Written evidence submitted by the Joseph
Rowntree Foundation
The Joseph Rowntree Foundation (JRF) is one of the
largest social policy research and development charities in the
UK. For over a century we have been engaged with searching out
the causes of social problems, investigating solutions and seeking
to influence those who can make changes. JRF's purpose is to understand
the root causes of social problems, to identify ways of overcoming
them, and to show how social needs can be met in practice. The
Joseph Rowntree Housing Trust (JRHT) shares the aims of the Foundation
and engages in practical housing and care work.
INTRODUCTION
JRF welcomes the Treasury Select Committee Inquiry
into the fundamental principles of tax policy. We are concerned
about the distorting affects of current taxation policy within
the UK housing system. This submission highlights the importance
of taxation policy in relation to of its impact on house price
volatility, people's housing tenure choices and resulting wealth
inequality.
The evidence in this submission is drawn from work
commissioned by the JRF Housing Market Task Force. The Task Force
was convened to recommend credible policy solutions that would
act to avoid extreme fluctuations between "boom and bust"
in the housing market cycle. The Task Force has reviewed evidence
in a wide range of areas including housing taxation and subsidies,
the distribution of wealth and increasing the supply of social
housing.
SUMMARY
In considering the underlining principles of tax
policy this submission focuses on potential reform of housing
taxation in the UK as a means of achieving wider housing market
stability and addressing current distortions within the tax system.
The additional potential of such reforms to raise revenue and
deliver a more progressive approach than the current system are
also briefly considered.
The key points we make in the submission are:
— The
tax treatment of housing is biased towards owner occupation and
acts to distort people's tenure choices.
— Although
taxation of property currently amounts to 4% of the UK's GDP;
it was estimated in 2008-09 that lost revenue from not taxing
home ownership was £10.6 billion.
— Housing
taxation could be a fundamental tool in levelling out the boom
and bust cycle of house price volatility which could deliver wider
economic and growth benefits.
— A new
approach to taxing property could be more progressive across the
income scale and between different local authority areas than
the current council tax system.
— More
equality between the tax treatments of different asset classes
to promote a more level playing field between different asset
classes such as housing, savings, pensions and other forms of
wealth.
— Making
changes to the tax treatment of home ownership could also act
as a brake on the growing inequality within the housing system.
A tax and subsidy system designed with housing supply incentives
in mind could have radical stabilisation and distributional outcomes,
particularly if the new instruments were targeted on housing supply
intended for lower income households.
KEY PRINCIPLES
UNDERLINING TAX
POLICY REFORM
We agree with IFS that a tax system should include
a clear vision and be as simple, transparent and progressive as
possible (IFS 2010). OECD also argue that in the current financial
context the aim of tax reform should be to reduce distortions
within tax systems and to raise additional revenues from taxes
without damaging economic growth (OECD 2010). The current housing
taxation system in the UK has a clear bias in favour of home ownership
(Whitehead 2011; Crawshaw 2009; Wilcox 2009). In addition to this
taxation bias it is notable that current patterns of inheritance
suggest wealth inequality will widen with those at the bottom
of the income scale being left further behind (Appleyard and Rowlingson
2010). This growing gap between the housing "haves"
and "have nots" within the UK system is not simply a
consequence affordability pressures, it is also a result the way
in which gains from home ownership are treated within the tax
system. Wilcox (2009) argues that addressing the favourable tax
treatment of home ownership is likely to lead to a price adjustment
within the housing market. An international review of housing
and subsidy systems supports this perspective, identifying property
tax reform as a way of achieving less volatile housing markets
and less distortion in people's housing choices (Oxley and Hafffner
2010). Meen (2010) also notes how the favourable tax treatment
of home ownership distorts people's choices away from financial
assets and towards home ownership. Thus the current system of
property taxes in the UK violates the key principle highlighted
by OECD (2010) of tax systems avoiding distortions in people's
choices.
