The Property Council of Australia (PCA) has called on the Government to dump stamp duties in exchange for raising the GST or broadening land taxes. From The AFR:
“South Australia has already shown its willingness to take on tax reform, including stamp duty. The other states and territories should now step up to the mark. Stamp duty is an inefficient, volatile tax – contrary to all best principles of taxation – and the states should not be relying on such a volatile income stream to fund essential services like health, education, infrastructure and transport.”
“The most obvious solution would be to broaden and increase the GST, but we are open to discussion on a broad-base, low-rate land tax or other revenue options.”
You will get no disagreement from me. As I have argued many times before, stamp duties are one of the worst taxes going around.
Not only do stamp duties hinder labour mobility by discouraging workers from relocating closer to employment. But they also unnecessarily 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.
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Stamp duties are also highly inequitable. As shown in the below RBA chart, between 4% and 8% of the housing stock is transacted annually. As such, we have a bizarre situation where a small minority of the population are paying taxes that support services for the whole community – all for the privilege of moving to a home that better suits their needs!
Treasury’s discussion paper on tax was clear in its dislike of stamp duties and support of a broad-based land tax. Whereas stamp duties are incredibly inefficient – creating a large marginal excess burden – land taxes are one of the most efficient taxes around, actually creating positive efficiencies:
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Conveyancing stamp duties… have a high excess burden because they discourage the exchange of residential and business properties…
Stamp duties are some of the most inefficient taxes levied in Australia… they are levied selectively on activities or products and are taxed on the total transaction value, rather than the ‘value added’ component. Such transaction taxes are more likely to discourage turnover of taxed goods, as taxpayers attempt to reduce or avoid paying the tax…
Because revenue growth is driven by property prices and numbers of transactions, stamp duties on conveyances are a highly volatile tax, with revenue collected from stamp duties on conveyances fluctuating by over 50 per cent in previous years. Stamp duties on conveyances add to the costs of buying and selling property and can discourage businesses from undertaking productivity enhancing purchases of existing land and capital. The outcome can be retention of land for relatively unproductive purposes…
Stamp duties also impact on consumers by increasing the cost of buying and selling houses. As house prices increase over time, unadjusted progressive tax rates also increase the tax burden associated with stamp duty. For example, the burden of stamp duty on a median-priced house in Melbourne has almost doubled over the past 20 years — from 2.67 per cent of the sale price in 1988 to 5.16 per cent in 2011.
This clearly adds to transaction costs and contributes to Australia’s high (by international standards) costs of moving. These costs can discourage householders from moving to housing that best suits their needs and can be an important barrier to labour mobility. A number of reviews have found that, by dampening the number of house sales, stamp duties can also add to commuting times.183 Stamp duty can also be inequitable — those who move more frequently face higher costs than those who move less frequently, even if their circumstances are otherwise similar…
Modelling also suggests that broad-based land taxes, such as municipal rates, have a low economic cost (Chart 2.9). This is because land is immobile (unlike other capital) and cannot be moved or varied to avoid tax. The model applies this assumption to both domestic and foreign ownership of land. Land taxes paid by foreign and domestic landowners are only redistributed to the domestic households, providing a benefit to Australian households and generating a negative marginal excess burden for a broad-based land tax shown in the chart.
As argued previously, there are also broader reasons to endorse the implementation of land value taxes in place of stamp duties. First, a broad-based land tax would help 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, an broad-based land values tax would penalise land banking and vagrancy, effectively increasing the supply of land in the process and bringing new homes to market more quickly.
Past Commission inquiries have recommended replacing stamp duties with a more efficient form of taxation, such as a broad based land tax, as this will improve flexibility and efficiency in the housing market (PC 2013b). A more flexible housing market will also support geographic labour mobility, allowing more workers to move to areas with better employment opportunities…
RECOMMENDATION 12.2
State and Territory Governments should remove or significantly reduce housing related stamp duties, and increase reliance on more efficient taxes, such as broad based land taxes.
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…
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:
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.
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While it is clear that stamp duties are a horrible tax, equity and efficiency considerations demands that they be replaced by a broad-based land tax, rather than a less efficient and regressive increase in the GST.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
