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.

Some microeconomics for you - taxes on sugary drinks:

 This piece comes from Conversable Economist Conversable Economist - Conversable Economist - In Hume’s spirit, I will attempt to serve as an ambassador from my world of economics, and help in “finding topics of conversation fit for the entertainment of rational creatures.” Conversable Economist

It has lots of interesting pieces - take a look.

OCTOBER 26, 2023

The Limited Effects of Taxes on Sugar-Sweetened Beverages

Here’s the case for imposing a tax on sugar-sweetened beverages: 1) Obesity is a major public health problem, through its effects on diabetes, cardiovascular diseases, asthma, certain cancers, and mental health; 2) Consumption of sugar-sweetened beverages is an outsized contributor to obesity; 3) Taxing sugar-sweetened beverages will raise the cost that consumers pay, and thus diminish their consumption. This logic is sufficiently powerful that taxes on sugary drinks have been imposed, sometimes locally and sometimes at that national level, in 50 countries. The average American (average!) consumes about 200 calories per day in the form of sugar-sweetened beverages, among the highest of any country in the world.

So how is it going? Kristin Kiesel, Hairu Lang, and Richard J. Sexton discuss the evidence in “A New Wave of Sugar-Sweetened Beverage Taxes: Are They Meeting Policy Goals and Can We Do Better?” (Annual Review of Resource Economics, 2023, pp. 407-432). Here are a few of their findings:

1) The effect of taxes on sugar-sweetened beverages (SSBs) on calories consumed is often pretty small. They write:

Eating two extra fries, chips, gummy bears or a single teaspoon of ice cream on a given day cancels out the calorie effect of reduced purchases of SSBs due to taxes measured by Dickson et al. (2021) for the United Kingdom. SSBs have been identified as a major contributor to obesity by many, including the World Bank (2020), but it is unhealthy diets overall, a lack of exercise, a variety of environmental factors, and genetics that determine gaining and retaining excess weight (NICHD 2021).

2) Details of the tax matter considerably. For example, a tax imposed at the city level means that sellers in the city will be aware that, when selling sugar-sweetened beverages, they are competing against untaxed sellers of such beverages outside the city limits. Thus, national taxes will tend to have larger effects than local ones., because sellers will be less likely to pass on a large share of the tax to consumers. Some taxes exclude “fruit drinks,” even though they may have added sugar , while others tax diet soda. Consumption of some types of sugar-sweetened beverages seems more responsive to price increases, like sodas, while consumption of others is less responsive, like energy drinks.

3) If drinking sugared beverages is in part a self-control problem, there are lots of alternative sources of calories that can readily replace sugary drinks, from candy bars to fast food.

4)Unsurprisingly, the revenues from taxes on sugar-sweetened beverages are not especially large compared with other tax sources. The authors write:

The estimate that $133.9 million in tax revenue is collected annually across the seven US cities with local SSB taxes amounts to about $33 per capita within the taxing jurisdictions (Krieger et al. 2021b). A tax implemented nationally that generated similar per capita revenue would amount to 0.32% of the US total tax revenue. Thus, revenues generated from current SSB taxes are rather trivial as a share of revenues, and beneficial purposes to which these funds are devoted could be supported from a modest redirection of funds from more broad-based taxes.

5) The taxes on sugar-sweetened beverages are probably regressive: that is, they cost a greater share of income for the poor than the rich. Indeed, such taxes tend to be less favored by the poor than the rich.

It is well documented that it is easier to be in favor of policy measures that mainly affect others (e.g., Diepeveen et al. 2013) and that at-risk groups whose behaviors are targeted by SSB taxes remain strongly opposed to them (Hagmann et al. 2018). Lang (2022) showed that tax pass-through for local SSB taxes was higher and demand was more inelastic in low-income and more racially diverse neighborhoods than in wealthier and predominantly white neighborhoods. These outcomes exacerbate the disproportionate burden on low-income consumers of raising revenue via SSB taxes. Even when modeled to be socially optimal under consideration of heterogeneous and time-inconsistent preferences (e.g., Allcott et al. 2019a,Dubois et al. 2020), SSB taxes remain mildly regressive at best.

This study isn’t the final word. As the authors are careful to point out, some studies of this literature suggest more optimism about carefully designed taxes on sugar-sweetened beverages as a policy tool. Those interested in more positive estimates might begin with Hunt Allcott, Benjamin B. Lockwood, and Dmitry Taubinsky, “Should We Tax Sugar-Sweetened Beverages? An Overview of Theory and Evidence,” in the Summer 2019 issue of the Journal of Economic Perspectives, or with the 2020 World Bank study, “Taxes on Sugar-Sweetened Beverages: International Evidence and Experiences.”

But I suspect that even those who are more optimistic about the virtues of taxes on sugar-sweetened beverages would agree that they are best-viewed as part of a broader effort to reduce obesity, not as a substitute for a broader effort. Kiesel, Hairu , and Sexton conclude in this way:

Indeed, it will take the knowledge and expertise of public health officials and scholars, economists, psychologists, and those most affected by health inequities and SSB taxes to carefully design multifaceted policies that alter our food environments and nudge both producers and consumers toward improved behavioral responses, health outcomes, and greater social welfare. Carefully designed taxes on added sugars and unhealthy foods implemented countrywide could be part of combined policies aimed at reducing the obesity epidemic and related health harms.Given their regressivity, limited impact on consumption of SSBs, and failure to incentivize product reformulations, we find little basis to support further implementation of local SSB taxes.