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… Madam Speaker, if the Government is to balance the Budget in these difficult times, it cannot afford to indulge in forms of taxation that shrink the economy from which all public revenue is drawn.
In some allegedly “conservative” circles, it has been argued — apparently with a straight face — that the tax system should not be too efficient, lest governments be able to raise too much revenue too easily. In other words, it is argued that governments should prefer taxes that damage the economy, to bolster the case for lower taxation.
The argument is obviously circular. If we oppose high taxes, as this Government does, we should do so because taxation is intrinsically evil, not because the choice of tax instruments has been deliberately rigged in order to make it evil.
If we wilfully ignore the circularity of the argument, we come up against a more practical problem: You can’t be a little bit pregnant. If a small government raises a small amount of revenue by inefficient taxes, it will cause a small amount of unemployment, underemployment and precarious employment, hence a small amount of poverty and its attendant problems, which the government will be called upon to solve or alleviate, for which purpose the government will need to squeeze more revenue from those inefficient taxes, causing more of the same problems — and so on. So the circular argument puts us on a circular road to serfdom: if a government that wants to be small tries to support itself by inefficient taxes, it will grow bigger and bigger in a futile attempt to solve the problems caused by its own parasitic existence.
To break the cycle, we need to throw out most of the old taxes and replace them with a new system that doesn’t damage the economy on which it depends, in order to reduce the political demand for palliative public expenditure. This Government — not in spite of its conservatism, but because of it — is now rising to the challenge.
From 1 January 2013, payroll tax will be abolished.1 From the same date, all existing State property taxes will be abolished. These include conveyancing stamp duty, emergency service levies, infrastructure levies on developers, insurance taxes (which in practice are largely paid by property owners), and the existing land tax (not to be confused with local rates). Land tax is being abolished, not because it is inefficient, but because the revenue measures that I am about to announce will make it redundant.
Madam Speaker, under Australia’s constitutional arrangements, State governments have the primary responsibility for public investment in infrastructure. The benefit of a public infrastructure project is manifested in higher property values in locations served by the project. More precisely, it is manifested as uplifts in site values (which are also loosely called land values or unimproved values). So, if the tax system captures a sufficient percentage of each uplift, the project will pay for itself by expanding the revenue base, without increasing tax rates, and without burdening taxpayers who don’t share in the benefit. It is not necessary to increase taxes in order to improve infrastructure. Rather, it is necessary to change the tax base so that future investment in infrastructure pays for itself. The initial change can be revenue-neutral.
So, the abolished taxes will be replaced by a property vendor duty on capital gains realized after 1 January 2013. The duty will apply to the capital gain net of inflation and capital expenditure, at a rate of 40 percent.2 The other 60 percent will be a net gain for the property owners. In time, most of it will be a gain that they would not otherwise get, due to infrastructure projects that would not otherwise proceed. Expectations of new infrastructure will revive the property market. Property owners will be better off in the further sense that the new vendor duty, unlike the old stamp duty, will be guaranteed not to turn a capital gain into a capital loss or to magnify a loss. Owners who have paid the old stamp duty more recently will be automatically compensated, because their capital gains will be smaller.
Under the new vendor duty, home owners who move more frequently will not pay proportionally higher amounts of duty over their lifetimes, but will pay their duty in a larger number of smaller steps. Under the new duty, a property sale will not create a tax liability, but will merely realize an existing liability. For these reasons the new duty will have less tendency to lock home owners into their current addresses than the old stamp duty.3
The Government will not take any action to prevent property owners from selling before 1 January in an effort to “beat the vendor duty”. If there is a rush of sales under the old tax system, the Government will simply accept the associated rush of stamp-duty receipts. However, the Government believes that any rush would be ill-advised because the taxes that are due for abolition reduce sale prices of property by reducing people’s spending power. While the old taxes don’t explicitly take a slice of the capital gain, they give the vendor a smaller capital gain in the first place — which they will no longer do after 1 January.
The vendor duty, unlike the taxes that it will replace, will not penalize construction and development, because buildings and other capital works (as distinct from the land on which they stand) do not appreciate in value, except by way of capital expenditure which is deductible against capital gains. Thus the vendor duty will capture uplifts in site values only. In this context the term “capital gain” is therefore a gross misnomer; what gains in value is not capital, but land.
While capital gains tax is vilified as a tax on investment, it is in fact the exact opposite: it’s a tax on divestment, with a deduction for investment. The initial investment is not added to the tax base, but subtracted from it. When the investment is in real estate, the tax base is the uplift in the site value. Usually this uplift has nothing to do with any activity of the site owner, but is caused by the activities of the surrounding community — including, without limitation, public provision of infrastructure.
Thus the vendor duty, although collected by means of the taxation power, is not tax in substance. The intrinsic evil of taxation consists in the public expropriation of a privately created value — not the public retention of a community-created value, let alone the public retention of 40 percent of a community-created value.
The precedent set by the New South Wales vendor stamp duty in 2004-5 indicates that the new duty will be deductible against capital gains for the purposes of Federal income tax. In the longer term, in view of the States’ responsibility for infrastructure, the Government believes that it would be appropriate for the Commonwealth to stop taxing capital gains on real property, in order to vacate the field for the States.
Madam Speaker, some of the State’s responsibility for public infrastructure is delegated to local governments, which should likewise finance their projects out of the ensuing uplifts in site values. Accordingly, from 1 July 2013, local councils will be required to raise at least 80% of their own-source revenue from general rates on site values, and the rest from service charges. The iniquitous “minimum general rates”, which force home owners in low-valued, poorly-serviced locations to shoulder more of the rates burden, so that those in more up-market locations can pay less, will be outlawed. To ease the transition, year-on-year increases in general rates bills, including any increases that coincide with the change in the rating system, will be capped to a certain percentage in real terms. But that percentage will be decided by each local council in accordance with its electoral mandate — not imposed from above. In addition, the Government will ensure that in the case of a ratepayer who is asset-rich but income-poor, the council can defer any part of the rates bill, or of any increase in the rates bill, until the property is sold in the normal course of events. The Government believes that councils already have this power; but we will make it explicit in order to avoid any legal doubt. No home owner should be forced to sell in order to pay rates.
To encourage local councils to deliver and maintain infrastructure, 25 percent of the revenue raised by the new vendor duty in each local government area will be granted to the responsible local government in lieu of the existing grant scheme.
The shared revenue from the vendor duty, together with site-value rates, will recover the cost of council-funded infrastructure over its service life, without imposing up-front costs on new housing lots…
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1 It would be particularly prudent to get rid of payroll tax at this time, lest any of the recently sacked public servants decide that they have nothing to lose by challenging the constitutionality of the tax, which obviously reduces their chances of finding alternative employment in the private sector.
2 Although the speech is fictitious, this figure is in the right ballbark.
3 Of course, it you’re a home owner, you don’t really have to pay stamp duty just because you move. By letting your old address to tenants and renting your new address, you can avoid a dutiable transaction — and negatively gear your old address into the bargain. If this obvious tax dodge were more popular, it would force the States to reform stamp duty along the lines proposed here, and force the Feds to take a more honest approach to negative gearing (e.g. allowing it for new homes only).
[The real Qld Budget speech will be delivered on September 11.]
