Stamp duty is a bad tax – but scrapping it will do nothing for first-time buyers

This was a better plan. Image: Getty.

Not a day seems to pass in this Conservative leadership contest without promises of tax cuts. Today the Times brings news that Boris Johnson is contingency planning an emergency No Deal budget to ensure the economy is “going gangbusters” by 31 October.

Central to that is said to be an idea to abolish stamp duty on homes worth less than £500,000 and reverse George Osborne’s increase in the levy, from 7 per cent to 12 per cent, on those worth more than £1.5m.

Stamp duty has few fans, and rightly so. It is a tax on transactions and so results in fewer of them, reducing housing market activity and disincentivising owner-occupiers from moving for work. It is inefficient and deserves to go.

However, on top of this is frequently added the complaint that it makes buying a house more expensive by adding an extra few per cent onto the purchase price. Indeed, this is how the idea is usually sold. Dominic Raab, who has been promoting the stamp duty reform Johnson is now considering, suggested earlier this year that it would “[save] first-time buyers up to £10,000 and [encourage] people to buy”.

But this is a misconception. That’s because, while stamp duty is levied on the buyer, the incidence – who actually shoulders the cost – is on the seller.

Consider a first-time buyer with an upper limit on their housebuying budget – after lawyers’ fees, moving costs and so on – of £510,000. They cannot afford to pay £510,000 for a property because the stamp duty liability – £15,500 – would take them over their budget.

Instead the most they can afford on the purchase price is £500,000, which would attract a stamp duty bill of £10,000. So the stamp duty has been capitalised into the price, reducing the value that can be recouped by the seller but leaving the buyer no better or worse off (except when they come to sell later).


If Johnson now abolishes stamp duty on homes up to £500,000 in value, the same buyer now has more of their £510,000 to put towards the purchase price. Assuming values above £500,000 will still be taxed at five per cent, this first-time buyer will now be able to spend a touch above £509,500 for the same property.

Who is the winner here? It’s not the first-time buyer – it’s the seller, who is £9,500 better off. The loser, to the tune of that £9,500, is the exchequer.

The effect on the first-time buyer is at best neutral but, in fact, if the plan is to abolish stamp duty on all acquisitions below £500,000 – including those by landlords and existing homeowners – then life is about to get harder for those trying to get their foot on the ladder.

Why? Because currently stamp duty is levied at higher rates on existing homeowners, and even higher rates still on landlords. This has depressed the price at which a landlord is willing to buy a property of a certain rental value below what the first-time buyer is willing to pay, giving the latter a distinct advantage.

Take a landlord who has £520,000 to spend on the same property as in our example above – plenty enough to outbid the first-time buyer whose maximum budget is £510,000. At current rates of stamp duty, while the first-time buyer can afford to bid £500,000 (with a tax bill of £10,000), the landlord can only afford to bid a touch above £490,000, on which the tax bill for them would be some £29,200. The first-time buyer gets the property.

If stamp duty were to be abolished altogether on property acquisitions up to £500,000, that would no longer be the case. The landlord would pay the same rate of stamp duty as the first-time buyer, and the winning bidder is the one with the bigger budget. Now, while the first-time buyer can afford to pay £509,500, the landlord can afford to pay £519,000 (but they probably don’t – they pay £1,000 or so more than the first-time buyer). The landlord gets the property.

This is the effect of the stamp duty reforms that are being mooted. Tax revenues will fall, house prices will rise, and first-time buyers will lose their advantage in the market against landlords. On efficiency grounds, this might all be a very good idea, and many will support it. But let’s be under no illusions about who will be the winners (existing homeowners) and who will be the losers (first-time buyers and the public purse).

If the aim is to help first-time buyers, retaining a higher rate of stamp duty on landlords makes sense. Even if that isn't the aim, the sensible way to abolish stamp duty would be to replace the lost revenues with a corresponding increase in other property taxes that are more efficient. The reconfiguration of council tax into a more equitable levy, calculated as a straightforward percentage of the value of the property (or even the land), would be a good place to start.

Daniel Bentley is editorial director at the think tank Civitas.

 
 
 
 

The IPPC report on the melting ice caps makes for terrifying reading

A Greeland iceberg, 2007. Image: Getty.

Earlier this year, the Intergovernmental Panel on Climate Change (IPCC) – the UN body responsible for communicating the science of climate breakdown – released its long-awaited Special Report on the Ocean and Cryosphere in a Changing Climate.

Based on almost 7,000 peer-reviewed research articles, the report is a cutting-edge crash course in how human-caused climate breakdown is changing our ice and oceans and what it means for humanity and the living planet. In a nutshell, the news isn’t good.

