The Property Council of Australia (PCA) has stepped-up its lobbying on tax reform, commissioning research based on a survey of 1,957 respondents showing that most Australians would prefer to see stamp duty abolished in exchange for an increase in the GST:
A comprehensive report from Newgate Research Community attitudes towards tax reform, commissioned by the Property Council of Australia, finds that nine out of ten Australians surveyed supported tax reform which made the system simpler and fairer.Nearly three quarters (72%) of Australians believed it was inevitable that GST will rise over the next decade, while only two per cent believed it would definitely not rise.
Most believed the GST is a fair tax because it was one that could not be dodged.
Stamp duty on the other hand is considered the most unfair tax of all with most Australians agreeing that it was now a major barrier to buying a home…
Three-quarters of Australians also agree that stamp duty is driving up home prices and making it unaffordable for young people to own their own home. Over two thirds of the community (70%) support the idea of abolishing stamp duty.
Australians believe overwhelmingly (71%) that the level of tax on people’s homes is too high. Reducing the level of tax on people’s homes is considered a higher priority than reducing the rate of personal income tax.
Over two thirds (70%) of people supported the abolition of stamp duty, with the concept of reforming the GST to pay for stamp duty abolition also receiving strong support…
Property Council Chief Executive Ken Morrison said the research showed Australians supported fair reforms to the tax system.
“Broadening or increasing the rate of GST has long been considered political poison, but that no longer reflects the attitude of the community,” Mr Morrison said.
“Australians clearly understand the need for tax reform and as the research makes clear they want a tax system that is fairer and simpler.
“Changes to the GST need to be taken out of the too-hard basket.
“Our research shows that Australians would support an increase in the rate of GST in return for doing away with other unfair, punitive taxes like stamp duty.
“Governments know stamp duty distorts the economy, hurts housing affordability and is a rollercoaster source of revenue.
“National tax reform needs to replace our most distortionary taxes with more efficient revenue sources.”
When it comes to stamp duty, the PCA is 100% correct. It is one of the most inefficient and damaging taxes going around, with Treasury’s discussion paper on tax showing it created a large marginal excess burden:
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…
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However, while the PCA’s arguments on stamp duty are valid, it conveniently failed to endorse shifting the tax base to a broad-based land tax, which is amongst the most efficient and equitable taxes going around, actually creating positive efficiencies. Again, here’s the Australian Treasury’s view:
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.
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.
So, based on efficiency grounds, a shift from stamp duties to broad-based land taxes is a ‘no brainer’ and would confer significant benefits for the economy and welfare.
As argued previously, there are also broader reasons to endorse the implementation of land value taxes in place of stamp duties.
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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.
This is not to say that the GST should also be broadened/increased, but rather that it should be traded-off against reduced taxes on incomes, which are also inefficient and are becoming increasingly inequitable because of bracket creep.
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Chris Richardson from Deloitte Access Economics agrees:
Look, there are great arguments for doing away with stamp duty at the state level, there are excellent arguments for widening the GST.
I’m not sure that the two go together.
The more logical thing to get rid of a bad property tax would be to replace it with a good property tax.
That’s what you’re seeing in the ACT.
For example, if they’re raising the equivalent of council rates, at the state level you could potentially do it through some type of land tax.
In summary, stamp duties are a horrible tax, and efficiency considerations demand that they be replaced by a broad-based land tax.
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Just don’t expect a vested interest like the PCA to argue the case.
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.
