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.

A quick way to help in housing

 

COMMENT

Stamping on stamp duty would free empty nesters to fly their coops

Paul Johnson

Monday January 16 2023, 12.01am, The Times

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This is my first column since the Christmas holidays, so I hope you will forgive me for starting by recalling a party I attended over the festive period. Not, I’m afraid, a recollection about the superb drink, stunning food or great company, but rather a reflection on the housing market.

The event was held in a large suburban house. It had once been home to a family, but is now occupied by a single man in his eighties, children long gone, wife deceased some years ago. A number of the guests were from a similar generation and in a similar position, still occupying the large family home, either alone or with a partner.

It’s not only those I meet at Christmas parties who are in this position. More than half of owner-occupied homes are under-occupied, in the sense of having two or more spare bedrooms. And this is a growing trend. On this definition, fewer than 40 per cent were under-occupied in the mid-1990s. Few renters under-occupy their accommodation. They have to pay hard cash for that spare space.

Being adept at the sort of small talk appropriate for such social gatherings, I quizzed a few of those present on their housing choices. “Why haven’t you moved somewhere smaller and more appropriate to your needs, unlocked the capital in your unnecessarily big house and made it available to someone who actually needs it?” It was not quite my conversational gambit, but I think they got the point.

Broadly speaking, I got two answers. First, moving house is a huge and time-consuming upheaval. Bluntly, if you’re in the last decade or two of life, you don’t want to waste a significant fraction of that time going through the sort of hassle involved in moving house. Fair enough.

Second, though, was stamp duty. Awareness of this as a significant cost and a disincentive to move seemed pretty much universal. Hurrah, I said, we economists are on just the same page. Of all the taxes levied at present, Stamp Duty Land Tax — the tax you pay on purchasing a property — has a pretty good claim to be the most damaging and pernicious of the lot. The more often you move, the more tax you pay. It gums up the housing market and, by extension, the labour market. Mutually beneficial transactions, for example an older person in a big house trading places with a younger family in a smaller house, are disincentivised.

This isn’t merely theory or anecdote, either. The best evidence we have is that stamp duty makes a big difference to the number of housing transactions. In a very careful study, Michael Best and Henrik Kleven, the latter a professor at Princeton, estimated that getting rid of a tax rate of only 1 per cent on purchases could increase housing transactions by as much as 10 per cent. If that’s even in the right ballpark, it suggests that even low rates of stamp duty are likely to be very damaging, and the very high rates we levy on expensive properties dramatically more so.

There are only two feasible excuses for the continued existence of stamp duty. The first is that it is a relatively easy way of raising tax. That’s why it was introduced in 1694, making it among the most venerable of all our taxes. But that, frankly, is no longer much of an excuse. We could perfectly easily raise the revenue that it brings in in other ways. Yet stamp duty has been increased time and again in recent years, reaching a top rate of 12 per cent on the most costly properties — and more for those buying a second property or who are not UK-resident.

The second is that it already exists. Abolishing it now would mean a windfall gain for, especially well-off, present home owners. Two responses to that: first, given that stamp duty has been increased over the past couple of decades, for a reasonable fraction of home owners, certainly most of those I was speaking to over Christmas, this would largely be a reversal of windfall losses imposed by previous increases; second, this could be at least partially undone by reforming council tax and raising it on more valuable properties.

Council tax is levied at a lower fraction of property value the more valuable is the property. That is inequitable. There is a single person discount, so single people occupying big expensive properties get a double bonus. And not having been updated in 30 years, it results in especially low rates of tax on family homes in London and the southeast.

It is likely that this is where my yuletide interlocutors and I would part company. I suspect they would not be keen on their council tax going up, even if stamp duty were cut. I understand the political problem. But the corollary of relatively low council tax, as a fraction of property value, enjoyed by the well-heeled occupants of expensive houses in London and the southeast is high tax on the occupants of less expensive properties, especially in the Midlands and the north.

The high cost of trading down is gumming up the housing market

YUI MOK/PA WIRE

Let me be clear. I am not saying anyone should be forced from their family home. What I am saying is that we absolutely should not be penalising those who want to move home. That is deeply damaging. I could make a better argument for subsidising such moves than for penalising them.

We hear much about the housing crisis and the crisis of housing affordability. We hear rather less about the millions of houses that are underutilised and often bigger than their occupants either need or want. The two are not unrelated. There are many contributors to our sclerotic, dysfunctional housing market. Our tax system, in particular stamp duty, without question is one of them. It is one that is readily amenable to government action.

Paul Johnson is director of the Institute for Fiscal Studies
Follow him on @PJTheEconomist

Can the Tories re-boot the UK economy?

 Scrapping the stamp duty cut would be a signal that the Conservatives are now a social democratic party

ALLISTER HEATH13 January 2021 • 9:30pm

What will the Tories stand for after Covid? Will they relearn to love lowish taxes and freeish markets? Or will the virus turn them into European-style social democrats, supporters of every public spending and social engineering scheme going? Will a year of wartime economics browbeat them into acquiescing to permanently higher taxes, or will they have the courage to return to their core principles to reboot the country after the worst pandemic since the Spanish flu of 1918-19?

