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Chancellor urged to scrap stamp duty as it is harmful to housing market growth

Stamp duty, the property tax paid when buying a home in the UK, is keeping people in homes of the wrong size, means they are forced to live to far from their work and is more harmful than income tax, according to a new report.

Not only is it slowing up housing market growth but it is harmful to the economy as a whole, costing the British economy some £10 billion and should be scrapped, says the hard hitting report from think tank the Adam Smith Institute.

The analysis says the tax, payable in rising increments for property or land bought for £125,000 or more, is four times more harmful to economic efficiency than income tax, eight times more harmful than VAT and getting rid of it would boost economic productivity, growth and employment.

The paper argues that stamp duty is deeply damaging to the UK housing market. Economists in Australia found that a similar tax was costing 75 pence for every £1 raised and with it costing British people £12 billion a year, this means the tax may cause as much as £10 billion worth of deadweight losses.

This happens because the tax gums up the housing market by penalising people from moving house. While the lack of supply of new houses is still the biggest cause of the housing crisis, it is exacerbated by stamp duty stopping the existing housing stock from being used efficiently.

The report also points out that by penalising older people for downsizing after their children have left home, for example, stamp duty stops larger homes from being sold to new families, making the effective supply of family sized homes even tighter.

It also points out that since stamp duty creates a built-in cost to moving it also creates a roadblock to people moving from one part of the country to another to find work, trapping people in low pay and preventing them from advancing.

The UK is home to around £7.5 trillion of property, with home owners taxed regressively against values last updated in 1991, and charged stamp duty at rapidly escalating rates. The report proposes instead to abolish stamp duty altogether, covering the cost by raising council tax bills on the most expensive properties in the country.

It also suggests that three weeks ahead of the Budget this policy is probably the most effective tax cut the Chancellor Philip Hammond could go for, boosting growth and improving the fundamentals of the housing market at a stroke.

Although the increased economic activity would likely offset some of the losses in the long-run, the paper suggests revaluing council tax and creating a new band for the most expensive homes as a way of making the move revenue neutral if necessary.

The paper also argues that Britain can boost housing and labour mobility, as well as economic growth and productivity, by focusing on the smaller taxes that cause the most damage to the economy. That all starts with abolishing stamp duty.

‘One of the best things about Philip Hammond as chancellor is a resistance to eye catching schemes that sound good but don’t make good economic sense. But stamp duty is so bad that scrapping it would be both eye catching and good economic sense,’ said Ben Southwood, head of research at the Adam Smith Institute and author of the report.

‘Almost any way of clawing back the money will do less damage than stamp duty does: it’s worse than council tax, income tax, VAT, and even corporation tax. Caution is a virtue but complacency is not, stamp duty has had its day and should be consigned to the dustbin of history,’ he added.

According to Sam Bowman, executive director of the Adam Smith Institute, stamp duty is almost as bad as setting fire to the money instead of raising it in tax. ‘The reason is that Britain’s productivity problem is in large part a mobility problem. People cannot move to where the best jobs for them are because the houses aren’t being built, and that’s made even worse by stamp duty keeping older people in family homes that are too large for them,’ he explained.

‘Stamp duty is gumming up the housing market and keeping people trapped in the jobs that aren’t best for them, and scrapping it should be a no-brainer for a Government looking for a bold, affordable way to take back control of the agenda in British politics,’ he added.