Oz lottery: Win $85 billion in Stamp Duty reform

on

Tags: , ,

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.

Stamp Duty slugs families $91 a month

on

Tags: , , ,

Close up of worker’s boot on construction site


The Housing Industry Association today released their estimate that conveyancing Stamp Duty costs Australian households $91 a month.

“By eroding deposits and making homebuyers borrow more, stamp duty is estimated to add $91 per month to household mortgage repayments for a median priced home,” HIA economist Shane Garrett said.
“Apart from hurting ordinary households, stamp duty restricts economic activity and obstructs the national dwelling stock from achieving its full potential in terms of the people it can house.”

Quite right. Stamp duty traps people in and out of housing. It hinders labour mobility and best job-matching. It means the opportunities to put land to its best and highest use are fewer and harder to achieve. Construction is discouraged.

Stamp duty also imposes very substantial deadweight costs, as I testified to the Senate economic references committee in 2014:

“Similarly, stamp duty is a very grave impost. People think the incidence falls upon the buyer. The buyer signs a cheque and they think the incidence falls upon them, whereas in fact it falls upon the vendor. So everybody is happy—everybody thinks somebody else is paying the tax. It is about time government straightened themselves out and said that we need to use not necessarily invisible taxes but the best tax bases we can find. The most honest tax is the tax with the least cost to the community. We are burning between five and six per cent of GDP each and every year because of our poor tax bases. It is a waste of money. If we want our country to flourish, here is a very obvious and painless way of advancing Australia.”

Abandon this bad tax!

Unfortunately, Mr Garrett turns to wringing his hands over the interests of foreign investors in Australian residential property and whine how much tax they pay. It is surprising to see the HIA fretting about foreign investor interests rather than the people who are likely to occupy the homes HIA members build. I think discouraging foreign investment in housing is a good idea, explained here. We already have a giant pool of domestic investors displacing potential homebuyers to renting and hardly need more.

Mr Garrett wants to end stamp duty, so does Prosper and others. To complete his argument, he needs to identify how the substantial revenue losses would be made up.

The HIA’s Dr Harley Dale has previously called for the exchange of stamp duty for land tax – a stance that deserves applause – and re-statement by Mr Garrett.

Dan Tehan wants to end Stamp Duty – for a big new GST???

on

Tags: , ,

1439419712577

MHR Dan Tehan (Liberal, Wannon) had an op-ed in today’s Australian Financial Review, States dragging their heels on tax reform, criticising them for clinging to very bad taxes, notably Stamp Duty on property conveyancing.

“Home buyers across the country are still being slogged $16 billion each year in stamp duty. If you’re looking to take out insurance in Victoria on a car, or home and contents, you’re chipping in to the state’s $1 billion insurance tax revenue stream.

And

“The reason these inefficient taxes are still hanging around is simple – the states have lost their zeal to reform and keep looking to the federal government to fund their responsibilities.

“Stamp duty alone now provides 24 per cent of the states’ revenue.

Any pollie who can see the damage Stamp Duty does to national economic well-being deserves our full attention. Dan goes on:

“Not only is stamp duty a tax that many countries have abandoned but the impact of it is felt directly at the hip pocket. The burden of stamp duty in Melbourne on a median-priced house has increased from 2.6 per cent in 1988 to 5.1 per cent in 2011.

He roundly criticises the states for the free-carry they enjoy from the federal government collecting GST for them – and for carrying it’s political baggage.

Thank you, Dan Tehan. These are important issues. But if the states are to remove Stamp Duty, how will they fund their activities? Dan is plumping for a broadly-based GST at a higher rate – that is, without exactly connecting the end of Stamp Duty and a big new GST.

If we made this exchange, property prices would rise by the median 5.1 per cent Dan identifies, while purchasing power would fall by the increase in the GST. The consequences would be dreadful.

There is a better way, as Prosper suggested to the aborted federal tax review in February:

The ideal tool to moderate land bubbles and properly fund infrastructure already exists in the hands of state and territory governments: State Land Tax. Unfortunately, this tax has been so riddled with exemptions and concessional treatments it must be considered dormant. The states show no interest in, for example, removing conveyancing Stamp Duty or Payroll Tax – both very damaging tax bases – and funding this by also removing exemptions from SLT. They fear the political consequences.

