In the state's eyes, smoking and homebuying are equally vicious

westernpromise

I was looking at Zoopla further to another thread, and this produced the datum that the average house in my road is worth £1.2 million. The stamp duty a buyer would pay to own such an average house would be £64,000.

Stamp duty is levied on the transaction, and the other costs of a property transaction are pretty low. Assuming you both sell and buy, you would spend perhaps £16,000 at the outside doing this on a £1.2 million London house. Stamp duty adds £64,000 to this, so it increases the cost of the trade from £16,000 to £80,000.

Yes, yes. I’m aware that it’s supposedly an ad valorem tax on the property itself, and thus the cost taxed is the £1.2 million, and thus the stamp duty is of no account to people with £1.2 million to spend, and all that. In the real world, however, the tax is levied explicitly on the transaction, whose cost it increases by a penal rate of 400%.

Looking at what other activities are taxed at such penalty rates, the only one that comes anywhere close is smoking. You can buy 200 cigarettes in an Asian airport for about £15, but they’d retail here for about £80, the £65 difference being a 430% tax added to the cost. Drinking spirits is much cheaper. A 70cl bottle of spirits retailing at £15 is in fact a £4.75 bottle, with £7.75 in spirit duty added, plus another 20% in VAT on the total (so, like petrol, a tax on a tax), which is an impost of 215%. The cheapest vice of all is using petrol: a litre of it costs about 35p wholesale, but retails for 99p, so the tax level there is a mere 180%.

Taxes this high are generally reserved for activities regarded as vices, and the tax aims to penalize, dissuade and limit them. While the government can collect a lot of money from the tax, some public good is served if there is less of the activity or preferably none. It seems very clear that the tax on property transactions is set so high because buying houses is regarded as a vicious activity - on a par with smoking, and worse by far than drinking spirits or driving. And if it’s not, why is the tax so high?

michaels

Every asset I buy, if I sell for a profit, I am liable to capital gains tax; except for one - my primaryr esidence. Why does the govt give a single asset class, not accessible to all, this highly privilidged tax status?

(Oops - missed the mine is bigger than yours bit by not quoting average house prices in my street)

cells

michaels wrote: »

Every asset I buy, if I sell for a profit, I am liable to capital gains tax; except for one - my primaryresidence. Why does the govt give a single asset class, not accessible to all, this highly privilidged tax status?

most assets you buy and then sell are free from CGT as you get a £10k or thereabouts annual allowance.

Can you think of any assets you have bought and sold and had to pay CGT on? Maybe shares is one but for that you have tax wrappers like pensions or ISAs which again means no CGT

So in short, most people never pay CGT on anything. The one big exception is probably landlords as they cant buy homes in tax wrappers

PasturesNew

cells wrote: »

So in short, most people never pay CGT on anything.

I've never paid it, nor ever will. Nor has anybody in my family ever paid it, nor will they.

CGT is a tax for "those with a few more bob than the rest of us" because they've got spare cash floating around to lob at 'investing' in some way.

cells

Stamp duty in London is getting far too ridiculous.

Five years ago I purchased a flat and paid £2,500 stamp duty. In a months time were I to sell the same flat then another Landlord would have to pay £30,000 in stamp duty. That is a massive increase and the result is going to be fewer transactions.

cells

PasturesNew wrote: »

I've never paid it, nor ever will. Nor has anybody in my family ever paid it, nor will they.

CGT is a tax for "those with a few more bob than the rest of us" because they've got spare cash floating around to lob at 'investing' in some way.

is it not a good thing that there is a tax that brings in billions but almost no one pays it?

mwpt

cells wrote: »

Stamp duty in London is getting far too ridiculous.

Five years ago I purchased a flat and paid £2,500 stamp duty. In a months time were I to sell the same flat then another Landlord would have to pay £30,000 in stamp duty. That is a massive increase and the result is going to be less and less transactions.

You are completely wrong!

It is "fewer and fewer transactions".

westernpromise

michaels wrote: »

Every asset I buy, if I sell for a profit, I am liable to capital gains tax; except for one - my primaryr esidence.

