“Get lost – rich tw*t” was French newspaper Libération’s headline riposte last week to the news that Bernard Arnault, France’s super-rich head of the Louis Vuitton empire, has applied to be domiciled in Belgium, supposedly to avoid President’s Hollande’s proposed tax rises for the wealthy. The paper’s response would seem to echo the feelings of many in France. Hollande’s most popular election pledge last year was his proposal for 75% taxes on incomes over a million Euros. He is also proposing hikes in the wealth taxes and capital gains taxes on property sales.
We will see whether the new tax regime will indeed drive the wealthy out of France. If it does so in large numbers we may see the policies dropped. But maybe not. Nordic countries remain competitive despite their high-tax regimes. Perhaps Hollande’s patriotic calls for France’s rich to help ease the public debt will shame some of the would-be tax exiles into staying put. On the other hand, maybe the rich bankers and others have over-hyped their opportunities to up sticks and move to friendlier tax regimes and Hollande is shrewdly calling their bluff. It’s certainly a high risk strategy but I’m glad he’s having a go.
It would be good to see a bit more bold thinking on Britain’s Left, which currently seems determined to let a good crisis go to waste. The British press are generally hysterical about proposals to increase taxes, but is it so unthinkable in Britain? People forget that in the 1970s top rates were over 80% after the otherwise moderate Chancellor, Denis Healey, announced he was going “tax the rich until the pips squeak”. I don’t know how many of the wealthy it drove out during those lean years, and whether it really did lower the overall tax take on the rich as the Right has always claimed. No doubt economists can give me the usually divergent views.
But I do know that the figures show that household income inequalities declined during that decade, despite the cuts in public spending, whereas they continue to rise during our current economic crisis, not least because the tougher austerity measures hit the poor the most and because this inequality is not offset by significant increases in the taxation of the better-off. During the 1970s it was the trades unions which the Right claimed were “holding the country to ransom”. Whatever the truth of that then, this is precisely what the rich are doing now in most western countries.
Higher income taxes on the rich would probably get considerable political support in Britain, as in France. A bigger problem politically would be to tax those on high middle incomes more, which is what Labour would need to do if it were to make taxation take more of the strain of reducing the deficit, and cuts less, as it promised before the last election. There is much to recommend this course, particularly if it were coupled with demand-enhancing public works programmes, such as building new homes on a grand scale.
Raising taxes, like all deficit reduction measures, reduces demand and stifles growth but at least it is simple to implement and quickly reversible. Draconian public expenditure cuts (and we have only seen a quarter of those planned so far) are difficult, if not impossible, to implement, cause immediate large-scale jobs loss, and are harder to reverse since they damage the whole infrastructure and cause a permanent loss of skills amongst the millions who are laid off. Forget the private sector “picking up the slack” mantra. Clearly that’s not happening, just as many predicted.
A major increase in the tax take would require a much wider range of measures, some of which would be unpopular. My favourite candidates would be a wealth tax, such as they have in France and a number of other continental countries, and the imposition of capital gains on all house sales, not just on second homes. A wealth tax is easily justified, given the massive increases in wealth inequalities in recent years, and might be easily sellable politically. Taxing the profits made on home sales would be less popular, since it would affect a significant number of home owners who still make large profits from buying and selling houses, and would pull the rug out from under the system of housing asset inflation which has been one of the main sources of social mobility in Britain – and not just for the middle classes – for three decades. Home ownership, and the chance to amass wealth through it, has been fundamental to the British mind-set since Thatcher set the band wagon rolling with her – highly popular but socially catastrophic – measures to sell off council houses. So it would be hard to roll back. On the other hand, it is already a myth for many in Britain, and particularly for young people, so now may be the time to try to change the culture.
Changing attitudes (and policies) on housing (both owned and rented) badly needs to to be tried. It is easy to forget – as the London property bonanza gets going again – that it was the US and UK mortgage markets, and the insane easy-lending policies of the 2000s, which detonated the financial crisis. They remain a time bomb since policy makers have not properly reformed them.
Many – most of us even – are more implicated in this than we like to acknowledge. It was not just the lenders offering so-called sub-prime loans that caused the problem, nor merely the property speculators who profited from preferential buy-to-let loans. It was also the millions of individuals who were prepared to indebt themselves to crazy levels to get on the roller-coaster. This scale of this money-making machine was surreal. I did a little calculation a few years back on the gains in home owner wealth during the 2000s in the UK. The value of the 18 million odd homes in the UK rose on average by about £100,000 in the 2000s. If just 15 million of their owners were owner-occupiers throughout the decade their collective housing assets would have grown by about £1.5 trillion. That is roughly equivalent to our annual GDP and what German taxpayers have spent on unification. It’s also slightly more than the current UK public debt. Even netting out for inflation and home improvements you can estimate private profits of over one trillion. This is a vast sum which has substantially changed the distribution of wealth (and thus opportunities generally) in the UK (in favour older cohorts).
Of course you can’t suddenly take those windfall individual profits back. But what you can do is make it less likely for new property bubbles to emerge – while at the same time increasing tax revenues. The simplest way to do the first, apart from building new homes, would be to remove the tax privileges given to housing profits by taxing capital gains on home sales (first and second homes) like other asset sales. This would reduce property speculation – big and small – and produce more stable property markets, like in France. It would also bring in substantial sums to the Exchequer. If capital gains tax were applied over the next five years at 30% on sales of, say, two million homes owned since year 2000, with an average net profit of £100,000, the total tax take would be £60 bn or £12 bn pa. No mean sum.
It is now very clear that the boosterish, under-regulated housing market in Britain – once so politically popular – has been a disaster. Apart from when housing bubbles bring financial mayhem, as recently, it is bad news even in normal times. A rampant housing market drains private investment from more productive uses, and encourages unsustainable levels of private debt (which is arguably a bigger problem in Britain than the public debt).
Worst of all, continuous property price inflation finally puts home ownership out of the reach of most people. Thus the rise of the new “generation rent” in Britain, most of whom will be denied the chance of mobility through homeownership and will be consigned to the grotesquely unregulated and often exploitative private rental sector for most of their lives. They look like being the first generation in almost a century to face worse prospects than their parents. Do we have to wait for demographic change to allow “generation rent” to out–vote the baby boomers before politicians dare to change their policies?