Saturday, April 29, 2017

When Raising Tax Rates May Decrease Revenues - The Case of Stamp Duty

The Laffer Curve may be controversial but there is no doubt it exists. You will raise zero tax revenue if the tax rate is zero and you will also raise close to zero if the tax rate is 100%. As you move closer to a 100% tax rate, the argument goes that companies and individuals will move, avoid tax, earn less or simply decide not to do the things that incur tax.

This seems self-evident, the real argument is at what rate you raise maximum revenues? 30%? 40%? 70%? And at what point increasing tax rates actually reduces revenues. The rate depends upon the specific tax you are considering.

In the case of stamp duty on UK house sales there is an argument that the rate introduced by George Osborne is already to the right of the maximum and therefore resulting in lower revenues.

Stamp Duty is now 10% on properties valued over £925k, 13% if it is a second property, and 12% or 15% if the property is valued over £1.5m. This has become a significant disincentive for people to move, they may instead decide to invest and extend their current property, or just not move.

Last year sales of properties worth more than £1.5million fell by almost 40 per cent on the previous year according to Land Registry figures. The estimated stamp duty collected on these properties by the Treasury fell by around £440million, from £1.079 billion to £635.7million.

It is possible the changes in April 2015 caused a rush in sales in February and March 2015, so it may be better to exclude March 2015. Another survey of Land Registry figures by estate agent London Central Portfolio, looked at the period April-October 2015 and the same period last year. This found that sales of properties between £2 million and £5 million in London fell from 7,285 to 4,913.

If falling sales of higher value properties is due to Stamp Duty changes it is an example of the Laffer Curve in action.