Clever politics? No, a tax on the cherished aim to own a home

ONE of the first acts of Gordon Brown as Chancellor was to increase stamp duty, which had been 1 per cent on all transactions above £60,000 before 1997. This was a modest fee that had a minimal effect on behaviour.

When Labour left office, the highest rate was 4 per cent on the most expensive properties. Now a Conservative Chancellor has taken this much further so that such properties now attract 12 per cent stamp duty.

Before the General Election this was seen as clever politics as it answered calls for a ‘mansion tax’ and parried the charge that the Tories help the better off. But is it also good economics? Not in the least. If government imposes heavy taxes on buying and selling assets – whether it be houses or anything else – it distorts the market.

Instead of buying or selling on the basis of good investment, need or even simply choice, decisions are hampered by the effect of tax. Decisions made on the basis of how to avoid tax are not necessarily the best decisions for the economy.

If the economy does not thrive because capital is misallocated, the Government will raise less tax. If, for example, a tax on buying and selling were so high it discouraged transactions, it would actually raise less tax.

It could be argued that this does not matter because stamp duty on £2million-plus homes affects only the super-rich or foreign oligarchs. Why not squeeze them until the pips squeak? Answer: the dynamism of the property market means that the top layer always affects the next layer of the pyramid. If people near the top cannot or will not sell, the people below them moving up the ladder cannot sell either, and so on.

A 12 per cent top rate of stamp duty is having exactly this effect. Estate agents in London report that the high end of the market has seen the volume of sales fall by 20 per cent.

High stamp duty also distorts the choice between buying and renting. A £2million property – no longer uncommon in central London – would attract stamp duty of £153,750.

That much tax would actually pay the rent of a similar home for about four years. Why not rent instead of buying? So high stamp duty is also a tax against home ownership which has otherwise long been a favourite Tory objective.

There is possibly an argument for penal stamp duty as it has cooled the housing market at the highest end and stopped a bubble. But if this were the reason for the policy it would be the worst type of 1960s-style demand management. It distorts markets and assumes governments know better than individuals.

High stamp duty may play well to the politics of envy, but a well-functioning housing market is in the interests of the economy at large. Squeezing it misallocates capital, deters home ownership and creates a less flexible, more European market.

Worst of all, high capital taxation cuts government income and makes it harder to bring down the deficit.

It may briefly have been good politics, but it is now just bad economics.

We are not just squeezing the super-rich and foreign oligarchs