Jessica Irvine has produced a sensible article today advocating that Australia shift its tax base away from inefficient and inequitable indirect taxes, like stamp duties, towards more efficient and equitable taxes, like a broad-based land tax:
The land of the fair go has given rise to some of the most unaffordable homes in the world…
…a new dividing range has [also] sprung up across our cities, between the affluent inner suburbs and the outer suburbs. Inner city areas have enjoyed the steepest home price rises over the past few decades, with slower growth in the outer suburbs…
It’s not fair…
One answer, according to economists, is to scrap stamp duty – which adds substantially to the cost of home purchase – and replace it with a broadbased land tax…
First, it would be progressive, collecting more money from those with higher wealth and less from those without it.
Second, by abolishing stamp duty on home purchase, it would lower the hurdle for first time home ownership.
Third, house prices in more valuable inner areas would likely fall as a result, reflecting the future cost of the land tax, making housing more affordable in those areas.
Fourth, developers would have more of an incentive to actually develop inner city land into housing, increasing housing supply.
Fifth, a land tax would form a more stable revenue base for state governments. This increased revenue could be used to fund more health, education and public transport facilities to outer suburban areas. This would also reduce housing inequality by making those areas more attractive to buyers.
Transitional arrangements could apply so that the new land tax did not apply to existing homeowners who had already paid stamp duty on their home. But new buyers could pay the land tax, rather than stamp duty.
There’s a lot to like about Irvine’s arguments.
Stamp duty is an inherently volatile source of taxation revenue for state governments, since it is critically dependent on both the volume of housing transfers as well as the price at which those homes transact. During the early-to-mid 2000s boom, when both prices and transactions soared, the states found themselves awash with cash, with total stamp duty collections rising by over 150% in the eight years to 2007-08. Since that time, however, stamp duty revenues have fallen significantly, putting the squeeze on state and territory finances that had become accustomed to the good times.
Stamp duties also unfairly penalise people that move to homes that better suit their needs. Obvious examples include baby boomers downsizing from large family homes and young growing families upsizing to bigger family-friendly homes. Such disincentives inevitably lead to an inefficient use of the housing stock, such as empty nesters occupying large homes with multiple spare bedrooms. Stamp duties also hinder labour mobility since they discourage workers from relocating closer to employment.
As shown by the next RBA chart, less than 5% of the housing stock is currently transacted annually. As such, Australia finds itself in the bizarre situation whereby a small minority of households are paying taxes that support services for the whole community.
A fairer way of sharing the tax burden would be to abolish stamp duties and extend land taxes currently applied on investment properties to one’s principal place of residence. As shown by the next chart, land tax receipts have proven to be a remarkably stable source of revenue when compared against stamp duties, since they are not affected by transaction volumes.
And there are further reasons to support a shift to broad-based land taxes, some of which have been alluded to above by Jessica Irvine.
First, land taxes would assist in the provision of new housing via two main channels. First, they would help to make infrastructure investments self-funding for governments, since any land value uplift brought about through increased infrastructure investment (e.g. new roads, trains, etc) would be partly captured by the government via increased land tax receipts. Accordingly, governments would be more likely to facilitate development, rather than act to restrict it in a bid to save on infrastructure costs. Second, a broad-based land tax would penalise land banking and vagrancy, effectively increasing the supply of land in the process and bringing new homes to market more quickly.
Transitional issues in moving from stamp duties to a broad-based land tax, and concerns about double taxation, could be overcome by crediting all landowners with the amount of stamp duty paid and then deducting the hypothetical land tax they would have paid since the date of purchase. As a second best option, asset rich, cash poor, retirees could also be permitted to accumulate their land tax liability, with the bill payable upon death (via the estate) or once the house is eventually sold (whichever comes first), with interest charged on any outstandings.
Requiring any land tax liability to be paid in smaller regular installments (e.g. once a month), rather than in a large annual or biannual lump-sum, could also assist in gaining community acceptance, since it seem like less of a burden.
The options are there, and with stamp duty revenues remaining volatile and having shrunk in recent years, it is in the state and territory governments’ financial interest to pursue reform and change the tax mix.
