Greens discover the housing, tax and wealth reality

The Greens have a new housing policy out. They begin with the high principle that all should have access to land then veer off with emotion at the tax rorts available to the wealthy.

Everyone Needs A Home calls for an end to negative gearing, the Capital Gains Tax discount and proposes exchanging state-based Stamp Duty for State Land Tax.

There. Three solid policy planks to return residential property ownership to citizens and end it being a plaything of debt-happy speculators and the rentier class. The Greens’ anger is understandable: these parasites overwhelmingly buy modest houses in established suburbs, displacing first home buying families to poorly serviced dwellings on the outskirts, to inappropriate flats or to renting.

Yet two of these initiatives are aimed on one economic flaw: the tax treatment of capital gains.

Negative gearing is a way to transform taxable labour income into concessionally taxed capital gains – hopefully to be realised in an advantageous tax year later in the holder’s life cycle. If capital gains were taxed the same as labour income, the allure of negative gearing would vanish in an instant.

A ‘home’ is made of two parts: the building and the land. Structures depreciate in value over their useable lifetime; the land abides forever. Capital gains are made solely in land price appreciation. Yes, a structure can be renovated or repurposed with fresh investment, but this investment adds to the capital base. Land needs no such attention.

The third proposal, to exchange Stamp Duty for State Land Tax has great merit and the Greens’ initiative here is to be applauded.

Stamp Duty is a dreadful tax and a real barrier to transactions, trapping people in and out of housing. Removing it would add an estimated $85 billion to the economy, or $91 per month per household – money that is currently wasted in deadweight losses that reduce the welfare of all.

In Prosper’s submission to South Austraila’s 2015 tax review we said the removal of Stamp Duty will see:

• More and better building construction
• Lower rents
• Better matching of families and housing stock
• A greater propensity to buy (on ease of exit)
• Less traffic congestion
• A deeper, more active land market

Rather than wait until gains are realised on sale, land tax falls upon land holding. While many small holders would be anxious over the possibility of a ‘big new tax’, land tax would fall particularly on the high value land occupied by the top 10 per cent of households by income – who the Greens single out in their policy paper. The Greens fear political repercussions from exactly this group, hence the ‘grandfathering’ of all current landholders – significantly delaying and weakening the benefits of land tax would bring.

The transition arrangement proposed is derived from the McKell Institute’s suggestion of a federal loan to bridge the revenue shortfall in early years. A better approach would be to tax all land immediately, granting offsets for stamp duty paid against a theoretical land tax from date of purchase. The elderly could be protected from harm by deferring land tax until death or sale as currently happens with municipal rates.

Prosper welcomes the Greens’ policy initiative in this area. However, we warn that the state land tax laws vary from weak to very poor and also need reform.

9 Comments

  1. Benjamin Smith29-07-2017

    You said towards the end of the article:

    “The transition arrangement proposed is derived from the McKell Institute’s suggestion of a federal loan to bridge the revenue shortfall in early years. A better approach would be to tax all land immediately, granting offsets for stamp duty paid against a theoretical land tax from date of purchase. The elderly could be protected from harm by deferring land tax until death or sale as currently happens with municipal rates.”

    Out of interest, how would your proposed transition from stamp duty to land tax work in practice?

    My thoughts would be a transition could work by assessing everyone’s property notionally for stamp duty, based on the market value of the land and improvements at transition date, and providing this as an opening credit on every owner’s land tax bill at initiation. Under this transition everyone is largely compensated for stamp duty using the growth in market price of the dwelling as the indexation factor.

    If these credits were transferable across dwellings you might be able to encourage people who want to downsize their homes to do so and effectively increase the value of the initial credit they have received.

    Much like you propose the elderly could be protected from harm by being able to defer payment until sale/death.

    The other area requiring reform is including the family home, above a certain threshold (say $1m) within the aged pension assets test. If people have their pension reduced to a part pension (or nil) by their home being included in the assets test they can elect to increase their aged pension, up to the full aged pension, on the proviso that the increased pension is secured against that person’s home and repayable at the earlier of the sale of the home and death (facility already offered by Centrelink for part pensioners). Surely it is unfair to allow some people to get the government to subsidise their living costs in order to preserve an inheritance in the form of a home for their children etc. versus how we treat pensioners who possess the equivalent dollar value in assets in a form other than an owner occupied home.

