In the second of our 2 part series on Stamp Duty Land Tax (SDLT), we discuss the alternatives to it. There is no such thing as an ‘ideal’ tax—all taxes involve some element of compromise. In principle though governments generally seek taxes that:-
- are easy and inexpensive to administer
- are difficult for taxpayers to avoid
- do not distort economic behaviour and
- generate significant revenue
Culture and history also have an effect. Taxes that have been in place for a long time become part of the financial and cultural landscape. It is also important that the public accept that taxes are fair and changes to taxation on housing or property can be viewed as deeply unfair, sometimes with huge political consequences.
Alternatives to housing transactions taxes have been proposed which usually seek taxes that distort behaviour less; the assumptions are that any proposals to replace SDLT should also involve taxation of property, and that any changes must be revenue neutral.
Purists who follow 19th-century economist Henry George advocate taxation of the value of the land. They argue that since the overall supply of land is fixed, taxation cannot alter its supply and therefore does not distort the market. Others say that distinguishing the value of the land alone from the value of the property including buildings is difficult and in any case unnecessary: that an annual tax based on the value of the property, or on its imputed rental value, would be much easier to implement and give almost the same results.
Less drastically, the current council-tax system could be reformed by revaluing properties and increasing the number of tax bands.
Reformers claim that such taxes would distort the market less and align incentives better than stamp duty. Home owners who did not value living in a high-value property enough to pay a recurrent tax would be incentivised to move, to be replaced by households that placed a higher value on that property. This would result in a more economically efficient allocation of the housing stock.
While the removal of SDLT would likely just affect house prices to rise by some proportion of the tax eliminated, this is not a strong argument for retaining it. Doing away with SDLT would eliminate an important barrier to transacting, and would reduce the up-front cost associated with house purchase.
The alternative of replacing SDLT with some kind of annual property-value tax would, in all likelihood be so challenging a change that no government would do it.
In political terms, any reform would need to include carefully designed transitional arrangements to smooth the impact on capital values.
Reform is not impossible but any transition period is always a problem, so it’s better to make any change gradually. Reducing the barriers to house purchase and increasing household mobility would certainly give the industry a much needed push in the right direction.