Scotland fixes stamp duty, the most broken tax in the nation

Now when will the rest of Britain follow suit?

A man walks a saltire past Holyrood. Photograph: Getty Images

Good news if you're Scottish: your government is fixing one of the most ridiculously broken parts of the British tax system! (If you aren't Scottish, you're going to have to hold on a bit longer).

Stamp duty, the fee paid upon purchase of a house worth more than £125,000, is set to be devolved to the Scottish government. It will be the first time that Holyrood has exercised the powers given to it in the Scotland Act 2012 to amend the duty on land and property.

Under the existing regime, stamp duty is one of the last taxes left in the world which features a tiered rate structure based on the entire value of the thing being taxed. That is: on a property worth £125,000, you pay 0 per cent stamp duty, but on a property worth £125,001 – exactly on the threshold – you pay a tax of 1 per cent on the entire value of the house. That's over £1000, just for a £1 increase in the sale price.

It gets even worse at higher levels. At £250,000, the duty raises from 1 per cent to 3 per cent, meaning a £1 change in house price costs an extra £5000 in tax. At £500,000, the cost of the £1 change is another £5000; at £1m, it costs £10,000; and at £2m, it costs a whopping £40,000. (Admittedly, few will weep hot tears for the people selling £2m houses).

That imposes a massive distortion onto the housing market. Take a look at this chart, from estate agent Savills, of the distribution of sale prices in London. Do you see the massive anomaly for houses priced between £250,000 and £260,000? That's entirely due to the stamp duty threshold:

If your house is surveyed at £255,000, you will actually take home less money selling it at that price than if you knocked £5,000 off the sale price (this isn't strictly true; the tax is techincally paid by the buyer, not the seller. But it's the easiest way to explain why it's stupid). And that imposes a distortion all the way up the market: if your house is surveyed at £260,000, you're having to compete with people who are selling theirs at over £5,000 below the asking price to avoid a tax. So you have to drop your price a bit as well.

Compare that to income tax, which is what's called a marginal tax: if you earn £155,000, you only pay the 45p rate on the last £5000 you earn, meaning there's no motivation to keep your earnings to £149,999.99.

The reason for Stamp duty being so unbelievably poorly designed is because it actually pre-dates our understanding of why it's a bad idea: the so-called marginalist revolution of the mid-to-late 19th century. That was when economists first started to realise that people make their decisions on the margin: that, for instance, when you are about to buy your tenth pair of shoes, you don't think "how much do I need ten pairs of shoes?"; you think "how much do I need this pair of shoes?"

Stamp duty was introduced in 1694 (and was literally a fee payable to the crown for placing its stamp on legal documents), and was first graduated according to value in 1808. Over time, we've come to realise how stupid that is, but no-one's actually had the guts to do anything about it. Although a decade ago the name was changed to SDLT, so that's something.

So congratulations to Scotland. The proposed tax will now be charged only on the value of the home above £180,000, and will be set at 7.5 per cent up to £1.5m, and 10 per cent above that. That leaves people selling houses worth less than £300,000 better off; but more importantly, it also fixes the broken structure of the old system entirely.

Hopefully the rest of Britain will follow suit – and soon.