The Taxpayers' Alliance is right to call for an end this terrible tax. But unless it's replaced with a revamped council tax only the well-off will benefit
The Taxpayers' Alliance has launched a campaign to "stamp out stamp duty", arguing that the structure of the tax is "a mess". The Times agrees, arguing that "stamp duty is almost perfectly designed to ensure the inefficient allocation of housing".
They're quite right. Stamp duty is a terrible tax. It applies only when a house is sold, so discouraging mobility and first-time buyers; and the cliff-edges mean that there are absurd incentives to distort the notional purchase price to save on tax.
So let's get rid of it. But of course it's not as easy as that. Abolishing stamp duty in isolation wouldn't make houses any more affordable; the immediate impact would be just to push up house prices, widening even further the gap between the haves and the have-nots in the property market. And it would be hugely regressive – more than two-thirds of the over £3 trillion (twice the UK's annual GDP) in property wealth belongs to the richest 30%.
Worse still, this giveaway to relatively well-off homeowners would punch a huge hole in the government's already strained finances. So more spending cuts would be required, or alternatively tax increases on other things, like income or consumption. These taxes would hit the less well-off much harder than stamp duty does. Moreover, such taxes – which can damage work incentives or discourage productive economic activity – are far more economically damaging than taxes on property or land. Houses don't work less hard if they're taxed more, or threaten to relocate to New York or Geneva. The UK would be better off – we'd be a more productive as well as a fairer society – with a higher tax burden on land and property, not a lower one.
But there is an alternative. The Taxpayers' Alliance cites approvingly the Mirrlees report, the Institute for Fiscal Studies' definitive review of the structure of the UK tax system. What they neglected to mention was the Mirrlees recommendation for a "housing services tax" – a revamped, increased version of council tax, "levied as a proportion of up-to-date values with no cap and no discount for unoccupied or single-occupancy properties".
This would have lots of advantages. It would be both more progressive and more economically efficient than either the existing council tax or stamp duty. By abolishing the regressive banding system, which means that people in cheap houses pay far more than those in expensive ones relative to the value of their properties, it would achieve most of the objectives of the proposed "mansion tax", without the complications, as well as removing the current perverse incentives to buy property and then not live in it. And by giving local councils a larger, less regressive revenue source it will strengthen local accountability. While some asset-rich, income-poor pensioners might face difficulties with increased bills, at a local level councils could defer payment until death or sale.
So if a housing services tax is such a wonderful idea, who would lose from it? Precisely those vested interests who would gain most from the Taxpayers' Alliance/Times proposal for abolition or sharp reductions in stamp duty – well-off homeowners, their children whose inheritances might be eroded, and rich foreigners buying expensive property in London.
So let's stamp out stamp duty – and replace it with a fair and progressive tax on housing.