Let’s scrap stamp duty and stop exacerbating the housing crisis

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People typically rank stamp duty as one of their most hated taxes (Source: Getty)

Often when we talk about taxes, we just weigh out how much they raise and who pays, and assume any change is about handing out cash to a favoured group.

But this is misguided. Some taxes distort the economy far more than others for every pound they raise for the Treasury.

By this measure, stamp duty land tax is the country’s worst – and the chancellor should skip reform and go straight to abolition in this year’s Budget.

Read more: How to solve the housing crisis in five years

Stamp duty now funds three times as big a proportion of the state’s budget than it did during the 1980s and early 90s. It is technically voluntary, but if you don’t pay it when you buy a house, the transfer of property deeds won’t be valid. In 1993, 42 per cent of properties were liable for it. Today, 73 per cent are, and rates have skyrocketed to 12 per cent at the top.

We have a housing shortage in the UK. There isn’t enough floor space to go around in the places people most want to live.

If housing is freely available then making sure each house goes to who values it most is less important, but when you have a scarce supply, allocating homes effectively is vital.

But it is in precisely this market that we have repeatedly hiked a tax specifically on transferring homes.

The real world effect is fewer people moving, meaning more of us living in areas far from our jobs, crammed into tiny boxes, or with spare rooms we don’t need. This causes more stress, more pollution, and lower economic activity overall.

It also results in less of the complementary consumption you get when people move house – removal vans, extensions, decoration, and furniture.

Stamp duty isn’t the main cause of the housing crisis, nor is scrapping it the main answer. Building more houses in the places that people most want them is obviously the biggest solution. But this tax is making it worse by stopping houses from getting to those who value them most.

This damage totals around 75p for every £1 raised, according to a recent Australian government review, the findings of which echo what I have found across my research. That’s £10bn worth of wider damage to the UK economy on top of the cost to those actually paying the tax.

In contrast, income taxes and VAT do only around 20p of damage for every pound they raise, and recurrent property taxes like council tax do almost no damage at all.

In my Adam Smith Institute paper out today, I offer Philip Hammond a solution: scrap stamp duty land tax and fix council tax to replace the revenues. This is a tweak that would not cost the Treasury anything at all, but would replace a hugely damaging levy with a much milder one.

Council tax as it currently stands is regressive and based on outdated values, hitting deprived parts of the country disproportionately by taking no account of the rapid and unbalanced house price changes since 1993. It would be easy to make it more progressive by linking it more coherently to property rental values.

That would take from those who have gained the most from the booming housing market, but these owners would be the ones to directly benefit from lower stamp duty when they sold. Essentially, it would lower the cost of moving home, without significantly disadvantaging either homeowners or the Treasury.

When surveyed, people typically rank stamp duty as one of their most hated taxes, right up there by inheritance tax.

The people are not always right, but on this one the chancellor can get a win, win, win: make the electorate happy, rebalance the country, and boost productivity by addressing the housing crisis – all without creating any hole in the Budget.

All he has to do is scrap stamp duty.

Read more: Here's how far London's high-end house prices have fallen due to stamp duty