Wrong. If you had bought a Jaguar XK140 in 1998 for £30,000 (which was possible) and sold it today for £130,000 (which is possible) you would pay no CGT.

http://pwc.blogs.com/private_business/2015/04/capital-gains-on-classic-cars-you-auto-know-the-facts-.html

I fail to see the relevance of the comment to my point, which is that the tax system treats the purchase of houses as a vice to be taxed out of existence.

the_flying_pig

westernpromise wrote: »

I was looking at Zoopla further to another thread, and this produced the datum that the average house in my road is worth £1.2 million. The stamp duty a buyer would pay to own such an average house would be £64,000.

Stamp duty is levied on the transaction, and the other costs of a property transaction are pretty low. Assuming you both sell and buy, you would spend perhaps £16,000 at the outside doing this on a £1.2 million London house. Stamp duty adds £64,000 to this, so it increases the cost of the trade from £16,000 to £80,000.

Yes, yes. I’m aware that it’s supposedly an ad valorem tax on the property itself, and thus the cost taxed is the £1.2 million, and thus the stamp duty is of no account to people with £1.2 million to spend, and all that. In the real world, however, the tax is levied explicitly on the transaction, whose cost it increases by a penal rate of 400%.

Looking at what other activities are taxed at such penalty rates, the only one that comes anywhere close is smoking. You can buy 200 cigarettes in an Asian airport for about £15, but they’d retail here for about £80, the £65 difference being a 430% tax added to the cost. Drinking spirits is much cheaper. A 70cl bottle of spirits retailing at £15 is in fact a £4.75 bottle, with £7.75 in spirit duty added, plus another 20% in VAT on the total (so, like petrol, a tax on a tax), which is an impost of 215%. The cheapest vice of all is using petrol: a litre of it costs about 35p wholesale, but retails for 99p, so the tax level there is a mere 180%.

Taxes this high are generally reserved for activities regarded as vices, and the tax aims to penalize, dissuade and limit them. While the government can collect a lot of money from the tax, some public good is served if there is less of the activity or preferably none. It seems very clear that the tax on property transactions is set so high because buying houses is regarded as a vicious activity - on a par with smoking, and worse by far than drinking spirits or driving. And if it’s not, why is the tax so high?

yeah, I mean, from government's point of view the qualities of a good tax must be something like: (1) it's relatively cheap & hassle free to collect, including being difficult to avoid; (2) it's 'fair' [e.g. doesn't overly hit people who can't afford to pay]; (3) in terms of incentives, it discourages bad behavior/doesn't unduly encourages bad behavior.


these criteria are often in conflict, e.g. [for various mostly sensible reasons] income tax is the single biggest earner for most governments, mostly on the basis of criteria (1) & (2), even though [see (3)], work is of course not something that should be discouraged at all, without lots of it we'd have no economy at all.


stamp duty is a *little bit* similar really... in my mind the logic for it goes:


(a) from an incentives (i.e. (3)) pt of view, taxing property is preferable to taxing say income, since, well, a house is, uh, a house, if I tax a house in London it won't decide to stop being a house & similarly (see (1)) can't go stomping off to Switzerland or whatever if it feels over-taxed.


(b) from a fairness point of view, property wealth is [far more than income] hugely inequally held and [again far more than income] hugely badly correlated to individual effort & ability. we know that people who own whopping great houses can afford to pay large tax bills.


where (a) and (b) point you to, in my view, is some form of land value/possibly mansion-type tax, but this breaks down crucially for a couple of reasons:


firstly, this'd need loads of messy valuations etc (see pt (1)) and also, crucially, it'd really upset the [immsensely powerful] grey vote.


this leads you to stamp duty - dead easy to administer since every transaction provides government with an instant up to date valuation, and it disproportionately hits mostly gen X and increasingly Y types who no-one really cares about anyway.


so it's absolutely true that SD strangely penalizes moving, and hence limits labour market mobility etc but these concerns are, pretty much, trumped by others.

mwpt

Good analysis TFP.

If the government were consistent in their actions and aims of, 1) blowing property bubbles and 2) collecting taxes, then I have the ideal solution for them. Simply allow stamp duty to be added to the mortgage. The future is rich!

Generali

cells wrote: »

Stamp duty in London is getting far too ridiculous.

Five years ago I purchased a flat and paid £2,500 stamp duty. In a months time were I to sell the same flat then another Landlord would have to pay £30,000 in stamp duty. That is a massive increase and the result is going to be fewer transactions.

Interesting that you don't consider that an OO would buy.