  2. Chris O’Neill29-07-2017

    If capital gains were taxed the same as labour income, the allure of negative gearing would vanish in an instant.

    Err, no.

    Capital gains tax would still retain huge advantages including:

    Deferring liability for many years into the future, sometimes practically forever.

    Flexibility in the choice of tax rate capital gains are exposed to and independent flexibility of the choice of tax rate that is applied to negative gearing losses.

    The only way to avoid the retention of these unfair tax advantages is to quarantine negative gearing losses to only be usable against future net rental income or capital gains.

  3. David Collyer31-07-2017

    You are correct that the owner of capital can freely choose when to transact. My assertion was around the allure of entering into deals funded by negative gearing. That would change abruptly.

  4. David Collyer31-07-2017

    Ahhhh! The thorny badlands of implementation. Many have spent enormous amounts of time working out transitional arrangements. I say, the actual programme would in the end be up to the government. Their approach would depend on economic circumstances, political realities and whether they wished to favor certain groups. I think implementation debates are a reformer’s quagmire – a very sticky place to jump into.

  5. Chris O’Neill31-07-2017

    “That would change abruptly.”

    That’s moving the goalposts somewhat. The biggest problem by far is unrestricted negative gearing. Maybe the Labor Party’s policy would be valuable.

  6. Chris O’Neill31-07-2017

    “A better approach would be to tax all land immediately, ”

    At least a gradual transition is infinitely better than what we have now.

  7. David Collyer31-07-2017

    I haven’t moved the goalposts, Chris. What I said is correct.

  8. Peter03-08-2017

    Hi David,

    My understanding is that a land tax has number of really positive benefits such as
    * it improves household mobility
    * it is a tax that is hard to avoid
    * it is a means to tax increase in wealth

    However, there is one scenario which concerns me. If an owner occupiers finds the value of their land suddenly appreciating due to forces outside their control, the land tax combined with those forces could lead to such households being displaced as they find themselves unable to pay escalating land taxes. I’m thinking of say, families that purchased their homes prior to their neighbourhood becoming gentrified. Or perhaps, an retired couple living in modest apartment where aggressive rezoning of their neighbourhood (common to many suburbs in Sydney and Melbourne) creates a sudden uplift in land values and their annual land tax.

    So a couple of questions:

    1. Am I right is presuming that these scenarios could occur? Or is there some reason why they wouldn’t?
    2. If there is a risk of these scenarios occurring, is there some way of implementing a land tax to mitigate against these possibilities, or minimise the chance of it happening?

    Cheers
    Peter

  9. Karl Fitzgerald
    Karl Fitzgerald29-08-2017

    Sorry for the delay Peter,
    The rate of gentrification is accelerated by the pace of land price appreciation. the current process sees artists chase cheap rents, wannabees move in to soak up the cool vibe, bidding up rents as long-term locals are forced out. I’m dreaming of making a follow up documentary to Real Estate 4 Ransom on this topic.

    Land tax acts to minimise these gentrification pressures. Land tax is in effect a counterweight to land price. Why? Because purchasers have to incorporate into their bid the cost of ongoing land tax payments (as they do with rates and all other oncosts such as insurance). Therefore, buyers lower their bid, reducing the price paid. At the same time, all the vacant properties we report on face some financial pressure, with many of the owners realising they must rent them out or sell them.

    Both of these put downward pressure on rents and land prices. The rezoning issue you raise is a tough one. Do we give a retired couple living on a corner block a free-pass as bread-earners spend 45 – 60 minutes each day in gridlock driving past a draughty 5 bedroom home with 2 retirees living in it? Treasurer Morrison has proposed some forward thinking policy in terms of freeing up such empty homes for better utilisation.

    In short, we can’t stop the progress of time, we need to change the culture of ownership from NIMBY to YIMBY (yes I’ll take a tree change in return for the doubling of the pension that a land tax system could enable). The economic dividends of removing so many deadweight taxes would supercharge the economy. A prosperous future awaits for the brave!

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https://prosper.org.au/2017/07/29/greens-discover-the-housing-tax-and-wealth-reality/