This week and last the Daily Telegraph has been running a campaign highlighting the difficulties and distortions arising from the substantial rise in stamp duty. For some properties, this has risen from 1% to 12%. On top of that there is the 3% surcharge on second properties. What started off as a good way of raising additional funds from property has ended up distorting economic behaviour and maybe damaging the economy.
When you consider that if an individual moves from a property worth £7 million and purchases a property worth around £4 million, the stamp duty on the purchase of the £4 million property is about £450,000. On top of this the house sale of will also depress the market. This is “dead money” and a rational reaction has been to reduce property transactions at the top of the market. This has had an effect all the way down the market reducing mobility. It has also contributed to under occupation of properties where (empty nesters have decided to stay in overlarge properties), consequently causing a shortage in family properties. The number of transactions has also slumped thus reducing revenues as well as causing the damaging social effects described above.
Taxation policy is a bit like an elastic band; governments which are perennially short of money try to push taxes a bit higher until there is a reaction which could be economic or political. One saw this with, for example, the petrol issue in the early 2000s where popular protest caused the governments to become much more cautious in raising fuel duty. In tax policy, finding the right level of tax for any particular transaction is a certain amount of trial and error.
One knows that at a rate of 100% one will collect no tax and at a rate of 0% no tax is collected either, so one needs to find the ‘sweet spot’ at which one can collect the maximum amount of tax with the minimum amount of political and economic pain. For example, the reductions in the rate of corporation tax from 28% to 19% has seen corporation tax receipts increase. The reduction in the top income tax rate from 50% to 45% did not result in a reduction in income tax receipts.
The lesson to governments is the same– cut rates and exemptions and you will collect more tax.
