Use land taxes to plug state revenue holes

ScreenHunter_18 Jul. 05 10.22

Cross-posted from David Collyer at Prosper Australia

Sometimes, through the smoke and fireworks of the national debate a political commentator sees the path forward and points the way.

Today in the Australian Financial Review, Alan Mitchell takes a far-sighted approach to the crisis provoked by the Abbott government in its attempt to raise and broaden the GST.

The Liberal Party has long been host to the clearest thinkers on the federal system embedded in Australia’s Constitution. Malcolm Fraser tried to unravel the ‘Canberra taxes, States spend’ dilemma that divorces revenue raising from program responsibility.

Civic society demands taxes and spending be tightly linked for accountability and fair scrutiny. Transparency is an essential feature of good government.

The first Abbott/Hockey budget seeks to end $80 billion in federal transfers to the states for health and education. The game plan is to force the states to beg for a tax on food.

Mitchell has a better idea, based on the principle of subsidiarity. This directs that matters ought be handled by the smallest, lowest or least centralised competent authority. Central government should perform only those tasks which cannot be performed at a more immediate or local level. This includes taxation.

State governments have quality tax bases – they just choose to use bad taxes and blame distant mandarins in Canberra for their self-imposed weakness. Voters struggle to see which level of government is responsible for which stuff-up.

Mitchell:

“In fact, they have all the efficient tax bases they need to raise a very large share of the spending now financed by grants from Canberra.

“They just prefer not to use them. They would rather rely on federal money and complain about “vertical fiscal imbalance.”

“Vertical imbalance is largely a myth perpetuated by state politicians who would rather avoid the responsibility for raising their own taxes.

Good can come from this Abbott/Hockey confected crisis. The Premiers are under no obligation to follow Canberra’s lead and destroy their narrow political capital by assuming responsibility for raising and broadening the regressive GST.

The states could instead take up the reforms urged on them by every genuinely independent tax review in living memory.

“Residential land tax also should be revived, and the most convenient way to do that probably is for state governments to gradually transfer more responsibilities to local government.

“Local government land rates based on unimproved property values are an efficient form of land tax, and while no one would enjoy paying higher rates, increased community control of schools, for example, might be quite popular. The availability of reverse mortgages also makes it more feasible for governments to rely more on the taxation of residential land.

State governments are sovereign. They do have choices. Rather than submit to a very bad deal from Canberra, they can reform themselves – and make Prime Minister Abbott responsible for the political costs of good public policy.

Unconventional Economist
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Comments

  1. Serfdom is not the way forward. Dismantle the global banking cartel and the necessity for land tax disappears.

    • to tax economic rents of land you have to get rid of income tax, which you can’t do unless you get rid of the banking cartel first since they’re the ones that demanded it in the first place….

    • surfbeach2536

      What ever happened to economies of scale?. We have been told one of the biggest obstacles to the Motor Vehicle Industry was a lack of economic scale for our manufacturers. Yet the same people are advocating turning away from centralising power to empowering the lowest levels of government.

      You know that the case for smaller government is becoming hopeless when a small shire council like Eurobodalla on the NSW South Coast has to determine what the sea level rise level will be in 75 and 100 years from now.

      And why should Australians living in different states receive different levels of medical care?

      If you want to save government costs centralise the medical system and the transport system for a start. Put a moratorium on new state taxes and levies, have a referendum on the transfer power to the federal parliament. Stop the duplication or triplication of management. stop the blame shifting.

      Land taxes may not be needed

  2. All we need is one more state to follow ACT and WA to start implementing land taxes and the rest will follow. Furthermore, citizens living in these states will also hopefully better see the direct benefits of their taxes.

      • It’s in their job description … do you think politicians go into politics for the good of the country?

        Having said that, look at the swiss and german systems. You pay local tax for local services. Don’t like the service, you know exactly who to complain to. If not you move to a different state/canton.

      • @NMT “yeah, governments never piss money away at all.”

        Your nihilism is very refreshing. We are all uplifted.

        Problem is, they piss it away AND use bad tax bases so we endure deadweight costs as well. Better to fritter away taxpayers funds from sound taxes, don’t you think?

      • Its not nihilistic, its realistic. Introducing tax reform without changing expenditures achieves absolutely nothing at all.