We recommend the Abbott government introduce a nation-wide one per cent Federal Land Tax – fully rebatable on State Land Tax paid – to oblige the states and territories to migrate their revenue bases away from genuine economic injury. State governments could adjust their tax rules and keep every dollar the Federal Land Tax raises, to the great benefit of all Australians. The Commonwealth would be entitled to argue this intervention is for sound economic reasons and dissipate the political fallout.

Transitional arrangements would need to be considered. A logical solution is to credit all landowners with the amount of stamp duty paid and then deduct the hypothetical land tax they would have paid since the date of purchase. This would address much of the fairness question.

There, Dan, is the solution. It would thrust Australia into an economic Golden Age. That is what you want – isn’t it?

Treasurer Hockey supports ending stamp duty for land tax

on

Tags: , ,

PRESS RELEASE

19 May 2015

MELBOURNE:- Federal Treasurer Joe Hockey has endorsed moves by South Australia to abolish Stamp Duty and replace it with a nil exemption, broad-based land tax. He said the cost of an annual land tax would likely be less in the long term than upfront stamp duty.

“This exercise in ‘experimental federalism’ has our enthusiastic support,” Prosper Australia Policy Director David Collyer said today. “Stamp duty is a vile instrument. It traps people in and out of housing and is a handbrake on economic activity.

In Prosper’s submission to the SA 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

In addition, Prosper estimates the SA government revenues of $886 million from Stamp Duty imposes a civic burden of at least $1,187 million, of which $300 million is cast on the ground in deadweight losses each and every year.

Mr Hockey told Adelaide’s The Advertiser South Australia would have an “early adopter” advantage by being bold and axing stamp duty.

“The (Abbott) Government is ruling nothing in and nothing out of the tax reform process but the Government is committed to a tax system that delivers taxes that are lower, simpler and fairer.

“All levels of government, including the states, recognise that in order to stay the same, we have to make changes.”

“Treasurer Hockey is far too modest,” Mr Collyer said. “Removing these entirely avoidable costs from South Australia will liberate the state economy. We believe the data shows the Weatherill government will advance South Australia’s economy with this reform and very substantial and enduring economic benefits are set to emerge. ENDS

Prosper urges SA government to end Stamp Duty for State Land Tax

on

Tags: , ,

sa_government

The South Australian government is undertaking a tax review to boost state competitiveness and economic efficiency. Their main focus is considering abolishing conveyencing Stamp Duty and funding this by removing exemptions from the existing State Land Tax.

Prosper Australia has made a submission to the review, energetically endorsing the government’s proposed reforms.

We say:

Stamp duty inhibits transactions. If removed, South Australia will see:

More and better 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

The discussion paper estimates SA government revenues from stamp duty this year at $886 million. KPMG Econtech estimates the marginal excess burden of conveyancing stamp duties at 34 per cent, and regards this as a serious underestimate as it does not consider the cost to households displaced to renting and the welfare losses in the mismatch of housing and families. Collecting that $886 million therefore imposes a civic burden of at least $1,187 million, of which $300 million is cast on the ground in deadweight losses each and every year.

Further, recent economic modelling by federal Treasury calculates land tax actually has a negative marginal excess burden (hint: that is really, really good) as land tax paid by foreign and domestic landowners is spent solely on domestic households. A boost to state demand of this scale would be welcomed by business and citizens alike. This reform is low-hanging fruit indeed.

A PDF of Prosper’s submission is here: Prosper’s submission.

Congratulations to the Wetherill government for using the ‘I’ word when talking about boosting South Australia’s efficiency and livability. No entity is more important to shaping the state’s fortunes than its government.

Cost-Shifting Stamp Duty – Onto You

on

Tags: , , , ,

FebMar14_dreamstime_m_33279078

 

 

The Housing Industry Association – the builder’s’ lobby group – today called for changes to allegedly improve home affordability in a media release The Real Cost of Stamp Duty, saying it added three per cent to the cost of buying property. HIA Senior Economist Shane Garrett calculated that if Stamp Duty was paid instead into an individuals’ superannuation, a West Australian would have an extra $234,000 at retirement and a Victorian $320,000.

