If We’re Going to Pay Tax

Angelina Litvin - Unsplash

Angelina Litvin – Unsplash

“If we’re going to have to pay tax we should pay tax in the most efficient, the most reasonable and most equitable way.”

So said Fairfax journalist Michael Pascoe on this week’s Renegade Economists radio show.


Karl Fitzgerald: This week listeners we’re with Michael Pascoe, one of Australia’s most respected economic commentators, you see him in the Sydney Morning Herald, he’s in The Age, all the Fairfax print, so Michael, fantastic to have you on the Renegade Economists. Last week you put out some very powerful articles talking about the need to get serious on reforming, our favourite topic here on 3CR, and that’s reforming property taxes. Why have you taken such a passion to this line of thinking?

Michael Pascoe: Well basically there are two sides to it, one is what one writer has called the “pantomime villain of Australian taxation” and that is conveyancing stamp duty. It is simply ridiculous, a bad tax, an inequitable tax, and economically damaging tax to hit people with stamp duty when they buy a property. This is a truth universally known that it’s a bad thing. So on one hand, stamp duty is bad, is evil and every State Treasurer know it, they just lack the spine to do something about it. On the other hand, land tax is a very fine tax.

If we’re going to have to pay tax we should pay tax in the most efficient, the most reasonable and most equitable way. You need a mixture of taxes, but land tax should be a key part of it. We are not taxing most of our land. The owner-occupied tax haven of the sacred family home plus a few other odds and sods as well are missing from what would be a reasonable tax net. It’s pretty hard not to be in favour of something which would lift the economy, would provide a more equitable society, and basically provide the means to provide the services we want as a society.

Karl: And it’s that closed loop nature of a land tax that’s so attractive when we segue over to something such as high speed rail, which has been throughout the news cycle this week.

Michael: It has but gee, there’s high speed rail and high speed rail. There’s been a long history of politicians with thought bubbles plus rail fanatics saying we should have a very high speed rail connection from Sydney to Melbourne maybe via Canberra.

I sometimes wonder if that’s because politicians go on their study tours and have a nice experience on the bullet train or in France and think, “Gee, we’d like one too”. I don’t think and every rational examination of it has shown that they don’t actually add up. We don’t yet have the population densities to justify it and it overlooks how competitive airline travel is. If you’ve got a plane taking off between Melbourne and Sydney every 10, 15 minutes in peak hour at a very competitive price, the airline industry wouldn’t roll over for someone who wants to spend an absolute fortune putting in long distance high speed rail.

However, as politicians have tried to find a way of making the uneconomic economic, they are seizing on the very reasonable idea of value capture to make it work. John Alexander this week, the Sydney backbencher who has a passion for high speed rail, floated the idea that if you put high speed rail from Sydney to Goulbourn a house in Goulbourn currently worth $200,000 would suddenly be worth $600,000 because it’s only 30 minutes from the CBD. Well, it would have to be a very fast train indeed to get there in 30 minutes. That doesn’t really add up. It might in another century or two, but not now.

What is interesting though is a proposal that was around at the start of this century to have Maglev high speed rail on a much shorter distance, in Sydney’s case from Sydney to Newcastle, Wollongong and the Blue Mountains. You certainly could build a case there for value capture, especially if you had a rational land tax that would provide a fair bit of money for a government prepared to back that sort of high speed rail.

Karl: The good news is that more and more interest groups are coming to understand that a land tax can be a useful mechanism to not only facilitate workers moving closer to their jobs by reforming stamp duties and replacing them with land tax, but there are private consortiums, they’ve been described as, approaching the government saying that there is some business case to build a new series of suburbs on the outskirts of Goulbourn or Bendigo and such cities (with value capture to finance the rail).

So it was very interesting seeing the report that you launched up in Sydney last week ‘Taking on Tax’, reforming the New South Wales property taxes, and it had a very interesting new network between the New South Wales Business Chamber, the New South Wales Council of Social Services and the Australian Manufacturing Workers’ Union, quite disparate groups all coming together on the rationality of this closed loop form of revenue raising.

Michael: It is and it’s symptomatic of something we’re seeing more and more of. When politicians fail it is interesting that civil society is beginning to step forward to fill the gap. You get serious tax reform in one of two ways, you either get it from a crisis that forces you to do it or you get it through leadership, and unfortunately there’s not much in the way of leadership around at the Federal or at most State levels. There are exceptions, but by and large the pollies are looking after their own short term jobs first, everything else second.

