Tax incidence doesn’t work this way

The caveat is that it is highly likely that the market will adjust quickly to the new system and that sellers, far from footing the bill, will simply price it in — pushing up house prices.

Or rather, it does work this way. The price is the price, how it’s distributed between tax and seller’s receipts is a very secondary issue.

16 comments on “Tax incidence doesn’t work this way

  1. Isn’t it more the case that the buyer now has X% more to spend on the headline purchase price that they didn’t have before, as they’d earmarked it for the SD? Thus the price rise is demand led, prices bid up by buyers, not imposed by the seller? After all if the seller could just add an extra £5k (or whatever) onto the price and get the buyer to pay it, why hasn’t he done so already?

  2. And prices don’t work that way. In an uncontrolled market price is always and in every case decided by the buyer. For the very simple reason he’s the one’s got the money. He’s under no obligation to spend it.

  3. @Jim

    ‘After all if the seller could just add an extra £5k (or whatever) onto the price and get the buyer to pay it, why hasn’t he done so already?’

    Because before the buyer did not have the £5k spare because it had to go to stamp duty, now he has.

  4. So surely all that is going to happen is that sellers bring forward transactions and buyers delay transactions during the switchover between “who pays”.

    When it was a relatively small amount of tax it wasn’t too big an issue, but for houses in London and the South East spending £600,000 on a house requires a stamp duty payment of £20,000 – not chicken feed by any means.

    If that could be avoided by having a gap of say 1 month between sale of the old home and purchase of the new home (staying in a hotel or air b-n-b during the interim and with house contents in storage) then you could potentially save a good part of that tax.

    I doubt that few would actually be able to accomplish that, especially given that everybody (buyers and sellers) would be trying to avoid it at the same time, but as Tim always reminds us “Incentives Matter!”.

  5. @bloke in spain

    And the seller is the one with the asset, he is under no obligation to sell.

    The housing market is akin to an auction, the seller sets a reserve price and only sells at that or above.

  6. The housing market is akin to an auction, the seller sets a reserve price and only sells at that or above.

    In an ideal world of perfect (or even honest) information then perhaps, but the reality is that people tend to put the house on the market for as much as they think they’ll get (and a bit more) so that they can accept near offers and discount a price they were never going to get anyway.

    More than once I’ve told an estate agent, “My listing price is x” to have the response “You’re going to struggle to get that”. Every time I’ve made the listing price.

    For the most part estate agents are clueless idiots on the make.

  7. The problem with stamp duty, is that it is a tax on moving house. I don’t mind paying more tax than people who have less than me, but why less than people who move less than me?

  8. david is right, stamp is a stupid tax as it discourages people moving. that keeps people from taking better jobs, and discourages empty nesters from downszing

    this shift in payer is stupid for tax incidence reasons

    it is also stupid politically. this is a tax that should be scrapped. when the buyer is paying the tax scrapping would be seen as helping young people moving up. with the seller paying the tax scrapping is seen as helping greedy rich property owners. the popular understanding is wrong…because tax incidence is poorly understood. but a smart person would have kept the good guy optically paying to make it easier to scrap the tax later

  9. It’s a tax on property-as-investment. Other government stupidity has made bricks and mortar something people put their money in, so now government wants a slice.

  10. @isp001

    +1

    It will also discourage people, old downsisers especially, from selling – all they’ll think is “If I sell, I get a big tax bill”. Fewer properties for sale – higher prices

    It’s a stupid idea – buyers pay the tax on everything from penny chews to mega yachts.

    I Javid wants to help – put stamp duty back to how it was pre Blair&Brown: a flat 1%

  11. As I think a few (between them) have alluded. The seller has a value in mind that he wants to realise from the asset. The buyer has a certain amount of money to spend.
    Before: Seller gets what he sells it for, buyer deducts SDLT from what he has available. After: Seller adds SDLT to what he sells it for, buyer pays what he has available.
    Net result – no change. **Almost** the same amount of tax is paid, value of transactions go up by about the amount of the tax. Far from benefitting first time buyers, they will suffer as they will now be expected to pay more – unless some sort of tax relief is put in place to match the existing tax reliefs for FTBs.
    I say “Almost” the same amount of tax because the tax paid will go up for the same effective transaction price. Whatever the value of the tax would have been, it’s now added to the selling price and so the tax due will go up by the marginal tax rate on that part of the price !
    It could also become complicated as the seller will need to know the tax status of the buyer unless they also scrap the penalties imposed to punish us “rich b’stard landlords”* but which also punish quite a few other people.
    * If you call “a rich b’stard” someone who is still “between jobs”, doesn’t qualify for state benefits (due to value of the rental property the state expects him to sell in order to realise and spend it’s value), and who’s savings are dwindling while waiting for a start date on a not very well paid job !

  12. If you are “a rich b’stard”, why do you need the state benefits? If you’ve done what a lot seem to, gone into BTL on the back of borrowing from the banking system, you’re a pain in the ass. Why banks lend to you beats me. Except of course they make money doing so. But where does the risk go? On the face of it you’re a lousy investment. All one class of borrower who, if they have trouble meeting servicing the debt, will be doing so for the same reason. Income from the asset not covering the interest payments. So you’ll all be trying to liquidate your asset at the same time. We’ve been there before on this. Ultimately the taxpayer bails out the ‘too big to fail’ banks.
    This is what equity should be for. Then the risk lands on the investor, where it belongs.

  13. When I moved home the price I could afford to pay was determined by the price I could get by selling, after factoring in all the costs of moving and with a reserve for renovation of the new home. Move the tax from buyer to seller and down-sizing becomes more expensive, up-sizing perhaps a little less taxable. So overall maybe the government gets a little more tax by taking it at the top of the ladder. But as others have already noted overall prices will adjust to the maximum that any buyer is prepared to pay. So long as buying a home is seen as a one way bet people will continue to buy the biggest house they can possibly afford.

  14. Buyer of a bottle of gin pays the duty versus seller of the bottle of gin paying the duty – when I say ‘pay’, we’re just referring to the one sending the electrons to the government.
    Makes no difference to the price if the collection rate is the same. Easier to collect from the seller.
    It’s amusing to see people on Chris Snowdon’s web-site who think if we increase gin taxes, the cost paid by the consumer won’t increase.

  15. Dear Mr Worstall

    Something similar can be seen at auction rooms where a buyer’s premium is charged.

    On items with a definite price such as current gold sovereigns, the hammer price is the market price of the sovereign less the buyer’s premium. The seller quite clearly pays the whole of the buyer’s premium.

    DP

  16. @bloke in spain August 17, 2019 at 11:21 pm

    You’re forgetting Osborn’s retrospective change withdrawing tax relief on some property rental expenses (loan interest) which means many landlords now making a non tax-deductible loss.

    imo Benefits when out of work, old, disabled etc should be paid regardless of assets – worked, paid the Tax&NI. Punishing savers whilst paying profligate is wrong.

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