This is utter foolishness. Removing Stamp Duty would simply and immediately raise the selling price of land by the full extent of the tax displaced, to the sole benefit of vendors.

Perhaps Mr Garrett is instead admiring the phenomenon of compounding returns and the giant opportunity cost of buying residential real estate.

Prosper Australia welcomes discussion on tax reform and actively supports the removal of conveyancing Stamp Duty. This is a particularly nasty tax that traps citizens in and out of housing. It makes moving for work transfers or family reasons expensive and directly injures those marginally attached to home ownership.

Interestingly, while the statutory incidence (who the law says must pay) of Stamp Duty falls on buyers, the economic incidence (who pays in practice) usually falls on vendors. This is why the HIA wants SD removed, probably to be replaced by broadening the GST to include food and at a higher rate. GST is a vile and regressive tax that should be condemned.

If taxpayers are to endure the upset of tax reform, then the change should be to best practice – the tax bases economists have identified as causing the least harm.  The HIA seems to want all property taxes removed to further inflate the staggering cost of land. Doing so would not help builders one bit.

Right next to Stamp Duty sits the ideal base: State Land Tax. A uniform SLT has deadweight losses and an average excess burden of zero. It causes no harm – a rare and special virtue among taxes, as KPMG Econtech clearly identifies:

KPMG
The HIA should embrace a shift of property taxes from SD to SLT, as REIWA President David Airey has.

Builders, who buy land and sell homes, would bear only the holding cost for the time it takes to construct the house. The most efficient builders pay least. Removing the transaction charge would also make buy-renovate-sell more profitable and enhance our housing stock.

The risk of hurt through double-taxation in the transition to SLT could be easily resolved by crediting every property owner who has paid SD with a hypothetical SLT from their date of purchase.

An impartial backgrounder on Stamp Duty and Land Tax by the Australian Housing and Urban Research Institute can be found here and here.

* An earlier version of this piece misunderstood the thrust of the HIA’s arguments.  The real intent is no better.

 

 

WA Treasurer plays the TINA card on Stamp Duty

on

Tags: , ,

06_712967665_north_600x_white

West Australian Treasurer Mike Nahan has acknowledged Stamp Duty is “dumb” but has no interest in changing it, claiming There Is No Alternative.

ABC WA reports:

In a speech to an economics forum in Perth on Tuesday, Dr Nahan said the state had come to rely on inefficient taxes, but reform was not an option.

“Our largest tax base, besides payroll, is stamp duty on housing transactions which is actually a tax on people moving house – about as dumb as you can get,” Dr Nahan said.

“Even when the GST was put in it was agreed that stamp duty is amongst the worst [taxes], particularly transfer fees on housing.

“It’s a bad tax but it’s a very important tax to us and we have no alternative.”

Anyone with a passing knowledge of tax and economics will be gobsmacked by these remarks.

Treasurer Nahan publicly acknowledges the serious deadweight costs imposed by locking citizens in and out of housing with Stamp Duty but refuses to do anything about it. Never mind he swore an oath to govern in the best interests of West Australians.

There most certainly is an alternative, Dr Nahan. Treasury has presented you with endless briefings and cajolings to abolish this very bad tax and replace the revenues by removing all exemptions from State Land Tax, SLT hurts no one but you refuse to even consider this reform.

Despite REIWA President David Airey pleading for exactly this, and the Treasurer’s office saying Dr Nahan had heard the REIWA’s call, this defence of the indefensible is his answer.

The mining investment boom is fading and the contractors are leaving. WA is now in an era of falling land prices. Now is the ideal time to remove a tax on transactions and replace it with charge on land holding. No one knows how low land prices will go – we should expect at least a revert to mean, which will hurt a lot of people. SLT adjusted by regular land valuations would act as a powerful automatic stabiliser and reduce the pain of this change.

If Dr Nahan persists with Stamp Duty, he should be warned these revenues are about to fall off a cliff as transactions shrivel in a declining market, without the automatic stabiliser benefits of SLT.

This episode is a very unpleasant reminder tax systems are made by politicians who bring to the task their own preferences and prejudices, and are willing to stand by dumb, bad laws.