        Define sound taxes ? I agree land tax gives a much more stable revenue base than the current system however :-
        *what is the point if there is not net gain given expenditures will not be reformed
        *At what cost to liberty and freedom from the state. We do not exist to serve the state, the state exists to serve the people therein.
        *Decimate the global banking cartel, the need for land tax exists no longer

    • @NMT


      *what is the point if there is not net gain given expenditures will not be reformed

      No one is arguing that this should not be done. You are making the whole process of tax collection and spending more efficient by by-passing the Fed altogether and you can directly point to your local government when things are not done.


      *At what cost to liberty and freedom from the state. We do not exist to serve the state, the state exists to serve the people therein.

      Can you elaborate? The tax will be used to provide you with a service like in Switzerland and Germany. Don’t like it, move to somewhere without or less tax and less services. no freedom is taken away from you.


      *Decimate the global banking cartel, the need for land tax exists no longer

      Again how does that give you better infrastructure, schools and health services?

      • ” The tax will be used to provide you with a service like in Switzerland and Germany. Don’t like it, move to somewhere without or less tax and less services. no freedom is taken away from you.”

        ummmmh if it is mandatory to pay land tax than:-
        1. Your freedom is taken away from you because you don’t have to option to opt out. (Reminds me of goodfellas, “business is bad? [email protected]#& you, pay me. House burned down? [email protected]#& you, pay me)
        2. A broad based land tax will result in paying for services that you don’t necessarily use.
        3. What the hell is wrong with a direct fee for a direct service?
        4. What happens when you are no longer producing an income through labour and can’t pay a tax on land that is supposedly owned by you?

        “Again how does that give you better infrastructure, schools and health services?”

        Without a banking cartel the government can spend money into existence for infrastructure and services like schools and health, without necessarily incurring a debt burden associated with it. Remove the right for private banking corporations to create debt notes and all our problems disappear. Your familiar with the concept of the exponential function right? You do appreciate you just have to keep borrowing more and more money to pay back more and more debt……..which can NEVER BE extinguished….EVER!

      • 1. Your freedom is taken away from you because you don’t have to option to opt out. (Reminds me of goodfellas, “business is bad? [email protected]#& you, pay me. House burned down? [email protected]#& you, pay me)

        And you can opt out of what now? Income tax ? so let the rest of the buggers pay for you?

        2. A broad based land tax will result in paying for services that you don’t necessarily use.
        Then ask your local government for services that you do use.

        3. What the hell is wrong with a direct fee for a direct service?
        Nothing. Except that many services that don’t or aren’t meant to turn a profit will never happen. What a US style health system?

        4. What happens when you are no longer producing an income through labour and can’t pay a tax on land that is supposedly owned by you?

        I am sure some concessions can be made. Alternatively you think about this when you buy the land right?

      • And you can opt out of what now? Income tax ? so let the rest of the buggers pay for you?

        The point is you dont need to pay income tax if the power of currency creation is removed from the banking cartel and placed in the hands of government. They spend currency into existence through the provision of infrastructure and services.

        I appreciate your point of view and why you purport the benefits of land tax….. I just dont agree with you, as destroying the banking cartel is infinitely more efficient and productive.

      • @NMT

        If you read some of my other posts, you will see I am all for destroying the banking cartel. However I think giving that power to the politicians will make it even worse.

        “There are two tragedies in life. One is to lose your heart’s desire. The other is to gain it.” ― George Bernard Shaw

      • Agree with your sentiments, however politicians merely respond to power. With the banking cartel gone, they may heed the wishes of the people a little more……..one can only hope at least.

      • @NMT

        Every time I have these discussions the following quote allows comes to mind:

        “A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy.” — Attributed to various

    • The Patrician

      ff, As can be seen below, all states currently impose and collect land value taxes with varing rates and bases.

      https://twitter.com/aushousingcrash/status/465071179170992128/photo/1

      Increasing revenue is simply a matter of broadening the base and/or increasing the rate while rolling back SD.

      TAS and ACT actually have the broadest base. WA has been a bit of a lagard but is catching up. That is the beauty of the LVT, each state can adjust the base and the rate to suit their circumstances, SD etc.

      They are each in control of their own destiny.

