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.