Digging into the detail of the Stamp Duty announcements
Something very curious is stated in the Autumn Statement supporting documents. It is difficult to know exactly what is going on because very little detail is provided. But it could demonstrate that the Office for Budget Responsibility (OBR) thinks that the hikes in Stamp Duty for buyers of very expensive homes will be very damaging.
The OBR forecasts that the direct effect of the Chancellor's Stamp Duty reforms will result in around £600 million a year less revenue in the next two years. However, once they account for the 'behavioural effects', the Treasury will lose around £800 million.
Economic collateral damage
A key paragraph in the document explains how the OBR accounts for behavioural effects:
"This measure is expected to impact on the frequency of transactions. For transactions where the tax charge is lower than the previous Stamp Duty system there is an expected increase in the volume of transactions, and for high-value properties adjustments for wider behavioural effects have been made."
Incomplete modelling or disastrous hikes?
Two possible explanations might illustrate why the OBR thinks that the reform will lead to less rather than more revenue than the direct effects in the static analysis:
1. Disastrous hikes. It is possible that the OBR expect that the impact on revenues from increasing the bill for homes over £937,500 is very big indeed. Academic estimates by LSE researchers Best and Kleven have estimated that the transaction numbers increase by 20 per cent when Stamp Duty rates are cut by one per cent. The new system means that effective rates are cut by between 1 and 2 per cent for properties between £250,000 and £333,000. But for all the properties enjoying a cut, the effective rate reduction ranges from 0 to 1 per cent.
By contrast, the effective rate increase for the 2 per cent on homes where the bill is going up ranges from 0 to 5 per cent. For example, the old 7 per cent rate goes up to 9.1 per cent on a £3 million home, to 10.6 per cent on a £6 million home and to 11.0 per cent on a £9 million home. At this level, Best and Kleven's estimates would imply 59 per cent fewer transactions, resulting in a 35 per cent fall in revenues from the combination of higher bills but fewer transactions.
Will a substantial negative behavioural effect on the 2 per cent of more expensive homes outweigh the weaker positive behavioural effect on the 98 per cent of cheaper homes?
2. Incomplete modelling. Another possibility is that positive "wider behavioural effects" of cutting the tax for cheaper properties have been ignored while the negative effects of raising it on high-value properties has been included, as implied by the wording of the sentence.
Without further detail it is difficult to know what the OBR thinks will happen as multiple and contrasting effects are included in the same number. Indeed, they also refer to behavioural effect of removing distorted numbers around the old thresholds and temporary effects around implementing the new system. But these are unlikely to answer the question. Neither of the likely answers are encouraging.
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