  3. It won’t happen. They will just keep commissioning more and more reports until they get the ‘right’ answer and don’t suggest this stupid equitable idea.

  4. Be careful with your wording. Parliaments are not sovereign, they were thrown ‘overboard’ at Federation. This is distinctly different to the sovereign parliament(s) in the UK.

    The people are sovereign. Governments are only sovereign in so much as they are of the people, for the people, by the people. Otherwise they are NOT sovereign, and the State Governments are certainly NOT sovereign. If you accept sovereignty in government then you accept serfdom and slavery.

  5. Land taxes are all very well, but they are a substitute for stamp duties on property purchases. It would be a good idea to replace one with the other, but state governments might not end up with more money.

  6. “This directs that matters ought be handled by the smallest, lowest or least centralised competent authority”

    Ah! So you agree I should decide what to do with my own money! I was competent enough to make it, I sure am competent enough to spend it wisely! Anyone else has that tiny little problem called moral hazard.

  7. this is all very well but will it allow for the following:
    1) rebate for those who recently bought and already paid a fortune in stamp duty eg me
    2) does it account for the fact that land prices will drop ( a good thing) so schedule may need to be revised
    3) in fairness shoudl it really be the land value or the GROWTH in land value that gets pinged the most. Someone who buys in a premium overpriced suburb may end up paying a heap of tax despite seeing 10 years of no gains.

    • 1) Agreed and this can be grandfathered i.e you pay no land tax until sold or your stamp duty goes towards your land tax.

      2) Land tax is usually on the unimproved value of land, what ever it may be, year to year.

      3) Why? It is not a CG type tax. Value goes up, you pay more, value goes down, you pay less.

    • FF, the point I am making is that someone who buys at the peak of a bubble may see no value improvement in his land but still pays enormous tax. The person who sold at peak may have gained all the benefits. This is not equitable if a person who bought ina less expensive area by comparison makes better gains.

      In terms of enforceability and consistency of govt income streams then land tax wins hands down, and for that reason in balance is a better tax than a CGT. However, a CGT in theory is more equitable as its paid out of the gain someone has made on unimproved land – this is the economy getting back some of the wealth the economy has produced for that piece of land. Land tax could simply punish someone more for owning expensive land without seeing a benefit from it.

      .. that said, in balance it probably works ASSUMING expensive land continues to appreciate at the same rate (or higher) than other land.

      • @squirell

        I understand what you are saying and the below statements are what is wrong with the land/housing situation in Oz.

        the point I am making is that someone who buys at the peak of a bubble may see no value improvement in his land but still pays enormous tax. The person who sold at peak may have gained all the benefits.

        .. that said, in balance it probably works ASSUMING expensive land continues to appreciate at the same rate (or higher) than other land.

        Land tax and the like are not about the capital gains etc made by anyone. In fact they work even if prices go up or down etc. You are paying because you own the land and on the unimproved value of the land. Your land price goes up, you pay more. It goes down, you pay less.

        Land tax could simply punish someone more for owning expensive land without seeing a benefit from it.

        No a land tax will force someone to seek the most benefit out of the land and not just sit and watch it’s value grow. You can still do that if you wish.

        It will hopefully move investment from the CG mindset to the yield mindset.

        Also to note, from you point of view SD is much much worse. Anyone buying at the top will pay SD at that rate. Atleast the land tax will decrease as prices fall.

  8. Stephen Morris

    Without wishing to disparage land taxes (which everyone seems to agree are a move towards more efficient taxation) I would caution against the naive assumption that “State governments are sovereign.”

    Alan Mitchell’s claim that “Vertical imbalance is largely a myth perpetuated by state politicians” is itself a myth – a myth perpetuated by those who either do not know the history of taxation in Australia or who choose to distort it.

    For those interested in that history it is summarised here.

    The realpolitik of this is that central government politicians absolutely detest independent state taxing powers. Ultimately they will move to eliminate anything that gives the states independence of action.

    Section 51 of the Australian Constitution gives the Commonwealth quite limited powers. Creative interpretations by the [Commonwealth-appointed] High Court (especially in relation to corporations powers and foreign affairs) have expanded that a little. But the main weapon in the Commonwealth’s armoury has always been money. Provided that the states can be kept impecunious, the Commonwealth’s ability to make Section 96 grants “on such terms and conditions as the [Federal] Parliament thinks fit” is the main weapon for undermining subsidiary and expanding central government “power-without-responsibility”.

