Another one on tax - the bad effects from stamp duty

 

The ridiculous tax that has doomed a generation to financial ruin

Tories’ extraordinarily harsh levy continues to suck every saver and supportive parent dry

NEIL RECORD27 April 2024 • 9:05am

Related Topics

• Tax rises, 
• Stamp duty, 
• Housing crisis

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The Government is reported to be considering a tax break on stamp duty in the 2024 Autumn Statement.  

According to reports, consideration is being given to raising the starting price at which stamp duty kicks in from £250,000 to £300,000.  

This is thought to be part of a pre-election tax “giveaway” to encourage voters to stick with the Conservatives.

Stamp duty is a strange tax. It is voluntary (you are not compelled to buy a home – you could rent instead); it is generally levied at the very moment when the person who pays it has the least money in their entire lives; its taxpayers are much younger than average (the young move more than the elderly); and it has no offsets or allowances. 

You pay it – it’s done – and you never get the money back, whatever you do in the future.

The largest three sources of tax revenue for the Government are (in order) income tax (£250bn), National Insurance contributions (£179bn) and VAT (£162bn). Taxpayers may not like these taxes, but they understand that the Government must supply itself with a core base of revenue that takes a slice out of the heart of the economy. These taxes do that.

But there are many more taxes, and many of these attempt to modify behaviour – taxing “bad” behaviour more heavily than “good” behaviour.  

The reader will have his or her own idea of “good” and “bad”, but it is commonly agreed that duties on tobacco and alcohol (“sin” taxes) do align, at least in principle, with this idea.  

Economist call taxes like this “Pigouvian”, after a British economist Arthur Pigou (1877-1959), who argued that where consumption or production has negative effects on people not involved (say like causing ill health which uses public health resources), an additional tax is justified to compensate society and discourage the behaviour.

The same argument is being applied at the moment to carbon and pollution. You may not agree with the calculus but at least the principle is logical.

But back to stamp duty, or residential SDLT, as it is officially called.  

Stamp duty is levied on the purchase of a property to live in. Under no conceivable world could this behaviour be successfully claimed to be causing harm to the general population.

You could certainly argue that building houses on greenfield sites can have negative consequences to non-participants (like neighbours), but stamp duty applies to every home transaction, not just purchases of new homes.  

We are also facing a house price crisis in the UK, driven by two factors – strict planning law which prevents large-scale new development – and a very strongly rising UK population.

Stamp duty (specifically SDLT) is not a new tax, but the rates are – they are much, much higher than in recent history. 

Until 1997, the top marginal rate was 1pc (on properties over £60,000). As recently as 2011, the top rate was 4pc (on properties over £500,000). Today, the top rate is 12pc (on properties over £1.5m).

For an economically very important group – young professionals working in London and the Home Counties – these extraordinarily high rates will have changed an important perspective on life for them, and also changed their behaviour.  

The perspective change is that I suspect they believe that the Government is not remotely interested in their financial wellbeing.

A couple (say late 20s/early 30s) buys a flat in London five years ago for £600,000. Let’s suppose today that they both earn really well – £100,000 p.a. (including bonuses, etc) each. They would have paid some £20,000 in stamp duty on their flat purchase (about 1/3rd of one of the couple’s annual after-tax income in the year they bought).

Then today they find a house that will accommodate their growing family, but in London this could easily be £1.5m. They are offered a mortgage large enough to make the jump, probably with the help of family as well, but the stamp duty bill will be £91,000, or about 18 months after-tax income for one of the couple.

No logic has been offered by Government for this extraordinarily harsh tax – there are no offsets (like an allowance for the £20,000 already paid), and to get this £1.5m house (by the way, not a mansion in London by any means) they will likely have sucked every savings account, supportive parent and mortgage-provider dry. 

It will feel to them a ridiculous tax, targeted specifically at their desire to live and work in the best jobs in an expensive city. I suspect many will think about where else in the world they could get a better life.

But people are also adaptable, and the adaptation that this “ridiculous” tax engenders is to strongly discourage people climbing up the ladder from moving too often.  

When I was moving up the ladder (in the 1970s-1990s), I moved four times in 10 years. Buy; do up; earn and save; move. This formula was brilliant for a generation now just retiring, but stamp duty has completely robbed the generation now moving up from doing this. 

Moving now has to be in the largest leaps possible. This compromises the liquidity of the property market, and it runs the risk of forcing upwardly-mobile young people to take financial risks (like huge mortgages) that they may find come back to bite them. It exposes them to larger property market risk and larger interest rate risk than they would otherwise choose to take.  

