CUTTING ROOM: Evan Davis at Large

Management Today, August 4, 2003 | Go to article overview

CUTTING ROOM: Evan Davis at Large


Why we'd all lose from capital gains on house sales; the first sign of an upturn?; my hell at the Eden Project; the fatal attraction of SUVs ...

A new think-tank report suggests that we charge capital gains tax on owner-occupied housing. The proposal is not from any old think tank but the Social Market Foundation, for whom I have written the odd report myself.

At the risk of sounding disloyal, I hope the chancellor ignores it. I know the UK housing market is imperfect, and I can see merit in treating houses like any other asset, with no favourable tax privileges. But though taxes in principle may be a good idea, in practice they may not work.

CGT is fundamentally flawed. If it were properly imposed, you would tax a capital gain as the gain occurred, not when the gain was realised by a sale. But we do not operate CGT that way. Measuring the value of assets at regular frequencies is impractical, so we levy the tax when they change hands. Yet that means CGT discourages the sale of an asset at all. And the last thing we want to do is stop people moving by hitting them with a big tax when they do. We already have stamp duty, an illogical tax on moving. And we have huge tax breaks for other forms of investment, like pensions and ISAs, as well as advantages to renting property in the form of housing benefit.

Perhaps the worse aspect of the proposal is that it perpetuates one of Britain's most pernicious myths: that a rise in house prices makes homeowners better off. If prices rise, sellers make a gain on the house they sell, but pay more for the house they're buying (assuming they don't move into a tent). It's not a gain at all. The sooner people realise this, the sooner our housing market will function better, and the sooner we can stop worrying about house prices to the extent we do.

It's worth looking at the recent statistics on profitability. Having peaked in 1998 and moved mostly downhill since then, British company profits are at last recovering, it seems. The net rate of return of UK firms in the first quarter of this year was 12.1% - the best three months since the summer of 2000, according to National Statistics. Presumably, this is not unrelated to the fall in sterling. These statistics never get reported as widely as others that seem of far less consequence - like monthly purchasing manager surveys. Perhaps they are not publicised enough. …

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CUTTING ROOM: Evan Davis at Large
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