Prosper Australia

photo credit: 10b travelling

Clear-eyed media commentary in the national interest is rare and sweet.

Alan Mitchell’s analysis of the Henry Tax Review in the Australian Financial Review -  A tax on all your economic rents  – is such a creature.

He opens with a broadside at entrenched interests pretending the changes will affect the economy:

“Imposing a tax on “economic rent” should not change the level of economic activity since, even after the tax, the rate of return to the owner will still be greater than the next best available investment.”

And goes on to endorse the Henry Review’s recommendation to end the owner-occupier exemption from Land Tax and embrace its economic efficiency.

For those who have not or cannot read the Henry Review, Mitchell’s analysis compares our rosy future with the tax-diminished present.

The benefits Henry offers in taxing land rather than jobs and business are simply enormous. The  Land Values Research Group  estimate these at around a trillion dollars a year.  That would nearly DOUBLE Australia’s GDP. 

Did I say DOUBLE our income?  I did.

So sign the petition!

The Henry Tax Review is the federal bureaucracy’s wish list.  Its aspirational targets are based on sound economic foundations and impeccable logic. We may expect its 138 key recommendations to be implemented over the coming decade – just as the Asprey (1975) and Ralph (1999) tax reviews were.

Implementation may have to meander through a few budgets and innumerable public crises, but do not doubt the will and capacity of the bureaucracy to see the recommendations put in place. 

Further to Mitchell’s public-interest line, some business newspapers unite their readership around the money dream and simply hold up a mirror to self-interest.  While this is comforting and reassuring to the advertising manager, it does nothing to advance our thinking.

There is currently a circulation battle between the New York Times and Rupert Murdoch’s Wall Street Journal that pivots on just this point.  The NYT prefers insight while the new WSJ editorial policy offers Republican Party slogans that appeal to avarice and self-interest.

We are indeed fortunate that our premier business newspaper falls clearly into the former group. Thanks, AFR.

And sign the petition!

photo credit: raminders

We follow the glitter of celebrities and our football teams and let others do the dull work of government. Our dreams are about homes, cars and holidays.

But sometimes an issue is so important it deserves our undivided attention, if only for a short while.

The big issue is tax – who pays and how – toward all the things government does.

The Henry Tax Review maps out the Treasury’s tax agenda.  And while politicans come and go, Treasury endures forever.

The Asprey report, comissioned by the Whitlam government, guided and inspired governments and their advisers for the following 25 years.  The last tax reform report was the Review of Business Taxation by John Ralph, released in 1999, which focussed on tax avoidance. All the main recommendations of both reviews were implemented and are now part of the tax system.

Henry’s 138 recommendations aren’t designed to make government rich – although vested interests will tell you so, as they wipe away crocodile tears at the injustices being forced upon them.

And the Review does not follow Jean Baptiste Colbert’s maxim, “The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.”

The Review, supported by a great body of economic thought, is a genuine attempt to tax us fairly, at low cost and without distorting behavior. 

The Land Tax recommendations are central to this ambition. Many don’t understand the implications of this proposal and recoil from the idea of a new tax.  They only see government plunging its hand in their pocket.

The Review says:

•  Land is an efficient tax base because it is immobile; unlike labour or capital, it cannot move to escape tax.
• Economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases.
• Stamp duties on conveyances are inconsistent with the needs of a modern tax system.
• Land tax needs to be reformed.
• Broadening the base of land tax would provide a reliable and stable source of revenue to State governments.
• Land tax rates should be based on the value of a given property, so that the tax does not discriminate between different owners or uses of land.

 The arguments for rebasing tax onto land can be found right across the Prosper Australia website.

 I commend the Henry Tax Review to you.

 And sign the petition!

photo credit: Troy McClure SF

Gavin R. Putland

Published in today’s Crikey

In contrast to the Henry report’s advice that payroll tax be eventually abolished (recommendations 55 and 57), the Rudd government has decided to increase its own payroll tax. No, really. Australia’s federally mandated, employer-funded 9% superannuation contribution is equivalent in every way to a federally funded 9% contribution, paid for by a 9% federal payroll tax.

