The Australian’s Adam Creighton has written a ripper post explaining why, in the wake of tax avoidance scandals (e.g. multinational and the Panama Papers), a broad-based land tax is needed more than ever, but will never see the light of day due to vested interests and weak politicians:
Windfall gains to private land owners stemming from developments outside their control are a far better object for taxation than income and consumption, which prop up vast avoidance industries…
Taxes on land are unique economically because they can’t be avoided and they don’t distort supply…
In fact, over time land tax (which should apply only to the unimproved part) could even reduce rents by encouraging development, including more apartments, on undeveloped land…
Land taxes may well be fairer, too. Just as the owners of land adjacent to new railway stations have done nothing to generate their windfall, land owners don’t lift a finger to generate increases in unimproved land values…
A comprehensive national, flat rate tax on unimproved land taxes was part of Labor’s platform from 1891 to 1905. The party should consider resurrecting this policy and using the proceeds entirely to slash personal income and/or company tax to unleash a productivity, investment and spending boom. This would help affordability; property prices would automatically fall…
A 1 per cent annual land tax without any exemptions could raise around $44bn based on the ABS’s estimates…
The economic ignorance and self-interest of land owners will, however, prevent any shift towards land tax, however beneficial it might be in the long run for almost everyone.
Vested interests would launch a hysterical defence of existing arrangements, wrongly claiming poor renters would be harmed.
Others would argue even stupid policies can’t be changed because some people have arranged their affairs around them.
Creighton has nailed it.
Land taxes are one of the most efficient sources of tax available, actually creating positive welfare gains to the domestic population of $0.10 for each dollar raised, since non-resident home owners are also taxed (see below Treasury chart).
Even just switching inefficient stamp duties (which cost the economy $0.70 per dollar raised) to a broad-based land tax would produce an estimated 1.5% increase in GDP, or $24 billion, without changing the amount of tax raised.
Unfortunately, while the arguments for shifting the tax base towards land taxes are impeccable, there are several key factors holding politicians back.
Consider the proposal to merely junk stamp duties in favour of a broad-based land tax levied on all land holders.
As shown by the RBA, only around 6% of the housing stock is transacted on average in a given year:
This means that in a given year, only a small minority of households pay stamp duty (albeit tens-of-thousands of dollars of dollars). And once they pay it, they automatically become a roadblock to reform (“why should I pay tax twice”, is the common retort).
While having such a small group of taxpayers supporting services for the whole community is ridiculous, rather than governments sharing the tax burden by levying each household a much smaller amount on a regular basis, it is far easier politically to tax a small group than everyone.
The other major roadblock with land taxes is that they would be levied on retirees that are asset (house) rich but cash poor. They would, therefore, squeal like stuffed pigs if they were required to pay tax.
The obvious solutions to these roadblocks are:
- To overcome concerns around “double taxation”, provide a credit to anyone that has purchased a home in the past 10 years, equal to the amount of stamp duty paid, and then subtract the hypothetical land tax that would have been paid since the home was purchased.
- Allow retirees to accumulate their land tax liability, with the bill payable upon death (via the estate) or once the house is eventually sold (whichever comes first), with interest charged on any outstandings.
However, even with such arrangements in place, politicians would still face the option of maintaining the status quo and taxing only a small number of people each year (easy) versus reforming and taxing almost everyone (hard).
Add in a fierce scare campaign from the property lobby – especially if land taxes were extended beyond just stamp duties to replace income taxes – and the likelihood of achieving meaningful reform is slim, especially with the current useless crop of politicians.
Interesting article by Robin Christie | 16 Jul 2015
Property levies could be the key to fixing state and territory budgets, and could raise as much as $7 billion a year, the Grattan Institute has claimed.
Grattan’s ‘Property Taxes’ report…..explores how imposing a broad-based property levy could help Australia’s state and territory governments to boost their deteriorating budgets.
According to the report, a levy of just two dollars for every $1,000 of unimproved land value would raise $7 billion a year.
