Ditch the saddlebags of deadweight losses – for the win
Yesterday, Cameron Kusher of CoreLogic RP Data called for the removal of conveyancing Stamp Duty and its replacement with a universal land tax. His comments come just ahead of the release of the federal government tax reform white paper.
He echoes Australia’s Future Tax System (The Henry Review) which called for:
- The abolition of stamp duties on all property transactions
- The levying of land tax on all land
- Levying land tax using an increased marginal rate schedule applied to unimproved capital values, with the lowest rate being zero and thresholds determined according to per m2 values in order to tax more valuable land at higher rates
- Levying land tax on a per land holding basis, not an entity’s total holding, to promote investment in land development.
Stamp Duty is a very damaging tax base. KPMG Econtech condemns it in The Excess Burden of Australian Taxes:
(C)onveyencing duties are taxes on transactions in residential and commercial property and are applied to the combined value of the land and buildings. Their excess burden arises from three main distortions.
- Conveyancing duties drive a wedge between the prices that producers or developers of property receive and that which the purchaser pays. Specifically, the prices that producers receive will be lower than the prices that purchasers pay and property development will be lower than otherwise would have been the case.
- Conveyancing duties increase the cost of purchasing property, and some households or businesses (who would otherwise not have rented) may switch to renting. This would lower their welfare.
- The presence of conveyancing duties leads property owners to adjust their property consumption less frequently. This would lead to a welfare reduction because property owners would be less willing to change their ownership as their needs change.
KPMG Econtech estimates the marginal and average excess burden of Stamp Duty at 34 cents in the dollar and 31 cents respectively. This means the $4 189 million the State of Victoria took in SD in 2013-14 actually cost its citizens between $5 487 and $5 613 million – the difference around $1.5 billion being spilled on the ground.
You ought to be very angry about these deadweight losses. People complain about welfare cheats and big business wheezes, while overlooking the structural flaws in the tax system that destroy value and reduce the living standards of everyone.
There’s more. KPMG Econtech acknowledges their model measures only the first point above. I would scale the second and third welfare losses as each of equal economic consequence to the first. So make those excess burdens $1 and the economic cost of a dollar raised about $2.
If we instead use land tax, by reforming State Land Tax along the lines recommended by Dr Henry, Victoria would enjoy annual gains of around $5 billion plus a dynamic property market where housing is put to its best and highest use and change is easy.
In Stamp Duties, Land Tax and Housing Affordability – The Case for Reform, Wood, Ong and Winter mildly points out the benefits, saying:
The logic would seem inescapable. If Australia seeks:
- Downward pressure upon house prices
- Faster redevelopment of old industrial sites
- Easier entry to home ownership for first home buyers
- Increased supply of private rental accommodation
- A reduction in the number of taxes (by one), and
- Removal of a barrier to labour mobility;
Then it would remove stamp duties on residential property transactions whilst extending land tax to owner occupiers and applying it on a per property basis.
There are winners and there are losers in this change. AHURI – Dr Wood et al again – kindly modelled the consequences in The spatial and distributional impacts of the Henry Review recommendations on stamp duty and land tax.(2012)
As Victoria’s SD rate is an effective 5.5%, we may expect PPOR landowners in Port Philip, Melbourne, Stonnington, Bayside, Boroondara, Yarra and Glen Eira to strenuously object. Virtually everyone else gains, once the benefits of SD removal are included.
The leafy green inner suburbs of Melbourne also enjoy low rates, as their municipal infrastructure is fully installed and paid off along with quality schools, excellent public transport, low crime, fine parks and few bogans – all capitalised into land prices. They currently enjoy a free carry.
There is considerable fuzzy thinking about who actually pays SD. We know the buyer writes the cheque, because the law says so – the statutory incidence. However, the economic incidence actually falls on the vendor, who would otherwise receive all the buyer pays out. It staggers me how few understand this, the grounds for the old RE adage ‘Never Sell!’
I do have a caveat. This property tax reform turns a transaction charge into a holding charge. In isolation it would boost property prices by the SD saved. If this transition happened in a falling land market – imminent, imminent – the widespread financial damage coming would be lessened. Oh, and we would have a bettter tax system.
The federal government tax reform white paper ought look carefully at the tax reform suggestion Prosper made to the Senate Economic References Committee:
Recommendation 1: Reform Land Value Tax. The ideal tool to moderate land bubbles and properly fund infrastructure already exists in the hands of state and territory governments: state land tax (SLT). Unfortunately, this tax has been so riddled with exemptions and concessional treatments it must be considered dormant. The states show no interest in, for instance, removing conveyancing stamp duty or payroll tax – both inefficient taxes – and funding this by also removing exemptions from SLT. They fear the political consequences, despite land tax being the most efficient and highly equitable tax.
We suggest the current government introduce a nationwide one per cent federal land tax (FLT) – fully rebatable on SLT paid – to oblige the states and territories to use their taxing powers properly. State governments could adjust their tax rules and keep every dollar the FLT raises, to the benefit of all Australians. The Commonwealth would be entitled to argue this intervention is for sound economic reasons and dissipate the political fallout. Placing state and territory finances on sound bases would vastly improve the federal system mandated by Australia’s Constitution. Transitional arrangements would need to be considered. Rebating all stamp duty paid against a hypothetical past SLT obligation would address concerns of fairness and equity.