Henry Review Excellence

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 to prices. 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). Nor does it take much paperwork.

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.

3 Comments

  1. Mattz26-06-2010

    “Higher Land Taxes will push down the price of most land, making it more economical to invest in rental property.”

    How can you be serious about the above statement. What you propose is tax on the rental value of a property. If you are talking about a 10% tax on the land value of a rental property of lets say $500,000 in value that is $50,000 in tax. How on earth can you say it would be more economical to invest in rental property. ?????????

  2. Karl Fitzgerald26-06-2010

    Hi Matt,

    good to hear from you again! Here in Australia we hear there is a 1% vacancy, but yet we find it closer to 7%.

    Many of these vacancies are inspired by the pursuit of capital gains rather than rental income. For eg, if you rented out your property here over the last year you would have earned $17,280. If you held it empty and sold it after 12 months you would have earned $120,500.

    A Land Tax will force these speculative vacancies onto the market – there is over 1 year’s supply of auctionable properties held off the market in Melbourne.

    It will become uneconomic to hold these properties empty. All this added supply will push down the price of both rental and owner occupied properties.

    With that, existing rental tenants will see that there are a number of cheaper rental options available. Some may move. Some will think about it. If landlords try to pass on the added cost of land tax, tenants will move to cheaper locations.

    Therefore Land Tax cant be passed on and is undoubtedly the most efficient of all taxes. Why? Because it doesn’t add to prices, in effect it taxes away the capital gains, giving us a mechanism to lower income and corporate taxes. Read the Henry Review to see how.

    Why should entrepreneurs, the lifeblood of capitalism, be taxed higher than those who buy and sell an asset?

    Such is the speculative capitalism we live within.

    Re your final question – If you want to invest in rental property, it will be cheaper in terms of auction prices and mortgage costs. With the lower land prices, the yield will be better. If you are investing for capital gains, it will be uneconomic.

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