Regular readers will know that I am a big fan of shifting state tax bases away from stamp duties on property transactions towards broad-based land taxes. The benefits of broad-based land taxes are numerous, but include:
- Less volatility in revenue collection than stamp duties, since land taxes are not dependent on the volume of transactions;
- More equitable than stamp duties, since they spread the tax burden across all home owners, rather than the small proportion of buyers in a given year;
- More efficient use of the housing stock, since home buyers would be more likely to move to homes that better suit their needs;
- Assisting in the provision of new housing by helping 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; and
- Penalising land banking and vagrancy, effectively increasing the supply of land in the process and bringing new homes to market more quickly.
Over the weekend, Salon‘s Jesse Myerson published a spirited article arguing for the US to implement land taxes as a way to both reduce inequality and mitigate poverty:
If we want a real overhaul/simplification of the tax code, the way to do it is to tax land value. It might be the only tax we need. No sales tax. No income tax. No payroll tax to fill a Social Security trust fund. No corporate income tax that, as we can plainly see, offshores profits. No need to tax labor and industry at all. Just tax the stuff that humans had nothing to do with creating, and therefore have no basis to claim ownership over at all. You’ll find that almost all of it is “owned” by the fabled 1 percent.
And boy are they sucking a lot of money out of it. By far the most valuable asset form in the U.S. is real estate, and the majority of that is the value of the land, as distinct from the value of the human-made buildings…
No one put any enterprise or cost into producing the land’s value – they simply bought it when it was cheap, sold it when it was dear, and waited for the check. “They” are the Finance, Insurance and Real Estate (FIRE) sector, and they capture 40 percent of the United States’ profits, despite the complete passivity of their profit-accumulation method…
Not only would a land value tax (LVT) drastically shrink that Wall Street bloat, it would have prevented the housing bubble in the first place. Land, after all, was the speculative commodity at play, not the houses themselves, which, as “Arrested Development” incisively suggested, were a bunch of crap…
An LVT would stimulate urban property development without incurring the socially catastrophic ethnic displacement pattern we call “gentrification”… As that noted far-left rag the Economist notes, “Property developers … would be less inclined to hoard undeveloped land if they had to pay an annual levy on it”… Urban land, scarce by definition, is very valuable. There is no reason to let a small group of rich landlords extract its value, when what created the value are parks, subways, local restaurants and other things the landlords didn’t provide.
The Henry Review of the Australian taxation system concluded that “land is an efficient tax base because it is immobile; unlike labour and capital, it cannot move to escape tax” and that “economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases”.
While not shown in the below chart from the Henry Review, a broad-based land tax would presumably have similar efficiency to the Petroleum Resource Rent Tax (PRRT) and Municipal rates, since it would be applied to a tax base that is completely immobile – land.
While I mostly agree with the Henry Review’s conclusion, and strongly believe in shifting states towards land taxes, I certainly don’t believe in making land the only tax input, as Jesse Myerson seems to be arguing.
I also do not believe that broad-based land taxes would necessarily result in no distortions. For example, if land taxes were set at 100%, then rural land owners on the fringe of our cities would receive no profits from the sale of the land and would have absolutely no incentive to improve their land or accept an offer from someone wishing to develop the land for housing. The 100% land tax could, therefore, ‘freeze’ the use of the land, potentially starving the urban economy and housing market of land over time. So while land taxes are generally superior than transaction taxes, like stamp duties, the rates should not be set too high to discourage the change of ownership to a more efficient use.
Nor do I believe that land taxes are a substitute for liberalising land supply and planning. While land taxes will help to reduce land banking and the overall level of vagrancy, if the overall amount of developable land remains heavily restricted, then artificial scarcity will continue to place upward pressure on prices, as it has done in places like Hong Kong where broad-based land taxes are in effect but property bubbles are forever prevalent.
Put simply, replacing less efficient taxes with a broad-based land tax would be a marked improvement to Australia’s taxation system and housing market, but on its own is no panacea.
