Increase Stamp Duty, I say

Stamp duty is in the news again, and again is being discussed in what I regard as irrational terms. It is being described as a tax on buyers and as increasing the price of houses.

The truth is that it is a tax on sellers and it depresses the price of houses. The price of houses is set by the interplay of supply and demand, which in practical terms for the most part means the capacity of buyers to pay. Several factors affect this, including the availability and terms (period, interest rate, LTV ratio) of finance, and personal income, with the latter the major one, arguably.

Imagine Mr A is selling his Dublin house. He wants to get as much as he possibly can. The two remaining competing buyers, let us call them Ms B and Mr C, have both been advised that € 1.1 million including stamp duty is probably going to be needed to get the property. Ms B has decided that she wants the house enough to pay this, and that she can afford it. Mr C cannot afford to go over € 1m including stamp duty. Encouraged by everyone, he believes that he could afford the house if only there were no stamp duty.

Mr C therefore persuades his friend, the Minister for Finance, to abolish stamp duty. Nothing else has changed. Mr A still wants to get as much as he can, and Ms B can still afford to pay € 1.1m.

Now, post-abolition, is Mr A, knowing or suspecting that Ms B has € 1.1m, going to sell it to Mr C instead for € 1m ? Why is Ms B not going to pay € 1.1m if she has to ?

Who will doubt that Mr A will get € 1.1 m for the house if stamp duty is gone, ceteris paribus* ?

Thus, it follows that stamp duty is holding prices down, and is a tax on Mr A, who is the seller.

The same result ensues if you start in a scenario of no stamp duty followed by its imposition. Ms B will end up paying €1.1m for the house in the first, and Mr A will receive €1.1m. If tax is imposed at a rate of 10%, Ms B can still only pay €1.1m for the house, and Mr A is forced to give €100k to the tax-man.

With the above in mind, is it any surprise that the PDs, whose main political appeal is to property-owners, are keen on reducing stamp duty ?

*This is a tell-tale phrase, meaning "with everything else staying the same", which indicates to the cognoscenti that I have studied the subject.