Wednesday, March 28, 2007

Why stamp duty matters

What seems to have been missed by Cowen and other FF ministers who have chosen to defend the current stamp duty system is that those buying houses have to find the money to pay it from their deposit savings. The money to pay for the stamp duty comes out of your savings not the mortgage. So you if you're bidding on a house which many in the 2nd hand market the price can easily move from one threshold to another. Of course, the minister and the revenue know this which is why the bands from 190,000 to 382,000 move through 5 bands while the next doubling of value involves just one jump.

It might surprise the minister for finance but you're not getting squat in Dublin for under €317,500 these day. So first time buyer or not, if you've saved €32,000 as a deposit and then when you bid on a house and it goes over 317,500 you have to find another €9,525 cash in order to pay for the house. That is a lot of cash to come up with.

Of course the minister is strangely content to force young couples to move out to Meath, Kildare, Wicklow into new estates as it benefits the building industry. The fact that it means new schools have to be built and old ones in more central areas have to demolished is also good for builders.

These are the current bands.

€127,001 - €190,500Exempt3%

€190,501 - €254,000Exempt4%

€254,001 - €317,500Exempt5%

€317,501 - €381,0003%6%

€381,001 - €635,0006%7.5%

Over €635,0009%9%

1 comment:

Geoff said...

Why the stamp duty debacle matters.

On Monday 23rd April our illustrious Minister for Finance angrily asserted on TV that “bringing stability to the market” was the government’s priority and that as soon as he had figured out how to do this we will all be told. Unsurprisingly we were told that proposals from competing parties did not acknowledge the complexity of the problem and would not achieve his objective. He never acknowledged that the present FF stamp duty regime is itself fundamentally faulty. But consider…

There will always be more “pre-owned” property available to buy in Ireland than the shoe box constructors can offer at any time. Charging an iniquitous tax as soon as the selling price exceeds €317,500 (what does this buy close to your place of work?) while letting those buying new property go scot free is already blatant interference in the ubiquitous free market. The government is already seriously distorting the market.

My unsophisticated mind cannot resist the notion that the divulged donations of the developers to FF might have something to their favourable treatment? Are new properties not already commanding a premium price because of their exemption from stamp duty? Who wins / loses from this cosy arrangement – (hint developers / taxpayers).

Lifting the tax free threshold on “old” property to say €450,000 or more would certainly entice more buying activity and prices might soon rise by the erstwhile tax levy. Minister Cowen publicly cries crocodile tears at the prospect of all those already endowed speculators making further undeserved gains.

If he genuinely believes the speculators have done too well, he has very many powerful remedial instruments at his disposal e.g. increase capital gains tax or introduce a property ownership tax only for those who have more than one. The snag is that this would disturb the received wisdom of looking after the rich so that they can look after the party.

What people too easily forget is that the pitiable first time buyers would far prefer a higher property price on which to raise a mortgage than a price lower by say €20,000 but with an equivalent up front levy to the government that locks many of them out of the ownership club for ever.

As always the most sensible future proof solutions are the simplest – banish land rezoning gains, obviating a legacy of more bribery tribunals for our children. Abandon stamp duty altogether or at worst charge a flat rate of say 2% on all sales with no concession on new / old or first / subsequent purchases. The economy gains if everyone is free to trade up / down without punitive obstacles to mobility of the whole population. But Minister Cowen has become powerfully addicted to his X billion honey pot and reality hurts.

If we must have price bands with increasing tax rates for each band then the taxes should be levied incrementally on each band instead of the prevailing iniquity of charging the top rate on the whole price. You hardly need Junior Cert Maths to see that the current formula guarantees further market discontinuities.

I am not a PD apologist but we must ultimately thank Minister McDowell for a brief moment of clarity last year when he told us that abolishing the tax would make a lot of sense. Enda and Pat have sensibly taken a cue from this and are attacking the government where they are demonstrably vulnerable and culpable. The buyers and sellers are now sensibly deferring their dealings until the whole mess is sorted out, pre or post election. The reduced activity must already be adversely affecting the public coffers.

The most comical character in the present stalemate is the immovable “I am not budging” Minister Cowen.
By continuing to promulgate his hostility to sensible reform (he must have his reasons – see above), his angry posturing is exactly what is needed to deepen the crisis.

Should we now feel sorry for poor, peacemaking, please everyone Bertie? First McDowell exacts a public statement from Bertie saying their views on stamp duty are in harmony, then Cowen proclaims that he also has the support of the boss. Who should we believe?

What an irony it would be if FF were to now lose the election because Minister Cowen keeps digging himself into a bigger chasm. Imagine the headlines – Finance Minister’s claimed fiscal rectitude eclipsed by Fine Gael’s vote winning pragmatism.

The new fiery Enda lost no time challenging FF to reform stamp duty while they are still in power if they now genuinely understand the need. The only courageous, credible option for the man from Offaly is now to take the advice.

Geoff Burne