Economics, politics and the reality of the 'squeezed middle'

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Osborne opts for the tax politicians love...

... and economists love to hate.

A tilt towards taxing big wealth?
A tilt towards taxing big wealth? Photograph: Getty Images

George Osborne's budget morning story, that Stamp Duty will go up to 7 per cent on properties over £2 million, shouldn't really surprise us. It has strong echoes of Gordon Brown's 2010 budget day story about hiking Stamp Duty up to 5 per cent on homes above £1 million in order to fund a tax cut for first time buyers. It's the tax that politicians have grown to love, and economists love to hate.

Not that the Chancellor will care much but he should expect plenty of gnashing of teeth from the dismal profession. Stamp Duty is after all a tax on labour mobility (a key economic resource), so it keeps people living in places they'd rather leave and makes it less likely they will move to take new jobs (though how much of a barrier this will be to those in a position to fork out £2m is far from clear). And the way it is currently structured results in major distortions in the housing market as small increases in house price generate large leaps in the tax owed.

And yet Stamp Duty is a popular tax with politicians. Why so? In part because the revenue it raises have risen quickly with house prices. But also because it is judged to be a less painful tax to get the public to go along with compared to many others. People pay it at a time - uniquely - when they are spending very large sums of money that the stamp duty tax bill is tagged onto. A tax bill of £20,000 incurred when buying a house for £500,000 may feel less painful to many than getting an annual bill of around £2,000 for 10 years for living in the same house. And unlike serious reform of our out-dated council tax system, or indeed the introduction of a proper Mansion Tax, increasing Stamp Duty doesn't require a wider revaluation - that most dreaded of political events. Nor does it suffer from the fabled problem of hammering the old lady on a low income living in an expensive house.

A full-blown mansion tax it certainly isn't, but 7 per cent stamp duty on properties above £2m is a tilt towards taxing big wealth. It's not a tax rise to please the wonks, it doesn't open a much needed new chapter in property taxation, and it falls far short of what the Lib Dems were aiming for. But it is still a symbolic move which will bring in a bit of extra revenue without creating many screams or administrative upheaval. Osborne will be pleased.