Sunday, April 8, 2012

How to win over the squeezed middle: subsidize first time buyers, tax landlords

Labour have benefited a good deal from the Tories' ill-judged budget - the latest polling gives them a ten point lead, although this is largely a function of the Tories' loss of preferences rather than Labour gaining much. Ed Miliband still inspires little confidence in voters, but it's interesting to see that the sheen is wearing off David Cameron at last.

Anyway, what Labour needs is redistributive policy ideas that are easy to sell, and can win over voters in both richer and poorer areas of the country. So here's one. Why should landlords get a tax break on their second, third, fourth mortgages, but hard-pressed homeowners get no tax breaks on their mortgages? This is simply crazy. Sure, many people have invested in buy-to-let as part of their financial planning, and they will protest at this, but are they really an electorally significant bloc, and in particular, are they the kind of people that Labour are likely to win over?

I've not done the numbers, but my guess is that some kind of tax break for new homeowners (easily done, has to be first mortgage after some cut-off-date), paid for by reducing or removing entirely the tax break for buy-to-let landlords, could be a real vote winner, especially in wealthy areas (where the tax break would, of course, be proportionately worth more). I think removing mortgage tax relief for first homes was probably the right thing back in the 1980s and 1990s, but what has happened is that whole generations (basically anyone much younger than me) are being excluded from the housing market, whilst current taxation asks nothing of people whose homes have gone up in value. Now asking older homeowners to pay higher tax on their paid-for properties is political suicide, so my plan focuses on making a small, generally wealthy group pay instead. If we want to be conservative about it, we could leave some of the landlord tax breaks intact - for instance allowing mortgage interest deduction just on one buy-to-let mortgage. And we could phase it in so that big investors would have time to adjust their portfolios and not get bankrupted by the change (though quite why they need such protections is a fair question).

An obvious difficulty here is that tax breaks for homeowners will, all else equal, push prices up and negate the beneficial effect. But if the change to buy-to-let rules is gauged properly, it would lead to people getting out of letting and releasing properties onto the market. In high cost areas this would be particularly likely, so it would also have the effect of opening up the housing market in the areas where there are most labour shortages. Done right, the net effect might leave prices roughly stable whilst redistributing access to the market from buy-to-let investors to people in the squeezed middle who are currently forced to rent.

So, Ed and Ed, what are you waiting for?