By itself, a federally funded super contribution proportional to income would be pilloried as upper-class welfare. By itself, a payroll tax would be seen as just about the stupidest way to pay for something. Put the two together, and you have such a great vote-winner that the government, without any supporting recommendation in the Henry report, wants to ramp up the tax to 12%.

Even at 9% the tax is patently worse than the much-ridiculed state payroll taxes because it has a higher rate and no thresholds. But by implementing the superannuation guarantee as a compulsory “private” transfer, the government keeps it out of the federal Budget and thereby hides the magnitude of its intervention and the crass stupidity of the equivalent tax.

Meanwhile, the government studiously ignores Henry’s recommendations 51 to 54, which call for an all-in land tax with a threshold and progressive rates, levied on value per square metre rather than aggregate value. The per-unit-area basis avoids distortions related to aggregation and ensures that most agricultural land would be below the taxable threshold.

It strikes me that such a land tax would be particularly suitable for on-budget financing of the superannuation guarantee, for the following reasons:

(1) Taxes that are politically unacceptable when used for general revenue can become acceptable when hypothecated for popular causes.

(2) Few causes are more popular than the financing of retirement incomes, because everyone hopes to retire.

(3) The main political problem with an all-in land tax is that it offends retirees who are asset-rich but income-poor, and who have based their retirement plans on the absence of such a tax. But if the tax were earmarked for superannuation, then obviously those who have taken their super would be exempt, because including them in the net would lead to churning. Problem solved.

(4) The popularity of property investment shows that rising values of land are already widely seen as a means of financing retirement. Funding the superannuation guarantee out of land tax would merely make the system official and universal. Surely a funding mechanism that is a virtue when practised by some cannot be a vice when practised by all.

If the superannuation guarantee were on-budget, there would be no support for funding it out of a 9% or 12% federal payroll tax. But I cannot resist pointing out that such a tax, imposed at the federal level, would at least be constitutional. State payroll taxes are another matter.

Under s.90 of the Constitution, only the federal parliament can impose duties of excise. If, as held by the majority of the High Court in Ha v. NSW (1997), an excise is “an inland tax on a step in production, manufacture, sale or distribution of goods”, then payroll tax would seem to be an excise in so far as it applies to labour expended in “production, manufacture, sale or distribution of goods”. If, as held by the minority in the same case, “A state tax which fell selectively upon goods manufactured or produced in that state would be an excise duty”, then payroll tax would seem to fit that definition in so far as it falls on goods, especially as the same judges added that “Whether a tax which falls upon locally produced goods discriminates against those goods in favour of imported goods is a question of substance, not form”.

It might be argued that payroll tax does not specifically target goods as opposed to services. But neither does the GST, which is imposed at the federal rather than the state level because it is assumed to be an excise!

As I explain in an earlier article, payroll tax is not the only unexploded constitutional ordnance in the present tax system. Stamp duties on new vehicles (recommended for abolition by Henry) are also arguably duties of excise, while the collection mechanisms for GST and personal income tax would appear to violate s.82 of the Constitution, which says: “The costs, charges, and expenses incident to the collection, management, and receipt of the Consolidated Revenue Fund shall form the first charge thereon …”

All of these constitutional threats can be removed with little political difficulty, no loss of revenue, and huge savings in compliance costs. But the legislators, in my experience, don’t want to know. I am therefore inclined to think that the most promising venue for meaningful tax reform is the High Court.

Read more of Gavin’s excellent work at the Land Values Research Group

Ken Henry and his team’s hard work looks to have paid off. Initial readings show the undeniable truth that land based taxes are the most efficient taxes. Look at the attached graph (via KPMG, not Henry) showing that The Resource Rent Tax, Municipal Rates and Land Taxes are the three with the least marginal loss.

We do beg to differ with the KPMG economists who Swann has quoted in his press release today on the claim that the GST is equivalent to a Land Tax in terms of efficiency (look at 4th tax from the bottom of above graph). That is outrageous – a huge fail (unless economic theory has been secretly re-written in the last 24 hours)…

The GST is regressive. It is distortive. The deadweight costs from such a tax lead to a lower overall supply at a higher price. This can’t possibly be equivalent to a Land Tax, which is funded out of the community generated value that lifts our land prices on average by 6% per annum. A Land Tax just recycles the community’s combined efforts back to the government. It does not increase prices nor reduce supply – on the contrary it reduces most land prices by increasing supply (watch out land bankers).