Property taxes have been identified by OECD (2010)
as an area of taxation reform that would be least harmful to economic
growth. In addition, housing taxation reform designed with housing
supply incentives in mind might also act to stabilise the housing
market and improve distributional outcomes (Oxley and Haffner
2010). Before considering the reforms that might deliver the objectives
of a more progressive tax system, a more stable housing market
and improved distributional impacts it is worth dwelling a little
on the desired principles of a housing or property tax system.
In addition to the efficiency and equity principles
of the wider tax system, the following objectives are crucial
elements of an effective property tax system (Oxley and Haffner
2010; Hall and Gibb 2010):
— Less
volatile housing markets;
— A neutral
or complementary impact on local housing systems, other tenures
and private developers;
— Less
distortion of people's choices between owning and renting;
— Able
to work with private funding efficiently;
— Consistent
with society's ideas of delivering affordable rents and prices
and supporting low income households;
— With
the grain of other related social policies relating to, for example,
labour incentives, worklessness and mixed communities; and
— Good
value for money for the public purse.
As OECD (2010) note the current context surrounding
public spending deficits requires a consideration of additional
revenue raising opportunities. Wilcox (2009) estimates that a
failure to tax home ownership amounted to lost revenue of £10.6
billion in 2008/09. However Oxley and Haffner argue that as property
taxes currently amount to around 4% of GDP in the UK (see Boadway
et al 2009) care should be taken to ensure that any reforms focus
on addressing housing market volatility rather than increasing
the overall take from property taxation. As Wilcox (2009) notes
the downward price adjustment likely as a result of levying taxes
on home ownership could well reduce the amount of this "lost"
revenue in practice.
Oxley and Haffner (2010) identify four reforms as
preferred options for generating additional investment incentives
in housing and addressing house price volatility. They are:
— Additional
supply incentives through tax/subsidy enhanced contracts with
private landlords. This could include depreciation allowances
which would ensure that private landlords were providing properties
for low income households. This option would require further modelling
in order to establish value for money. However it could be a method
of encouraging landlords to let to lower income households, particularly
in a constrained local housing allowance framework. Properties
would not be held in perpetuity so any modelling to develop this
option would need to address both shorter and long term outcomes
for lower income households and the housing market.
— Additional
tax/subsidy incentives for more housing investment (through
additional building, conversions and more effective use of the
existing stock). This could include reducing VAT on renovations
and conversions within the existing housing stock. As the current
VAT system favours new build housing, which carries a zero rate
of VAT, there are tradeoffs with this approach. Moves to equalise
VAT rates between renovations/conversions and new build properties
might mean charging VAT on new build housing. Further work on
this option would need to be done to establish the impact on housing
supply and the construction industry. Given the need to increase
housing supply this may be a more medium to long term option which
is perhaps more relevant to achieving sustainable housing to address
the challenges of climate change than addressing house price volatility.
— Stamp
Duty Land Tax (SDLT) changes that relate
payments more closely to property values without banding distortions
and with progression through a wide range of values or alternatively
the abolition of Stamp Duty Land Tax which might be linked to
council tax reform and/or the introduction of a property tax.
— A
periodically levied property tax (or reformed council tax)
system that more closely reflected current market values (ie updated
automatically or at set periodic intervals). This would address
the preferential treatment of home ownership within the UK tax
system and the distortion this creates in people's tenure choices
and preferences. The close reflection of house prices within the
structure of a property tax would act as an anti cyclical policy
measure that could operate as a "brake" on house prices
and create greater house price stability within the market. In
practice this reform might be linked to changes in Council Tax
and/or changes in Stamp Duty Land Tax—in theory a functioning
property tax system could replace SDLT since transaction taxes
such as SDLT may become less necessary if the real value of house
prices were taxed.
