To win the election, the new Victorian Premier Ted Baillieu pledged to phase in reductions in Stamp Duty by fifty per cent on real estate transactions under $600,000 for first home buyers.
This is a very modest proposal. Mr Baillieu’s incoming government has a blank page on which to write. We urge him to write big!
Be bold, Mr Baillieu. Don’t just reduce Stamp Duty on starter homes, abolish it completely.
Stamp Duty is a stupid tax. It stops people moving house for a better job. So we fall short again and again on best matching skills and jobs. Our productivity suffers.
It reduces the velocity of real estate sales, forcing homeowners to stay put no matter what. Stamp Duty falls most heavily on those forced to sell – like those whose family has outgrown a property, the financially over-committed who simply cannot afford what they have bought and, sadly, on household reorganisation from death and divorce.
However, simply removing this tax would just boost land prices higher and take away a major though inconsistent source of state revenue. Other measures are needed too.
The Coalition has also committed to reducing Payroll Tax.
Again, abolish it, Mr Baillieu. This is a vile impost that distorts and reduces both employment and wages. Even though it falls on large businesses and is invisible to workers, it remains part of every employer’s calculation: can I afford another worker?
The economic benefits of these moves would be staggering: our economy would boom. Victorian would become an absolute magnet for employment and investment, not just from interstate but internationally as well.
Labor and capital are highly mobile: they go where they are wanted. Removing taxes on these factors of production is the clearest signal any government can give that it is open for business.
And Mr Baillieu, we know you want Victoria to grow as fast and as far as possible. Here is the path to an economic Golden Age.
The revenue loss could be easily made up by adjusting Land Tax rates and removing the principal residence exemption. Our low land taxes and residential exemption have led to the hoarding of land and warped investment. This is the key reason for sky-rocketing land prices and the Great Australian Housing Bubble.
One could be forgiven for thinking Victorian Labor has handed the Coalition a poisoned chalice on housing. Melbourne house prices recently rose past space-constrained Sydney to become the most severely unaffordable housing market in Australia, and arguably in the world.
While real estate agents and home-owners remain in denial, serious international economic agencies like the IMF and the OECD have adding their voices to Prosper’s in pointing to the imminent bursting of Australia’s housing bubble.
If the Victorian government used Land Tax as the key source of government revenues, our land bubble would never have inflated as it did. Land Tax is a vital automatic stabilizer that rises with sale prices and recedes when they fall.
Government’s failure to adopt this central economic tool condemns us to a continual boom and bust cycle.
Stamp Duty and Payroll Tax are unjust levies and weak substitutes for Land Tax – the fairest, most dynamic and most honest revenue measure available to government.
Alongside the prosperity this change in the tax base would bring, there is another benefit available that is dear to your heart. It would give the citizens of Victoria their liberty, independence and freedom – just like John Stuart Mills wanted for us all. It would give every adult the chance to flourish and grow. Land would be put to its best and highest use without exception.
I’d like to see that!
Premier Baillieu has read the Henry Tax Review that recommends just this course. You should too.