Monday, 30 October 2017

Two and a half cheers for the Adam Smith Institute

I'm surprised that Ben Southwood's article made it unredacted into today's City AM:

Some taxes distort the economy far more than others for every pound they raise for the Treasury. By this measure, stamp duty land tax is the country’s worst – and the chancellor should skip reform and go straight to abolition in this year’s Budget.

Not true, VAT is the worst, NIC is the second worst, but hey...

Stamp duty [sic] now funds three times as big a proportion of the state’s budget than it did during the 1980s and early 90s. It is technically voluntary, but if you don’t pay it when you buy a house, the transfer of property deeds won’t be valid.

That is not actually true; SDLT is triggered when there is 'substantial performance' of the contract, actual legal completion is irrelevant.

In 1993, 42 per cent of properties were liable for it. Today, 73 per cent are, and rates have skyrocketed to 12 per cent at the top. We have a housing shortage in the UK. There isn’t enough floor space to go around in the places people most want to live.

There is no overall housing shortage; by definition there will always be a shortage of homes in places people most want to live.

If housing is freely available then making sure each house goes to who values it most is less important, but when you have a scarce supply, allocating homes effectively is vital. But it is in precisely this market that we have repeatedly hiked a tax specifically on transferring homes. 

The real world effect is fewer people moving, meaning more of us living in areas far from our jobs, crammed into tiny boxes, or with spare rooms we don’t need. This causes more stress, more pollution, and lower economic activity overall. It also results in less of the complementary consumption you get when people move house – removal vans, extensions, decoration, and furniture.

Agreed, although the 'complementary consumption' is not really adding to the economy (broken window fallacy).

Stamp duty isn’t the main cause of the housing crisis, nor is scrapping it the main answer. Building more houses in the places that people most want them is obviously the biggest solution.

Not true; demand for homes in the most desirable areas is more of less infinite; build them and they will come; more people = agglomeration benefits = higher prices etc. Areas with the highest densities/largest number of people have the highest rents/prices, just look at a bloody map.

But this tax is making it worse by stopping houses from getting to those who value them most.

Agreed.

This damage totals around 75p for every £1 raised, according to a recent Australian government review, the findings of which echo what I have found across my research. That’s £10bn worth of wider damage to the UK economy on top of the cost to those actually paying the tax.

Not sure how they work that out; £10 bn is less then 1% of GDP, so you wouldn't be able to reliably measure it anyway. But let's accept it as perfectly plausible.

In contrast, income taxes and VAT do only around 20p of damage for every pound they raise...

Looks about right; if you assume an overall average 45% tax rate. So apply his 20p deadweight costs to total revenues from income tax, VAT, NIC and corporation tax of about £450 bn; the losses from those is easily £90 billion; nine times as much as his estimated deadweight costs of SDLT.

... and recurrent property taxes like council tax do almost no damage at all. In my Adam Smith Institute paper out today, I offer Philip Hammond a solution: scrap stamp duty land tax and fix council tax to replace the revenues. This is a tweak that would not cost the Treasury anything at all, but would replace a hugely damaging levy with a much milder one. 

Council tax as it currently stands is regressive and based on outdated values, hitting deprived parts of the country disproportionately by taking no account of the rapid and unbalanced house price changes since 1993. It would be easy to make it more progressive by linking it more coherently to property rental values.

Woah! How did that get past the Homey censors at City AM!?! It's clear that they'd lap up the bit about scrapping SDLT, they must have overlooked the sting in the tail.

That would take from those who have gained the most from the booming housing market, but these owners would be the ones to directly benefit from lower stamp duty when they sold. Essentially, it would lower the cost of moving home, without significantly disadvantaging either homeowners or the Treasury. When surveyed, people typically rank stamp duty as one of their most hated taxes, right up there by inheritance tax.

I'm not sure people hate SDLT that much; it's a one-off hit every couple of decades and you move on with your life. But Inheritance tax is the next most obvious tax to toll into a reformed Council Tax (by which he actually means Land Value Tax, although he daren't say it) or else it is a double charge on valuable homes/land.

The people are not always right, but on this one the chancellor can get a win, win, win: make the electorate happy, rebalance the country, and boost productivity by addressing the housing crisis – all without creating any hole in the Budget.

Except that people appear to hate Council tax most out of all taxes, duly whipped up by the whole Home-Owner-Ist lobby.

The bit he misses is that, yes, removing SDLT would increase the number of housing transactions; with the desired effect that older people/low earners would be more likely to move out of more productive areas allowing younger/more productive people to move there, that's where the estimated £10 billion boost comes in. Making up the revenue shortfall with a reformed Council Tax would easily double the effect, so it is not that it does "almost no damage at all", but actually boosts the economy; it has negative deadweight costs.

5 comments:

L fairfax said...

I really hate stamp duty. I don't mind paying more tax for having a nicer house, but not for moving more often.

Lola said...

I haven't read Sam's paper yet but I hope that he recommends that his revised council tax is chargeable to and payable by the freeholder and that there are no reliefs.

Mark Wadsworth said...

LF fair point.

L, let's not get bogged down in details, early days yet.

Physiocrat said...

According to my back-of-an-envelope guesstimates, the Exchequer would not lose anything like the £110 billion net yield from VAT if the wretched tax was just scrapped.

Mark Wadsworth said...

Phys, VAT is a shit tax, but it is not that bad.

My fag packet says that VAT at 20% increases the marginal tax burden on productive, VATable enterprises from 40% average (Income tax, NIC, corporation tax) to 50%.

The size of the deadweight cost is the tax rate cubed.

Therefore, at 40% overall tax, total receipts are 40% x (1 - 0.4^3) = 37.4% of untaxed potential.

At 50% overall tax rate, tots receipts are 50% x (1 - 0.5^3) = 44% of untaxed potential

So getting rid of VAT means overall fall in receipts of 7%, slightly less than VAT's share of total tax bill 1/5 x 44% = 9%.