…….While it accepts that property taxes can be unpopular because they are highly visible and hard to avoid, it states that they are also both efficient and fair. In addition, it argues that property taxes don’t change incentives to work, save and invest.
“Our proposal is manageable for property landowners, and protects low-income people,” said Daley. “Low-income retirees with high-value houses could defer paying the levy until their house is sold.”
According to the paper, other key arguments in favour of property taxes include:
Unlike capital, property is immobile – it cannot shift offshore to avoid taxes.
Over the last 25 years, taxes on property and property transactions have been the only significant growth taxes for states, with revenues keeping pace with the economy.
Shifting from stamp duty to a property levy would provide more stable revenues for states, and add up to $9 billion in annual GDP.
“Concerns about the risks of multinational tax avoidance, the increasing mobility of capital around the world, and the increasing value of residential property relative to incomes, should make property taxes a priority in any tax reform,” states the paper.
“Higher property taxes could also be used to fund the reduction and eventual abolition of state stamp duties on property. Stamp duties are among the most inefficient and inequitable taxes available to states, and their revenues are inherently volatile.”
Abolition of stamp duties would remove the temptation for State governments to restrict land release, driving up prices in order to increase stamp duty revenue. But high prices act as a deterrent for young families to purchase their own homes. Land taxes instead would create an incentive for states to release new land for development, widening property ownership and their tax base.
Read more at Could a new property tax save the economy?.
Great post from Unconventional Economist (reproduced with kind permission from Macrobusiness) gets to the heart of the current budget stoush.
Cross-posted from David Collyer at Prosper Australia
Sometimes, through the smoke and fireworks of the national debate a political commentator sees the path forward and points the way.
Today in the Australian Financial Review, Alan Mitchell takes a far-sighted approach to the crisis provoked by the Abbott government in its attempt to raise and broaden the GST.
The Liberal Party has long been host to the clearest thinkers on the federal system embedded in Australia’s Constitution. Malcolm Fraser tried to unravel the ‘Canberra taxes, States spend’ dilemma that divorces revenue raising from program responsibility.
Civic society demands taxes and spending be tightly linked for accountability and fair scrutiny. Transparency is an essential feature of good government.
The first Abbott/Hockey budget seeks to end $80 billion in federal transfers to the states for health and education. The game plan is to force the states to beg for a tax on food.
Mitchell has a better idea, based on the principle of subsidiarity. This directs that matters ought be handled by the smallest, lowest or least centralised competent authority. Central government should perform only those tasks which cannot be performed at a more immediate or local level. This includes taxation.
State governments have quality tax bases – they just choose to use bad taxes and blame distant mandarins in Canberra for their self-imposed weakness. Voters struggle to see which level of government is responsible for which stuff-up.
“In fact, they have all the efficient tax bases they need to raise a very large share of the spending now financed by grants from Canberra.
“They just prefer not to use them. They would rather rely on federal money and complain about “vertical fiscal imbalance.”
“Vertical imbalance is largely a myth perpetuated by state politicians who would rather avoid the responsibility for raising their own taxes.
Good can come from this Abbott/Hockey confected crisis. The Premiers are under no obligation to follow Canberra’s lead and destroy their narrow political capital by assuming responsibility for raising and broadening the regressive GST.
The states could instead take up the reforms urged on them by every genuinely independent tax review in living memory.
“Residential land tax also should be revived, and the most convenient way to do that probably is for state governments to gradually transfer more responsibilities to local government.
“Local government land rates based on unimproved property values are an efficient form of land tax, and while no one would enjoy paying higher rates, increased community control of schools, for example, might be quite popular. The availability of reverse mortgages also makes it more feasible for governments to rely more on the taxation of residential land.
State governments are sovereign. They do have choices. Rather than submit to a very bad deal from Canberra, they can reform themselves – and make Prime Minister Abbott responsible for the political costs of good public policy.