When it comes to causes of the housing crisis, stamp duty land tax is far from the most important. And since it claws nearly £12bn out of primarily well-off peoples’ hands, many of those who care about housing will be content to let sleeping dogs lie, unpopularity notwithstanding.
But stamp duty does a lot more damage than it might seem – and when the housing market is so broken, it’s especially important to support any politically-achievable change that might make things a bit better.
Back in 1997 less than half of housing transactions faced stamp duty at all, and when they did, it was at a proportional 1% rate all the way up the schedule – that is, for houses worth both £50,000 and £2m (although there were next to no houses in the country worth £2m back then). Ever since then, politicians of both parties have been unable to resist ratcheting the rate up: the top rate is now 12 per cent.
It is progressive. But taxes on bicycles, using the train, and eating free range chicken would be progressive: progressivity isn’t the be-all and end-all of a particular tax, even if we want the system to be very progressive overall. There are many ways to soak the rich and if we want to do it then we should do it in a way that causes the least collateral damage to the economy at large – that is, to the rest of us.
Stamp duty is uniquely bad by this measure. The key problem is that stamp duty stops people from moving.
Housing ownership needn’t be the tenure that most people aspire to, but in practice it is. That means that, for people to live in a place they love, close to their family or friends, in range of a job they want – or indeed near that job so they don’t have to endure a hellish commute – they often need to own a house there. To own a house there, there needs to be a house there, and that’s why the most important solution to the housing crisis is building more houses. But even of the stock we have, we can use them more efficiently.
However, we do most of our property taxation specifically by taxing these moves. We barely (and regressively) tax people for occupying expensive property – or valuable land – through our ageing, ailing and increasingly preposterous council tax system. But we tax them heavily and progressively when they move.
Economists have tried to measure the effect many times, and find that even in the middle of the distribution, where tax rates are relatively modest, the impact can be large. The best research papers typically find that a 1 per centage point increase in tax rate cut property transactions in the affected range by something like 10 per cent – sometimes larger in the short run, when including re-timing to take advantage of a lower rate.
My suggestion is that the chancellor abolish it in the budget this year. Taxes don’t typically get abolished, but stamp duty isn’t a typical tax.
And there is an obvious place to get the revenue back: council tax. Council tax is regressive by design, and has become more regressive over time as property prices in certain parts of the country have soared, and yet have faced no extra tax due to already being in the top band.
This banding itself is ridiculous. New build homes are put in bands based on what they would have been worth in 1991, assuming nothing had changed. So Brixton, for example, is still assumed to be cheap and relatively run-down, and new flats in swish Oval Quarter worth hundreds of thousands of pounds are in band C, paying peanuts.
Reforming council tax so it taxed properties at around 10-15 per cent of their rental value up the scale, like if VAT was on housing services, would easily cover the cost of scrapping SDLT. It would be similarly progressive, fairer, and have none of the damaging economic disincentives to moving.
No, it wouldn’t solve the housing crisis – but none of the real solutions to the housing crisis are on the table. This move is exactly the sort of thing a Tory chancellor could and would do. And at times like these the housing market can do with all the help it can get.
Ben Southwood is head of research at the Adam Smith Institute.