Has Vince Cable, much-praised Treasury spokesman of the Liberal Democrats and vindicated Jeremiah of the UK’s property bubble, produced a “batty idea”? Even the FT thinks so. But the batty Lib Dem idea is not Mr Cable’s “mansion tax”, but replacing council tax with a local income tax. Taxation of property should be heavier, not lighter. But it should also be less regressive. That is why the mansion tax is the germ of an excellent idea.
Property taxes are economically desirable, though the best such tax is on site value, rather than on completed development. What makes such taxes attractive is that they bear not on effort, but on “rent” – value over and above the economic costs of production. Income tax, by contrast, bears on successful effort.
The value of a site is determined not by the activities of the owner, but by its location and amenities. The most important amenity is the infrastructure created by public authorities. A tax on updated site values automatically recoups the cost of infrastructure investment from its principal beneficiaries. If local authorities were allowed to keep the additional revenue generated by their investments, they would have a powerful incentive to further the development of their area.
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