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.