Image: Chart from OBR Economic & Fiscal Outlook December 2014. Click for larger image.
Following the changes to stamp duty announced by George Osborne in the Autumn Statement, the Scottish Conservative Party has published proposals to change the proposed Scottish replacement – Land and Buildings Transaction Tax – due to be introduced in April 2015. The topic was raised at First Ministers Questions today (col. 14)
The Tory proposals include halving the rate between purchases of between £250,000 and £500,000 from 10% to 5%. The party claims that its proposals “would mean 97 per cent of transactions, including all those below £500,000, will leave house-buyers better off.”
This claim (and similar claims by the Scottish Government) that cuts in stamp duty rates represent a saving to housebuyers is misleading and wrong. It is a symptom of widespread illiteracy around the fiscal dimensions of land and property.
In broad terms, people have a fixed budget when they buy a house. They can, perhaps afford £150,000 made up of a loan and capital of their own. This sum has to cover the costs of acquisition (fees and stamp duty) and the sum paid to the seller for the house. If stamp duty rates are reduced it follows that more money is available for the other costs (fees and the price paid). Assuming that fees remain fixed (such as land registration fees) and others (survey fees and conveyancing costs) remain unchanged (either as a fixed sum or as a percentage of purchase price), the money saved in stamp duty will be available to bid up prices.(1)
This is a straightforward economic principle that was the subject of this useful analysis by Shelter and is noted by the Office of Budget responsibility in its Economic and Fiscal Outlook December 2014 on page 126 as follows.
The OBR analysis makes clear that the cuts proposed by George Osborne and the Scottish Conservatives will be more than offset by higher house prices. Those higher prices will, in many cases be financed by loans, the interest on which will be higher over many decades. A small saving in a one-off transaction tax will not simply be more than offset by higher house prices but by ongoing, compounded and volatile interest payments to financial corporations.
The best solution (and the one I advocated two years ago and is recommended by one of the Scottish Government’s own economic advisers – Sir James Mirrlees) is to abolish this transaction tax in its entirety and replace the volatile yield with a better-designed system of recurrent taxation of land and property. The Mirrlees Review (Chapter 16 pg 404) noted that,
If the Scottish Conservative (and indeed other parties) want to be truly radical, they would be well-advised to stop tinkering with rates (that will not have the claimed effects), abolish stamp duty and its associated bureaucracy, and agree to far more fundamental reform in fiscal policy relating to land and property.
(1) Of course, buyers are often sellers and will receive higher bids for the property that they are selling. But given that most buyers who are sellers are trading up, this merely exacerbates the inflation in prices.
A good post, Andy.
The Mirrlees Report is quite right: stamp duties lower the price that buyers are prepared to pay to the seller; and if the duties are abolished, buyers will offer a higher price. But instead of the Mirrlees recommendation that stamp duties be replaced by an annual charge for the continuous stream of services yielded by the house and its location, why not charge only for the land value and exempt the value of the bricks and mortar?
Their point about the capitalisation of taxes into the price of the house/land asset is not only relevant to stamp duties.
As Adam Smith knew well, _all_ taxes ultimately reduce what tenants can afford to pay owners of land. So he advocated replacing taxes on earned incomes (that discourage work and enterprise) and replacing these with an annual charge on landowners for the privilege of their exclusive ownership of the fixed supply of land. And land being fixed, there are no distortionary supply-side effects – unlike what happens when you tax labour and productive enterprise.
Reduce taxes on earned incomes and then both national income and rents would rise. Then finance government spending via a “tax” (i.e, a benefit-related charge) on the rents.
Stamp duty was yet another of gordon browns assault on the poor . Yet another ill judged stroke of buffoonery.
Why oh why did he ask the BUYER to pay the tax? Surely the seller is the one with the cash?
Stamp duty did as much as the bank crash to put first time buyers out of the market.
Hector, as I’m sure you must know, stamp duty (for all its rights and wrongs) goes a long way back before Gordon Brown. The seller is the one with the cash and he indeed does pay a much bigger tax – it’s called Capital Gains Tax.
Stamp duty on houses was next to nothing before brown got his grubby hands on it, and you should know there is no CGT on primary residences.
On land sales CGT is simply avoided by rollover into more land or foreign property
So primary residences pay no CGT.
Another giveaway from taxpayers.
Would vote for any party that removed this and introduced LVT.
Surely at the very least stamp duty drastically cuts / restricts property speculation – not something you’d want to encourage more of?
What evidence is there of that? What minimal impact it might have is vastly outweighed by its deadweight costs. Speculation best eliminated by recurrent taxation, not transaction taxes.
It increases speculation because it drives the first time buyer out of the market as they dont have a spare 5 or 10k to pay the chancellor. So buy to let landlords clean up.
First time farm buyers are really clobbered.
Andy, you regularly quote from Mirrlees to support your arguments so why are your own proposals for land taxation of houses not what Mirrlees recommended?
I don’t have any proposals for “land taxation of houses” but if you are referring to work I have undertaken on land value rating (or LVT), then the reason is because LRV is rooted in classical economics whereas Mirrlees is a neo-classical economist.
Yes, I was referring to your papers such as “A Land Value Tax for Scotland” (and similar ones for England and Northern Ireland) and how the proposals therein would apply to houses.
I doubt many folk appreciate the distinction between classical and neo-classical economics (I certainly don’t) so my question was why you castigate political parties’ proposals for being contrary to Mirrlees when your own proposals are contrary to Mirrlees?
Is this a serious question? I hereby castigate myself.
on 27 th November I posted the following “Andy you previously stated ” I have proposals that would maintain the integrity of the Land Register, assist with the process of land registration AND ensure free public access to good quality information about who owns Scotland. This will be the subject of another blog in the near future,” in your blog on 1 August about the completition of the Land Register. When are you going post your blog regarding your proposals..they would be very interesting. The completition of the Land Register is said to be linked to Land Reform.” you do not seem to have replied.
It would also be interesting to know what your views are on the implementation of the Land Registration (scotland) act 2012 since the appointed day? Will Scotland be ready for LBTT?
I am afraid I didn’t have the time to publish that blog. It’s on a (long list) of blogs to publish & hope to do something very soon in connection with land reform proposals. I don’t know if Scotland will be ready for LBTT – I haven’t followed the preparations.
Any tax should have 3 principles. Transparency, fairness and moderation. Regardless of who is paying it. I do feel the 10% rate below £500 is a bit steep. Clearly someone with a £999k budget is in a different ability to pay bracket to someone with a £400k budget. We seem obsessed with having a low number of rates, something started Blythe Tories in the 80’s. Why not introduce more rates between £250 and £1m? Say 4%, 6% and 8%? I see a comment that LVT should replace income tax. How would that work? It’s not all foreign tax dodgers and tweed clad range rovers in the sticks you know!