Prime Minister Malcolm Turnbull has positioned the Commonwealth Government to introduce a 1% federal land tax and reform our bust political system that denies voters the right to hold government accountable.
Overnight, the states rejected the Prime Minister’s call to abolish Stamp Duty and to fund this by removing the exemptions and wheezes that hamstring their single best revenue base – State Land Tax. Their placing party politics above sound economics condemns them.
The simple exchange of property taxes promises to deliver an estimated $24 billion a year or 1.5% of GDP into taxpayers pockets by removing the deadweight losses Stamp Duty imposes. Prosper regards this figure as a gross underestimate of the benefits this would deliver over time.
Australia’s worst taxes are imposed by the states. Their reform offers great advantages to all and deserves national attention.
A 1% nil-exemption federal land tax fully rebatable against State Land Tax paid would provide the political cover the states and territories need to enact the reforms unceasingly urged by their Treasury officials and independent economists.
Estimates of the level of State Land Tax needed to replace Stamp Duty vary, depending on assumptions. Prosper economists estimate 0.67% would be needed in Victoria; Deloittes puts it at 0.58%; KPMG calculates up to 1.4% in NSW. A federal land tax rate of 1% will give states and territories room to also remove other burdensome taxes. The Henry Review names 120 taxes that ought to be scrapped; the states could choose freely from among these.
A higher and broader GST has been debated and rejected as deeply regressive. Sharing Income Tax would harm the weaker states. Lifting Payroll Tax would discourage and burden work even more. By a painful process of elimination we have arrived at the reform target hidden in plain view: ending Stamp Duty for State Land Tax.
There are no legal impediments to a federal land tax. Australia had one 1911-52, its validity affirmed by the High Court (Osborne v Commonwealth 1911).
The only negative about land tax was identified by Nobel laureate Milton Freidman who casually observed: “It’s the only tax left on the books for which people have to write a big cheque.”
This uncomfortable reality is the sole genuine impediment to this reform and good public policy. Our distaste for paying a tax directly and personally means we spill $24 billion onto the ground every year – evidence we are so deeply irrational self-harm seems to make sense.