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The Lib dems and their “Mansion Tax”

The Liberal Democrats kicked off the party conference season with some controversial policies, earning them a decent amount of press coverage.

The policy that’s received the most attention is what is being called the “mansion tax”.

The tax would hit 250,000 properties worth more than £1million under plans outlined by Treasury spokesman Vince Cable.

Under the controversial proposals, Owners of houses worth more than £1million would pay an additional tax of up to half a percent on the value above £1m.

This 0.5 annual levy on the most expensive homes would raise around £1.1billion pounds.

The problem with this idea is that it goes against our understanding of taxes, which is that they are based upon a flow of income i.e economic activity rather than on the value of your assets increasing in value.

This prevailing belief dictates that taxes should be based on income which is the flow of funds into households and firms or on the flow of consumer purchases.

The inherent problem with a property tax is that whilst it may appear to be redistributive, in the medium to long term the effect is that it will hit the elderly and those without income who see the value of their homes increase in value. The value of your home is not related to your income.

Even with the proposal to increase the starting rate of income tax to £10,000 – there-by moving thousands out of taxation – the question still arises as to whether it is fair to impose another level of taxation irrespective of the person’s income or ability to pay.

And after all, whose valuation will be accepted?

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