Land & Buildings Transaction Tax (LBTT) is a replacement for stamp duty – the tax you pay when you buy your home. LBTT is a ‘good’ tax for a governments as its easy and cheap to administer and collect.
The Scottish Government have had responsibility for setting the levels of LBTT since 2015.
LBTT brings in significant revenue for the Scottish exchequer but has not achieved the level of return the government expected. It is estimated that the current tax take on LBTT will be down £800M in the lifetime of the current parliament. This shortfall is because LBTT rates are set too high.
Unfortunately, the current minister responsible for setting these tax rates does not appear to appreciate that if you set tax rates too high then your total tax revenue may not increase. This is because of an economic phenomenon called the Laffer Curve.
The Laffer Curve provides that as you increase taxes there comes a point where your total tax take will start to decrease. The housing market provides a ready example of the effect the Laffer Curve can have on a market.
If you increase the tax on moving home beyond a certain level people will stop or delay moving. This is because they find it too expensive to do so and may resent paying high level of taxes.
If you get the Laffer Curve wrong it kills the Goose that lays the golden egg.
The minister has now indicated that he is considering changing LBTT rates. This will be the second time they have been changed since 2015 as the Scottish Government gets to grips with simple economic theory.