Prosper Australia

photo credit: spike55151

Dr Terence Dwyer

 - B.A. (Hons) B.Ec. (Hons) (Syd.) M.A. Ph.D. (Harvard), Dip. Law (Syd.), FTIA, Visiting Fellow, Crawford School of Economics and Management, Australian National University.

Dr Dwyer’s Submission to the Henry Tax Review

Executive Summary

• The Treasury tax paper acknowledges the three factors of production but needs to follow through on the logic of its’ analysis.
• All taxes resolve themselves into taxes on the incomes of the three factors of production, land, labour and capital.
• All taxes are distorting, save a tax on economic rent. Taxes on capital and labour are both distorting – they suppress factor supplies to the economy.
• Land value taxation has long been endorsed by economists as a perfectly efficient tax. It also has long roots in Australian history.
• A basic argument for land value tax is that it is the one and only tax base that cannot flee in response to a tax. Capital and labour can emigrate – land cannot.
• Nor can a land value tax be shifted as an extra cost to business. Ultimately, a land value tax must be borne by the landholder at the time of introduction.
• Once a land value tax has been established, any purchaser of land discounts the price to allow for the tax and, in that sense, it is not a burden on anyone other than the owner at the time of introduction.
• Land value taxation is not distorting because it is capitalized – it cannot be avoided. A land value tax becomes a burden-less tax and has a zero marginal tax rate.

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photo credit: The Rocketeer

The State Government has come under more pressure from the property lobby in Government Criticised for not cutting Land Tax

“The Treasurer should have provided stamp duty and land tax relief as measures to stimulate demand for property investment. They could have done that by increasing existing thresholds or reducing rates.” said TressCox Lawyers partner Michael Westaway

Commercial agents have reported that land tax bills for some prominent city buildings have soared by as much as 100 per cent. These are passed on to commercial tenants on net leases, who are finding the increases bear no relation to the financial health of their business.

That is because land tax is based on valuations taken every two years, and the last valuation was in December 2007, at the height of the property boom.

It also reflects the removal of a cap previously limiting annual land tax increases to 50 per cent.

The government continues to walk into these policy traps. It makes moves like removing the 50% cap but yet doesn’t ensure property is valued annually. With regards to this week’s State Budget, we would have preferred:

• Stamp Duty abolished
• Payroll Tax abolished
• Higher and flatter Land Taxes
• A lower Land Tax threshold
• Yearly land valuations

Many of these issues were promoted in the 2001 Harvey Report into State taxation. Both John Brumby and John Lenders were key signatures to that report.

The real estate industry would approve of the impediment that stamp duty provides to property turnover.
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The tax unit for an asset-holding tax should be the asset!

Gavin Putland

Recommendation 10 of the Draft Report of the IPART Review of State Taxation suggests “changing the tax unit for land tax from joint ownership to the individual” as a means of reducing complexity caused by aggregation of site values.

That raises the question: As land tax is a tax on site values, wouldn’t it be simplest if the tax unit were the site? Our first submission to this Review proposed a mechanism which would indeed make the tax unit the site, without creating winners and losers in the transition to the new system. With a little elaboration, the transitional arrangement can account for the effects of aggregation before doing away with it.

Origin of the problem

Because the acquisition of major assets requires income in excess of necessary consumption, the distribution of major assets, including land, is more unequal than the distribution of income. And because land tax (in NSW and other Australian jurisdictions) exempts owner-occupied residential land, the ownership of taxable land is more concentrated than the ownership of land in general. For these reasons, land tax would be strongly progressive even if applied at a flat rate with no threshold. The purpose of a threshold is not so much to make the tax more progressive as to limit the number of taxpayers, especially among swinging voters. But a threshold, by itself, creates the opportunity for landowners to minimize tax by holding a large number of low-valued sites, this strategy being especially viable for urban speculators who “buy at the fringe and wait”. To close the loophole opened by the threshold, site values are aggregated before the threshold is applied.
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