How Rachel Reeves can raise tax while freeing up growth

Abolishing stamp duty would raise growth. The tax paid on new residential purchases gums up the housing market and stops people moving to get a better job. It literally makes us poorer.

A small annual property tax – 0.54% above £500,000 and 0.81% above £1m – would raise roughly the same sum from roughly the same people. Those in London and the south-east would still pay almost all of it. It is better than a new band on council tax – which raises money for councils, not government. It is a much better idea than capital gains tax on homes: that would further deter people from moving.

It would, however, be harsh to tell someone who has just paid stamp duty to pay a new tax too, or tell an elderly widow who has lived in her house for 50 years to do the same.

We should limit the new tax to future house purchases – people would pay it instead of stamp duty, rather than on top. That, however, creates a cashflow problem for the government. In the long run, it will get the same revenue but, as John Maynard Keynes said: “In the long run we are all dead.” Political careers can end far quicker. The chancellor needs to bring forward revenues from another tax to cover the gap.

That is surprisingly easy. Previous governments did this in effect by selling off student loans – taking money up front, and losing a future revenue stream.

The best approach would be to offer a discount, say 3.5% a year, if people pay their income tax in advance. Since this is a discount, not an income, there would be no tax payable on the 3.5% return.

Imagine a rich person pays £100,000 in advance. They would then pay £10,350 less income tax in the following year, rising with compound interest to £14,000 less in the 10th year. HMRC would give these people a higher tax code, meaning their employer would automatically take less income tax from them each month. If they lose their job, or die, they get a tax refund automatically, as happens already if you have overpaid tax. It really is a failsafe, automatic 3.5%-a-year tax-free return for the individual.

It is almost impossible to get a guaranteed 3.5% tax-free return, certainly once you have used up the Isa allowance. I would expect money to flock in from the moderate to seriously rich. After all, the government has to cap the amount anyone can hold in premium bonds, because the rate – 3.6% tax free – is sufficiently attractive that many hold the maximum amount and would buy more bonds if they could. If 3.6% is that attractive, 3.5% is likely to be a winner as well.

This is also a good deal for the government – 3.5% is much less than the 4.8% the government is currently having to pay on 10-year gilts, even taking into account that some of that return will be taxable.

Allowing people to pay tax in advance would liberate the fiscal headroom that would allow the chancellor to reform our tax system in pro-growth ways. Income tax revenues would be accelerated, property tax revenues deferred, with the short- and long-term fiscal positions remaining identical. The only change is that Britain would now have a more sensible approach to property tax – one that ungums the housing market, supports economic growth and makes us all better off. What’s not to like?

Tim Leunig is director of economics at the consultancy Public First

Photograph by Jonathan Brady/WPA Pool, Getty