Rob­bing us of the in­cen­tive to get rich would be a big mis­take

The Daily Telegraph - Property - - Cover Story - Ed­mund Con­way

Af­ter years of be­ing point­edly ig­nored, economists have sud­denly found them­selves bask­ing in an unfamiliar glow of adu­la­tion re­cently. All sorts of peo­ple, in­clud­ing politi­cians, lis­ten to their ad­vice, and some­times even fol­low it.

How­ever, economists have an Achilles heel, which is that they tend to look at life through an eco­nomic prism. While such an out­look can help ex­plain the mo­ti­va­tions of the masses, it of­ten pays less at­ten­tion to the ele­phants in the room.

One of the most glar­ing ex­am­ples of this in re­cent years is the eco­nomic pre­dic­tion that the size of the buy-to-let and sec­ond­homes sec­tor will con­tinue to soar in the com­ing years, while the num­ber of peo­ple who own their own home will fall and the num­ber of renters will in­crease.

Granted, the logic is flaw­less. Houses are trad­able as­sets as well as places to live, and there is al­ways de­mand for rental ac­com­mo­da­tion, so al­low­ing peo­ple to have more than one house helps lu­bri­cate the wheels of the econ­omy. And there is ev­i­dence that, when peo­ple buy sec­ond homes, it helps trans­fer wealth from well-off ar­eas to less for­tu­nate ones. More­over, changes to the tax sys­tem mean it is some­times more eco­nom­i­cally at­trac­tive to rent than buy.

But while all this is fine in an en­tirely ra­tio­nal world, it ig­nores the facts that politi­cians do not al­ways be­have ra­tio­nally.

And I have an in­creas­ingly strong sus­pi­cion that the ma­jor po­lit­i­cal par­ties could be lin­ing them­selves up for a tax grab on those who own more than one prop­erty. Labour has al­ready mut­tered about this. The Lib Dems have pro­posed in­creas­ing tax for sec­ond home­own­ers. And while John Red­wood re­cently sug­gested abol­ish­ing in­her­i­tance tax, he also wanted to main­tain a con­sid­er­able cap­i­tal gains tax on sec­ond homes.

One likely mea­sure is an in­crease in stamp duty for those who leave their homes un­oc­cu­pied. At the mo­ment they are able to claim an al­lowance, but the Gov­ern­ment has al­ready al­lowed in­di­vid­ual coun­cils to re­scind this and could well scrap it en­tirely.

This pro­posal makes eco­nomic sense. Al­low­ing peo­ple to leave a prop­erty un­oc­cu­pied penalty-free en­cour­ages peo­ple to waste re­sources in a coun­try where the sup­ply of homes is fall­ing short of de­mand.

The other prime can­di­date for over­haul is cap­i­tal gains tax, which charges peo­ple a cut of any prof­its they make on their as­sets (though first homes are ex­cluded). The tax has al­ready been the sub­ject of huge out­cry when it emerged that private-eq­uity barons have used it to cut their tax bills. So I sus­pect that the Gov­ern­ment may also raise the rates paid by sec­ond-home own­ers if they sell on the prop­er­ties.

This is a real worry. As any econ­o­mist will tell you, rob­bing peo­ple of the in­cen­tive to get rich would be a se­ri­ous er­ror. I would say this, wouldn’t I? Let’s hope the politi­cians keep lis­ten­ing to the economists that lit­tle bit longer.

ed­mund.con­[email protected]­graph.co.uk Ed­mund Con­way is Eco­nomics Ed­i­tor of The Daily Tele­graph

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