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“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.

Transcript

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.

 

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