Why We Need to Scrap Stamp Duty | Tom Spencer
For many young people, today owning a place of their own is an unrealistic pipe dream. Different politicians have tried to address this problem through a variety of methods: whilst Labour has suggested increasing the number of council houses, it is unnecessary for the government to be getting involved in such a way. Alternatively, the Association of Accounting Technicians has suggested an idea that Sajid Javid is reportedly fond of: to make it so the stamp duty obligation would be paid by the sellers instead of the buyer.
In theory, this makes sense. Only those already owning houses will be responsible for any stamp duties allowing a lower price to be paid by those entering the housing market. However, this confuses how sellers will react to additional duties being put on their sales. Instead of simply accepting the increased cost of selling their home, what this change will do is just increase the price of houses, as sellers will only put the increased costs onto the buyers.
Further to this making the situation worse, it seems likely that this move will further decrease the supply of housing. Consider that you own a house that you wish to sell to take a step up the housing ladder. Now that sale comes with an obligation to pay an additional 2-12% of the total fee. For many people, this will discourage them from moving up the ladder, because it just becomes more difficult to make money from your house. The problem with this is that when no one moves up the property ladder, the space at the bottom will never free up.
So, this well-intentioned plan simply will not work. This tax distorts price signals, reducing labour mobility and preventing allocative efficiency. So, what we must do is quite simple; scrap stamp duty. Taxing transactions makes very little sense, so it appears odd that when we’re enduring a housing crisis this policy hasn’t gathered more mainstream support. Regardless of what party in the transaction is paying a tax, by merit of the taxes existence the transaction is discouraged. So, if we want people to own houses then its clearly a counter-productive to continue to hold stamp duty.
However, this brings us to a problem of how we’re to replace the £8.7Bn that the duty generated in 2018. Thus, we must find a way to generate this money in a way that isn’t an unfair attack on the housing market, allowing more people to find a home. One idea which seems to make the most sense has been recommended by Julian Jessop of the IEA is a land-value tax.
Although, when this idea when seen in Labours 2017 manifesto it was wildly criticised, being described as a ‘garden tax’ the idea was largely misunderstood and sensationalised in the tabloids. The key benefit of this tax is that even if the land is unused, the owner is still required to pay the duty for that land. This will discourage hoarding of unused land, encouraging that land being put to productive uses. Furthermore, this tax is fundamentally progressive meaning that it can foster support across the political divide.
Although, when the Mail reported Labour’s announcement of the policy, they recorded that it would cost the average family £4000 this is completely dependent on how the tax is implemented and most likely won’t be the case. In 2016 the ONS recorded that the total value of land in the UK amounts to £5Tn. As just under £9Bn is needed to be raised then the total tax amount necessary would be limited. However, this doesn’t even take into account how it is much more likely the tax would be progressive. This would mean that it will be possible to generate the receipts of stamp duty without charging many people any money.
So, whilst it’s nice to see that Sajid Javid sees that stamp duty needs changing. His methods are strictly counter-productive, and the introduction of a land-value tax would be a much better, and fairer method of gaining the necessary revenue for a government to function. All Javid seems to have said so far is that he is open to the idea, so I hope that if he is serious at allowing young people to ever own their homes, he looks to scrapping stamp duty, not making the issue worse.