REIWA: Abolish Stamp Duty for State Land Tax

on

Tags: , , , ,

REIWA President David Airey - sold on land tax

REIWA President David Airey – sold on land tax

Yesterday REIWA president David Airey issued a call in the West Australian newspaper for the WA government to abandon Stamp Duty and fund this by removing the many wheezes from the tattered State Land Tax.  Hooray!

Airey says:

“It’s time to recognise that stamp duty on property as a means to raise revenue is clumsy, inefficient and out-dated. 

“REIWA calls on the Government to have a serious look at broadening the land tax base to all property owners with a view to abolishing stamp duty altogether. 

“The benefit to property owners is the simplicity of a modest, annual land tax as opposed to “bill shock”, when hit with a huge stamp duty tax in the tens of thousands when they transact. 

“In some cases stamp duty is so prohibitive to potential buyers that they stay put, jamming the market and not allowing established homes to flow into the first-homebuyer pool.

 “A broad-based land tax was proposed by the Henry tax review in 2010 and has merit.

 “It’s time for a mature discussion around this proposal with the aim of creating a long-term plan for a better system of property taxes – one that’s not at the mercy of an anxious treasurer every financial year.

Removing Stamp Duty would do wonders for the flexibility of the property market.  Lowering the cost of change would lift labor flexibility and productivity as workers could easily move to where their skills are most highly valued.  Families could trade up and down as their circumstances change.  Everyone benefits.

Increasing the number of property sales would also increase RE agent activity and income, but transaction costs are dwarfed by the greedy government take and their modest self-interest here is easy to forgive.

The changes to State Land Tax are easy to implement: flatten the rate, remove all exemptions and thresholds, and use the proceeds to strike out a tax that stifles productive activity.  If the WA Barnett government embarked on this piece of experimental federalism, their property market would enjoy an impressive turn of speed. Arthritic eastern states, take note.

Before we get too excited by his long-sightedness, the REIWA also calls for another flabby First Home Vendor’s Boost – economic poison that inflates the cost of land everywhere for everyone.  Sorry, Mr Airey, that’s a terrible idea.  We need to end the era of sweeping government manipulation of the property market.

I cannot locate Airey’s West Australian article on-line.  Attached is a PDF of the print original.  Thanks to Seven West Media Limited for giving voice to an idea we all should embrace and to John Massam for the scan.

Stamp Duty stifles labor mobility

on

Tags: , , , ,

Jean Baptiste Colbert 1666 Goose me!

Jean Baptiste Colbert 1666
Goose me!

The Productivity Commission is out with a major study that recommends ending Stamp Duty on conveyances in favor of a land value tax to avoid trapping people in their homes when better jobs beckon elsewhere.

The Geographic Labor Mobility report examines the match between skills and employment – or more exactly, where these mismatch.   A close fit lifts productivity, incomes and national well-being.  This is a major reason people flock to cities and the biggest cities grow fastest: a wide range of work options within reasonable distance of home means both workers and businesses can best realise their potential.

State governments stand in the way.  They are addicted to Stamp Duty revenues, just as they are hooked on gambling taxes and speeding fines.  Never mind this base is pro-cyclical – it booms in good times and collapses in bad.  No, that doesn’t make it an automatic stabilizer, far from it.  It merely tracks transaction volumes and sucks blood.

Jean-Baptiste Colbert’s famous words from three centuries ago still dominate state government thinking: “The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.”

Governments rank being popular above being economically useful.  They find it too easy to shrug off the issues raised in every independent tax reform report commissioned in recent decades: this tax base is regressive, it traps people in and out of housing, and it favors long term holders over first home buyers.

And worst, it stifles property transactions, as the Productivity Commission notes:

“Evidence from surveys and study participants is strengthened further by the findings of recent academic research on the effects of stamp duty on housing turnover. Using data on Australian house sales between 1993 and 2005, Davidoff and Leigh (2013) found that a 10 per cent increase in stamp duty lowers housing turnover by 3 per cent in the first year and 6 per cent over a three‑year period. Davidoff and Leigh (2013) estimated that the 37 per cent increase in the average rate of stamp duty levied that occurred between 1993 and 2005 resulted in a reduction in home sales of about 11 per cent — equivalent to roughly 39 000 foregone sales per annum.”

