ESSA

ESSA

It’s time for a land tax


Sam O'Connor

By

April 3rd, 2015


Sam O’Connor argues that stamp duty should be replaced with a broad-based land tax, to improve the government bottom line and help Australians deal with the rising cost of home ownership.


In 2010, the Henry Tax Review was handed down to the Government. Dr Ken Henry and his team of experts had put together a report consisting of 138 specific recommendations that would provide necessary reform to Australia’s tax system. Amongst the many recommendations was a tax that, if applied correctly, could in one fell swoop take significant action towards resolving the fall in government tax revenue and the increasing issue of housing affordability in Australia. It’s called a broad-based land tax. It would replace the current property taxation system of stamp duties, and it’s arguably one of the most effective (and equitable) methods of taxation available to any government.

So, how does this work? A broad-based land tax, also known as a ‘land value tax,’ is simple. You would pay tax based purely on the value of the land you occupy, rather than the property you live in. Per Recommendation 51 of the Henry Tax Review, this would replace stamp duty. Recommendation 52 decrees that the tax ought to operate at different rates. Farmers who own large amounts of relatively cheap land in rural areas, for instance, would not have to pay a disproportionate amount of tax. Multiple rates would apply for areas of different value, with most agricultural land sitting in the lowest bracket, incurring zero tax, in a similar fashion to the tax-free income threshold.

Replacing stamp duty with a land tax has many benefits. Stamp duty is regarded by many economists today as an ‘archaic’ and ‘inefficient tax’, an anachronism of the 19th century that has no place in the modern economy. Unlike a land tax, which would apply to all landowners on a regular basis, stamp duty is a transactional tax. That is, it only applies to those buying or selling property, and thus can be avoided by those who own homes for long periods without buying or selling. Moreover, studies show stamp duty isn’t just fiscally inefficient, but it also acts as a drag on the economy . People are simply less willing to move house when they know that, aside from the associated costs of moving, they will also be hit with hefty stamp duty. This acts as a disincentive for older people with large houses to downsize, which means much of Australia’s housing stock is not being utilised as efficiently as possible. If stamp duties were abolished in favour of land tax, the more revenue could be raised over the long run because land prices tend to be more stable than that of property.

It’s very important to note that there is a successful precedent for such a change. Showing some initiative, in 2012, the government of the Australian Capital Territory began phasing out stamp duty in favour of broadening its (already existing) land tax. This aimed to raise an extra $10 million in revenue by introducing new marginal rates and broadening the base of the land tax. Australia’s states all have their own land taxes, but none have been reformed in the way that the ACT’s has. Similar reform on a national scale would be a great boon to the Australian economy.

From a political perspective, this would be a shrewd act of reform that would help tackle the issue of inequality in property ownership and affordability, and provide a boost to tax revenue over the long term. If Australia is to continue its prosperity in decades to come, we must be as efficient as possible in our use of assets, and collection of government revenue. A broad-based land tax is a fine place to start.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

  • Aristidi Armstrong

    Great article, Sam! It definitely seems to be a more equitable system rather than stamp duty. You mentioned that abolishing stamp duty would assist in making housing more affordable. I was wondering what your position on negative gearing was, seeing as that is often blamed for the increasingly high price to income ratios we are seeing on average in Australia.

    • Sam O’Connor

      Thank you for your kind words!! I’m of a similar mind towards negative gearing as I am towards stamp duty. The treatment of negative gearing by government policy, in my view, is a severe problem that needs to be addressed. It allows property investors to invest in more property and encourage reckless speculation with government subsidies, pricing those who would most benefit from home ownership (mostly young families) out of the market. If it were removed, I imagine property prices would gradually contract to a more affordable level.

  • Steven Nguyen

    Land tax would not address the fundamental issue, with the housing bubble (namely, increasing speculation via both domestic and foreign investors). If you want more affordable housing, you would aim to address negative gearing, and the global interest rates (namely that disgusting currency war). The reason the government’s bottom line is struggling, is ill-investment, and the belief that the economy would continue to experience growth, through a flawed commodity boom (in conjunction with the artificial wealth being created by our financial institutions – major banks). They borrowed to binge on inefficient debt fueled growth (following in America’s footsteps)

    Moreover, the concept of a land-tax has been raised several times, but as an economist, you should know that from a political perspective it is not shrewd but equivalent to political suicide.

    Either way, this is a flawed and superficial way to address the issue of housing affordability, as it does not discriminate between the affluent and the struggling (which in turn, creates the need for reimbursement in some form – which we know will be exploited).