So civil society is increasingly stepping forward and saying, “Look, we’re open to reform because we understand better than the pollies that for our standards of living to be sustainable and for us to continue to have the society we want to have we have to be prepared to fix things that need fixing”. And it’s a pretty easy target to pick on stamp duty when every report, every study, every inquiry, every half-intelligent look at it has said, “Stamp duty is dumb. Replacing it with a broad land tax is simply a no-brainer”. So here you had quite disparate groups, as you just mentioned, the New South Wales Business Chamber, the Council of Social Service and a major union saying, “Yeah, we can see that this is a good idea”.

It’s expensive though. The figures that were put forward in that study, they commissioned KPMG to do the modelling, while it came up with good scores for economic growth and it’s purely replacing stamp duty with land tax, it’s budget neutral, it still comes up with a sticker shock for the average Sydney house, and that’s what has politicians running scared.

Karl: So Michael Pascoe from Fairfax Media, let’s spell that out a bit because Brian Toohey in the AFR wrote a bit of a scare piece the day after the report saying that a home owner in Mossman would pay some $24,000 a year in land tax, a $1.3 million home in Melbourne would pay $17,000 in land tax. We need to take the understanding to the next step to say, “Well hang on a minute, if you were actually buying in those communities that $17,000 annual land tax would be taken off your purchase price over the next 20 years”, so you would incorporate that into your purchase price that you had to pay this upcoming fee in future years.

The KPMG report, the modelling is building in this aspect, but they couldn’t make definitive statements about the distributional impacts of such a switch. How do you think we take this level of understanding forward without the relevant modelling in place?

Michael: It is hard because that’s sticker shock and I would just stress that the tax is on the land value. I know the Victorians like to tax capital improvements as well, but just on the land value, if the land is worth that $1.3-odd million a tax of 1.3% yeah, it’s an absolute shock. $17,000 a year sounds like a lot to suddenly pay in tax, but to put that in perspective that’s 1.3%. The 30 year average of housing price appreciation is 7.25%. So while home owners are appalled at having to pay 1.3%, they feel entitled to a windfall capital gain of 7.25%, and don’t forget that the family home is already a tax haven. It’s dubious that there is no capital gain tax on the family home anyway.

So if you put that 1.3% in the context of long term capital gain and maybe to help sell it you could even do a deal that you could have the land tax as a percentage of capital gain, there are all sorts of compromises along the way, to make people realise that it’s not that rich. With that rise in land value, the appreciation of land value, and it’s worth perhaps thinking about that for a moment too: what does someone who owns a block of land do to deserve the price of that block of land going up in price? It’s a windfall gain. It’s really society that provides the lift in value. It’s society that creates the extra demand for land, that improves the infrastructure, that improves the education and health possibilities that make any given block of land worth more now that what it was in the past. So it’s not unreasonable for society to get a share of that appreciation.

Karl: And part of the mix that could well come out from this report was the fact that every citizen would benefit by $1,600 a year in terms of the efficiency gains, so how could we roll that into some sort of implementation strategy so that there was not such a sticker shock?

Michael: I think that’s much harder. That’s one of those theoretical economic modelling type figures that everyone on average is better off by $1,600. Well, the person in the street, the voter in the street doesn’t see that. What they see is what would be leaving their pocket every quarter as they paid the land tax.

I think there would have to be an avenue to let land tax capitalise, let it come out of the eventual sale of a property perhaps to make it payable for many people. If you’re a pensioner who’s living in a house, a house you don’t want to leave and suddenly you get whacked with a whopping great land tax the theoretical modelling that you’re $1,600 a year better off just won’t wash. People of course don’t realise that they are already paying that amount on average through stamp duty, through extra costs built into the system. When it’s not seen it’s very hard to explain it to people. I think part of the sales job has to be a very gentle dose of pain.

I had the pleasure of co-chairing the 2011 Tax Summit and I had the state tax session where we had the Treasurer of every state and territory plus the Commonwealth Treasurer in the room. You could hit them over the head in public and they had to take it, it was great fun. Every one of them knew that scrapping stamp duty and replacing it with land tax was the right thing to do, but none of them, with the exception of the ACT at the time, was prepared to go further. The ACT went home, didn’t have to go very far home, did their own study and politically has been able to begin the process by phasing it in over 20 years.

It’s a bit easier for the ACT because it’s also the local government authority, so they can avoid that evil word of “tax” and just say that they’re increasing rates to cover stamp duty as they phase out stamp duty and increase rates. You still have people complaining and there is a very fair case for someone who can’t afford to pay skyrocketing rates when their income’s not rising, which is why I think you’ve got to be prepared to capitalise those things.

You can of course expect the usual backlash and people will call this “a death duty by stealth”. Well, there’s a case to be made that there’s nothing wrong with death duties, they’re also a perfectly reasonable sort of tax and, again, to stress it, when it’s coming out of a windfall appreciation that hasn’t been earned by the land holder and the value of the land, why not?