Real estate agents ought to be furious over government suppressing their commission income with this tax.  So should builders, who may only hold land a short time and are slammed.

Stamp Duty makes the lives of those who bought at the peak and are now in negative equity a misery.

The Productivity Commission helpfully provides a guide to the cost of this outrage.

Table 8.1          Government fees payable on home purchases in capital citiesa

September 2013

City

Median house
price ($)b
Stamp
duty ($)
Mortgage registration fee ($) Transfer fee ($) Total fees (% of median house price)

Sydney

640 000 24 290 105 209 3.8

Melbourne

500 000 21 970 85 1 339 4.7

Brisbane

445 000 6 825 157 962 1.8

Adelaide

392 000 15 930 148 2 825 4.8

Perth

515 000 20 438 160 270 4.1

Hobart

334 000 11 295 125 191 3.5

Darwin

568 000 28 116 133 133 5.0

Canberrac

547 800 19 490 121 234 3.6

a Calculated fees are for established homes used as primary residences and do not include any discounts for first home buyers or pensioners. The mortgage registration and transfer fees for Victoria assume an electronic transaction.  b Median house prices are for established homes for the December quarter 2012.  c The ACT Government has committed to gradually phasing out stamp duty over a 20 year period beginning in 2012.

Sources: ABS (House Price Indexes: Eight Capital Cities, Cat. no. 6416.0); Productivity Commission estimates.

 

So next time you have your state MP’s ear, call for Stamp Duty reform.  They can be a little deaf, so use a loud clear voice.

Land tax must kill negative gearing, Stamp Duty

on

Tags: , , ,

Phone pic

By Catherine Cashmore , a market analyst and journalist with extensive experience in all aspects relating to property acquisition. Follow Catherine on Twitter  or via here Blog .

There’s been a lot of debate around property taxation in Australia – significantly negative gearing, which allows an investor to use the short fall between interest repayments and other relevant expenditure, to lower their income tax.

The policy promotes speculative gain meaning the strategy is only profitable if the acquisition rises in value rather than holding or falling. Therefore, in Australia, investor preference is slanted toward the established sector – the sector that attracts robust demand from all demographics and as such, in premium locations, has historically gained the greatest windfall from capital gains.

Aside from the impact this creates in terms of affordability – pushing up the price of second-hand stock, burdening new buyers with the need to raise a higher and higher deposit just to enter ownership – it also negatively affects the the new home market, which traditionally struggles to attract consistent activity outside of targeted first homebuyer incentives; albeit, the headwinds resulting from planning constraints and supply-side policy should also not be dismissed.

Additionally, Capital Gains Tax and stamp duty have also received much debate. Both are transaction taxes, and therefore have a tendency to stagnate activity, acting as a deterrent to either buying and selling.

Stamp duty as modeled by economist Andrew Leigh , is shown to produce a meaningful impact on housing turnover, leading to a potential mismatch between property size and household type – a deterrent to downsizing and therefore selling.

Additionally, it burdens first-time buyers by increasing the amount they need to save in order to enter the market. Frequent changes of employment concurrent with a modern day lifestyle are also hampered, as owners are unwilling to move any meaningful distance outside their local neighbourhood, and search for work in local areas alone.

But, outside of academia and intermittent articles, there is scant debate in Australian mainstream media regarding land value tax and it’s practical impact.

The theory is taken to its extreme, and best advocated by American political economist and author Henry George who wrote his publication ‘Progress and Poverty’ 1879 – an enlightened and impassioned read – and subsequently inspired the economic philosophy that came to be known as ‘Georgism.’

The ideals of Henry George reside in the concept that land is in fixed supply, therefore we can’t all benefit from economic advantage gained from ‘ownership’ of the ‘best’ sites available without effective taxation of the resource.

George advocated a single tax on the unimproved value of land to replace all other taxes – something that would be unlikely to hold water in current political circles. However, his ideals won favour amongst many, including the great economist and author of “Capitalism and Freedom” Milton Friedman and other influential capitalists such as Winston Churchill, who gave a powerful speech  on land monopoly stressing:

“Unearned increments in land are not the only form of unearned or undeserved profit, but they are the principal form of unearned increment, and they are derived from processes which are not merely not beneficial, but positively detrimental to the general public.”