With excess deaths at horrifying levels, and mortality surging when adjusted for age, the only immediate priority must be the race to vaccinate. If anything, the Government should be throwing even more money at the problem: officialdom’s apparent lack of urgency has been disgraceful.

Boris Johnson and Rishi Sunak were right to temporarily jettison macroeconomic orthodoxies last year. Emergencies require the suspension of ordinary rules: for now, the size of the budget deficit remains irrelevant. Yet at some point, hopefully sooner rather than later, we will have vaccinated enough older and vulnerable people, the Government will reopen our society, and it will become time to start talking about fiscal discipline again.

What then? Will the Tories, scenting a window of opportunity, jack up taxes on property, capital, petrol, inheritance and just about everything else, as some influential voices have repeatedly threatened? Down that road would lie madness and oblivion: every Tory once knew that high-tax economies grow more slowly than lower tax ones, and most still realise how stupid it would be to hammer the private sector as it exits the worst depression in centuries.

We will get the first inkling of the Government’s post-Covid ideological direction at Sunak’s Budget on March 3. It will, in the main, be a non-event: with the schools still shut and the economy trashed, propped up by furlough and massive subsidies, the Treasury rightly acknowledges that this won’t be the time for fiscal consolidation or long-term thinking. It will keep the spending taps wide open.

Yet there will be one ominous and bizarre exception: the temporary cut to stamp duty is set not to be extended. Yes, you read that right: while every one of the myriad Covid spending schemes – from furlough to subsidies for all of the industries crippled by lockdown – will remain, the one consumer tax cut introduced during this crisis will be reversed, even though it worked and repealing it would cause chaos.

It is apparently fine for the deficit to be bolstered by higher spending, but unacceptable for it to be increased by a tax cut. Is that really what passes for Tory thinking on the economy these days? If so, it would be time to panic; so let’s assume, instead, that this is simply a case of Treasury officials having been allowed to run riot, pasty tax-style, making use of the fog of war to pursue their longstanding obsession to tax property ever more heavily.

I hope that the Chancellor will step in, for the looming battle over stamp duty is a microcosm of the wider battle for a new Tory philosophy post-Covid. We need an economic policy reset: we will not pay for our way in the world simply by moving civil servants to the North, spending more on grands projets and banning carbon-emitting industries. Every low-growth country has already tried that: if high taxes, high-speed trains, fake decentralisation and urban metros were the answer, France would be the most successful economy in the world.

The Government can only succeed if it dramatically re-energises the private sector. We need (non-Covid) spending restraint, deregulation, planning reform, far more encouragement to entrepreneurship, an extension and radicalisation of the free ports idea and, yes, judicious tax cuts designed to spur growth, investment, mobility, risk-taking, work and business creation.

The Government has said that the larger Covid national debt won’t derail its manifesto commitments to spend more on infrastructure; in the same way, the virus’s fiscal legacy cannot become an excuse for massive tax hikes or a reason to prevent pro-growth tax cuts and a proper supply-side agenda. If that means a higher budget deficit for a period, so be it.

Stamp duty itself is one of the most destructive and irrational taxes in Britain. For decades, it was levied at trivially low levels, until Gordon Brown and then George Osborne weaponised it. It is one reason why the property market is so illiquid, why people move so much less than they did in the Eighties and a major psychological barrier to downsizing. Stamp duty’s burden is split between sellers, who suffer from a fall in the value of their home, and buyers, who cannot borrow to pay for the tax and are therefore forced to delay purchases for years. It symbolises a political system rigged against those who aspire to own their own home. Axing or cutting this ridiculous tax wouldn’t by itself cure the housing crisis, but it would begin to ameliorate it.

Property is already taxed more heavily in the UK than in any other OECD country, with stamp duty, council tax, business rates and the rest yielding twice the average at 4.1 per cent of GDP. But part of the reason for the reluctance to axe stamp duty is that it is seen by some in government as largely a London problem, and the capital has now shifted to the Left to such a degree that it is almost a Labour rotten borough. I have come across Tory MPs and advisers who ask, shamefully, why they should bother using up political capital to help young Lefties in Islington or Putney.

Yet the difficulty of buying their own home is one reason why so many younger professionals have embraced socialism, and this applies equally to Tory Southern England. During the general election, focus groups revealed that 30 and 40-something female voters in particular were being driven into Jeremy Corbyn’s hands by this problem. There is also a moral case for home ownership as the foundation of a conservative society.

It would be a political and economic calamity for the Conservatives to give up on free market economics after Covid, as Rishi Sunak understands full well. He should make his stamp duty holiday permanent, and in doing so remind his Tory colleagues that, pandemics notwithstanding, they are either the low-tax party or they are nothing.