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.
David
Very interesting analysis but the Federal Government really does not need to get involved.
Let me put another option that does not require a Federal Land Tax.
My proposal is the abolition of both stamp duties and land taxes and their replacement with one new property owners state tax (POST) assessed not on land values but on the amount of council rates paid on each property.
Taking NSW for example – if the loss of revenue from stamp duty and land tax is $12 billion per annum and the amount of council rates collected each year is $6 billion then each property owner would have to pay an amount of POST equal to twice his council rates to collect the same revenue.
Governments could budget to raise exactly the revenue required to the last dollar. No over collections or under collections.
Simple and easily understood by every property owner without being frightened out of his skin each year with false and artificial land values dreamed up by the Valuer General – a system I exposed in 2005 after getting the Ombudsman to hold an inquiry into land values in NSW
https://www.ombo.nsw.gov.au/__data/assets/pdf_file/0020/3377/Land-Valuations-October-2005.pdf
That is the theory that could then be extended as follows:
1. Properties paying less than say $600 per annum in council rates would pay no POST.
2. There could be a differential rate for business, industrial and residential commercial properties because POST is tax deductible for them.
POST would be collected by local councils with council rates and remitted to the Government less an administration fee that would provide additional funds for local development.
Some modelling needs to be done to determine any threshold and the rate to be charged each year for each class of properties. I have sought successive NSW Governments to do such modelling but they have always refused to do so.
My proposed system is contained in the following submission I made to the Henry Review in 2008.
http://taxreview.treasury.gov.au/content/submissions/pre_14_november_2008/David_Singer.pdf
Henry never looked into it. Maybe he and State Governments should do so now.
POST is a great advance in ending Australia’s parlous financial position and needs to be taken very seriously.
Would be pleased to answer any queries
david singer: You mean, whatever problems now exist with council rates, you want to multiply them by 3.
Gavin
No I don’t. Your response is only looking at one side of the equation and not the other.
Let me explain:
All owners of real estate (with a very few exemptions) have to pay council rates for the provision of local government services in the area where their property is located.
Do you think it fair that only some people owning that same real estate pay a property tax – now called land tax – for the provision of State government services such as schools, hospitals, police, teachers and nurses – whilst others owning real estate pay nothing?
That is just as scandalous a proposition as those found out paying no tax in the Panama Papers.
The trade off is the abolition of stamp duty the next time you buy another property and the increase in economic activity of an estimated $24 billion disclosed by Treasury modelling – benefits you fail to mention.
My proposal represents a fairer redistribution of the way property taxes are presently levied without increasing those taxes.
My proposal introduces a new system of assessment that replaces land values as the basis of assessment with a system of assessment based on the amount of council rates paid on each property .
Everyone knows what council rates they pay and can easily calculate what their property tax will be. No one could do that with any certainty under the current system. Pure guesswork is replaced with unerring accuracy.
Assuming your figures are correct (which still needs to be determined) – you and any other knockers should do the following calculation:
1. What amount of council rates are you paying on your property now?
2. Multiply that figure by 3.
3. How much will your POST be?
4. How much was your property worth when you bought it?
5. How much is it worth now?
6. How much stamp duty will you save if you sell your property and buy another of equivalent value elsewhere?
Come back with the answers and I will be happy to further discuss my proposal with you.
Hi David,
Thanks for your considered posts. I agree that widening the tax base whilst simplifying the number of taxes is beneficial. The problem is that so many states now charge rates on the improvements. Other states have rate caps and minimum rates to curtail effectiveness. The ACT stamp duty reform is nation-leading. They have removed stamp duty by increasing the land-only component of municipal rates. If you added that caveat to your proposal it would meet best practices. Read more on our rating portal.
Karl
Under my proposal – the different systems of assessment used by each State to collect council rates, stamp duties and land tax is irrelevant.
All each State Treasury needs to determine is:
1. The total amount of council rates currently raised by whatever system of assessment is applied in that particular State
2. The total amount of land tax and stamp duties on property transfers currently raised by whatever systems of assessment are applied in that particular State
3. The factor or factors to be applied to 1 to raise the revenue being abolished in 2. The factors would probably be different for different types of property (private dwellings, commercial, industrial residential investment or agricultural ) and could also include a threshold of council rates paid by each property owner before the new tax cuts in.
The factors to be applied would be based on council rates paid by property owners – not land values determined by the Valuer General whose values have proved inaccurate, contentious and open to appeal. This would enable each State to accurately budget to the last dollar the amount of the new property tax to replace lost stamp duty and land tax.
Honesty in budgeting should always be the aim of any tax. It does not happen at the present time in estimating stamp duties and land tax collections. The inordinate amount of time spent by Treasury in estimating these figures could be put to better use – not to mention the freeing up of court time in costly appeals against disputed land values.
Council rates collected represents a finite amount on which to base the property tax to replace lost stamp duty and land tax revenue. Land values cannot and do not.