Sunday, December 7, 2014

The case for 7% stamp duty on property

In the spirit of turning ideas on their head, let me put forward the case in favour of stamp duties on housing transactions. To be honest, it is pretty compelling to me. If I had to rank taxes from best to worst in terms of efficiency and equality, land value taxes would be first best, but stamp duties would be not far behind, huddled together with Tobin taxes and capital gains taxes to make up a top four.

There are three mains arguments in favour of stamp duties - improved price stability, no affordability effects, limited mobility effects.

Price stability
The first point is that stamp duties are not a tax on relocating, but a tax on asset market churn. We know that property bubbles have the characteristic of high transaction volumes arising from speculative buying and selling. Eliminating some of this activity because of its increased costliness will have an indirect effect of stabilising prices to some degree. Additionally, fewer transactions means less waste of resources on the real estate sales industry. Essentially it is a Tobin tax for property markets. If reducing resources devoted to the zero-sum game of trading share markets is a good thing, then the same is true for property markets.

From the perspective of macro stability stamp duties are a massive automatic stabiliser - raising plenty of revenue during the boom, and much less during the bust.

No affordability effects
Valuation theory and practice support the view that stamp duties, although paid for by the buyer, actually come off the price of housing. That is, buyers determine their total willingness to pay a the house, and subtract any transaction costs from that total to arrive at a residual that they can pay to the seller. Empirical studies also support this view.

In terms of effects on home prices, the cost of stamp duty is subtracted from prices, leaving the total purchases costs unchanged. If they also deter speculative sales as I suggest in the previous section, then the net effect of stamp duties on property prices is to reduce them. That’s about the best side-effect from a tax you could hope for.

Limited mobility effects
Some people call stamp duty a tax on mobility. It’s not. There is a whole group of people called renters who are quite a mobile part of the population and avoid the tax entirely. While the evidence suggests that fewer relocations are made by owners (perhaps 8% fewer in a year for a 1% increase in the stamp duty rate), disentangling the speculative motive of such sales from the actual labour force relocation motive has never been attempted, though they must be entwined.

Already a house sale has a combined cost to buyers and sellers of probably close to 8-9% of the house price; from removal costs, lawyers, agents, inspections, loan fees etc. Why not make it 10% by raising stamp duty ? After all, the seller gets a lower price and the buyer pays the same total of house price plus stamp duty. It’s a transfer from current home owners.

In all it stamp duties seem like a pretty reasonable tax in terms of economic efficiency. Perhaps rather than promoting land value taxes as a replacement for stamp duty, a better position is to use land tax revenues to replace more distortionary State taxes such as payroll tax.

While I’m at it
Many economists in tune with the role of land rights in economics have criticised Piketty's book for being a bit loose in the way he aggregates capital. They say that because he conflates improvements and property rights, such as land, a tax on all wealth to reduce inequality, as he proposes, will act like a tax on improvements and land value.

But what they forget is that this is about the second best tax. If a tax on property rights of all sorts (minerals rights, patents, land and so forth) is a first best tax, an incremental tax on wealth is second best. Having this argument is completely counterproductive from a policy perspective.


  1. Apart from exempting vacant land from property tax. it would be hard to think of a better way way to promote inefficient use of land.

    1. Than what? A 7% stamp duty?

      Walk me through your logic then.

      Does it matter who owns BHP share to their investment decisions? Won't all land owners be responsive is some way to returns from investing in improvements?

  2. Higher stamp duty would prevent speculators to buy so many properties. They wouldn't be able to buy 5 half a million investments with only $100k in savings. It would also limit maximum price they are able to pay.
    Property tax does nothing to stop speculation (remember USA), property tax gets used to offset income tax so ultimately does not cost speculators much, if anything.

  3. Of course it IS a tax on mobility, unless you are arguing that renting is a perfect substitute for owning.

    But is not. Renting is discouraged by the tax system, in two ways:

    [1] If you rent, you need extra income to pay the rent, and that income is taxed. For example, if you own a house in one location, but move and rent in another location, the income on the first house (used to fund the rental on the second house) is taxed. In the almost exactly equivalent situation of living in a home you own, you are not taxed. Instead the interest on your mortgage can be deducted as an expense, reducing your income by the cost of ownership.

    Belgium taxes owners on the notional rental value of their properties, but the UK does not, alas.

    [2] If you own, you get a considerable tax-free gift from HMRC when you sell your house. But landlords must pay capital gains when they sell properties, which has to be factored into the rents they charge.

    You may argue that in the very long run the value of property does not appreciate more than inflation (the Herengracht canal argument) but post-1970 some argue this may no longer be true, though of course it is too early to tell. In any case, the tax system is so structured that few landlords are able to exactly offset capital gains and capital losses, so CGT is inevitably payable on houses that are owned for rental purposes, even if the up-movements of the cycle were to exactly balance the down-movements.

    For these two reasons owning is financially preferable to renting. In a previous era it was not so - most Londoners including the elite rented in Keynes's time. Nowadays people look to rent, as soon they start earning and become less cash constrained. They normally justify this in financial terms ("I just didn't want to go on paying rent") and while it is unlikely that they work through all the tax elements, my experience looking at different countries' tax systems is that they have a considerable impact on ownership patterns. This is often ascribed to "culture" but in reality there are material forces at work.

    The long and the short of it is that renting and owning are rather different, and that by imposing a higher stamp duty on owners, you discourage mobility, just as providing council housing, the rights to which are tied to residence in a particular location, also discourages mobility.

    1. How does renting being different from owning relate to the mobility point? If you move but don't sell and rent in a new location you are both a housing investor and a renter, getting ownership advantages and mobility advantages.

      If you are saying that there is an inequity in the system that means renting is somehow inferior, then sure, there's in inequity. Reducing stamp duties only makes it worse by giving free money to current home owners at the expense of future home owners.