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OK, everyone, rotten tomatoes at the ready. I’m about to commit “Barbecue stopper” heresy, and I fully expect to be set up in the stocks in the town square.

You see, stamp duty isn’t the evil tax that many – but particularly politicians, real estate agents and home builders – think it is.

A cook’s tour

There was a time, before focus groups and 24-hour news cycles, when income tax wasn’t even a twinkle in a Treasurer’s eye. Back then – as early as the mid-late 1600s – governments raised revenue by charging a combination of property taxes, import duties and “stamp duties” on financial transactions. Before such a transaction could be valid, it needed to be literally stamped by a government body, which cost money.

Fast forward about 350 years, and most stamp duties have been abolished. Certainly, income taxes and consumption taxes (such as GST) have taken over as primary revenue raisers for governments to finance their spending.

But notably, stamp duty remains on most property sales, levied by state governments. It’s a significantly large amount, but particularly so during a good old-fashioned property boom! So state Treasurers are particularly fond of this version of revenue raising.

The tax to remove all taxes

It seems a long time ago, but it was only in 2000 that the then-Howard government introduced GST. The new tax was designed to give state governments a steadily increasing flow of revenue (the federal government promised that all of the revenue raised would be shared among the states) and allow the states to remove stamp duty as well as other so-called inefficient taxes, levies and duties.

These “inefficient” taxes, it was also claimed, were “frictional” in nature – they influenced the free flow of economic activity.

That was the plan, but you probably won’t be surprised to know that the state governments didn’t exactly deliver on their promises, and stamp duty remains, in various forms, across the country.

Now, I could spend another column (or two, or three or four…) talking about government promise-keeping and breaking, but the states’ recalcitrance might have worked in favour of home owners.

Careful what we wish for

To see why, let’s look at the US precursor to the Global Financial Crisis. Until 2008, Americans were enthralled by their ability to borrow money at low rates, buy a heap of houses, wait for prices to skyrocket, then sell for a tidy profit. Rinse and repeat.

Books, courses – even television programs – were devoted to this “can’t-lose” strategy called flipping. Americans bought, waited for prices to rise, then sold. It was like taking candy from a baby.

Now there are significant differences between the US and Australia. But one important element is those so-called “frictional” costs. In the US, they don’t exist – at least not in any material way. There was no reason not to roll the dice. In Australia, those costs make buying and selling a little harder.

If you’re going to sell your house and buy another, you have to pay stamp duty. Want to flip it? Then you’ll need another whack of stamp duty for the next place. And in the process, if house prices rise anyway, at least a decent (though still very small) chunk of the gains goes to government – acting as an “automatic stabiliser” for the economy and government spending.

Foolish takeaway

In short, stamp duty provides a reasonable source of government revenue and acts as a handbrake for speculation. It might be what economists call “inefficient”, but I’d call that a public service.

Let the tomato throwing begin!

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Posted by Scott Phillips – Money Manager (Fairfax) on 25th August, 2015