In essence, raising the percentage of tax that falls on the unimproved value of land has few distortionary or adverse affects. It creates a steady source of revenue whilst the landowner can make their own assessment regarding the timing and type of property they wish to construct in order to make profit without being penalised for doing so.

However when the larger percentage of tax payable is assessed against the value of buildings and their improvements – through renovation, extension or higher density development for example – not only can those costs be transferred to a tenant, there is less motivation to make effective use of the site – having a flow on effect which can not only exacerbate urban ‘sprawl’, but also increase the propensity to ‘land bank.’

The Henry tax Review commissioned by the Government under Kevin Rudd in 2008 concluded that “economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases”proposing that stamp duty (which is an inconsistent and inequitable source of revenue) be replaced by a broad based land tax, levied on a per-square-metre and per land holding basis, rather than retaining present land tax arrangements.

The Australian Housing and Urban Research Group attempted to mimic the proposed changes using their AHURI-3M micro-simulation model  in a report entitled The spatial and distributional impacts of the Henry Review recommendations on stamp duty and land tax.

And whilst it’s difficult to qualify how purchasers may factor an abolition of stamp duty into their price analysis, perhaps adding the additional saving into their borrowing capacity, and therefore not lowering prices enough to initially assist first homebuyers, it does demonstrate how over the longer-term falls in house prices have the potential to exceed the value of land tax payments , assisting both owner-occupier and rental tenant as the effects flow through.

Additionally, increasing the tax base would provide developers with an incentive to speed up the process and utilise their holding for more effective purposes. And importantly for Australia, it can provide a reliable provision of revenue to channel into the development of much-needed infrastructure.

The rationale for this is coined in the old real estate term ‘location, location, location.’ Everyone understands that in areas where amenities are plentiful – containing good schools, roads, public transport, bustling shopping strips, parks, theatres, bars, street cafes and so forth – increases demand and therefore land values, invoking a vibrant sense of community which attracts business and benefits the economy.

The idea behind spruiking a ‘hotspot’ – such a common industry obsession – is based on purchasing in an area of limited supply, on the cusp of an infrastructure boom, such as the provision of a new road or train line for example, enabling existing landowners to reap a windfall from capital gains and rental demand for little more effort than the advantage of getting in early and holding tight whilst tax payer dollars across the spectrum fund the work.

Should a higher LVT be implemented, the cost and maintenance of community facilities could, in part, be captured from the wealth effect advantaging current owners, compensating over time for the initial outlay. Imagine the advantage this would offer residents in fringe locations who sit and wait for the failed ‘promises’ offered, when they migrated to the outer suburbs initially?

Take New York  for example – between the years 1921 and 1931 under Governor Al Smith, New York financed what is arguably the world’s best mass transit system, parks, libraries, schools and social services shifting taxes off buildings and onto land values and channeling those dollars effectively.

The policy influenced by Henry George ended soon after Al Smith’s administration, and eventually lead to today’s landscape – a city built on a series of islands, with limited room to build ‘out’ facing a chronic affordable housing shortage with the population projected to reach 9.1 million by 2030.

More than a third of New Yorkers spend half their paycheque on rent alone yet like London, there is little motivation for developers to build housing to accommodate low-wage workers concentrating instead on the luxury end of market, broadening the gap between rich and poor as land values rise and those priced-out, find little option but to re-locate.

New York’s Central Park is the highest generator of real estate wealth. The most expensive homes in the world surround the park with apartments selling in excess of $20 Million, and newer developments marketed in excess of $100+ million.

Like London it’s a pure speculators paradise – in the ten-year period to 2007, values increased by 73% – owners sit on a pot of growing Gold and there’s little to indicate America’s richest are about to bail out of their New York ‘addiction’ with an expansive list of ‘A’ class celebrities, high net worth individuals, and foreign magnates, owning apartments in the locality.

New Mayor-elect Bill de Blasio who won his seat, based on a promise to narrow the widening inequality gap – preserve 200,000 low and middle income units, and ensure 50,000 affordable homes are constructed over the next decade, will struggle to subsidize plans whist facing a deficit reputed to be as much as $2 billion in the next fiscal year.

