I’ve long held the view that land taxes are the best form of taxation. I certainly agree with that. But the idea that stamp duties are exceptionally bad is not clear cut. The key reference point for this belief is from the various modelling exercises of economists looking to estimate the welfare losses from these taxes.
The main problem, however, is that there are no transactions in equilibrium economic models, so there is no way to model a transaction tax. Equilibrium models are ‘pre-solved’ by the Walrasian auctioneer to determine the distribution of goods to a single representative agent.
Here’s what the Australia Treasury had to say when they tried to model the welfare effects of stamp duties.
It is inherently difficult to capture this type of capital transaction tax in a model with a single representative agent. The approach adopted here treats real estate services as an investment good which improves the productivity of the firms, including the housing sector. One way of thinking about this is that real estate agents play a valuable role in finding producers that value the capital the most. Therefore a potential owner will be willing to pay a real estate fee equal to the profit they will enjoy over the previous owner. Within this setting the conveyance duty is treated as a tax on the value of investment and subsequent productivity gains facilitated by the transfer of land and structures.Translated it reads “our model can’t capture transaction taxes so we’ll just assume the tax is something else to fit it into the model we do have.”
The best micro-level analysis comes from Davidoff and Leigh, who find that the main impact of higher stamp duties is to reduce frequency of home sales, and of those home sales, some will be from people relocating.
Yet it is not clear that the welfare effect of reduced home sales is negative if some of those sales are merely fuelling speculation in the housing market. The basic result of all transaction taxes in asset markets hold - if some of the transactions are simply speculative churn, than there can be positive welfare effects from reducing turnover through transaction taxes.
So I urge caution about calls to cut stamp duties, even if those calls are accompanied by the proviso that such a change must be accompanied by higher land taxes, and especially if those provisos are likely to be ignored.