Sunday, April 22, 2007By Vincent Browne
For some years now, a tax strategy group has been meeting in preparation for the following year’s budget.
This group is chaired by an official from the Department of Finance, and includes representatives from the Departments of the Taoiseach, Enterprise, Trade and Employment and Social, Community and Family Affairs and the Revenue Commissioners.
They write up papers on various options, consider proposals from departments and generally give advice to the government on issues on the budget. Until a few years ago, the Department of Finance used to refuse to divulge the papers of this group under the Freedom of Information Act, but that decision was overturned on appeal, and it is now possible to look at what the officials have been proposing and see their views on various options. The documents are now published on the department’s website.
In preparation for the budget of 2000, the tax strategy group received proposals from the Department of the Environment and Local Government for a reduction in the rates of stamp duty. In considering these proposals, the tax strategy group noted that, in the budget of 1998, there had been significant reductions in stamp duty rates.
Despite that, however, a study found that ‘‘the measures have not increased liquidity in the second-hand housing market. Any further reductions (in stamp duty rates) may not alleviate the main problem in the housing sector - that of supply (and therefore the price of houses).
‘‘There would appear to be no compelling argument for a rebalancing of the thresholds at present,” said the study.
‘‘There is no indication that any further reductions would benefit house purchasers. Given the strong demand in the existing market, sellers of secondhand housing may increase prices to correspond with any reduction in stamp duty and absorb any tax benefit.”
So what is it about stamp duty? How is it assumed that a reduction in, or abolition of, stamp duty will lower the prices of houses? Aren’t the prices of houses - as with the price of everything else - determined by the laws of supply and demand? If the laws of supply and demand haven’t been suspended, doesn’t it mean that, if the state forgoes the revenue from stamp duty, the revenue forsaken will instead go into the coffers of the house vendors, whether developers or the owners of existing houses? That would be of no benefit to house-buyers.
So what is it with the parties and stamp duty? Why are they so keen on diverting revenue from the state to the coffers of developers or the owners of existing homes, who are often fairly wealthy people? Isn’t the point of the exercise to reduce the price of houses for first-time buyers? How can that be done by reducing or abolishing stamp duty? Stamp duty is not a bad idea. First, unlike Vat, the tax that now yields most revenue for the state, it is progressive, and affects rich people more than poor people. Second, it diverts to the state revenue from already over-endowed sellers. It makes no difference to the price of houses, except perhaps at the margins.
So what are the parties on about? Why has stamp duty become such a major issue in the election campaign? The Bacon reports of some years ago made several sensible proposals which, if implemented, could have resulted in a reduction in house prices. Peter Bacon noted that housing densities were low in Ireland.
‘‘A typical starter home tends to be a three-bedroomed semi-detached house with a small front and back garden,” he said, proposing higher density developments with different designs of houses. This would have led to lower construction costs, because of smaller houses, savings in infrastructural costs (sewerage and water), and savings in the cost of the sites.
Bacon made lots of other proposals, including shared ownership schemes to help in the financing of houses, simplification of planning procedures and the rezoning of sufficient land to ensure a rapid increase in the supply of houses, which, in itself, would reduce the price of houses.
But instead, all we have in this election campaign so far is guff about stamp duty. Bizarre. In his most recent remarks on stamp duty (last Friday), Tanaiste Michael McDowell said: ‘‘Large stamp duty bills are impacting upon workers who need the freedom to move between regions, as well as [on] older people who want to move to smaller second-hand homes when their children leave the family home.”
But the tax strategy group found that the previous reductions in stamp duty did not improve ‘‘liquidity’’ in the secondhand home market, which means it did not result, for example, in more older people selling their homes.
Anyway, how could mobile workers benefit from a reduction in stamp duty? The laws of supply and demand will dictate the price at which they sell their house and the price for which they buy their new house. Stamp duty is irrelevant.
If I may illustrate my point: assume there is a demand for 10,000 houses at €400,000 plus 7 per cent stamp duty, which means a total of €428,000 per house. If stamp duty is removed, it doesn’t mean those houses will be sold for €400,000; they will be sold for €428,000.
