Prosper’s submission to the Victorian Legislative Council Inquiry into Land Transfer Duty Fees reflects our evolving thinking around the core motivations for the reform.
14 April 2023
Prosper Australia is an independent research institute focused on the management of land and other natural resources through taxation. Prosper was formed over 100 years ago to further public knowledge of the teachings and principles of economist and land tax advocate Henry George.
We have a long history of research into property taxation, including commissioning the leading investigation of how to transition from stamp duty to land tax (attached to this submission).
We welcome the attention to improving the efficiency and equity of Victoria’s tax base. However we are unconvinced of the case for stamp duty reform on economic grounds.
Estimates of the productivity gains from abolishing stamp duty have found large effects. However these are exclusively based on modelling within the Computable General Equilibrium (CGE) framework. Such models do not feature asset transactions and so are inherently incapable of identifying the economic effects of transaction taxes. We place low stock in these estimates. Some of these models also misrepresent the microeconomics of taxes on land. As tax economists understand them, stamp duty and other land-based taxes are passed into lower land values, not higher investment costs, as they are modelled in the CGE analyses.
We agree with Cameron Murray of the University of Sydney that these CGE model estimates are flawed, and encourage the inquiry to seek his evidence on this point. We also agree with Dr Murray that replacing stamp duty with land tax is a low-priority reform on economic grounds, since it would be akin to “substituting off the best player on the field to bring on the best player in the team”. Taxation generally should be shifted to land; stamp duty does that already.
The strongest productivity case for stamp duty abolition applies to commercial and industrial land transfers, since taxing these transactions may deter changes of ownership that would alter the productivity of land use more substantially than do changes in residential ownership. On a pragmatic level, the cashflow and other transition issues with land tax on commercial and industrial properties also appear less significant.
As we see it, the case for reforming residential stamp duty centres on equity. It is unfair that those who transact more often pay more tax. Land tax is fairer than stamp duty, because the distribution of the tax burden depends on the value that society at large contributes to the landowner, which is expressed in the value of their land.
The limited case for stamp duty abolition has two implications if a switch to land tax is to be pursued.
One, there is little evidence that any efficiency dividend from doing so justifies incurring a budgetary cost to facilitate the change.
Any reform should therefore be revenue-neutral or revenue-positive. Since land is an efficient base for taxation the state should be seeking to expand, not shrink, its reliance on this base.
Two, since the case for reform is about equity, the transition must be equitable. A new land tax imposes an unanticipated burden on the initial cohort of landowners. Permanent grandfathering of tax-free status would forever crimp the revenue potential of the new tax, but temporary arrangements for recent buyers would be important to ensure the change is fair and politically feasible.
Smart transition design to balance revenue, efficiency and equity objectives is crucial. That the NSW stamp duty reforms delivered so little after promising so much is due in part to the inattention paid to transition issues, including by the Thodey Review, before highly-constraining promises about the transition approach were made by the NSW Government.
We have laid out an efficient and equitable transition model in our 2019 report Stamp Duty to Land Tax: Designing the Transition. It centres on a tax credit for recent buyers, funded by setting the new land tax at a higher rate, along with a deferred payment option for all residential taxpayers.
We do not support the approach taken in NSW. Permanently grandfathering tax-free treatment for existing owners removed virtually all equity and efficiency merit in the switch, which has become little more than a complicated form of first home buyer support, not a meaningful tax reform.
The efficiency and equity case for land taxation is indisputable. But there are other opportunities for stamp duty reform too, such as creating a value capture tax triggered upon sale with tax liabilities based on the land value uplift since the last sale. This would be much fairer than the current stamp duties, and would preserve the practical advantages of levying a tax at the time of transaction.
We are happy to speak to the inquiry on alternative reform options, on stamp duty to land tax transition approaches, issues with CGE modelling, and any other aspect of stamp duty reform.