South-Western College Publishing - Economics  
Why Is This 18th Century Relic Still Around?
Topic Government and the Economy
Key Words stamp duty, tax, stock purchases, tax revenue
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Reference ID: A151560897

News Story Britain has taxed property and stock shares for over two hundred years, and Parliament shows no signs of repealing it. A small tax, raising only about 0.8% of total government revenue, the stamp duty nevertheless has shown itself to be remarkably resilient over time

The property tax (also called a stamp duty) itself is assessed as only 0.5% of the market value of the trade, and is assessed only on domestic transactions. It's remarkably cheap to collect, costing only 3pence for every 100, compared to the corporate income tax that costs 1.42 for every 100 collected. At the same time, tax opponents claim that the tax is anti-competitive, since it is only assessed on domestic trades. If a foreign company were to buy a London firm, it would pay the tax once and never again, since the resulting firm would now be a foreign company. If a British firm were to buy a London company, it would pay the tax over and over again, for every transaction made, because the firm would remain a domestic company.

Other tax opponents argue that the tax reduces share price, and thus the incentive to engage in investment, which may require additional share purchases. What's more, it's not a tax on any sort of value-added, as other taxes would be; it's simply a tax on the transaction itself.

Perhaps this is why William Pitt the Younger in the late 18th century raised the value of the tax. Because he could.

Questions
Discussion Questions:
1. Why would this tax on stock share transactions lower the share price? Use a graph of supply/demand to illustrate your answer.
2. Suppose the British government decided to eliminate this stamp duty, and replace the lost revenues by raising proportionately the corporate income tax. Trace the possible outcomes of this action to determine its appropriateness.
3. Some have suggested that our tax systems should be scrapped in favor of one system that taxes all economic transactions the same, regardless of the particular transaction. What do you think would happen under such a system?
Multiple Choice/True False Questions:
1. How would you describe elasticity of demand for stock shares, based on this information?
  1. Perfectly inelastic
  2. Relatively inelastic
  3. Relatively elastic
  4. Perfectly elastic.
2. What happens to the consumer and producer surplus as a result of the imposition of this tax?
  1. Consumer and producer surplus both increase.
  2. Consumer surplus rises at the expense of producer surplus.
  3. Producer surplus rises at the expense of consumer surplus.
  4. Consumer and producer surplus both fall.
3. True/False. This tax increases investment in British firms.

Source "Licking the Stamp Duty." The Economist. 31 August 2006.
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