Limiting the Distortionary Impacts of Transaction Taxes: Scottish Stamp Duty After the Mirrlees Review

Research output: Working paperDiscussion paper

Abstract

We investigate the distortionary impacts of transaction taxes through a case study of the Scottish property market. We make use of three sources of variation in transaction tax rates present in recent Scottish tax systems: price notches, time notches and a shift to a more progressive transaction tax regime. Our results indicate that both kinds of notches have a distortionary impact that is sub-optimal. The Scottish Government's recent reforms had a positive impact through removal of the price notches, but time notches re-emerged allowing other distortions to persist. Using variation in effective tax rates from a progressive reform of the transaction tax system, we also find that the permanent effect of increased tax rates is a reduction in transaction activity. Looking across the price distribution, our results indicate that the strongest permanent responses occur in price ranges where tax rates fell due to the reform. This suggests that if governments insist on keeping transaction tax regimes, progressive taxation might be a good way to limit their distortionary impact, whilst also encouraging transaction activity in the lower end of the market.
LanguageEnglish
Place of PublicationGlasgow
PublisherUniversity of Strathclyde
Pages1-29
Number of pages30
Volume18
Publication statusPublished - Oct 2018

Fingerprint

Tax
Tax rate
Government
Tax system
Progressive taxation
Price distribution
Effective tax rates
Property market

Keywords

  • transaction taxes
  • property markets
  • behavioural responses to taxation
  • notches in tax systems

Cite this

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title = "Limiting the Distortionary Impacts of Transaction Taxes: Scottish Stamp Duty After the Mirrlees Review",
abstract = "We investigate the distortionary impacts of transaction taxes through a case study of the Scottish property market. We make use of three sources of variation in transaction tax rates present in recent Scottish tax systems: price notches, time notches and a shift to a more progressive transaction tax regime. Our results indicate that both kinds of notches have a distortionary impact that is sub-optimal. The Scottish Government's recent reforms had a positive impact through removal of the price notches, but time notches re-emerged allowing other distortions to persist. Using variation in effective tax rates from a progressive reform of the transaction tax system, we also find that the permanent effect of increased tax rates is a reduction in transaction activity. Looking across the price distribution, our results indicate that the strongest permanent responses occur in price ranges where tax rates fell due to the reform. This suggests that if governments insist on keeping transaction tax regimes, progressive taxation might be a good way to limit their distortionary impact, whilst also encouraging transaction activity in the lower end of the market.",
keywords = "transaction taxes, property markets, behavioural responses to taxation, notches in tax systems",
author = "Daniel Borbely",
note = "Published as a paper within the Discussion Papers in Economics, No. 18-17 (2018). This paper forms part of a PhD program within the Department of Economics, fully-funded by the University of Strathclyde.",
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Limiting the Distortionary Impacts of Transaction Taxes : Scottish Stamp Duty After the Mirrlees Review. / Borbely, Daniel.

17. ed. Glasgow : University of Strathclyde, 2018. p. 1-29.

Research output: Working paperDiscussion paper

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AB - We investigate the distortionary impacts of transaction taxes through a case study of the Scottish property market. We make use of three sources of variation in transaction tax rates present in recent Scottish tax systems: price notches, time notches and a shift to a more progressive transaction tax regime. Our results indicate that both kinds of notches have a distortionary impact that is sub-optimal. The Scottish Government's recent reforms had a positive impact through removal of the price notches, but time notches re-emerged allowing other distortions to persist. Using variation in effective tax rates from a progressive reform of the transaction tax system, we also find that the permanent effect of increased tax rates is a reduction in transaction activity. Looking across the price distribution, our results indicate that the strongest permanent responses occur in price ranges where tax rates fell due to the reform. This suggests that if governments insist on keeping transaction tax regimes, progressive taxation might be a good way to limit their distortionary impact, whilst also encouraging transaction activity in the lower end of the market.

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