Karl: Yes, well the value of Australian land increased by $525 billion last year and here we have all three levels of government costing about $500 billion, so this scratching around for $80 billion to cover health and education, the money is there but the problem is the public education system.

Michael Pascoe, any last tips? Which government department, where do you think we can apply pressure that some bureaucrat can say, “Look, we can see the logjam here, we know it’s the best system, but the people just aren’t getting it. We need the nation’s best comedians and cartoonists to break this down so everyone understands”?

Michael: How does it happen? Well, I’ll go back to what I said earlier: you get change, you get tax reform out of crisis or leadership, and the State Governments have a crisis on the way. The reality of our demographics, some states more so than others, we are heading for a crisis.

It was admitted after the COAG meeting that the Band-Aid offer of a few billion dollars to the states will get them out to 2020 on health spending. Beyond that even a rich state like New South Wales begins to run into problems. A state like South Australia is heading towards a demographic brick wall and the South Australian Government is aware of that and is doing more than most to try to come to terms with it. As states begin to go broke, and if the Federal Coalition continues with its policy of putting the squeeze on states to make the hard political decisions, they’ll simply have to do it.

When you have a shortage of beds in hospitals, when you have people dying in ambulances, when the states are simply not capable of paying for what people demand, that’s when that crisis forces change.

Karl: Well Michael Pascoe, thanks very much for your time here on 3CR’s Renegade Economists.

Michael: Pleasure.

The show also featured some significant statements from the 730 Report:

MALCOLM TURNBULL: (Value Capture) can certainly contribute to financing a project. Look, as you know, we have a new cities and new approach to infrastructure. Obviously, there’ll always be a big role for government to make grants, to make direct investments. But there’s also the opportunity to capture some of the considerable value that is created in land by the construction of transport infrastructure. That’s how railways were financed in the 19th Century, actually. It’s not actually a radical new plan at all. It’s actually a sensible old plan that’s been forgotten.

And also:

JOHN ALEXANDER, LIBERAL MP: I think value capture has got the potential of being able to fund the entire project. And there are those things who think that way and there’s those like Anthony Albanese who don’t share this joyous view. But he’s been wrong before, he’ll be wrong again.

JOHN ALEXANDER: I think, strangely, we’ve come across a perfect storm of opportunity in that Sydney is the second most expensive real estate in the world and Melbourne is the fourth most expensive and the opportunity to release incredible amounts of land that have got very low cost that could be 20 or 30 minutes from the CBD gives that opportunity of enormous value uplift and therefore the opportunity of value capture to fund that infrastructure.


Reference the show notes, have the show emailed to you each week (by joining and following our Mixcloud) or have it downloaded onto your device via the podcast here.


  1. Steve20-04-2016

    Maybe I am late and not sure if someone will answer me this. But this was a great read as in finally I get a figure on what a land value tax would cost. I was reading macrobusiness blog and some others all pushing for this but they never provided a figure so in my head it was something like maybe another car rego. Around a 1.000 dollars per house to replace stamp duty. I had no idea it would be this high , closer to 10.000 a year for the average Sydney home!!!
    How on earth is people going to find that kind of extra money when they are already struggling paying the mortgage with prices so high ?

    Unless they also reduce income/ payroll tax so people have more money In their pocket out of the same salary, is this being considered ?

    If not this would certainly crash house prices if approved .. Is that correct ? Is this the intention actually ? Thanks if anyone can shed any light on this I am not an economist.

  2. Karl Fitzgerald
    Karl Fitzgerald20-04-2016

    Hi Steve,

    the $1.3m figure is purposely high to scare people. If we took the median price for established house prices (ABS 641602 – Residential Property Price Index) in Melbourne at $621,000 and assumed that 70% of the price can be attributed to the land component, that equates to $434,700. With all things equal, a 1.3% rate equates to $5,651. In Sydney the median land price according to the ABS is $910,000 (Dec 2015), resulting in an $8,281 Land Tax payment. Sticker shock yes! But as you say, there will be a downward pressure on prices. Land valuations according to council rating notices are lower than land prices mentioned here. So they may be lower than this example. But still the cost is a challenge for this reform. If only the banks could be brought on baord, to assist mortgage-holders in lieu of delivering a more stable economy. This is something Prof Michael Hudson is very strong on.

    As soon as this LVT ‘switch’ is seriously mooted, the 1000s of empty apartments Highrise Harry and others drip feed to the market will be put on the market. New buyers will pay lower prices as explained on the podcast. This will do wonders for the local economy, with greater purchasing power enabled. Land tax is in effect a counter-weight to mortgage debt.

