Stamp duty versus mansion tax

Although superficially similar, high stamp duty is not a mansion tax

It seems increasingly likely that one of the measures to be announced in the budget in a couple of hours will be an increase in stamp duty to 7 per cent for properties worth over £2m. The argument seems to be that because the Conservatives will be compromising on the 50p tax – cutting it to 45p rather than scrapping it altogether – the Liberal Democrats will compromise on the mansion tax, allowing Osborne to introduce it as a new rate on an existing tax rather than new tax altogether.

Unfortunately, while the mansion tax isn't a great tax – it was sold as a proxy wealth tax, when household value isn't that great a proxy for wealth – it is still better than stamp duty. This is because it is at heart a consumption tax (you pay it for "consuming" a year's worth of £2m+ housing), whereas stamp duty is a transaction tax.

As the Mirrlees review on taxation explained (volume II, page 151):

Any tax on transactions will reduce expected welfare by discouraging mutually beneficial trades. Welfare is maximized when assets are owned by the people who place the highest value on them. Taxing transactions will affect who owns an asset, and so can disrupt the efficient pattern of ownership.

The value of a good or service is determined by the flow of benefits that are derived from owning it. So a consumption tax can be levied either on the purchase price of the good or service when it is first sold or on the flow of benefits over time. A transactions tax does not do this and it always seems preferable to tax the benefits directly...

Stamp duty on house transactions, for example, taxes according to the number of times a house changes hands over its lifetime. Houses vary considerably in the number of times they are traded, but there is no good economic argument for taxing more-frequently-traded housing more. Worse still, a tax on transactions reduces the incentive to trade in housing and leads to less efficient usage of the housing stock. A tax on the consumption value of housing would make sense... but a stamp duty on transactions does not.

It is a basic tenet of capitalism that, in a free market, transactions are good. By definition, if they are entered into, they make both parties better off – and stamp duty, by imposing a cost on it, means that otherwise beneficial exchanges may not occur.

This is, incidentally, the basis of the argument against a financial transactions tax; the comeback is that financial transactions occur in a broken market, and so cannot be expected to be mutually beneficial – and certainly not socially beneficial.

The Mirrlees report ended up recommending that stamp duty be abolished in its entirity, but instead the chancellor will be putting an even greater proportion of the UK's fiscal burden on it. Given it is being used as a proxy version of a proxy version of an efficient tax, it is not surprising that it has problems.

Mansion: The house allegedly bought by Saif Gaddafi in Hampstead, London (Getty)

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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Forget planning for no deal. The government isn't really planning for Brexit at all

The British government is simply not in a position to handle life after the EU.

No deal is better than a bad deal? That phrase has essentially vanished from Theresa May’s lips since the loss of her parliamentary majority in June, but it lives on in the minds of her boosters in the commentariat and the most committed parts of the Brexit press. In fact, they have a new meme: criticising the civil service and ministers who backed a Remain vote for “not preparing” for a no deal Brexit.

Leaving without a deal would mean, among other things, dropping out of the Open Skies agreement which allows British aeroplanes to fly to the United States and European Union. It would lead very quickly to food shortages and also mean that radioactive isotopes, used among other things for cancer treatment, wouldn’t be able to cross into the UK anymore. “Planning for no deal” actually means “making a deal”.  (Where the Brexit elite may have a point is that the consequences of no deal are sufficiently disruptive on both sides that the British government shouldn’t  worry too much about the two-year time frame set out in Article 50, as both sides have too big an incentive to always agree to extra time. I don’t think this is likely for political reasons but there is a good economic case for it.)

For the most part, you can’t really plan for no deal. There are however some things the government could prepare for. They could, for instance, start hiring additional staff for customs checks and investing in a bigger IT system to be able to handle the increased volume of work that would need to take place at the British border. It would need to begin issuing compulsory purchases to build new customs posts at ports, particularly along the 300-mile stretch of the Irish border – where Northern Ireland, outside the European Union, would immediately have a hard border with the Republic of Ireland, which would remain inside the bloc. But as Newsnight’s Christopher Cook details, the government is doing none of these things.

Now, in a way, you might say that this is a good decision on the government’s part. Frankly, these measures would only be about as useful as doing your seatbelt up before driving off the Grand Canyon. Buying up land and properties along the Irish border has the potential to cause political headaches that neither the British nor Irish governments need. However, as Cook notes, much of the government’s negotiating strategy seems to be based around convincing the EU27 that the United Kingdom might actually walk away without a deal, so not making even these inadequate plans makes a mockery of their own strategy. 

But the frothing about preparing for “no deal” ignores a far bigger problem: the government isn’t really preparing for any deal, and certainly not the one envisaged in May’s Lancaster House speech, where she set out the terms of Britain’s Brexit negotiations, or in her letter to the EU27 triggering Article 50. Just to reiterate: the government’s proposal is that the United Kingdom will leave both the single market and the customs union. Its regulations will no longer be set or enforced by the European Court of Justice or related bodies.

That means that, when Britain leaves the EU, it will need, at a minimum: to beef up the number of staff, the quality of its computer systems and the amount of physical space given over to customs checks and other assorted border work. It will need to hire its own food and standards inspectors to travel the globe checking the quality of products exported to the United Kingdom. It will need to increase the size of its own regulatory bodies.

The Foreign Office is doing some good and important work on preparing Britain’s re-entry into the World Trade Organisation as a nation with its own set of tariffs. But across the government, the level of preparation is simply not where it should be.

And all that’s assuming that May gets exactly what she wants. It’s not that the government isn’t preparing for no deal, or isn’t preparing for a bad deal. It can’t even be said to be preparing for what it believes is a great deal. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.