I'm no fan of taxes, but even the most demented libertarian would agree the State needs some revenue. Relative to most of the other ways to raise it, taxing capital gains on houses is a good wheeze. Like any other squalid moral protoplasm with a house in Cambridgeshire, part of me is dead against it. It's that kind of feeling that led the Treasury to deny it was thinking about the idea. Politically that made sense: but it was not admirable.
In economic terms, taxing profit on your house removes a source of confusion. A house is not just a place to live but also an investment. It is different from most other investments, however, in that you don't get taxed when you sell it. If you're looking at a house on the margins of what you can afford, you know in your bones: "we'll have to put the kids in kennels so we can both work to cover the mortgage, but just think, every pound it goes up is a pound we keep". If the state took 40p of each of those pounds a lot of people would say instead "forget it, let's get somewhere smaller and take a decent holiday for a change".
Then the silly prices don't get paid, and houses go up in value slower. Half of us are disappointed but the rest, young adults who need to get a stake in the country for the most part, get a chance to own a house in the first place. Also, with less money going into mortgages, perhaps we spend more on other things - things that people can get jobs making, rather than houses that have already been built.
Granted, it would be hard luck if you needed a bigger house because you have more children, but all the houses in your town have gone up. The windfall gain on your own house, with which you were going to bridge the gap, just got cut in half. One answer to that is that you can rent out the small house and use the income to fund the big one. Getting more rentable houses into circulation might also be a good side effect. But I agree, it's still unfair.
So sue me. Every tax is unfair on someone. You have to pick the one with the fewest problems, and mitigate those problems. One way to mitigate this problem is graduated tax relief. You pay tax on the price you sell for, minus the "base price". If you sell up after a month or two, the base price is the same as you paid for the house. But every year you live there, the base price goes up by a percentage. Many other capital gains are taxed this way.
The effect is, if you lived in the village all your life you keep most of the gain to buy another house down the road, but if you're a carpetbagger who lucked into a two-year windfall, you pay. That seems fair, and it makes it easier for people to go on living in their communities - which is also easier because the tax keeps house prices down in general. We'd also want a change in planning rules, so that if you've lived here for ten years and just had twins and your mother-in-law moved in, then it's jolly difficult to turn down your application to make the garage into a flat.
It's not perfect: but it's less imperfect than most. It's certainly a progressive tax: it only kicks in when you're already doing well. At a political level, you may well be queasy about taxing one's home: people owning houses without the State having anything to say about it tends to keep the State in its place. But we've paid property taxes for centuries without succumbing to tyrrany, and we have the council tax to this day. Replace council tax with local income tax at the same time as cutting national income tax and filling the gap with CGT on houses, and it might even work at the level of gross electoral politics too. And it's cheap as chips to collect, too: half a page of tax return that anyone can understand to net tens of thousands for the revenue.
Taxes are always a compromise and we should never forget this. On the whole, CGT on houses is a good compromise. I can see why the Treasury had to be so vigorous about talking it down in public; in private they must know it's a hot idea.