Could Stamp Duty be a more effective means of controlling house prices?
The best test of whether Stamp Duty is effective at controlling the housing market is to assess whether the increases brought about in 1997 appear to have slowed the market significantly.
The threshold when Labour came to power was 1% for all purchases above £60,000, with an exemption for purchases below that. Today, although the exemption and 1% threshold remains, transactions above £250,000 are now liable for 3% duty, and 4% over £500,000.
In total, Labour has increased Stamp Duty four times since coming to power ' in 1997, 1998, 1999 and 2000. During that time house prices have risen by a further 63%, seemingly unaffected. It is likely the increases would have been slightly higher without the tax rises, but that effect is swamped by the mis-match between supply and demand in the residential housing market.
Coverage of Stamp Duty would have to be wider and the rates higher before it had any noticeable effect on the housing market. However, as a policy tool it is inherently flawed as it is not easy to adjust quickly or frequently, and many sales evade it as buyers and sellers refuse to price above the thresholds.
In addition, if house prices were weak it would be difficult for the Government to cut Stamp Duty as it is a useful revenue-raising device. As the UK only has a small private-rented sector it is useful in allowing people to move cheaply and easily around the country by trading property.
Higher Stamp Duty is a tax on mobility and if used to reduce house price inflation, it would reduce house sales and raise the cost for people moving around the country to secure employment. In Europe where Stamp Duty is generally higher ' far fewer house sales occur and there is some evidence that labour mobility is reduced.
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