Nobody could deny that Alistair Darling has a lot on his plate right now. Balancing the need to fill the hole in the nation’s finances with the need to maintain the fragile economic recovery should be keeping him busy — even if the demands of a next-door neighbour facing a catastrophic election defeat do not.
But as the Chancellor plans next week’s Pre-Budget Report, there is an area of policy that is crying out for reform that should not be overlooked. For more than ten years the country’s housing market has suffered the distorting effect of an absurd stepped system of stamp duty.
Under the current regime, buyers face a 1 per cent bill on the total value of a property bought for more than £175,000, 3 per cent for properties worth more £250,000 and 4 per cent on properties worth more than £500,000. The result is a glut of properties marketed at a price just under each threshold and very few just over. There is not an ounce of logic to such an arrangement.
Far better to have a system where buyers pay a percentage tax only on the value of a property above a given threshold. For example, buyers could pay no stamp duty on the first £175,000 of a property’s price but 2.5 per cent on the next £100,000 and 5 per cent or more on everything above. There would, of course, be winners and losers with such reform, but the exact levels of the tax and thresholds could be calculated so that the majority of buyers do not pay any more than at present.
However, there is a compelling argument to say that buyers of the most expensive homes should be forced to pay more — at least if we accept that tax rises are needed in addition to spending cuts to help to fill the budget deficit.
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For a start, taxing the property purchases of the rich is a better way to raise revenue than taxing their income. Property is an unproductive asset that benefits few, whereas work creates wealth, ideas and businesses that benefit everyone — the taxman included. Taxes on properties are also hard to avoid — you cannot take a ten-bedroom mansion to Monaco, but you can take your business and ideas.
Furthermore, property taxes in the UK are actually low by international standards. According to research by Taxand, a global network of tax advisers, the tax liability for selling a £700,000 property in the UK is substantially less than in Spain, Italy, France, the Netherlands, Portugal, Australia and India. The UK is also alone in Europe in not levying VAT on the sale of new-build properties — saving buyers tens of thousands of pounds.
Admittedly, the comparison is not straightforward and the total revenue from property taxes in many of these countries is less than in the UK, despite higher rates, because there is a rental culture rather than a buying culture. Even so, there must be some scope to increase the costs paid by the wealthiest buyers in the UK.
A final point to recommend higher rates of stamp duty on the most expensive homes is that it could help to discourage excessive house price inflation, which makes it difficult for people to move up the property ladder.
Of course, any reform would need to make sure that first-time buyers — who are the lifeblood of a well-functioning property market — are not discouraged. As such, the starting rate for the first stamp duty band should not fall from the increased level of £175,000 set during the Budget in April. (This higher rate is due to fall back to £125,000 at the end of this year.) The Government should also consider whether stamp duty rates should vary depending on regional circumstances. At present, the weight of the tax falls disproportionately on London and the South East, where house prices are significantly higher. Incomes in this region are also higher, but not so high as to justify such a large discrepancy in the burden of stamp duty.
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There is no doubt that property taxes can be unfair, and appear to be arbitrary, but at least they have the virtue of being better than many of the alternative ways of raising revenue.
An obvious place to start the spending cuts
An immediate opportunity to start scaling back the Government’s mammoth overspending could come with its coverage of the Pre-Budget Report.
On Wednesday Direct.gov.uk, the Government’s information website, will publish details of all the measures announced by the Chancellor.
Given that every other news website on the internet — including our very own at Times Online — will be offering a similar service, you have to wonder whether this is a sensible use of taxpayers’ money, particularly since the Treasury already publishes all this information on its website.
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Of course, axing the Direct.gov.uk Pre-Budget Report service would be about as effective at closing the government deficit as taking a cup of water from the ocean would be at stopping rising sea levels, but there is an important principal at stake.
No government — particularly one so deeply mired in debt — should waste money offering a service that is already more than adequately provided by the market.
For the very best coverage of the Pre-Budget Report on Wednesday, go to timesonline.co.uk/budget. The fun starts at midday.