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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Is anyone prepared to solve the NHS funding crisis?

As long as the political taboo on raising taxes endures, the service will be in financial peril. 

It has long been clear that the NHS is in financial ill-health. But today's figures, conveniently delayed until after the Conservative conference, are still stunningly bad. The service ran a deficit of £930m between April and June (greater than the £820m recorded for the whole of the 2014/15 financial year) and is on course for a shortfall of at least £2bn this year - its worst position for a generation. 

Though often described as having been shielded from austerity, owing to its ring-fenced budget, the NHS is enduring the toughest spending settlement in its history. Since 1950, health spending has grown at an average annual rate of 4 per cent, but over the last parliament it rose by just 0.5 per cent. An ageing population, rising treatment costs and the social care crisis all mean that the NHS has to run merely to stand still. The Tories have pledged to provide £10bn more for the service but this still leaves £20bn of efficiency savings required. 

Speculation is now turning to whether George Osborne will provide an emergency injection of funds in the Autumn Statement on 25 November. But the long-term question is whether anyone is prepared to offer a sustainable solution to the crisis. Health experts argue that only a rise in general taxation (income tax, VAT, national insurance), patient charges or a hypothecated "health tax" will secure the future of a universal, high-quality service. But the political taboo against increasing taxes on all but the richest means no politician has ventured into this territory. Shadow health secretary Heidi Alexander has today called for the government to "find money urgently to get through the coming winter months". But the bigger question is whether, under Jeremy Corbyn, Labour is prepared to go beyond sticking-plaster solutions. 

George Eaton is political editor of the New Statesman.