Why Cutting Stamp Duty would have Minimal Effect on Downsizing

Telegraph has been siren on this recently

The tax in not particularly efficient, compared to say a proper land value tax, but even in its present form its nowadays a huge earner for the Treasury, so change is less than likely.

But would the key argument, that cutting it would release lots of homes for younger people from older people downsizing, hold water?

No.  The flaw in the argument is the belief that houses prices would remain the same.  Never ague from a price is the economics saying, you also have to look at the demand effects.

A price cut from a tax cut would encourage more sales, but also more purchasers, we have a huge shortage of housing, especially right size housing for older people. The additional purchasers would push prices back up again.  In technical terms  the housing market is supply inelastic.  This would mean the impact on released supply would be small, and also incidentally the reduction in the Stamp Duty tax take.  This line of thinking suggests that some reform of stamp duty might have some minor effect at the margin, and be revenue neutral, if for example you lowered it for age categories likely to downsize, and raised it for categories likely to upsize.  However a tax break based on age would be politically toxic.  It isnt going to happen.

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2 thoughts on “Why Cutting Stamp Duty would have Minimal Effect on Downsizing

  1. “A price cut from a tax cut would encourage more sales, but also more purchasers, we have a huge shortage of housing, especially right size housing for older people. ”

    A huge shortage? Based on what?

    Land is inelastic in supply and demand for nice locations is more or less infinite. So prices are not an indicator of a lack of supply. Indeed the UK has more dwellings per capita than ever, including London/SE. Just looking at the numbers would if anything indicate a huge over supply of “housing”.

    Yes the UK has affordability problems for parts of its society and dysfunction in the housing market. But this is only caused by land values being capitalised into selling prices and private rental incomes. Therefore these issues could and should be ended completely and permanently by a LVT ie the elephant in the room is on the demand side.

    Of course supply is an important issues regarding economic welfare and growth. But it isn’t, or rather shouldn’t be an issue with regards to affordability.

    • No zoning in inelastic in supply, England has lots of land. The demoninator of housing need is not per capita but per household, basic math mistake need overwhelming and growing by every serious study by experts who know how to divide one number by another.

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