Stamp duty on shares raises billions of pounds, but after 200 years is it time to scrap it?
This year is the 200th anniversary of the introduction of stamp duty as we know it, although it has existed in other forms for much longer.
In order to transfer ownership of certain assets, such as property or shares, prescribed documents must be drawn up and stamped, and taxes or duties paid to HMRC. It's quite a money-spinner, expected to generate £13.5bn in revenue in this tax year.
These taxes are very visible to house-buyers, but much less visible is the stamp duty paid on the purchase of shares, which generates about two-thirds as much revenue as stamp duty on the purchase of residential property. Depending on the level of activity in these markets, that proportion could change considerably.
The reason that this revenue is less visible, is that much of it is paid on our behalf by pension funds and other investment vehicles, so we don't really notice the drag on our finances. And even when we do pay it ourselves directly, when we buy shares, it is only 0.5% so we don't really feel much pain.
But we trade shares, directly or indirectly, far more often than we buy a house, so the duty we pay on shares is of a similar magnitude to the duty we pay on houses.
Last year a group of City institutions, including the London Stock Exchange, commissioned a study to examine the implications of stamp duty on shares for individuals, businesses, and the economy. Consider the following:
- Stamp duty reduces the average pension fund at retirement by £6,441, increasing to £11,538 for equity-based portfolios (in 2006 pounds);
- Abolishing stamp duty on shares would result in a one-off increase of 7.2% in the value of shares. This is because the 0.5% drag on returns occurs every time a share is traded, in perpetuity -- eliminating that repeated frictional cost should increase the price we are willing to pay for shares;
- To put it another way, the cost of equity could fall by up to 0.8 percentage points, making it easier for businesses to raise funds;
- This would result in additional annual investment of £2.7bn to £6.4bn by FTSE 350 companies, and an increase in GDP of between 0.24% and 0.78%;
- The report also estimates that the change could be self-financing, with the loss of stamp duty being recouped by the other taxes generated from the increased level of economic activity. Their scenarios range from an annual loss to the exchequer of £1.7bn, to a gain of £1.1bn.
The problem, of course, is that abolishing stamp duty on shares would be a gamble; if these estimates are wrong, we'd have a bigger hole in the budget. And after all, tax has to come from somewhere.
One can also make similar arguments for the abolition of almost any tax, including stamp duty on houses -- if it were abolished, there'd be more money for people to spend in the economy, and less friction slowing things down. But that's not to dismiss the idea. The potential benefits of simplifying or eliminating a wide range of taxes are well worth considering, in my opinion, especially where they impede or distort the market.
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