The Economist over the weekend published a great primer on the benefits of broad-based land taxes:
Taxing land and property is one of the most efficient and least distorting ways for governments to raise money. A pure land tax, one without regard to how land is used or what is built on it, is the best sort. Since the amount of land is fixed, taxing it cannot distort supply in the way that taxing work or saving might discourage effort or thrift. Instead a land tax encourages efficient land use. Property developers, for instance, would be less inclined to hoard undeveloped land if they had to pay an annual levy on it. Property taxes that include the value of buildings on land are less efficient, since they are, in effect, a tax on the investment in that property. Even so, they are less likely to affect people’s behaviour than income or employment taxes. A study by the OECD suggests that taxes on immovable property are the most growth-friendly of all major taxes. That is even truer of urbanising emerging economies with large informal sectors.
Property taxes are a stable source of revenue in a globalised world where firms and skilled people can easily move. They are also less prone to cyclical swings. In the financial bust America’s state and local governments saw smaller declines in property taxes than other forms of revenue, largely because the valuations on which tax assessments are based were adjusted more slowly and less dramatically than actual prices. Property taxes may even restrain housing booms by making it more expensive to buy homes for purely speculative purposes.
Yet, despite these benefits, the average high income country, including all levels of government, raises under 5% of total tax revenue from annual levies on land or the buildings on it (including council rates):
Times are slowly changing, however, with The Economist reporting that some 20 countries that have recently introduced new property taxes, or are considering doing so. Ireland is a case in point. Following recent reforms, capital gains from rezoned land is now classified as windfall gain, attracting 80% tax.
While I would not like to see a broad-based land values tax (LVT) implemented on top of Australia’s other taxes, there are strong arguments for improving the efficiency and equity of the tax system by replacing highly distorting taxes, like stamp duties, with an LVT in a revenue neutral manner.
As argued previously, stamp duties are an inherently volatile source of taxation revenue in Australia, since they are critically dependent on both the volume of housing transfers as well as the price at which those homes transact. Stamp duties also unfairly penalise people that move to homes that better suit their needs, as well as hinder labour mobility since they discourage workers from relocating closer to employment.
In addition to the efficiency benefits purported above by The Economist, a broad-based land LVT would also assist in the provision of new housing via two main channels. First, an LVT 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 LVT 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 LVT 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 an LVT, 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. Asset rich, cash poor, retirees could also be permitted to accumulate their LVT 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 LVT 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 arguments for LVTs are well known. It’s just a shame that Australian policy makers will not even consider reform.