So far from being a “Pigouvian” tax, stamp duty encourages, rather than discourages, behaviour which is likely to have negative consequences for society. Society does not want a vulnerable, over-financed housing sector – the lessons of 2007-09 should have taught us that.

So why does this, or any Government, continue with this terrible tax? The answer, of course, is money. In 2022-23, residential SDLT in England raised £11.7bn, or just over 1pc of Government revenue. 

This Government, desperate for cash, just cannot find within itself the will to abandon such a nice little earner – easy to administer with the money mainly coming from the apparently well-heeled.

A tax which impinges on young people trying to buy their first home – trying to better their living circumstances by moving from a flat to a house (perhaps to accommodate a growing family), and which has no basis in Pigouvian logic is a tax that should be abandoned, and indeed should never had been contemplated in the first place.

A small adjustment in the starting point for the tax is not going to change anything.

Taxes and labour mobility - the Scottish experience

 

Don’t expect Rachel Reeves to learn anything from the SNP’s disastrous rule

The fact Scotland’s high earners are fleeing south should be a warning

BRIAN MONTEITH26 April 2024 • 6:03pm

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How can we put the brakes on the ambitions of Rachel Reeves to find ways to tax us more? She has surrounded herself with advisers who back high tax, and when she gives speeches she is very careful to use coded phrases that leave the possibility of more, and higher, taxes on the table.

Fortunately we can point to Scotland as an example of how leftist economics risk sending public finances into a tailspin.

As a Scot, it gives me no pleasure to state it, but the destination of travel for Scotland’s public services must be to fall further behind the performance levels of the rest of the UK.

Why? Because more of Scotland’s highest tax contributors will join those already choosing to move their tax domicile to England, ensuring a widening gap between budgeted and actual tax revenues, which in turn will ensure diminishing funds for quality public services.

It is this lesson that Rachel Reeves and any other prospective chancellors must learn. When the top earning 10pc of UK taxpayers contribute 60pc of the revenues it is this group of people – who also happen to be the most mobile – that tax policy has to be careful to consider. 

To emphasise this lesson the lowest earning 50pc of taxpayers contribute only 9.5pc of revenues. 

If governments of any colour want to protect revenues they cannot afford to lose even a small number of the highest earning taxpayers.

A government study into the effects of having different tax rates in Scotland from the rest of the UK has provided valuable evidence that fears about a Scottish brain drain are indeed taking place. 

Here’s how it has happened. In 2018/19 the SNP split Scotland’s basic rate tax band into three while also increasing the tax rate for higher and top rate taxpayers, creating five tax bands – in contrast to England, Wales and Northern Ireland, where there are three.

Now, in this tax year of 2024/25 the SNP has introduced a new “advanced rate” band at 45pc for those earning between £75,000 to £125,140 and increased the top rate to 48pc. 

In general, the Scottish Government has uprated the lower tax bands by inflation, but by freezing the higher rate threshold at a lower level than the rest of the UK, more people earning £40k-£50k in Scotland will now pay at the higher-rate tax bracket.

Anyone having an income of more than £28,867 in Scotland now pays significantly more income tax than someone with the same earnings elsewhere in the UK. Those under it pay slightly less.

The Treasury study found the changes introduced in 2018/19 led to 1,030 higher earners moving south, losing Scotland £61m of tax receipts that year.

While the analysis could not find “reliable evidence of a change in net cross-border migration” for those paying the SNP’s new 19pc “starter rate”, or its new 21pc “intermediate rate”, it did find changes for those liable for the increased 41pc higher rate – 1p higher than England – which applied to income between £43,430 and £150,000.

As if this study is not worrying enough it is fair and reasonable to believe the reality is already far worse, for the Treasury limited its study to only 2018/19 and not the effects of the further SNP tax hikes that followed. 

Add the impacts of the top rate becoming 48pc, now having lower starting levels for higher tax bands than the rest of the UK, and the introduction of an “advanced” intermediary tax band at 45pc and the carnage for tax revenues must be worse.

A Scottish taxpayer with an income of £125,000 will pay £5,221 more in income tax than in the rest of the UK – equivalent to a 7pc hit to their post-tax income.

There’s no need to take my word for it, the Scottish Government’s own Scottish Fiscal Commission estimates that “behavioural responses” will offset 90pc of the latest increase in the top rate of tax in Scotland. 

