taking free morgages without taking entrepreneurial risk was never meant to be the solution for everyone. (If you think I'm describing a ponzi scheme here, well...)
This is where I really like Sam's point: Where Thatcherism might have something going for it is where it asks for personal agency and an entrepreneurial mindset. Growth is tied to risk and assuming there are positive-sum-returns for society, you want some people to take risks and it's not wrong when they also profit from it - i.e., from the risk itself, not only from their work. (This of course means many people earn more than they earn on skill/hard work alone.) While I am in favor of this approach, I think the problem is that it's made and applied too often by zero-sum-game-players. This is how I understood the "entitlement" Sam refers to. And with rent seeking so high, entrepreneurial risks are even higher (as the consumer economy is even weaker), which is bad for everyone.
One reason why the percentage of pensioners owning their homes outright is up from 1993 is that in the 30 years since 1993 many older pensioners who did not own their homes will have died. I recall the Ryedale byelection in 1986 where pensioners deserted the Conservatives in droves complaining about how youngsters were being helped to buy their own homes while their rents were going up (they were cross about a very small pension increase as well). All of these pensioners would have been born before 1926. One advantage of pensioners owning their own homes as their properties is that they are generally well maintained. The problem is that far too few of the under 50s and under 40s and between 15 and 30 are owning their homes.
On the level of unemployment expected in 1978, I worked for the British Chambers of Commerce at the time, and I recall that while a 3 million figure was not mentioned, a 2 or 2.5 million figure was discussed in the Department of Employment owing to demographic factors. The 17 year duration of a Conservative government was not anticipated, but nobody could have anticipated the Labour split, the Foot leadership, Galtieri giving Margaret Thatcher a huge boost in credibility as a leader or the Labour 1983 manifesto ("The longest suicide note in history")
There’s an argument about trust here. Do we trust the government to use our taxes equitably? I’d suggest we can’t - the current administration is corrupt. At the moment I’m working FT at 70 yrs old mainly to support 4 adult children being fleeced by rents, and to pay for medical stuff the NHS has given up on. My property is a modest flat but Band D because Surrey. I can’t downsize and in my case the most likely outcome of greater taxation would be that I can’t afford to subsidise my kids. I’d probably retire, move out of London, pass on any equity, and the economy would lose a 40% taxpayer.
This is a libertarian argument against taxation of any kind. I don't accept it because the alternative - even if government does waste money - is a deeply unfair society. If we are going to tax at roughly the current rate or a bit higher then making the split between wealth and income fairer seems worthwhile. One reason your kids are getting fleeced by rent is because property is treated so favourably in our tax system.
‘Kid getting fleeced by rent’ becomes ‘kids get even more fleeced as they also pay the landlords LVT passed onto them in increased rent’
As I understand the argument, it’s mostly about shifting the burden - and it sounds like your family carries already much of it. A good policy should make it easier for you, not harder - even when doing so indirectly, e.g. by less “fleecing” of your children.
That’s where my total lack of trust in good policy making comes in. As a boomer, I am actually worse off than my late and modestly employed (teacher and police sergeant) parents were. (Also large family so inheritance was nowhere near enough and I gave it to the kids anyway).
I guess the argument is distorted by the blatant corruption of the post-2016 Conservative Party? Corruption has always been inherent in our system, but the Conservatives have been ever more blatant and unashamed. Like the 1990s but with money more than sex, at a time when financial scandals are the we worst possible scandals to have? The 90s sleaze was primarily about sex, at a time when the economy was going well current sleaze is about money, when most people are struggling. Is this a significant difference?
"And increasing house supply will only have a marginal impact on prices."
Fantastic article as usual but I disagree with this quote, and I'd argue this is the only valid argument Chris Giles makes. Given the extremely high cost of housing to buy and as a percentage of household income (either mortgage or rent) a genuine long term fix to housing supply would make a huge difference to wealth inequality.
We could, to dig up an old nonsense, eat some landlords.
I understand the point about adding more homes not being the solution as being based on the impact that our financial systems have on house prices, in that not restricting who may buy could mean extra homes are then purchased by wealthy citizens and used as second (or more) homes, or as rental properties, which if used as STL also impacts on wider societal problems, such as loss of high streets and seasonal employment challenges.
Fantastic piece as always, and I like how you take the responses and criticism and address them. Another good reason keep subscribing as its fascinating to see the debate evolve.
I read both the articles you address and, whole I agree with some points, I don't think anything invalidates your basic argument: the beneficiaries of Thatcherism have unwittingly led to an anti-Thatcherite electorate. While there are points of detail in every area, that can be argued over indefinitely, it's impossible to dispute the fact that inequality has both widened and deepened. In a way, we're seeing something similar to the US theory that their "middle class" no longer really exists, due to inequality and the monetisation of practically everything. The key question is whether a 2-term Labour government (if it happened) could or would address some of the fundamental factors via significant policy changes, or whether they will tinker at the edges for fear of electoral and media unpopularity.
Do you think a significant Labour majority (again, if it happens), and the possibility of a second term would make them bolder on policy solutions?
Perhaps before we jump to the ever more tax (as long as it’s not me) approach to transfer wealth through the generations consideration should be given to explaining the rise of personal indebtedness at a time of super abundance and cheap (historically speaking) goods and services. Then again Where would property prices be now if there were fewer single adult households and mortgages rates had stayed nearer to the 10% plus levels of the seventies and eighties? Maybe someone could explain too why the claims made at every general election to pay for increased services through efficiency savings never materialise. The problem of the widening in income disparity is much more complex than simply the boomers having all the wealth (which I’m not sure they do). Let’s look at really eliminating tax breaks and harmonising the essential ones across all incomes. Standardising Pension payments relief is one to start with. Scrapping the NI ceiling is another. And a much more banded income tax system a third. Sadly the solution is much wider than simply taxing the boomers indeed I suspect, on past evidence, to do so would not materially improve the lot of the just about managing.
Is the monetisation of pretty much everything since 1980 skewing society in ways that need to be reversed? Is the "boomer" generation really an accidental beneficiary of a model that's now running on fumes?