The Laffer curve
I love analogies and business models that can be applied to real world scenarios. My previous favourite was the Dunning Kruger model, now I think that the Laffer Curve has taken top spot.
The reason this model grabbed my attention was an article about how revenue generated by buy to let stamp duties has fallen since the rate of stamp duty (SDLT) was increased. Add into that a further rise in SDLT forecast in the Autumn budget.
SDLT on second properties was raised in April 2016, since then the revenue generated by SDLT has fallen, not risen. This graph from the Government’s own publication shows what has happened;
Bear in mind that the increases in SDLT were bought in during the April 2016 budget but came into force in 2017, receipts from SDLT have fallen from over £500m since.
The Laffer Curve
Named after Arthur Laffer, the Laffer curve states that there is a level of taxation at which receipts from taxation falls.
It looks like this;
The chart shows how a nil level of taxation results is zero tax revenues. Increasing tax rates increases tax receipts. As a government continues to raise taxes the benefit becomes less, the level of tax receipts falls.
At some level of taxation, higher taxes place a heavier burden on the economy. Economic growth or activity within that sector lessens causing a decline in tax receipts. At some point the higher level of taxation either discourages work or closes down business areas.
With buy to let, there is a level of tax that discourages landlords, meaning that activity falls and tax receipts follow. This is, perhaps, where we are now.
In the modern world, there is not just the fall in tax income but also the risk that those generating tax receipts move into other countries, domiciles or more favourable tax regimes. To this end, it is then much harder to reverse the trend.
The real world Laffer curve
The statistics with buy to let suggest the level of SDLT is such that we may be on the cusp of the curve, which makes increasing rates at the next budget a huge risk. I appreciate that the housing market needs to be controlled but there appears to be a lack of acceptance that investors buy properties from homeowners, this fuels the owner-occupier market, it also enables borrowers under pressure to exit with lenders intervening.
If the investor option is taxed out of the market we risk a stagnant owner-occupier sector and lenders with a higher risk of default. Oh, and base rates have just gone up.
Time for some forward thinking Mr Hammond.
By Dave Farmer
Thank you Lime for your timely reminder of the massive £500M cost of this mistake, and perhaps more tax losses to come. Think how many extra schools and hospitals we could have with this money.
Isn’t it strange Clive, I mention tax and the level of comment goes through the roof! Agree, there is a lot of good that could be done with £0.5bn!