In a number of markets with high house prices, governments have implemented various forms of stamp duty. Stamp duty is a tax on the transfer of assets, including residential property. Policy-makers claim that stamp duty increases are an instrument through which they intend to decrease property demand, and ultimately ease housing costs. However, empirical evidence suggests that such taxes are ineffective in achieving this objective.

We present evidence that the likely reason these taxes for this outcome is that the demand function of property buyers in these high house price markets are not elastic. The event study methodology is used to test the impact of stamp duty on the residential property price and transaction volume.

Following this, we develop a model to show that the real impact of residential property stamp duties is an increase in government revenue. Governments in high housing cost markets face an agency-like problem when determining taxation policy. Our paper aims to examine the impact on government revenue from stamp duty using data from Hong Kong.

Hong Kong presents a natural experiment in which to test our model. Often ranked as one of the world’s most expensive and unaffordable property markets, the Hong Kong government has introduced various stamp duties since 2010. While their stated aim is to stabilize housing prices and transactions, no prior studies have examined the effect of stamp duty on government revenue.

Our findings provide a timely contribution to the current discourse on housing affordability policies. While tax policy may not directly ease housing costs, through redistribution of wealth governments may still use tax policy to alleviate the affordability problem.