Less is more?


There is an interesting tension in the concept of tax.  At a basic level the purpose of tax is to raise revenue for the Government so in theory a higher tax rate should raise more money.

If only it were that simple, but there are two reasons why it isn't.

As tax rates increase the incentive to seek tax reduction kicks in.  Taxpayers will pay 98p on advice to save £1 in tax because they are making money and anyway isn't that what tax is all about?  Isn't it just a game between the population and the Government to see who wins?

Well, maybe.

More directly, when tax rates get too high they stultify economic activity.  Consumers vote with their money and transactions fall.

That may in fact be the desired aim. Tax can be used as an economic rectifier, nudging the market (or on occasion bludgeoning it) into a different direction or squeezing a particular sector to affect its behaviour.  To that extent it can be a more focussed process than, say, interest rates which are the ultimate in blunt instruments.  The economic effect can be used to bring about a social purpose, putting downward pressure on house prices for example.

But this report goes on to say that the changes in stamp duty have led indirectly to the loss of 14,000 jobs and cost the economy nearly £1bn in lost demand for removals, renovations and related services.

Economic analysis is fraught with vested interests and political perspectives but if it genuinely is the case that a tax change results in the double whammy of lower receipts AND fewer jobs then we should only retain it if there are some other very persuasive arguments in its favour.

Over to you Chancellor.

Quote mark icon

Stamp duty reforms have slowed the housing market and raised half as much money as the Treasury predicted, it has emerged, amid calls for Philip Hammond to review the tax.
featured image