Site Value Should Rule on Setting Rates
Letter to the Editor – The Post (W.A)
Re your report, ” ‘Wrong’ rates ping home builder” (POST 15/8). Gill Vivian is absolutely right when she says she is being penalised for helping to improve her suburb, and that the system is wrong.
The alternative is however much simpler and more obvious than Cottesloe mayor Morgan seems to suggest.
Instead of basing the rate on the gross rental value, it should be based on the unimproved value of the land or “site value”, which is only determined by the location of the property.
While the value of improvements are created by the land owner, site values are created by the community and depend on closeness to schools, government services, economic and social activity and so on.
Taxing improvements naturally causes a decrease in improvements and an increase in house rents.
Site value taxation, however, is the only tax that has no negative effect on the economy because the supply in land is fixed; this has been acknowledged by all economists since Adam Smith.
On the contrary, site value taxation heavily encourages land owners to use land productively and discourages property speculation (which bring about housing booms and busts, one of the main causes of the global economic crisis).
Shifting rates from the gross rental value to the site value would therefore increase the supply and lower the prices of accommodation.
It would thus benefit people with the lowest incomes the most. Taxing land and natural resources in replacement of taxing useful economic activity should be a policy of higher governments too.
More information on this topic can be found on http://www.prosper.org.au.