    The crunch comes for existing homeowners. As I suggested this week on the back of the ACOSS support for this reform agenda, the savings in deadweight costs, some $10.4 billion per annum, could be offered to the states as a transitional ‘incentive’ measure. Perhaps this money could be targeted more directly to asset-rich, income-poor pensioners. We believe that over time wages will rise as small business pay lower rents, allowing more headroom for wages. Cheaper rents mean cheaper bonds, encouraging more business startup.

    AHURI modeled that under the current arrangement, those buying in the ‘affordable’ sprawling suburbs pay some 15% of stamp duty revenues. Under a Land Tax reform, those areas would pay just 4% of revenues. Wealthier areas pay more. KPMG finds that as many jobs as Westpac creates – 32,000 – would be created by the reform.

    I fear that the commercialisation of real estate has just begin. 40 to even 50 year mortgages are now legal in Australia. Some hard work needs to be done on the educative process and the transitional process. Keep asking questions!

  3. Steve20-04-2016

    Hi Karl

    I really appreciate the time and effort spent in such a thoughtful response. for the record I am a renter so any downward pressure on prices is fine with me, as well as I understand the fairness of a tax like this over a “transaction” tax like stamp duty. It is just that I am a realist and think the vested interests on this issue will make it near impossible to pass if it will cause such a pain.

    As to your last point I didn’t know that, and it scares me to death that it is being considered (or is it a done deal already?) mortgages of 40 to 50 years !!, surely if government had the best interests of people on their minds they would not allow this… that is debt slavery ! Mortgages should not be longer than 20/25 years in my opinion… the faster people get out of debt with housing the better quality of life they can have afterwards and then spend money on the rest of the economy… this would surely make for better/more balanced growth or am I wrong ? otherwise housing just keep sucking every last dollar in disposable income until there is no more for the rest of the economy.
    (And no, I don’t subscribe to “using your house capital gains as an ATM mentality”)

    How come this has not been reported more widely ? who approves this new terms ? governments or un-elected regulators on their own ?

    Another topic related to this, which worries me and I think would be interesting to read more about in sites like this is a serious analysis and criticism on the way the CPI is calculated.
    My concern is that the CPI is really not reflecting the “real” cost of living (at least in big cities) I see a disconnect between CPI being reported as 2% or 2.5% but rents (in Sydney at least) keep being revised between 4 to 8% per year !, if CPI reflected real cost of living (after all around 30% to 40% of salary is spent on either a mortgage or rent so it should be weighted accordingly) then that would be on the news and discussed more widely if CPI were 5% o 7% per year… as I said I am not an economist, but that is my perception, happy to be proved wrong.


  4. Karl Fitzgerald
    Karl Fitzgerald21-04-2016

    Interesting that we have record low inflation whilst we have had record high land price appreciation (of recent)! The reason is the CPI does not incorporate imputed rents from home owners (2/3 of the market). With rents stickier than prices, this understates the pressure rising land and housing costs place on the economy. The best of both world’s eh?

  5. Karl Fitzgerald
    Karl Fitzgerald21-04-2016

    HOLD PRESS: Steve, I am churning numbers and have some interesting findings I will post soon! The KPMG numbers appear to be too high.

  6. benj04-05-2016

    Why not just take Stamp Duty, base it on land values, and instead of asking people to pay it in one lump sum, ask them to pay it in installments.

    Start off with monthly installments over five years, then gradually lengthen them to installments over 25 years. Hey presto a LVT.

    At the same time, shift income/sales taxes onto this new and improved Stamp Duty.

    This is good because a) it avoids the issues to do with Poor Widows in Mansion b) penalizing existing homeowners.

  7. Karl Fitzgerald
    Karl Fitzgerald05-05-2016

    HI Benj,

    I see you are UK connected and have probably been twisted by the horrible policy butchering of the UK’s Stamp Duty Land Tax. If ever there was a way to torpedo a policy function, this would be it (closely followed by the bedroom tax).

    Installing lump sum payments distorts the market in a host of ways. People don’t want to move for fear of the $36,000 SD fee (here in Melbourne). This means the old end up rattling around in big homes in the inner suburbs whilst working families have to move to the sprawl to afford something that soon becomes too small. Then they get stuck there. Congestion entails.

    Your instalment plan goes the wrong way. Land Taxes should be yearly, if not quarterly. We had 20 year Land Tax instalments in Canberra. Every 20 years a scare campaign was run on how much extra in Land Tax they had to pay compared to last time. Never mind that their land values had increased commensurably! A lumpy SD plan ensures the cost is capitalised into the mortgage price, meaning there is no commensurate drop in land prices.

    The numbers we have crunched show that we could afford to double the pension with a reasonable Land Tax. The per household tax burden would reduce. But hey we need the modelling don’t we?

    Thanks for the feedback, the more ideas the better. Implementation is certainly the area we need more clarification on.

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