Government intervention in the housing market is a tricky business. On the one hand, it is a social good to improve people’s chances of owning a home, and homeowners deeply resent a stagnant or falling market. On the other hand, we have all too recently seen the risks of excessive lending. These are the well rehearsed motivations for and concerns about the Help to Buy scheme.
With rates of home ownership falling, though, helping people to become homeowners is a politically attractive objective. The question is, can it be done without spending or risking vast quantities of taxpayers’ money, or causing a bubble to artificially inflate?
It’s universally acknowledged that more housebuilding would be a positive step. While that should of course happen, for political and practical reasons it is a medium term measure at best.
There is something the Chancellor can do in next week’s budget which would help existing homeowners, and would-be first time buyers, though: reform stamp duty.
As the TaxPayers’ Alliance campaign, Stamp Out Stamp Duty, argues, we should aim eventually to eliminate stamp duty entirely.
It is a form of double taxation, and it represents a tax on the main family home – an asset which is exempted from capital gains tax for entirely moral reasons. It particularly hits those at the bottom of the pile, eating into their hard-saved deposits, particularly given that the 1 per cent rate now kicks in well below the average house price. Stamp duty also distorts the economy – producing weird variations in prices, deterring people from downsizing (which reduces opportunities for those with growing families) and adding extra costs to the process of moving to another area for work, for example.
But, with deficit reduction still the priority (as Paul Goodman argued yesterday) our short term aims must be a little more modest. As a first step towards abolition of this unfair tax on aspiration, the Chancellor ought to reform the duty to a marginal model, rather than the current ‘slab’ system.
Before we get bogged down in technical terms, here are the definitions. A slab system is one in which the taxpayer is charged a percentage on the whole value of the transaction once that value crosses the threshold, ie a house costing £125,000 incurs no stamp duty at all, but a house costing £125,001 incurs 1 per cent stamp duty on the whole amount, £1,250 in total.
A marginal system, like that operating for income tax, only applies the percentage charge to the money above the threshold – so a £125,001 house would incur a tax of 1p.
This would bring stamp duty into line with other commonly understood taxes, and reduce the heavy burden which currently afflicts those at the bottom of the pile most severely. A lower burden and a marginal system would help to iron out those distortions in the market, too. More people would be able to buy and sell houses, increasing opportunity and bolstering everyone’s freedom to make full use of their own property as they might wish.
Of course, given the importance of cutting the deficit, as Paul noted, we can’t just sling out tax cuts without giving thought to the consequences.
Fortunately, an enlightening Walbrook Economics study for the TPA has examined the impact on the Treasury’s revenues, too. If transaction numbers were static, such a reform would reduce the tax take by around £1.3 billion a year. Of course, the market is not static – and one of the main reasons to make stamp duty marginal is that it would free up the market, and increase the number of transactions.
That’s only the start of the upsides – people would be more likely to spend money on home improvements, and a more active market would provide greater incentives to build new houses. All in all, the TPA suggests each new transaction would on average be worth around £6,000 to the Exchequer in extra revenue raised as a result of the new economic activity.
For the Treasury to make that £1.3 billion back in extra market activity, therefore, the reform would need to generate only 210,000 extra transactions a year. To put that into context, there were 1.07 million transactions in the UK last year, a relatively low number compared to the years before the crash. Studies of the impact of recent stamp duty holidays suggest reductions in the rate stimulate sales in the short and long term at least enough to hit that figure and thus balance the books.
Laffer Curve-style justifications that tax cuts pay for themselves often involve a lengthy lag time. In this case, though, it seems that the market is sufficiently flexible and stamp duty is a sufficiently serious burden that a change would produce a swift enough reaction essentially to pay for itself.
Reforming stamp duty from the current unfair slab rate to a fairer marginal system would be a double victory for George Osborne – he would help people to become homeowners or to move up the housing ladder, and do so in a way that would be fiscally neutral at worst. It’s a way to improve the lives of large numbers of people at an affordable stroke.
Aspiration and fiscal responsibility in one neat package. What’s not to like?