High stamp duty lowers house prices

A new paper from IZA confirms: it's sellers who really pay stamp duty.

Stamp duty is one of the most hated taxes in the country. That's partially because it's for large amounts, levied all at once: it hurts a lot more to hand over £8000 in one lump sum than it does to have it taken from you over the course of a year. It's also because it is a tax which is broken at a very fundamental level. Unlike nearly every other tax, stamp duty (technically called Stamp Duty Land Tax, SDLT) is valued at a percentage of the total value of the house, with the percentage increasing as the value increases. That leads to some very strange effects on the housing market as people revalue their houses to avoid hitting the thresholds:

In this chart, from Savills, you can see the effect of the stamp duty thresholds at £125,000, £250,000 and £500,000.

But stamp duty is also hated because it raises the cost of moving house. The tax is payable by the buyer of the property, making it seem particularly painful for first-time buyers, who don't have the cash from selling a previous residence to provide the necessary liquidity.

But, as we know from other debates, who pays a tax isn't always as clear as it seems. The classic example is the employer's contribution to national insurance: they pay tax on 13.8 per cent of their employee's earnings, but there's evidence to suggest that if that tax did not exist, it would lead to higher wages, not higher profits. So is the same true for stamp duty?

Chris Dillow points to a paper published by the Institute for the Study of Labor (IZA – the institute is German) suggests it is. The authors, the IMF's Ian Davidoff and IZA's Andrew Leigh, write that:

The short-term impact of a 10 per cent increase in the stamp duty is to lower house prices by 3 per cent… Since stamp duty averages only 2-4 per cent of the value of the property, these results imply that the economic incidence of the tax is entirely on the seller; that is, prices fall by the full amount of the tax.

The data is for the Australian market, but sits comfortably with snapshots like the Savills graph above, which show that, at least at the thresholds, sellers are extraordinarily sensitive to the cost of stamp duty. There's few for whom that's good news – though if you don't yet own a house and plan to buy one and never sell it, it won't hurt.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Autumn Statement 2015: George Osborne abandons his target

How will George Osborne close the deficit after his U-Turns? Answer: he won't, of course. 

“Good governments U-Turn, and U-Turn frequently.” That’s Andrew Adonis’ maxim, and George Osborne borrowed heavily from him today, delivering two big U-Turns, on tax credits and on police funding. There will be no cuts to tax credits or to the police.

The Office for Budget Responsibility estimates that, in total, the government gave away £6.2 billion next year, more than half of which is the reverse to tax credits.

Osborne claims that he will still deliver his planned £12bn reduction in welfare. But, as I’ve written before, without cutting tax credits, it’s difficult to see how you can get £12bn out of the welfare bill. Here’s the OBR’s chart of welfare spending:

The government has already promised to protect child benefit and pension spending – in fact, it actually increased pensioner spending today. So all that’s left is tax credits. If the government is not going to cut them, where’s the £12bn come from?

A bit of clever accounting today got Osborne out of his hole. The Universal Credit, once it comes in in full, will replace tax credits anyway, allowing him to describe his U-Turn as a delay, not a full retreat. But the reality – as the Treasury has admitted privately for some time – is that the Universal Credit will never be wholly implemented. The pilot schemes – one of which, in Hammersmith, I have visited myself – are little more than Potemkin set-ups. Iain Duncan Smith’s Universal Credit will never be rolled out in full. The savings from switching from tax credits to Universal Credit will never materialise.

The £12bn is smaller, too, than it was this time last week. Instead of cutting £12bn from the welfare budget by 2017-8, the government will instead cut £12bn by the end of the parliament – a much smaller task.

That’s not to say that the cuts to departmental spending and welfare will be painless – far from it. Employment Support Allowance – what used to be called incapacity benefit and severe disablement benefit – will be cut down to the level of Jobseekers’ Allowance, while the government will erect further hurdles to claimants. Cuts to departmental spending will mean a further reduction in the numbers of public sector workers.  But it will be some way short of the reductions in welfare spending required to hit Osborne’s deficit reduction timetable.

So, where’s the money coming from? The answer is nowhere. What we'll instead get is five more years of the same: increasing household debt, austerity largely concentrated on the poorest, and yet more borrowing. As the last five years proved, the Conservatives don’t need to close the deficit to be re-elected. In fact, it may be that having the need to “finish the job” as a stick to beat Labour with actually helped the Tories in May. They have neither an economic imperative nor a political one to close the deficit. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.