Read Henry clarify this in excellent detail here. Great to see economic rent theory is alive and well.

However, it is a pity that Rudd has explicitly ruled out a Land Tax on the family home. Future GFC’s are banking on another land bubble to support CEO bonuses.

On negative gearing, Henry finds (p81, Part 2, Vol 1):

Current income tax arrangements for savings lead to significant arbitrage opportunities. The different treatment of capital gains as against other savings income and related expenses is an important driver of these opportunities. This creates significant distortions in how rental properties, in particular, are financed and for the rental property market.

There seems to be plenty of supportive material. More reading is required to see the detail. On tax effecting behaviour:

There is considerable evidence that tax differences have large effects on which assets a household’s savings are invested in. Based on an examination of the literature and OECD data, the OECD concluded that while low-income individuals respond to tax incentives with more saving, for high-income individuals in particular savings are diverted from taxable to tax-preferred savings (OECD 2007a). (p80, Vol1, Pt2)

A point of clarification is needed here though (Chapter C:C2):

Levying higher taxes on larger holdings discourages investment in land by institutional investors in rental housing.

Higher Land Taxes will push down the price of most land, making it more economical to invest in rental property. Such a tax switch would allow the removal of company, GST and payroll taxes – all enhancing investment in rental property. If institutional investors are looking for a genuine, yield-based return on their investment rather than a capital gains based return, they must look seriously at a Land based Tax system.

photo credit: Zach K

 
The Melbourne versus Sydney rivalry has been reignited – Melbourne’s population is growing faster and is projected to overtake Sydney by 2037, a new report predicts.

Going Nowhere, a report by BIS Shrapnel for a property developer lobby group, shows Melbourne building new homes at twice the rate of Sydney. 

Suddenly the ancient divide matters. The largest city becomes the country’s commercial centre, attracting head offices, high-level professionals and wealth. 

This is a prize Melbourne craves – to again be the ‘Marvellous Melbourne’ it was in the Victorian goldrush.

Melbourne is winning this race because Sydney has stumbled on land costs – too many families are locked out of the housing market and are making their nests elsewhere.

Who can blame them.  Couples buying in Sydney at the moment will sacrifice their lives to a mortgage.

The developers’ lobby Urban Taskforce blames state levies on residential subdivision for boosting the cost of land.

They would, wouldn’t they.

Urban Taskforce is playing the old, old game of cost shifting.

Developer levies are an attempt to meet the staggering cost of building schools, transport links and other services in new urban areas.

Levies are a second or third best option. They are capitalized into land prices and developers add an extra profit margin for having to pay them.

It doesn’t have to be like this.

Levies are a poor, distorting substitute for Land Tax.

Land tax is light where values are low, in the outer suburbs where service provision is overwhelmed by distance and rapid change.  Land tax is higher where the high quality government services provided in established residential areas boost land prices.

Land tax makes land cheaper.  It gives landowners a powerful incentive to put land to its best and highest use, increasing supply.  It removes brakes on the transfer of land like stamp duty.

Land tax would transform the lives of all those citizens locked out by high prices and denied independence, freedom and autonomy.

We see ourselves as a land-owning democracy. Land tax would make this truly so.

Sign the petition!

photo credit: midlander1231

For too long, the media eagerly reported the property spruikers’ claim ‘prices only go higher’.

This ‘truth’ turned homeowners into speculators and led a whole generation of first home buyers to commit to enormous mortgages they will only pay off after thirty years of unrelenting sacrifice.

This week the public story changed.  Abruptly, solemnly, journalists have picked up another thread and a new story to tell: Land prices are so high they are stifling economic activity.

And their sources are impeccable. 

The International Monetary Fund yesterday warned Australia’s housing bubble threatens our financial stability. 

Australia’s Housing Industry Association is wringing its hands over the fact that land prices are driving up house costs while material and labor costs are essentially flat.

COAG – the council of our state and federal governments is commissioning a review of factors curtailing the supply of new houses and artificially pushing up the demand for housing.

And as I noted below in It’s official: Australia’s house prices the highest in the world!, The Economist newspaper ranks Australian prices as globally the highest relative to rents.

