CUTTING ROOM: Evan Davis at large

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 ...

by Evan Davis, economics editor of the BBC
Last Updated: 31 Aug 2010

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. But as Iain Duncan Smith might have said: 'Never underestimate the power of the quiet statistic.'

From under-selling to over-selling - it's holiday time, and perhaps you're considering a trip to the acclaimed Eden Project in Cornwall. Here's a tip: visit Cornwall, skip the Eden Project. It's the best example I've encountered of a product labouring under the disadvantages of having been oversold. It's not just that the hype surrounding it is hard to justify; it has had the unfortunate effect of packing the project with hordes of people who palpably have no interest in its contents, rendering the 'biomes' too crowded for anyone to enjoy. You queue to get into the car park, wait for the bus to the ticket office, queue for a ticket, walk (or catch a shuttle) to the biomes, and then, in tropical temperatures, shuffle past the plants, with people invading your body-space both behind and in front of you; then you repeat the sequence in reverse.

Far better, I'm told, to pay a visit to the National Botanic Garden of Wales. It has its own massive greenhouse dome (designed by Norman Foster) and it is apparently as botanically interesting as Eden. But why has it received a fraction of Eden's publicity? Publicity generates its own attention, so hyped things get ever more hype, while other things get ignored. A pity.

On to my favourite subject - sports utility vehicles. New research from US economist Michelle White looks at their safety record. The conclusion?

SUVs are safer for their drivers, but more dangerous for other road users.

That much is obvious, but White goes further. If we net out the two effects of SUVs, the aggregate result is that SUVs kill. In the US, the switch to 'light trucks' is causing 3,700 fatal crashes involving non-SUV occupants; while saving 1,400 fatal crashes involving SUV occupants. This is a dismal cost/benefit ratio of 2.5 to 1.

You might conclude that we should ban them, but that would be illiberal.

People who drive them and cause damage to other road users should face a larger penalty than the rest of us. So, for example, if you drive an SUV and injure a child, you would face a mandatory jail sentence. That would confront drivers of SUVs with at least some kind of danger, although not the precise danger they dump on everyone else.

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