It’s time to levy the land

ScreenHunter_18 Jul. 05 10.22

By Leith van Onselen

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):

ScreenHunter_19 Jul. 05 10.44

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.

[email protected]

www.twitter.com/leithvo

Comments

  1. reusachtigeMEMBER

    As much as taxes need to be weighed much much more heavily on land rather than on work and transactions, it won’t happen because this nation is the ultimate rent-seekers paradise and such a move would stir up a hornets nest of rent-seekers. It would be turned into THE BIGGEST election issue of all time, no matter when in time it was to occur.

      • darklydrawlMEMBER

        You guys need to get into power so you can make these changes…

        Then you have some leverage to fight the good fight…

        One of the greatest failing of democracy is that what is ‘popular’ isn’t always what is best and required for a successful society.

      • reusachtigeMEMBER

        I think the only way it could be sold to “the people” is by offering major income tax reductions, maybe even to the level of corporate tax as max, then showing them what it means. When the rent-seekers scream and campaign against the tax the counter would have to be “big corporate land owners (and potentially opposition parties) wish to deprive you of these huge tax savings, it’s money they are trying to stop you from getting in your pockets”.

      • JacksonMEMBER

        Keep going for it UE, it is such a simple argument that is has to win through eventually, though I recognise this could be on a similar geological timescale to the formation of the land itself.

        Keep taking the high road…

      • The country that wins this economic battle with its landowners and rentiers will profoundly outperform its peers, forever.

        Untaxed wages? Labor would migrate from around the world and work itself to the bone.

        Untaxed business? A giant boost to productive output and magnet for entrepreneurial activity.

        Taxed land? Access to inexpensive land for all. A giant building boom that would make recent years look languid.

        Tax avoidance? Nil.

        This gift horse parades up and down in front of economists and politicians every day, but remains trumped by privilege and prior advantage.

        Instead we have Stamp Duty, Payroll Tax and 125 other mean and nasty revenue measures, all so the land may remain untaxed.

        Bah! Humbug!

    • Well is would be one way to drown out small issues like boats.

      Tony would be in trouble if Rudd decided to make the election about Land Tax. Of course he’d have to sell it, which is tricky after governments since about the 80’s have tricked the masses into getting into the Property Ponzi scheme.

    • +1 However imo it’s not just an election issue, me thinks there are stronger i.e. international forces at play.

  2. Alex Heyworth

    Economic rent was one of Ken Henry’s five target areas for taxation. Land is one of the prime areas in which economic rent occurs.

    Maybe if Chris Bowen was PM? He has been talking about tax reform. If he could get the Libs onside, as Bob Hawke did in the 80s …

    Nah, I’m dreaming.

    • darklydrawlMEMBER

      One day I might see again a current pollie with a fully developed backbone…

      • Alex Heyworth

        Even Hawke was described as “old jellyback” by his Finance minister, Peter Walsh. If you have the opposition on side, the voters are stymied. No spine required.

  3. Jeesh Leith. I am less convinced of this certainly as you say without extensive overhaul of existing tax burdens. Not sure how this would affect agricultural nor mining uses and definitely not confident our legislators could get balance and methodology right.

    They would probably require assistance in drafting from land developers, agricultural and resource sectors…to ensure balance 😉

    • Yes, they do. In fact, I’m pretty sure a lot of them do, eg. Joondalup, Wanneroo, etc

  4. Tax the crap out of stuff that you can’t move and tax as lightly as possible stuff that can.

    Simple common sense.

  5. How exactly would a land tax work? Would it be based on block value? Block size? Or value/size?

  6. Good idea, without doubt. Whether the powers that be have the nous or will to actually do this, well, I’ll believe that when I see porcine aerobatics outside my window.

    Till then, big up to all those who’re pushing this on behalf of us, the people.

    Have a good weekend, all

  7. WeNeedaWarpDrive

    David Collyer:

    “Untaxed wages? Labor would migrate from around the world and work itself to the bone.
    Untaxed business? A giant boost to productive output and magnet for entrepreneurial activity.
    Taxed land? Access to inexpensive land for all. A giant building boom that would make recent years look languid.”

    If the federal government spending for 2012/3 of $376.3 billion (will ignore state budgets) is funded by a land tax then it will be businesses and households that cover that figure.

    If I own the land that you lease your business on then you will be paying me the land tax for that land plus profit which you will pass on to your customers.

    If you own the land that you run your business on then you will pass the land tax on to your customers plus profit.

    If you own a rental property you will pass the land tax on to the tenant.

    If you rent the land tax will be included in your rent.

    Say 20% of the federal spend comes from households and 80% from business.

    20% of 376.3 billion is 75.26 billion divided by 7,760,322 is $9,698 per household
    80% of 376.3 billion is 301.04 billion divided by 2,141,280 is $140,588 per business

    That doesn’t equal untaxed wages or untaxed business.

    I agree that this would force the value of land to plummet and business would move to the outskirts of cities where the value of the land is low.

    the supply of land is not fixed (unless you take land as everything that is not ocean). Industrial and manufacturing parks and services delivered through IT would all move as far away from the city as possible to minimise their tax bill.

    Sounds more distortionary to me than the current system.

    If you want to remove distortion then a more simple way is to bring all the tax rates (income and business) to the same rate and get rid of the stupid disincentives like payroll tax.

    Agree that removing distortion is a worthy goal but I have a bad unintended consequences feeling about excessive LVT as it does not address the root cause of things. You can fix the distortion without LVT and you can fix the asset bubbles without LVT (credit growth / fractional reserve banking etc).

    http://www.abs.gov.au/ausstats/[email protected]/mediareleasesbyCatalogue/950EC94DB899312ECA2573B00017B8F4?Opendocument

    http://www.abs.gov.au/websitedbs/censushome.nsf/home/factsheetshtdc?opendocument&navpos=450

    http://www.budget.gov.au/2012-13/content/overview/html/overview_42.htm

    UE:

    “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.”

    What do you mean by this?

    How would LVT make infrastructure self funding?

    For it to be self funding it would need to be privatised which means the tax is passed on to consumers.
    If there is a land tax on the land on Melbourne train lines which is passed on to consumers the ticket prices would go through the roof and you would finally cut through voter apathy and people would start to demonstrate 🙂

    A land tax on roads passed to users via car registrations would mean less people use cars and since public transport prices are through the roof so people be like WTF?

    How would it be self funding?