Yet economist Michael Hudson has recently assessed land values in New York City alone  to exceed that of all of the plant and equipment in the entire country, combined.

Currently more than 30 countries around the world have implemented land value taxation – including Australia – with varying degrees of success not only based on the percentage split between land and property, but how those funds are channeled back into the community, and the quality of land assessments in regularly updating and estimating value.

Pennsylvania is one such state in the USA to use a system which taxes land at a greater rate than improvements on property – I think I’m correct in saying nineteen cities in Pennsylvania use land value tax with Altoona  being the first municipality in the country to rely on land value tax alone.

Reportedly, 85% of homeowners pay less  with the policy than they do with the traditional flat-rate approach. When Mayor of Washington county Anthony Spossey, who also served as Treasurer from 2002 to 2006, and under his watch enacted an LVT was interviewed  on the changes in 2007, he commented:

“LVT ..helps reduce taxes for our most vulnerable citizens. We have an aging demographic, like the county, region and the state. Taxpayers everywhere are less able to keep up with taxes, and that hurts revenue. LVT helps us mitigate the impact both to them and the city. It’s a win/win..”

Until fairly recent times, another good example to cite is Pittsburgh. Early in the 1900s the state changed its tax system to fall more on the unimproved value of land than its construction and improvements.

Pittsburgh’s economic history is a study in itself, and has not been without challenges. For those wanting to research further, I strongly advocate some of the writings of Dan Sullivan  – (former chair of the Libertarian Party of Allegheny County, (Pittsburgh) Pennsylvania) – who is an expert on the economic benefits of LVT and has written extensively on the subject.

Sullivan demonstrates that Pittsburgh not only enjoyed a construction boom whilst avoiding a real estate boom under a broad based LVT system, but also effectively weathered the great depression whilst maintaining affordable and steady land values along the way.

In comparing it to other states struggling to recover from the recent ‘sub-prime crisis’ he points out:

“In 2008, just after the housing bubble broke, Cleveland led the nation in mortgage foreclosures per capita while Pittsburgh’s foreclosure rate remained exceptionally low. Since then, the foreclosure rates in Las Vegas and many Californian cities, none of which collect significant real estate taxes, have passed Cleveland’s foreclosure rate. However, on September 15, 2010, The Pittsburgh Post-Gazette reported that while at the end of the second quarter of 2010, 21.5% of America’s single-family homes had underwater mortgages (the American term for negative equity), only 5.6% did in Pittsburgh. As a result Pittsburgh was top of a list  of the ten markets with the lowest underwater mortgage figures.”

When land value tax is implemented – with the burden taken of buildings and their improvements ensuring good quality assessments and sensible zoning laws – it not only assists affordability keeping land values stable, but also benefits local business through infrastructure funding, discourages urban sprawl, incites smart effective development of sites, reduces land banking, and as examples in the USA have demonstrated – assists in weathering the unwanted impacts of real estate booms and busts.

Despite the numerous examples across the world where a broad based land value tax has been deployedsuccessfully , changing policy and bringing about reform is never easy and rarely without complication.

Additionally, the implications of a yearly tax on fixed ‘low-income’ retirees must be handled with care and understanding, as there are ways to buffer unwanted effects whilst changes are implemented.

Therefore, the process adopted in the ACT which is abolishing stamp duties over a slow transitional 20 year  period to phase in higher taxation of land is not altogether unwise.

With any change to the tax system, the headwinds come convincing the public that it’s a good idea. In this respect, balanced debate and conversation is necessary, as questions and concerns are brought to the fore.

The increased tax burden also falls on those who have significant influence across the political spectrum; therefore strong leadership to avoid lobbying from wealthy owners with vested interests is essential.

Albeit, as I said last week, we have a new and growing generation of enlightened voters who are well and truly fed up with battling high real estate prices, inflated rents, and care not whether it’s labelled as a ‘bubble’ – but certainly care about their future and that of their children.

Therefore – I do see a time when all the ‘chatter’ around affordability, will finally evolve into ‘real’ action – and a broad based LVT should form an important part of that debate.

 

 

 

https://prosper.org.au