Cryosphere in decline

Most of us rarely come into contact with the cryosphere, but it is a critical part of our climate system. The term refers to the frozen parts of our planet – the great ice sheets of Greenland and Antarctica, the icebergs that break off and drift in the oceans, the glaciers on our high mountain ranges, our winter snow, the ice on lakes and the polar oceans, and the frozen ground in much of the Arctic landscape called permafrost.

The cryosphere is shrinking. Snow cover is reducing, glaciers and ice sheets are melting and permafrost is thawing. We’ve known this for most of my 25-year career, but the report highlights that melting is accelerating, with potentially disastrous consequences for humanity and marine and high mountain ecosystems.

At the moment, we’re on track to lose more than half of all the permafrost by the end of the century. Thousands of roads and buildings sit on this frozen soil – and their foundations are slowly transitioning to mud. Permafrost also stores almost twice the amount of carbon as is present in the atmosphere. While increased plant growth may be able to offset some of the release of carbon from newly thawed soils, much will be released to the atmosphere, significantly accelerating the pace of global heating.

Sea ice is declining rapidly, and an ice-free Arctic ocean will become a regular summer occurrence as things stand. Indigenous peoples who live in the Arctic are already having to change how they hunt and travel, and some coastal communities are already planning for relocation. Populations of seals, walruses, polar bears, whales and other mammals and sea birds who depend on the ice may crash if sea ice is regularly absent. And as water in its bright-white solid form is much more effective at reflecting heat from the sun, its rapid loss is also accelerating global heating.

Glaciers are also melting. If emissions continue on their current trajectory, smaller glaciers will shrink by more than 80 per cent by the end of the century. This retreat will place increasing strain on the hundreds of millions of people globally who rely on glaciers for water, agriculture, and power. Dangerous landslides, avalanches, rockfalls and floods will become increasingly normal in mountain areas.


Rising oceans, rising problems

All this melting ice means that sea levels are rising. While seas rose globally by around 15cm during the 20th century, they’re now rising more than twice as fast –- and this rate is accelerating.

Thanks to research from myself and others, we now better understand how Antarctica and Greenland’s ice sheets interact with the oceans. As a result, the latest report has upgraded its long-term estimates for how much sea level is expected to rise. Uncertainties still remain, but we’re headed for a rise of between 60 and 110cm by 2100.

Of course, sea level isn’t static. Intense rainfall and cyclones – themselves exacerbated by climate breakdown – can cause water to surge metres above the normal level. The IPCC’s report is very clear: these extreme storm surges we used to expect once per century will now be expected every year by mid-century. In addition to rapidly curbing emissions, we must invest millions to protect at-risk coastal and low-lying areas from flooding and loss of life.

Ocean ecosystems

Up to now, the ocean has taken up more than 90 per cent of the excess heat in the global climate system. Warming to date has already reduced the mixing between water layers and, as a consequence, has reduced the supply of oxygen and nutrients for marine life. By 2100 the ocean will take up five to seven times more heat than it has done in the past 50 years if we don’t change our emissions trajectory. Marine heatwaves are also projected to be more intense, last longer and occur 50 times more often. To top it off, the ocean is becoming more acidic as it continues to absorb a proportion of the carbon dioxide we emit.

Collectively, these pressures place marine life across the globe under unprecedented threat. Some species may move to new waters, but others less able to adapt will decline or even die out. This could cause major problems for communities that depend on local seafood. As it stands, coral reefs – beautiful ecosystems that support thousands of species – will be nearly totally wiped out by the end of the century.

Between the lines

While the document makes some striking statements, it is actually relatively conservative with its conclusions – perhaps because it had to be approved by the 195 nations that ratify the IPCC’s reports. Right now, I would expect that sea level rise and ice melt will occur faster than the report predicts. Ten years ago, I might have said the opposite. But the latest science is painting an increasingly grave picture for the future of our oceans and cryosphere – particularly if we carry on with “business as usual”.

The difference between 1.5°C and 2°C of heating is especially important for the icy poles, which warm much faster than the global average. At 1.5°C of warming, the probability of an ice-free September in the Arctic ocean is one in 100. But at 2°C, we’d expect to see this happening about one-third of the time. Rising sea levels, ocean warming and acidification, melting glaciers, and permafrost also will also happen faster – and with it, the risks to humanity and the living planet increase. It’s up to us and the leaders we choose to stem the rising tide of climate and ecological breakdown.

Mark Brandon, Professor of Polar Oceanography, The Open University.

This article is republished from The Conversation under a Creative Commons license. Read the original article.