The Government could make even more money from expensive homes if only it were to reduce stamp duty, which now runs at a punitive top rate of 12pc
We are pretty useless, as a nation, at learning the lessons of history. This is as true of economic matters as it is of international affairs. Take the taxation of labour, capital and transactions: we keep forgetting, relearning and then forgetting again that excessively high taxes can kill off economic activity and actually reduce a government’s tax take.
The existence of this effect - deemed a paradox by those who don’t understand the critical importance of incentives in motivating human beings - has long been acknowledged by theologians, philosophers, political scientists and, of course, economists of all persuasions. The tax rate that maximises revenue is not 100pc, for at that level nobody would do any work or buy and sell anything - though, of course, it is not zero either. It is somewhere in between - and that is where the agreement ends.
Economist argue bitterly over what the revenue-maximising level really is - it depends on the kind of tax, on the country, the period in history, the mobility of labour and capital and many other variables. But the fact that excessively high taxes can choke off economic activity and backfire against the tax-raising authority is not in doubt, apart to the odd delusional communist or Corbynite groupie.
In the 1970s and 1980s, Arthur Laffer’s eponymous curve demonstrating this argument graphically convinced policy-makers to slash marginal income tax rates. But the argument has a long and distinguished pedigree. Ibn Khaldun, the 14th century philosopher, put it brilliantly in The Muqaddimah: “It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments.”
John Maynard Keynes also understood. “Taxation may be so high as to defeat its object...given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget,” Keynes argued. “For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more - and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.”
The tragic reality is that the British government is once again jacking up taxes too high in a number of crucial areas. One is high-end property transactions: the massive increase last December in stamp duty for properties worth more than £1.1m, the culmination of a dramatic increase in this tax since 1997, has clearly backfired on the Treasury.
Stamp duty depresses prices, which means that sellers lose out; and because buyers cannot borrow to pay it, the tax reduces liquidity in the market and cuts the number of transactions. This in turn means less money for the Government, both directly (stamp duty receipts themselves) and indirectly (people who buy homes generate lots of VAT and estate agents also pay lots of tax). Better a smaller slice of a larger pie than a larger slice of a smaller one.
An analysis from Knight Frank, adjusted for house price inflation, calculates that there was a 21pc slump in the number of £1m-plus sales in the year to April 2015, compared to the previous 12 months. The research also reveals a drop in transactions every single month between July 2014 and April 2015, compared with the previous year. Of course, the threat of a Labour government and the mansion tax also hit transactions prior to the election but stamp duty was by far the biggest problem.
London made up just 13pc of all deals in the first quarter of this year but contributed an astonishing 46.9pc of stamp duty revenue, up from 43.4pc in the same period in 2014. The tax is increasingly a way to raid the pockets of Londoners and those who live in its prosperous, Home Counties commuter belt, redistributing resources to other parts of the country. It is deeply unfair and is damaging the London economy, the UK’s most important asset.
The top 1pc of homes in particular have become a cash cow: properties worth in excess of £1m in London accounted for just 1pc of all deals but 25.8pc of the total stamp duty take, up from 19.8pc last year.
Yet the Government could make even more money from expensive homes if only it were to reduce stamp duty, which now runs at a punitive top rate of 12pc. It should halve the rate and see what happens: I predict that the market would be jump-started, that housing transactions would shoot up, and that a properly conducted, dynamic analysis would show the Treasury pocketing more cash overall.
A lubricated housing market would improve the mobility of labour, help older people downsize and younger people upsize, and keep advisers in business. Liberating London’s housing market would help the rest of the country: more Londoners would move out, taking their capital with them, and more non-Londoners would be able to move in.
The real problem with the UK housing market is that it is under-supplied as a result of ridiculous regulations and an antiquated approach to land use. Taxing homeowners and homebuyers to death is merely a diversionary tactic that creates fresh problems without solving anything.
The Government needs to relearn the lessons of the 1980s: too much tax kills tax receipts. George Osborne should slash stamp duty - it is the best way to ensure that cash comes flooding back into his coffers.