Originally published in the Sydney Morning Herald April 8, 2015
by Jessica Irvine
Sometimes, the answer is right in front of your face. Sometimes, it’s just below your feet.
As we embark, as a nation, on a sensible and measured debate about tax reform, land tax should be a major part of the discussion.
Of the roughly four things governments can tax – companies, individuals, consumption and land – economists agree that land is by far the most efficient source for taxation.
Why? Well, of course, all taxes distort behaviour in the economy. That is because the targets of taxation go to great lengths to avoid it. Think Cayman Islands.
Land tax is one of the most efficient taxes for precisely the reason it is unpopular: it is hard to dodge. They know where you live. You can hire as many accountants as you want, but it is difficult to hide that mansion in Point Piper.
Hate them as we may, taxes are a necessary evil to fund the things we want as a society, such as healthcare, education and to help the poor.
The goal of government should be to raise enough taxes while doing the least damage to the economy possible.
Land tax is often overlooked in the tax debate, but the way forward is clear.
The Ken Henry review recommended land tax should be broadened to fund the abolition of other more damaging state taxes, such as stamp duty.
“Stamp duties are a highly inefficient tax on land, while land tax could provide an alternative and more stable source of revenue for the states,” the review found.
Economists hate stamp duties because, as a tax on transactions, they prevent transactions from taking place that would otherwise have been mutually beneficial.
First-home buyers must save for longer before they can buy a home. Ageing property owners are discouraged from moving to smaller properties.
A broader land tax – applied to all homes in Australia – could raise significant revenues, and at a lower rate than now. Ironically, parties arguing for no land tax could have more success arguing for the burden to be shared more widely.
Presently, only half of the total value of land in Australia is liable for land tax, according to the Abbott government’s tax discussion paper released last week.
“This results in forgone revenue and distorts land use,” the paper states.
For example, the application of high rates of land tax on large institutional landholders prevents large companies from investing in private rental housing. Instead, we have a cottage industry of landlords. Renters get to live on the whim of mum-and-dad property investors, who are more likely to up and sell, and less likely to fix the leaky sink promptly.
More broadly, there is evidence of “significant economic gains associated with state tax reform”, the discussion paper finds.
Replacing stamp duty with a broad-based land tax could boost the economy by 1.3 per cent in the long run, on some estimates.
Implementation would be tricky.
There would need to be a provision for asset-rich, but cash-poor senior property owners to delay payments until their properties sold.
A new tax on homes, in isolation, would likely result in an immediate fall in prices, as the present value of all future land tax was factored into the sale price.
But if done in combination with a reduction in stamp duty, prices would be supported by buyers having more money upfront to spend on the purchase.
Over time, the economy would benefit as a less efficient tax was replaced with a more efficient one.
Most importantly, taxing land better would force a more efficient use of land in our major cities. Australian cities are home to some of the biggest houses in the world. A land tax would give grandmas in Woollahra, rattling around in their four-bedroom homes, more of an incentive to subdivide or downsize. No more sitting on windfall wealth from rising property prices and passing it on to the kids.
It is getting harder to ignore the glaring and rising wealth inequality across Sydney: the affluent inner sanctum versus the rest. Natural supply constraints and NIMBY councils have pushed up prices, regardless of where the Reserve Bank has interest rates.
Sensible tax debates are, at heart, debates about what sort of society we want to be.
Should we be a society in which wealth is passed from generation to generation through property, a landed aristocracy 2.0?
Or should governments begin to tax wealth where they find it: at home.
The Economist magazine, hardly known as a bastion of left-wing thought, last week called for countries to rely more on land taxes to relieve affordability and drive more efficient land use in global cities.
Sound like pie in the sky?
Well, no. The ACT government recently committed to just such a reform. Over two decades, stamp duty will be phased out and replaced with a broad-based land tax on family homes.
Land tax offers a way forward for cash-starved state governments, with the added benefit that you do not need to wait for a sensible and measured tax debate in Canberra.
And I wouldn’t hold my breath on that one.