Peter Martin, Australia’s clearest economic writer, has turned his icy gaze to Stamp Duty.
This vile tax causes real harm to all of us and begs to be struck from the statute books.
Yes, it is a state tax. Yes, the feds can push reform along and add $85.5 billion to the economy.
“There’s no doubt about what’s the worst tax in Australia, and no doubt about the best bang-for-your-buck tax swap.
“The treasury set out the numbers in a discussion paper prepared for the tax review Malcolm Turnbull ditched. The worst of the taxes it examined was stamp duty. On the treasury’s estimate real estate stamp duty shrinks the economy by an astounding 72¢ for each dollar it collects.
“None of the other taxes it examined come close. The economic cost of company tax is around 50¢ for each dollar collected, the cost of income tax somewhere between 20¢ and 30¢, and the cost of the GST between 17¢ and 20¢.
“One tax, and only one, has an extraordinarily low economic cost. It’s land tax, sometimes levied as council rates. Its economic cost is so low it’s negative. The treasury’s calculations suggest every extra dollar it raises actually boosts the economy by 10¢.
“It means that a stamp duty for land tax swap could boost the economy by a massive 82¢ for each dollar swapped. There’s no bigger benefit imaginable from rejigging tax.
“People who move house frequently are whacked with much more stamp duty than people who tend to stay put. So they experiment with staying put, driving longer distances clogging up roads. They renovate rather than move, or buy bigger houses than they need in case they run out of room. Older Australians put off downsizing in order to put off stamp duty.
“In contrast, land tax doesn’t discourage anyone from doing anything, except from wasting land. It makes unoccupied properties and holiday homes more costly. It prods people into using land well, and into downsizing if it makes sense.
“So far only the Australian Capital Territory has taken the plunge and begun swapping stamp duty for land tax. It’s doing so slowly over 20 years so that people who have just bought properties aren’t hit by full stamp duty followed by full land tax.
Martin then explains The Greens’ proposal to end stamp duty on new purchases, replaced by a land tax thereafter. The Commonwealth could borrow the $47 billion in funds needed and lend it to the states – a bridging loan while land tax revenues caught up.
The Parliamentary Budget Office costed the proposal and found the loans and interest would be fully repaid by 2030 if the states imposed a land tax on new purchases at the following average rates:
New South Wales 0.69%
Victoria 0.76%
Queensland 0.62%
South Australia 0.58%
Western Australia 0.55%
Tasmania 0.45%
Northern Territory 0.66%
The $47 billion loan would save the economy $33.8 billion in deadweight costs over the period, while land tax’s negative deadweight cost (a giant positive) would add $51.7 billion. Instead of going backward, we would be going forward. Together, this tax switch would add $85.5 billion to GDP.
“The Commonwealth would have bought the best economic boost a tax-switch can buy for a song.
Every unbiased tax review in living history has energetically recommended removing stamp duty and using land tax instead.
Source: McKell Institute
If the states reject the dangled carrot of a low-interest loan, Turnbull has another more pointed tool at hand: a federal land tax, as we had from 1910-1952.
The ACT “is doing so slowly over 20 years so that people who have just bought properties aren’t hit by full stamp duty followed by full land tax.”
Indeed if you have just paid full stamp duty then you would expect to pay a lot less land tax than someone who didn’t pay any stamp duty at all. It wouldn’t be a genuine “swap” otherwise.
The obvious way to transition is to switch when a property is transferred so that the new owner doesn’t pay stamp duty but pays land tax. Some might complain that property that isn’t transferred for many, many years won’t be paying stamp duty for many, many years but then there wouldn’t be any stamp duty coming from that property for many, many years either under the current regime. If that is a defect in switching to land tax then stamp duty already has the same defect so it’s not actually a disadvantage, just a lack of advantage over stamp duty in that particular aspect. A change doesn’t have to be advantageous in every possible way to be worth doing.
Some might complain that property that isn’t transferred for many, many years won’t be paying land tax for many, many years but then there wouldn’t be any stamp duty coming from that property for many, many years either under the current regime.
The switch is certainly worth doing, Chris. There is a genuine risk some people will avoid selling/exchanging because to do so would expose them to land tax thereafter. I would prefer full land tax payable now, with recent buyers being credited for stamp duty paid against a hypothetical land tax liability from date of purchase. That would be scrupulously fair.
Transitional arrangements are difficult. Slight tweaks to protect favored parties can have major consequences.
“There is a genuine risk some people will avoid selling/exchanging because to do so would expose them to land tax thereafter.”
I’m not sure what that means. Do you mean they’d rather stay in their old property than move because they would have preferred paying stamp duty on their new property than paying land tax? Doesn’t sound like a good reason for someone avoiding moving to me.