Angela Rayner and Stamp Duty
At a meeting with Ford Administration officials Dick Cheney and Donald Rumsfeld in 1974, Arthur Laffer, a supply-side economist, drew a bell-shaped curve on a napkin to illustrate his argument that there comes a point in raising the rate of tax that becomes counter-productive for raising tax revenue. It was not a new idea but Jude Wanniski who was also at the meeting coined the phenomenon the ‘Laffer Curve’.
The Laffer Curve assumes that no tax revenue is raised at the extreme tax rates of 0% and 100%, meaning that there is a tax rate between 0% and 100% that delivers the most revenue. A rate too low or too high reduces the revenue collected.
Why?
If the rates are too high tax-paying residents like Angela Rayner, the Deputy Prime Minister, submit misleading facts, to avoid paying the tax. This is no longer a serious option. To find out why, listen to our podcast of the week, Andrew McKenna, the former co-head of the team responsible for HMRC for offshore compliance and fraud. Andrew McKenna is now the CEO of McKenna Tax Consultancy.
Andrew discusses HMRC's sophistication and intelligence in obtaining and processing information and data.
But there are other ways taxpayers change their behaviour which are legal to avoid paying the tax.
Imagine you are the owner of a business which has increased in value since you set it up, and the Treasury puts up the rate of capital gains tax to a level which you are not prepared to pay. You may therefore decide not to sell the business until the rate comes down. In this scenario, the Government receives no tax on your capital gain, which remains unrealised.
Another example is the current rate of SDLT - Stamp Duty, on the sale of residential real estate. For a foreign buyer, the rate is now 19%. That means if you are a foreign buyer looking to buy a home for £10,000,0000, you would have to pay a whopping £1,330,000 in stamp duty. If, as would appear to be the case, the value of residential property is falling, not rising, this is money which will not be recouped over time.
It is widely believed that stamp duty is at rates which are beyond the maximum rate most buyers are prepared to pay with the result that the housing market across the country, not just prime property in London, is stagnant. My neighbours in the country had an acceptable offer on their property last year, but for personal reasons, they did not accept it. Now, the property has attracted not a single buyer and they have taken it off the market. Again the Government have made no revenue from my neighbours taking the property off the market.
Thomas Pugh, chief economist at audit firm RSM, was quoted in the Financial Times as saying stamp duty on the purchase of UK residential property is ‘especially harmful’ to the economy because it stops people moving to areas with better jobs, or downsizing from larger properties.
At this point, I need to declare a vested interest. I have a substantial apartment in London that I want to sell to downsize, providing for my adult children and my future needs. It has been on the market now for over two years.
The apartment is beautiful. It has uninterrupted views overlooking Hyde Park. Harrods and Kensington Palace can be clearly seen from the private roof terrace, but because of the slowdown in the market due to high rates of stamp duty, which has choked off foreign buyers, and the uncertainty of what Rachel Reeves will do in the October budget to plug the black hole in the public finances, the property has not sold.
There has been talk about Reeves introducing a Capital Gains Tax on the sale of Main and Only Residences. This is a bonkers idea. If the housing market is facing a ‘correction’, or downturn in value, introducing a Capital Gains Tax (CGT) on your home would create losses if the values of homes were rebased to today’s value. - A sale in future months would then be more likely to give rise to losses to be carried forward against any future gains, thereby making the situation worse for the Treasury, not better.
Furthermore, Keir Starmer explicitly promised before the election not to levy CGT on primary residences, not least because it would stagnate the housing market further rather than bring back buoyancy.
But to look at the property market in isolation is to overlook the broader economic impact of a stagnant housing market. There are huge industry sectors affected by a stagnant market, not least of which are estate agents, interior designers, plumbers, electricians, decorators, soft furnishings, curtain makers, and the list goes on and on.
One proposal, which I again dislike, given my plan to downsize and invest for the future, is to increase the basic rate of tax on dividends from 8.75% to 20%.
There are many elderly people (excluding myself) who have a finite amount of capital, which they have worked for and saved their entire lives, and have carefully budgeted to live on as they get older. The only option for these people is to spend less, given that their earning capacity has diminished if the returns on their shares goes down due to increased tax. Ironically, as they spend less, the Government collects less money on VAT.
What is desperately needed is to create an environment where businesses can thrive, because this is the only sector which genuinely increases revenue for the Government. Thriving businesses provide income for employees on which jobs PAYE is paid, business profits pay corporation tax, and goods and services sold attract VAT. Thriving businesses boost our economy and make us feel better.
Sadly, this Government has done everything it can to make businesses struggle. It has increased National Insurance and removed inheritance reliefs on business property, to name but two egregious examples.
As counterintuitive as it may sound, reducing taxes that have reached the point at which no further revenue will be paid by increasing the rate is a viable way forward, especially for stamp duty and should be introduced in this October’s Government to make us feel better.