    • BW

      Hi Steven,

      Whilst I agree that the commodity boom did hide frailties in the long term growth of the Australian economy, I don’t think you can isolate the main cause of the booming housing market to only speculation growth and distorting policies like negative gearing. Yes, I completely agree that they are major contributors to what we are observing, but that is not the whole story, the state of the property market is a combination of demand AND supply side factors which are working together to increase prices. Domestic/international speculation growth, negative gearing, capital gains tax, restrictive/inelastic land supply and high levels of population growth are all contributing to the so-called ‘bubble’ (amongst a range of other factors).

      That being said, I think shifting from stamp duty to a broad based land tax is a sensible measure which should come as part of wider tax reform. Stamp duty is a disincentive to buying/selling existing property (as Sam has addressed), resulting in inefficient housing stock. If we could phase out stamp duty as the ACT has whilst implementing a broad based land tax, it is likely we will see greater housing turnover in a market with extremely high levels of demand.

      I personally think that the controversial debate currently going on regarding negative gearing and capital gains is more likely to be politically damage in the current environment than implementing a land tax. With a land tax, you also have the added benefit of gaining extra revenue from any appreication in land prices from infrastructure investment, which can offset future investment costs.

      I am curious to how the government/policy makers can address global interest rates/currency war, could you elaborate on that?

      • Steven Nguyen

        Effectively they cant, rather they wont. It’s a matter of vested interest (a lower currency, is better for our export/services/tourism industry), and frankly, with the stalemate in the senate – which is costing us an arm – they wont do anything about long term interest rates. The economy is in the slumps – the world knows that booms are always accompanied by a downturn (effectively a crash), yet the economy didn’t seem to care about that for 10 years, and effectively focused on fake growth. We have taken a reliant stance on China who are slowing (others say stabilizing – doesn’t matter how you term it, it means that growth/demand is declining), which is just plain bizarre. What this effectively translates to, is that the RBA cannot (will not) raise interest rates (which in the long term, must average 4-5% for sustainability) – rather interest rates are expected to be cut in today’s meeting (the 5th of April).

        Currency wars happen all the time, just look at the petro-dollar system, it was America’s big middle finger to the world, its just this time, it feels like the people running it are incredibly more foolish, or the recent mass QE on their end.

        And yes, negative gearing is not the main issue for why the economy is smack dead on the ground, it is however, a proponent to the fake wealth/growth of the economy over recent years. Just watch, if another crisis hits, the government will most likely be unable to cover for the four big-banks (it’s like a repeat of America), whereby the public will be forced to dig into their coffers.

        BTW it is important to note that future budgets are deemed to be still based around the assumption, that commodities will rebound (i.e. the emphasis on living off commodities has not changed)

        I admit I’m a cynical individual. But being cynic, even I can see the blatantly obvious issues that the government seems to want to avoid.

      • Steven Nguyen

        As we expected, the RBA cut interest (once again).

        “At its meeting today, the Board decided to lower the
        cash rate by 25 basis points to 2.0 per cent, effective
        6 May 2015.

        The global economy is expanding at a moderate pace,
        but commodity prices have declined over the past year,
        in some cases sharply. These trends appear largely to
        reflect increased supply, including from Australia.
        Australia’s terms of trade are falling nonetheless.

        The Federal Reserve is expected to start increasing
        its policy rate later this year, but some other major
        central banks are stepping up the pace of unconventional
        policy measures. Hence, financial conditions remain
        very accommodative globally, with long-term borrowing
        rates for sovereigns and creditworthy private borrowers
        remarkably low.

        In Australia, the available information suggests improved
        trends in household demand over the past six months
        and stronger growth in employment. Looking ahead, the
        key drag on private demand is likely to be weakness
        in business capital expenditure in both the mining and
        non-mining sectors over the coming year. Public spending
        is also scheduled to be subdued. The economy is therefore
        likely to be operating with a degree of spare capacity
        for some time yet. Inflation is forecast to remain consistent
        with the target over the next one to two years, even
        with a lower exchange rate.

        Low interest rates are acting to support borrowing and
        spending, and credit is recording moderate growth overall,
        with stronger lending to businesses of late. Growth
        in lending to the housing market has been steady over
        recent months. Dwelling prices continue to rise strongly
        in Sydney, though trends have been more varied in a
        number of other cities. The Bank is working with other
        regulators to assess and contain risks that may arise
        from the housing market. In other asset markets, prices
        for equities and commercial property have been supported
        by lower long-term interest rates.

        The Australian dollar has declined noticeably against
        a rising US dollar over the past year, though less so
        against a basket of currencies. Further depreciation
        seems both likely and necessary, particularly given
        the significant declines in key commodity prices.

        At today’s meeting, the Board judged that the inflation
        outlook provided the opportunity for monetary policy
        to be eased further, so as to reinforce recent encouraging
        trends in household demand”

        Get ready, this unsustainable ride is going to hurt long term stability.

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