Stamp Duty: Britain’s Most Damaging Tax

The country is in dire need of tax reform. In a recent report which I co-authored for the think tank Policy Exchange with Roger Bootle and Ben Sweetman, we set out the burden the tax system places on households and firms, and how it constrains growth. The report explains how the system can and should be reformed so that it incentivises rather than punishes hard work and investment.

The one proposal from that report which I want to focus on here is the abolition of the most damaging tax on the books: Stamp Duty Land Tax (SDLT).

How economists judge a tax

Economists generally judge a tax by how much distortion it creates relative to how much revenue it raises. A well-designed tax collects money without changing people’s behaviour too much. A badly designed tax discourages a valuable activity such as investment, work, or — in the case of SDLT — moving house. The economic loss from that discouraged behaviour, the ‘deadweight loss’, is a cost over and above the money actually collected.

Transaction taxes on property are a textbook example of a distortionary design. Unlike income tax or VAT, which apply repeatedly to ongoing activity, SDLT applies as a one-off toll specifically at the moment someone tries to move. It taxes mobility itself. GBTT has made a related case before, showing how stamp duty costs Britain more than it raises.

A tax on moving itself

The clearest evidence against SDLT comes from research by Christian Hilber and Teemu Lyytikäinen. Using a discontinuity in the pre-2014 ‘slab’ tax schedule — where the rate jumped sharply at certain price thresholds — they compared otherwise similar homeowners on either side of the cutoff. They found that a two-percentage-point rise in the tax rate reduced a household’s annual likelihood of moving by between two and three percentage points, roughly a 30 per cent fall in the rate of mobility.^[1]

This means that SDLT is trapping people in homes that no longer suit them: empty-nesters rattling around family houses they can’t afford to leave, young families stuck in flats they’ve outgrown, and older homeowners unable to downsize even when they would like to.

SDLT does not simply raise money. It taxes mobility itself — and traps families in homes that no longer fit.

The lock-in effect

This “lock-in effect” isn’t just a private inconvenience. It also carries a high economic cost. When a retired couple can’t afford to sell a four-bedroom house and buy a smaller one nearby, that family home stays off the market. Multiply that across hundreds of thousands of households, and SDLT effectively reduces the usable supply of family housing.

The costs ripple outward from there.

1Reduced labour-market flexibility

Even though the Hilber–Lyytikäinen research suggests the effect on job-related moves is smaller than on housing-related ones, SDLT does still act as a barrier to some people moving to where the good jobs are. In a country that badly needs stronger productivity growth, throwing sand in the gears of labour mobility is exactly the wrong thing to do.

2Fewer transactions, less activity

Every house sale supports a chain of work: conveyancers, surveyors, removals firms, and tradespeople doing up a new home. A lower-transaction housing market means fewer jobs supported for plumbers, electricians, builders, designers, estate agents and surveyors — dampening the local economic activity that would otherwise follow a more liquid housing market.

3Significant welfare losses

Finally, there are the welfare losses that flow from all those mutually beneficial trades that never happen. Research modelling the abolition of stamp duty finds welfare gains of around 3.5 per cent, with the large majority of households left better off — a substantial number in the world of tax modelling, and a measure of how much value is currently being destroyed by discouraging willing buyers and willing sellers from trading.^[2]

But can we afford to abolish it?

There is, therefore, a very strong case for abolishing SDLT. The obvious objection is that doing so would be expensive, and that it would be fiscally irresponsible to cut a tax without funding the gap. This is a fair point: it is important that governments do not make unfunded tax cuts. That is why, in an earlier report, I and other economists set out how public spending could be reduced in order to restore the public finances and enable tax cuts.

Even though cutting public spending should be a priority for the government, SDLT is so damaging that it should be abolished regardless. Those on the centre-right often get carried away in claiming that cutting or abolishing certain taxes will ‘pay for themselves’. This can be true — and the Laffer Curve is real — but it often isn’t.

A £20 billion prize — and a rare consensus

SDLT, however, is one of those cases where abolition brings such large economic benefits that it is worth doing. Research by the Adam Smith Institute finds that scrapping stamp duty would boost economic activity by nearly £20 billion each year — through more construction, higher wages as mobility improves, and greater consumer spending — while enabling tens of thousands of additional homes to be built and hundreds of thousands more sales.^[3] That is activity which creates jobs and raises wages, both of which are subject to other taxes, thereby clawing back a good deal of revenue for the Treasury.

In fact, SDLT is so economically damaging that its abolition has support from right across the political spectrum, as well as from politically neutral economists and tax experts. The IPPR, the IFS, Dan Neidle of Tax Policy Associates, Policy Exchange, the Centre for Policy Studies, the Adam Smith Institute and the TaxPayers’ Alliance all propose either replacing SDLT with a better-designed tax or simply abolishing it outright.^[4] That is just how harmful SDLT is.

Scrap it now

In the coming days, the UK will have a new Chancellor. Their priority must be to reform the tax system so that it incentivises rather than punishes productive activity such as hard work and investment. There are many changes the Chancellor could make. Some should not happen overnight, and any reform or replacement will need to be carefully designed. Stamp Duty Land Tax is not one of them. It could — and should — be scrapped immediately.