Claypool Tunnel
Creative Commons License photo credit: robsv

by Gavin R. Putland

A speech by Treasury Secretary Ken Henry on “The Future of State Revenue”, delivered on Mar.27, belatedly received some coverage in the Australian Financial Review on May 5.

At one point Dr Henry said:

Globalisation means that the things governments tax are becoming increasingly mobile. This has implications for tax system design.

But there are some inherently immobile tax bases, such as land. The importance of taxing these bases effectively is likely to increase in the future.

Returning to this theme later, he added:

I have noted that the taxation of immobile bases will become an increasingly important matter in the context of increasing globalisation. One of those bases is our non-renewable resources.

Referring to our non-renewable resources as a tax base is rather crude. While it is convenient to refer to the ‘taxation’ of resources, the royalties and other charges imposed by the Commonwealth and the States represent a return to Australians for assigning certain rights to appropriate — exploit, if you prefer — those resources. They represent a disposal price.

True. But why not apply the same logic to land? That is, why not consider “land tax” and “rates” on land values as a return to Australians for assigning certain rights to appropriate land?

Mineral royalties of so much per tonne, or so many percent of the price, or so many percent of the profit (or of the margin by which the profit exceeds some threshold rate of return), are equivalent to a partial assertion of public ownership of the minerals, indicating that ownership of the minerals has not been completely privatized. Indeed, mineral royalties imposed by the States must be classified that way. If they were instead classified as taxes, they would be excises, in which case they would be unconstitutional; under under s.90 of the Australian Constitution, only the Federal Parliament may impose “duties of customs and of excise”.

Similarly, annual public charges on land are equivalent to rent payable on that portion of the land value that has not been privatized. When such a charge is already in place, buyers of land are compensated for it because it is “capitalized” or “discounted” in the purchase price. In effect, the purchase price covers the privatized portion of the value, while the annual charge is the rent on the public portion. When the annual charge increases in consequence of the appreciation of the land, the owner does not lose, because the increase in the annual charge is only a fraction of the increase in the overall rental value — let alone the capitalized value.

Dr Henry’s review panel should be well aware that an annual charge on land is the rent on a retained portion of the land value. This was carefully explained to them in Prosper Australia’s submission (written by Dr Terry Dwyer) and the LVRG’s submission. The latter went so far as to suggest the complete abolition of “taxes” and the financing of governments through ownership of asset shares, which governments would effectively “purchase” by giving up their taxing rights.

As it happens, the Constitution does not prevent the States from imposing “taxes” on land, and therefore does not require them to acknowledge the fact that an annual charge on land amounts to the rent on a share of the land value. But it’s still a fact.