For behavioural responses read tax planning by moving tax domicile or sheltering earnings. It takes an especially distorted view of the world to increase a tax rate when you have already been advised it will realise only 10pc of the potential benefit and lose previously content taxpayers to another jurisdiction.

Research showed more than a third of Scots would consider leaving Scotland if income tax rates were increased before Humza Yousaf followed through with his tax hikes, with almost 48pc of 18- to 24-year-olds saying they would think about leaving.

Where will they go? Most will simply relocate to attractive parts of England that keep them within easy reach of Scotland, where they can still work and play, but as English taxpayers.

Amusingly, it was revealed in January some 300 Scottish civil servants actually live in England to avoid high Scottish taxes. Others will look for warmer and more fiscally attractive climes.

Many may consider moving to the US, where incomes are not only much higher but you also get to keep far more of your money. The top federal income tax rate of 37pc in America cuts in at £465,000 whereas in Britain the state snatches 40pc when you earn over a measly £50,270. 

Likewise Dubai is another attractive option, not least because take-home pay is double that in Britain, helped by the absence of any income tax.

This is why Ms Reeves and others like her must wake up. Low tax jurisdictions such as Dubai and countries such as Switzerland, Portugal and Italy do not hang back in advertising themselves as places to relocate to. They know the value of a small share of something big rather than a large share of nothing at all.

Despite warnings from Scottish Financial Enterprise, the Scottish Chambers of Commerce, the Institute of Directors – all representing employers who are struggling to attract or keep the best talent for their Scottish members – the SNP insists people are beating a path to work in Scotland. 

The British Medical Association, the British Dental Association and even the Scottish Government-owned Prestwick Airport all disagree – complaining it is getting harder to recruit and retain skilled workers.

The SNP is cherry-picking its figures by ignoring who pays the lion’s share of taxes and relying on improved tax take thanks to higher earnings and frozen tax allowances pulling in higher revenue – but the brain drain is real and its financial impact will grow.

Rachel Reeves and other prospective chancellors must learn the lesson of talented higher earners escaping Scotland so brain drain does not infect the whole of the UK.

Knowing something about Austrian economic theory would be very useful

 

Photo: Getty Images

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•   UFC figher Renato Moicano has praised the Austrian School of economics - he's right
•   The timeless principles of Austrian economics must be remembered
•   The Austrian economists turned the 'logic' of socialism on its head

Last week, Renato Moicano, a professional martial artist who competes in the Ultimate Fighting Championship (UFC), made a rather unusual announcement after a fight:

‘I love private property, and let me tell you something, if you care about your […] country, read Ludwig von Mises and the six lessons of the Austrian Economic School […]!’

Wise words! The Austrian School of Economics, which emerged in Vienna in the 1870s, was one of the world’s leading schools of economic thought in the late 19th and early 20th centuries, and while they have since somewhat fallen out of favour, we still have a lot to learn from them today. I am not quite sure what Mr Moicano means by ‘the six lessons’ (there is some speculation that he was referring to the book ‘Economic Policy: Thoughts for Today and Tomorrow’ published by the Mises Institute, which is composed of six lectures), but either way: in this article, I will single out six important insights that we owe to the Austrian School. 

Value is subjective

The value of a good is not a property of the good itself. It is something that we, the consumers, see in it. As Carl Menger, the founding father of the Austrian School, explained, value exists in our minds, not in the physical world. 

Like a lot of important insights, this seems extremely obvious – trivial, even – once somebody has spelt it out. But it is not obvious at all until somebody does so. For a long time, economists believed in the so-called ‘Labour Theory of Value’, the idea that the value of a good is determined by the number of working hours needed to make it. That would make ‘value’ an objective, physical property of a good, like its weight, its volume, or in the case of food, its calorie content. 

But value is clearly nothing of the sort. We can see this from the fact that things go up and down in value as consumer preferences change, even as the number of labour hours contained in them remains constant. 

Value is determined at the margin

The first pint of beer in the evening is a delight. The second one is still very nice, but it does not quite replicate the magic of the first one. Each subsequent pint is a bit less enjoyable than the previous one. Economists call this ‘diminishing marginal utility’. 

Again, this seems obvious once somebody spells it out, but it was not at all obvious at all until the ‘Marginal Revolution’ of the late 19th century, which the Austrian School was part of. Economists used to struggle with what was later called the ‘diamond-water paradox’: isn’t it strange that we value diamonds so highly, and water so little, given that diamonds have no practical use whatsoever, while we cannot survive for longer than three days without water? 

