The Cooking the Books column from the January 2015 issue of the Socialist Standard
When the Chancellor announced in his Autumn Statement that stamp duty on buying a house was being reformed, to reduce it on most purchases while increasing it on the most expensive, he claimed that this reform would benefit 98 percent of house-buyers. The assumption was that as this tax was being reduced, the price of houses would also fall.
The Chairman of the Office for Budgetary Responsibility, Robert Chote, however, warned ‘the reform could put up prices in some areas, predicting that they would rise where the tax had fallen and fall where it had risen.’
This paradoxical effect is what happens when something for sale is taxed in a sellers’ market as one where demand exceeds supply. This, in fact, is the logic behind the taxes on tobacco, alcohol and petrol. By regulating sales the government creates an artificial sellers’ market which pushes up their price; it then taxes the surplus profits of the sellers.
This situation can also arise without government intervention and is what Chote was predicting with regard to house prices.
John McDermott, in his ‘Since You Asked’ column in the Financial Times (6/7 December) elaborated. He has his questioner say ‘I thought that lower taxes would mean buyers would pay less overall.’ To which he replies:
‘Of course prices will go up. The Office for Budgetary Responsibility, Britain’s fiscal watchdog, estimates that for every 1 per cent fall in the effective rate of stamp duty, house prices rise 1.4 per cent, a house currently worth £300,000 would cost about £2,000 more under the new rates according to Shelter, a housing charity. When you lower transaction costs of any transaction, there will be more of those transactions. There will be lower transaction costs for 98 per cent of purchases, according to the OBR. In a market where there isn’t a lot of supply, the extra demand will push up prices.’
That’s how the market works. Sellers always charge what the market will bear at any time, irrespective of whether the tax on what they are selling goes up or down. If the tax goes up and the market won’t bear an increase in price, then the tax falls on them. If, on the other hand, the tax is reduced and the market will still bear the same price as before, they won’t pass the reduction on but keep the whole of it for themselves.
If again, as in this case, a tax reduction results in increased demand, this means the market will bear a higher price and the seller will increase the price. And vice versa, as with the higher stamp duty for the most expensive properties, this reduces demand for them forcing the seller to reduce their price.
This phenomenon was noted in the second issue of the Socialist Standard in October 1904 with regard to rates and the price of rented accommodation:
‘When the Central London Railway was opened the competition for houses in Shepherd’s Bush increased largely, and as a consequence rents rose as much as 3s. in the £. This was the limit offered for the time being, and when shortly after rates were raised by a good sum, the rents remained unaltered. At West Ham, which is the most heavily rated district in England, rents are falling, while rates are rising, owing to the decreased demand for houses.’
In any event, taxes on items that workers consume to recreate their labour-power, in so far as they increase or decrease the price of these items, exert, respectively, an upward or a downward pressure on wages. It’s just that, in the field of housing, reforms have a habit of not working out as planned.