Monitoring and preventing economic bubbles has become a major preoccupation of policymakers.  Exploding bubbles destroy lives and the consequences can linger for years.

As the Land Values Research Group demonstrated, most recessions are home-grown and centred on land speculation.

Australians are exquisitely exposed, as Jeremy Grantham explains:

“Bubbles are important for the country because there is nothing more dangerous and damaging to an economy than a great asset bubble that breaks. And this is something the Fed never seems to get. … We looked back as far as we could, [of the 34 bubbles we found over the years], 32 have moved all the way back down to the trend line that existed prior to the bubble forming. There were no exceptions. The two that are outstanding, the UK and Australian housing bubbles, form a unique and interesting subset caused by, I believe, floating rate mortgages. The mortgages came down so fast that they protected the bubble, and now we have to see what happens when interest rates rise. But if they do not, in both cases, go back to the old trend line multiple of family income, which is what should drive house prices, it will be the first time in history that such a bubble has not broken. This is not something that I would want to bet on if I was thinking of buying a house right now.”  – Jeremy Grantham, Interview with the Financial Times, 19 Apr 2010

This part of the economy is in screaming need of automatic stablizers. Such a mechanism exists in Land Tax. 

When prices are high, so is the tax, which slows activity. When prices are low, so is the tax, boosting activity.

The food we eat and the clothes on our backs are taxed yet land is somehow exempt.  How can this be fair?

Sign the petition!

photo credit:

Congratulations Citizens!

The Economist says your home is the most expensive among the advanced countries we generally compare ourselves with.

Before you puff out your chest in pride, consider what this means.

Mortgage repayments are the heaviest in the world, leaving the least disposable income for food, clothing and transport.

This is a very serous problem.  Someone buying a home at nine times their earnings with a 20 per cent deposit faces principal repayments (not interest, that is extra) of 24 per cent of gross pre-tax income for thirty years. Ouch.

While no one can exactly predict the timing, the risk of price falls are the greatest in Australia and likely largest in size when we run out of ‘greater fools’ to play musical chairs with and sell to.

With the Reserve Bank stepping up interest rates in measured and determined steps, this can only be a matter of time.

The Economist index compares house prices to rents, or if you like, to their earning potential. By this measure, Aussie houses are 56.1 per cent overvalued.

Were prices to correct to long term averages, median Melbourne house prices would slump from $524,500 to around $330,000.

According to the HIA, recent house price rises are solely due to the rising price of land, up 14 per cent, while materials rose only 1% and labor fell slightly.

The HIA are no heroes.  Behind the scenes, they are delighted their constituency – the land-banking developers - are peeling thousands off naive first home buyers by limiting land supply.

Our failure to impose a Land Tax – an automatic stabilizer – to slow price rises makes Australia acutely susceptible to land bubbles, despite us having more land than everybody except the Antarcticans.

We need to stiffen the backbone of our parliamentarians and bureaucrats, to make the necessary changes.

Sign the petition!

Part 3 to Phil Anderson’s Asset Bubbles Forever talk – what is the future for this commodity bubble?

Part 2 in Phil Anderson’s Asset Bubbles Forever presentation. Phil talks about WD Gann, 18 year cycles and interprets the 1929 Depression. Cycles are essential understandings and here Phil builds the framework. Check Economic Indicator Services for more from Phil.

Is The Age suffering from split personality disorder?

On page 8 of The Sunday Age (18.4.10) we read that house shopping is a “nightmare”, the market is “out of control” and that we are heading toward being a rental society where only the rich can afford to own a house.

As Maris Beck points out on the same page “In 1955, $7,000 bought a house. Now, it’s not even a deposit on a dream“.

Yet in the real estate section of the same issue we read of the “good year ahead”, the booming market and how “impressive” the price increases are.

Personally, I agree with page 8 and wish the spruikers of this “boom” would get lost. Any trend that pushes houses beyond the means of average people is a huge step backwards.

The only groups who profit mightily from high housing prices are banks (who get to write bigger mortgages), real estate agents (who get bigger commissions) and land speculators.

It’s time to re-regulate the banking industry and alter the taxation system to bring house prices comfortably back within our means.