Property tax reform is argued to be most likely to
address housing market volatility and reduce distortions in people's
housing choices. Whilst house price adjustments due to the introduction
of revised property taxes might go some way to addressing inequality
within the housing market; we accept that other taxes such as
inheritance tax reform could also have far reaching re-distributional
effects in terms of addressing inter generational wealth inequality
(Appleyard and Rowlingson 2010). For example Appleyard and Rowlingson
C2010) call for a fundamental review of the incentives and disincentives
linked to different asset classes such as savings, investments,
pensions and housing. They also demonstrate how the pattern of
inheritance mirrors the distribution of wealth more generally,
with those at the bottom falling further behind (Appleyard and
Rowlingson 2010).
Capital gains tax is also an example of tax relief
for home owners which might be worthy of further consideration.
However as Oxley and Haffner's (2010) review found that the impact
of capital gains tax changes was likely to be debateable and risked
increasing volatility this is not pursued as a potential area
of tax reform within this submission.
Britain already operates a quasi property tax system
through its collection of council tax. This tax has been described
as a hybrid tax based on property values and a charge for the
use of local services (Crawshaw 2009). Crawshaw (2009) highlights
how council tax meets the objectives of being difficult to evade
and delivers high collection rates. However he also identifies
it's potentially regressive impact—this is a major flaw
of the current system albeit that this impact is cushioned by
council tax benefit. For example the Lyons Review identified that
even with the current take up of council tax benefit those in
the lowest income decile still pay around 8% of their income in
council tax compared to 3% in the highest income decile (Lyons
2007). Stephens (forthcoming) also notes the imperfect nature
of council tax since it does not accurately reflect or tax up
to date property values and as such it fails to act as a brake
on house price volatility. In addition, Stephens notes the unequal
geographic impacts of council tax; for example current council
tax is around 0.65% of house prices in North East England but
only around 0.36% of house prices in London.
The Treasury itself has noted that fiscal measures
impacting on the housing market could reduce volatility (HMT 2003b
cited in Muellbauer 2005). Reforming property tax would of course
involve significant reform to local Government finance systems.
However we would argue that depending on the design of a property
tax within the UK it could have significant benefits in terms
of:
— Reducing
housing market and house price volatility;
— Creating
a more level playing field in people's investment decisions between
housing and other products such as pensions, savings and investments;
— Reducing
the distortion in people's housing tenure choices as the tax advantages
inherent in home ownership were addressed;
— Enabling
households to make housing consumption choices that were less
dictated by house price trends and more suited to life cycle stages
and labour market demands.
REFERENCES
Appleyard, L and Rowlingson, K (2010) Home ownership
and the distribution of personal wealth York: Joseph Rowntree
Foundation
Boadway, R, Chamberlain, E and Emmerson, C (2009)
Taxation and Wealth Transfers, prepared for the Report
of a Commission on Reforming the Tax System for the 21st century,
Chaired by Sir James Mirrlees. London: Institute for Fiscal Studies.
Crawshaw, T (2009) Rethinking housing taxation: options
for reform London: Shelter
Hall, D and Gibb, K (forthcoming) Increasing supply
in the social rented sector York: Joseph Rowntree Foundation
IFS (2010) Tax by design London: Institute
of Fiscal Studies
Meen, G (2010) Home-Ownership
for the Next Generation Reading: University of Reading
Meullbauer, J (2005) "Property taxation and
the economy after the Barker review" The Economic Journal
115 (March) C99-C117
OECD (2010) Tax policy reform and fiscal consolidation
Paris: OECD
Oxley, M and Haffner, M (2010) Housing taxation and
subsidies: international comparisons and options for reform York:
Joseph Rowntree Foundation
Stephens, M (forthcoming) Housing market task
force report York: Joseph Rowntree Foundation
Whitehead C (2011) "Owner-occupation in an increasingly
uncertain world: the English experience" in Ronald R and
Elsinga M Beyond Homeownership: Housing, Welfare and Society,
London, Routledge
Wilcox, S (2009) UK housing review 2009/2010 London:
Chartered Institute of Housing and Building Societies Association
January 2011
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