Professors John Freebairn and Miranda Stewart have penned an opinion piece today in The Age with a welcome call for state tax reform that could save taxpayers tens of billions every year.
Most taxes carry deadweight losses – value destroyed as behaviour is distorted to avoid paying tax or make un-taxed alternatives more attractive.
There are major and enduring economic efficiency benefits in dumping these ‘bad’ taxes in favor of ones we know have low or nil deadweight losses
In fact, federal Treasury modelling demonstrates one tax available today costs Australians less than it raises: State Land Tax.
Removing state Stamp Duty, which has a marginal excess burden of 34% (costing citizens $1.34 for every $1.00 raised) and using a universal nil-exemption land tax Treasury says costs citizens around 90c for every $1 raised would put real money in everyone’s pocket and absolutely turbocharge economic activity.
This is at the centre of Freebairn & Stewart’s argument:
2. Replace conveyance duty on property sales and current state land tax with a reformed comprehensive land tax
Stamp duties are levied at a progressive rate on transfers of property, including land value and buildings, and can be up to 7 per cent. There are various exemptions and special rates.
There are many problems with these duties. They are the most inefficient tax, as stated inRe:think, the government’s tax discussion paper released in March. They act as a barrier to the transfer of commercial and residential property from less valuable to more valuable uses and they are an additional indirect tax on buildings. Stamp duties are unfair for frequent property transferees and are the most volatile of state revenue sources.
The exemption of land tax for the home also distorts the mix of housing supply. Much of the tax on rental housing is passed on to tenants as higher rents, making housing less affordable.
In addition, state land taxes based on individual properties discriminate against the ownership of multiple properties. This reduces national efficiency benefits from economies of scale – Australia is very unusual in the number of small or individual rental property owners.
A broad-based land tax with a flat rate is the least distorting of all general taxes, and it can raise stable and substantial revenues to fund state services.
Local government rates provide a good foundation for a reformed broad-based land tax. To make life simpler, state governments could put land tax and rates on the same return. As the Grattan Institute recently argued in its property tax paper, a doubling of current local government rates would replace the revenue of stamp duty and current state land taxes.
A national definition of the land tax base should apply, but each state could levy different flat rates if they chose.
Sadly, Freebairn & Stewart also like Payroll Tax, a vile impost that weighs on labour incomes and gives a free carry to private capital incomes from business profits and rents.
The average excess burden on Payroll Tax means it costs $1.43 for every dollar raised, and is exactly the sort of tax we should scrap. It lowers wages, makes job creation harder and shrinks the value-add of workers.
That free carry for private capital incomes also inflates the market price of land, a heavy burden on young adults struggling to provide for their families.
We have heard over the years all sorts of self-serving nonsense about level playing fields and economic incentives. Untaxing wages, untaxing enterprise and taxing the land would deliver exactly these desired outcomes.
Thank you, Freebairn & Stewart – at least in part.