Stamp duty & labour supply

Imagine - and you’ll probably have to - that you have a large six-figure salary and live in a £1m+ house in London. You’re hoping to buy a more prestigious place. And then the government raises stamp duty on £2m houses to 7%. What do you do?

You could pay an extra £40,000 for the privilege of living in a tatty terraced house or a dark two-bed maisonette in Chelsea.

Or you could decide that, if it’s a big house you want, you should move out of London. In the civilized world, you can get a mansion with pool, tennis court and paddock for a little over a million - with the bonuses of increasing your chances of not having a complete cunt for a neighbour, and being within 15 minutes drive of one of the Britain‘s best music venues.

But of course, there’s a problem. Unless you can work from home, moving to the civilized world requires some upheaval. If you’re of a certain age, you might be able to retire early. You could sell your business a  earlier than you intended. Or you could downshift and do consultancy work, popping into London only a few days a month.

And here’s the thing. To the extent that people do this, their labour supply falls. Stamp duty can therefore “deter effort” just like income tax can - maybe more so. This is because a tax on expensive items - given the foregoing we can hardly call it a tax on luxury goods - in effect reduces the returns to work, just as an income tax does.

The question is: how likely is this? Naturally, I’m biased, having made a similar move myself. But isn’t at least possible? The notion that top rates of income tax have disincentive effects but higher stamp duty does not is, surely, very questionable.

Another thing: there is, of course, another effect here. As the smart money moves out of London, house prices there fall, thus imposing a cost onto their existing owners, but mitigating the cost to prospective buyers - thus transferring wealth from one sort of rich to another.  

Comments

[Account Deleted]

If you have a large six-figure salary (say over £250k), or enough liquid wealth to buy a £2m property outright, what is the likelihood that you also have a fixed labour supply?

Many of this cohort are probably already non-working wealthy, or those with a flexible, part-time career (rentiers and dilletantes, in plain French). The 9-5 wealthy in London, e.g. bankers and senior execs, can probably afford both a Chelsea pied-a-terre and the weekend mansion.

As for top-end London house prices falling, I suspect the smart money considers an increase in stamp duty to be a positive result when taken in conjunction with a lower top rate of tax, not to mention the absence of a mansion tax or LVT.

[chris]

Yes - it is a positive result for very many of them, as stamp duty can be avoided (eg by not moving or moving to a sub-£2m house) whereas income tax cannot so easily be. Only a Lib Dem could "think" otherwise.

[Tom Addison]

I love how the tatty terraced house that you refer to is described as "unmodernised" on the rightmove listing.

It reminds of that episode of The Simpsons where Marge becames an estate agent and is told small = cosy, dilapidated = rustic and on fire = motivated seller.

http://en.wikiquote.org/wiki/The_Simpsons/Season_9

[Koenfucius]

One not unlikely possibility is that the selling price will reduce by an amount close to the extra stamp duty. The extra tax burden will then be borne mostly by the *seller* rather than the buyer. The latter has a choice of buying one of many cheaper properties (as well as staying put and not moving); the former only has two options: drop the price or don't sell.

[Paolo]

What are you talking about? If you leave in a 2+M property in London you can simply stay put thus avoiding the stamp duty and keep working hard, benefiting from a 5p tax cut. If you leave in a -2M property and you want to trade up to 2+M property, i'll find that prices have adjusted to the increase in stump duty, and btw the mentioned 5p tax cut will probably in time more than offset the increase in stump duty. Only if you want to move out of London and retire in the civilised world (as you put it) you'll be penalised. But in that case there is no "deter effort" distortion, is there? Not to mention non-residents parking their cash for safe heaven purposes.

You sound pretty ideological on this one Chris, don't let it clouds your judgement.

[Keith]

The problem with this argument seems to me that the point you are making, sorry to say, is a bit limited. The really important idea about tax seems to me to be that all arguments about disincentive effects of taxation are untrue in the long term. In a small number of very extreme cases maybe taxing the rich more might actually be bad for the real economy; but for the most part tax changes tend to effect supply only in the short term. People adjust to the tax rules if they are unable to avoid them and carry on regardless. They continue to work and save and make profits etc. The case for shifting the burden of taxation from the well off to the masses is ideological drivel and always has been. Once you accept this ideology you end up having to cut state spending, welfare benefits, and the pay and working conditions of the majority of workers. You "tax" everyone else by having to charge for services that were free and charge more for things like rail or bus transport. All the people who gain from income tax cuts except the rich will lose their gains once they have to pay the extra for what ever services are made more expensive. This Cabinet is the same as Thatcher merely pretending not to be. But I am not fooled: I have seen the play before and I like the new cast no better than the original one. At least the wets were annoying enough that Thatcher had to sack them from her Cabinet. There is not a peep out of the Lib Dems. The old liberal party of Grimmond etc is dead and there is no disguising it any more. Let no one forget that almost all of the Cabinets policies are totally the opposite of what the Lib Dems said they wanted before the election. And no one gave a mandate for any of this at the ballot box. There was no "coalition party". The last time a liberal put the tories in was during Lloyd Georges government and it ended rather badly. I do hope that clegg and his party are sent packing like MR. David Lloyd George. The sooner the better.

[Paolo Siciliani]

BTW, to refer to the Laffer's curve to justify the cut of the 50% tax rate makes me cringe. The Laffer's curve effect is about people working less not avoiding taxes! The Govt say the reason why the 50% has apparently raised less then Labour estimated is down to renaming incomes to avoid the 50% personal income tax. But then why would the same people start paying at 45% if they got away with it? They won't, unless the savings from avoiding the 45% rate is lower than the fees paid to the accountants to dodge the tax in the first place.

Therefore, to frame this debate in terms of Laffer's curve is utterly misleading, if not clueless!

[lacoste uk]

in effect reduces the returns to work, just as an income tax does.

[Luis Enrique]

this seems sensible enough to me - I don't quite understand what other commentators think is so objectionable. Change relative prices, change (some) behaviour.

the price differential between property in London and elsewhere has this effect - it does't matter whether it's taxes or just changing prices that do it.

[Mark in UK]

@ Koenfucius

"One not unlikely possibility is that the selling price will reduce by an amount close to the extra stamp duty. The extra tax burden will then be borne mostly by the *seller* rather than the buyer."

I agree with you. I always wonder whether demands for stamp duty to be cut (as has happened over last decade or so on occassion) actually result in lower prices being paid. If a cut of say 1% is suddenly enacted then yes, if you have exchanged contracts, then yes, you pay less than you had expected.

But apart form that situation, potential buyers will apply their "saving" to (perhaps) bidding up against other competitors, and quite sooon prices in any area will find their level, which becomes the "going rate". No one really saves, but the Government loses a lot of tax.

Surely the only thing that will reduce prices significantly is a big increas in the supply of houses?

[Martin]

I live in Gretton.

15 minutes from Bushbaby to central Leicester?

At 3am on Sunday, perhaps.

Unless you know how to avoid the A47.