But there is nothing paradoxical about this at all once we think in terms of marginal rather than absolute value. If we are lost in the desert, we would, of course, pay any price for a bottle of water. However, most of the time, we are not lost in the desert. Most of the time, we have enough water. And an additional unit of it would not make us much better off. 

If somebody invented a 3D printer that can ‘print’ diamonds, the marginal value of diamonds would also drop. But with the limited number of diamonds currently in circulation, it never even gets to that stage.  

Profits are not exploitative

Marxists see capitalists as parasitic exploiters. They see them as the equivalent of a feudal landowner, who does not produce anything: they just own the land, and collect rents. 

Eugen von Böhm-Bawerk, the leading figure of the second generation of the Austrian School, explained that the role of the capitalist in a market economy is nothing like that. Profits are a legitimate reward for risk-taking, and patience. 

If you are a salaried employee, you are, to a large extent, insulated from the ups and downs of the company you work for. When the company goes through a rough patch, that is not your problem: you are still entitled to the same salary. You are also paid from the very first month, although it can take many years until a new company, or a new product line, generates any profit. 

But the flipside of this is that when a company eventually does generate large profits, you are not automatically entitled to a share of those. Employment contracts are like an insurance contract between risk-takers and risk-averse people. There is nothing ‘exploitative’ about that.

No economic calculation without market prices

When we say that Good X is worth three times, or five times, or ten times as much as Good Y, what do we mean by that? 

We mean that that is the ratio at which people generally trade X for Y. When X and Y are not tradable, we cannot know what that ratio is. Without market exchange, there can be no market exchange ratios. Without markets, there can be no market prices. 

Ludwig von Mises, the leading figure of the third generation of the Austrian School, pointed out that therefore, there can be no market prices in a socialist economy. Or more precisely: Mises assumed that even in a socialist economy, there could still be a (secondary) market for consumer goods. What there could not be is a market for capital goods, and input factors, e.g. raw materials, land, labour, machinery, and so on. 

Why does this matter? Because without prices, there can be no rational economic calculation. Marxists had always argued that capitalism was chaotic: ‘anarchy in production’, as Friedrich Engels called it. A socialist economy would be a more rational economy. Mises turned this logic on its head. He said that the so-called ‘planned’ economy of socialism would, in reality, be chaotic and unplanned. Because in the absence of price signals, the planners would not know what to do. This kick-started what later became known as the Socialist Calculation Debate. 

Knowledge is tacit, and dispersed

Everyone possesses some economically relevant knowledge, usually specific to our own circumstances, time, and place. If nothing else, at least we all know our own needs and preferences better than anyone else. 

This kind of knowledge is often ‘tacit’: we possess it, but we would struggle to articulate it.  

In a market economy, we do not need to express it. We just need to act upon it. Our actions influence market prices, and in that way, our knowledge is communicated to other economic actors. No central planner could possibly replace that process – not even today, with all the computer power we now have.

These important clarifications were added in the second round of the Socialist Calculation Debate by the man who would become Ludwig von Mises’s most prominent student, and the future Godfather of the Institute of Economic Affairs: Friedrich August von Hayek.

Low interest rates cause boom-and-bust cycles

Mises and Hayek also developed a theory of the business cycle, which works, very roughly, as follows. 

Imagine two otherwise identical societies, which only differ in one respect: in one of them, people are patient and forward-looking, in the other one, people seek instant gratification. 

This would lead to very different economic structures. The patient society would have a high savings rate. In that economy, it would be possible to have sectors with long production timelines, which take a long time to mature. These would not be viable in the impatient society. 

Now what happens if the central bank of the impatient society manipulates interest rates downwards? This would create the impression that this society has become more patient, and that long-term investment projects that were previously unviable have become viable now. 

But this would be an illusion, and if investors are tricked into starting those long-term investment projects, they will sooner or later find out that they are built on sand. An illusory investment boom is followed by a bust.  

Unlike Keynesians, Austrians do not believe that governments can do much to fight a recession. The malinvestment has already taken place, and needs to be liquidated. The economy has to go through a painful adjustment process. 

Conclusion 

In the second half of the 20th century, the Austrian School fell out of favour. This was partly a matter of methodology. Mainstream economics became a highly mathematical science, imitating physics, an approach which the Austrian School rejects. It did not help that Austrian economists tend to be very purist and uncompromising, which made it difficult to apply their policy recommendations in a world which had moved very far away from laissez-faire liberalism.

But the insights from their golden age are timeless, and you can still find interesting thinkers in the Austrian tradition today. Renato Moicano is right. Read some Austrian economics!

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