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  4. Report says stamp duty has "no sound economic basis"

Report says stamp duty has "no sound economic basis"


Published: 19 March 2013 | Author: Bernard Clarke

A timely report from the Institute of Public Policy Research (IPPR), published the day before George Osborne delivers his Budget, concludes that there is "no sound economic basis" for stamp duty – but says that it remains popular with governments because it is easy to collect and difficult for people to avoid.

Although it is unlikely that the chancellor will announce comprehensive reform in tomorrow's Budget, we agree with the "many economists" referred to in the IPPR report, Property and Wealth Taxes in the UK, who argue that there is a "lack of rationale" for stamp duty.

While the government is prepared to court unpopularity with proposals for an under-occupancy charge for housing benefit recipients in the social rented sector, the IPPR report argues that council tax discourages people from moving to smaller properties when their accommodation needs changes as children move away from home. The report says of stamp duty:

"It is essentially a charge on moving house, which may reduce people’s ability to move for work or encourage people to live in homes that are too large (or too small) for them. Stamp duty could therefore be adding unnecessary inflexibilities to the labour market and incentivising the inefficient use of residential properties."

The report says that "limited" international evidence suggests that property transaction taxes can affect the number of sales, which in turn can affect house prices. It points out that governments have used periods of exemption from stamp duty to try to shore up housing markets during slumps, but that the results have been "mixed." The report's authors acknowledge, however, that stamp duty may have a role in lessening volatility in the housing market. Because the amount of tax levied rises with house prices, demand could be dampened as prices increase, the authors says.

The report argues that on average housing is not particularly under-taxed as an investment in the UK, although it is probably under-taxed as a consumption good because no VAT is charged on the construction of new homes. It also suggests that stamp duty, weaknesses in inheritance tax, the lack of capital gains tax on residential properties and the absence of VAT on new homes all create distortions, but they are relatively small.

The major distortion within the UK property and wealth tax regimes is in council tax, the report argues. The way this is applied means that those living in larger and more expensive properties are under-taxed, the authors say, while households in smaller and cheaper properties pay too much tax.