If taxes are killing a market, why not lift the taxes for all?

This sounds like a sensible enough proposal at first glance but then we find that it perhaps doesn’t go far enough. For we’ve an analysis that a transactions tax is killing market liquidity. This is something we would expect of course. So, therefore, lift that tax for some - but why not lift the tax for all?

Pensioners in large homes should be let off stamp duty fees to encourage them to move to smaller properties, a leading thinktank will recommend on Monday.

The study to be published by the Policy Exchange also suggests purpose built homes for “ageing baby boomers” would encourage more people to move and “free up more family homes for younger generations“.

That a transactions tax reduces liquidity is rather the purpose of them at times. That’s the point of the ludicrous financial transactions tax for example. Thus the idea that a transactions tax like stamp duty reduces liquidity in the housing market isn’t a tough one to follow. Reducing the tax in order to promote liquidity, that process of people buying and selling houses, seems logical enough. Reduce that slice spirited off into the bureaucracy from each sale and purchase and there will be more such sales and purchases, people will indeed be able to move to the “correct” size of dwelling for their life circumstances. Correct here meaning the outcome of their individual decisions unadulterated by that tax wedge.

However, there’s nothing in this at all which suggests that only pensioners should be so favoured. The tax wedge, if it reduces transactions in one part of the market, will similarly be doing to in other parts of the same market. So, we face the same problem. A reduction in market liquidity through over-taxation of transactions.

At which point the solution becomes obvious enough. We’ve a problem from over-taxation, the solution is to reduce that taxation. And to reduce it for all so as to free up that market from the tax-induced constipation.

Lower stamp duty won’t build more houses, but it will enable people to move to larger or smaller as desires indicate, meaning that it will increase the supply of housing.