    It is not the states which have undermined their tax base. It is the Commonwealth – in pursuit of expanded power – which has done it, beginning at federation without the takeover of customs duties, again in the 1940s with the infamous Uniform Tax Cases (see the link for the ruthlessness with which the High Court trashed the states’ taxing base) and then on to Capital Duplicators and the prohibition of state sales taxes.

    Megalomaniacal central government politicians are not going to surrender that power willingly.

    Indeed, Tony Abbott (reflecting conventional Sydney chauvinism) has made it clear that he wants a move in the precisely the opposite direction: he has made it clear that wants to establish central government domination in all matters, whether or not they were granted to the Commonwealth under the Section 51. He (and most central government politicians) may be prepared to devolve “responsibility-without-power” but they will always be seeking to central “power-without-responsibility”.

    They are politicians. It’s what they do.

    That is the real fault line running through the Australian polity. As long as it remains, any move to give the states independence of action through independence of revenue-raising will be short-lived at best.

    • That is the real fault line running through the Australian polity. As long as it remains, any move to give the states independence of action through independence of revenue-raising will be short-lived at best.

      Perfect opportunity for the states to try and put this to the people right?

    • That is a fair comment but it is worth noting that centralisation was broadly supported during the 20th century across the community.

      Centralism = efficiency = modernity = the good life.

      Hard to believe but that is what most people (including state politicians) thought.

      Lefties of many flavours were keen on the idea and also those extreme lefties that crossed the tracks and became Neo-Cons.

      Conservatives and their general enthusiasm for tradition may have been more ambivalent but tended towards the centre as well.

      The exception were for the most part small “l” liberals and the anarcho and libertarian ends of the spectrum (Chomsky meets Ayn Rand)

      While centrism is still popular, a lot more people are growing more sceptical of big and bigger govt as it fails to deliver and is increasingly the play thing of careerist politicians.

      While not holding my breath I think there is potential for a smart state politician (outside of the parties) to lead a drive for devolution. People do have a sense of the local and an appeal to devolution is more likely to succeed.

      Of course state governments currently have little to recommend themselves but they are part of the journey to a more local form of government.

      In the end the interpretation of laws are significantly shaped by attitudes and they can change – sometimes.

      The high point of centralism may have already passed but it certainly will be on the way out when the “progressive” left stop dreaming of a kind warm central mother state.

      • Stephen Morris

        “centralisation was broadly supported” . . . . by the Elite.

        Of 44 constitutional referendums held in the 20th century in Australia, 32 were attempts to increase the power of the central government.

        Of those 32 attempts, just 2 were approved by the Australian people:

        a) the Social Security referendum of 1946; and

        b) the transfer of powers “with respect to the aboriginal race in any State” to the Commonwealth in 1967.

        And it is not – as centralists routinely claim – that Australian voters are “innately conservative”. Of the remaining 12 referendums, half were approved. A similarly high rate of aprroval has prevailed in state referendums and plebiscites.

        What the Australian People – in contrast to to the Australian Elite – opposed consistently during the 20th century was the centralisation of power.

        The same may be seen elsewhere. In Europe, the only peoples given a direct vote on the Euro (Danes and Swedes) voted against it, despite the elites of both countries urging them on into folly.

        Likewise, the “European Constitution” was defeated in referendums (most embarrassingly in France) and was then rammed through as the Lisbon Treaty with no direct voting (other than in Eire where it was first defeated and then passed after special concessions were granted to the Irish).

        In general, people do not like centralisation of power.

        Not surprisingly people do not like power being taken from their local community and given to faraway politicians who inevitably use it to line the pockets of the cronies in their home town.

        It is elites – who can use centralised power for rent-seeking – who like it.

      • ““centralisation was broadly supported” . . . . by the Elite.”

        I suppose that involves the question of who you are referring to as the Elite.

        As far as general support for centralisation is concerned, based on my encounters at a fairly lefty university, that would include most of the middle class from lower middle up.

        But then that may be who you had in mind when you referred to as the Elite.

        Direct democracy (real democracy?) supporters etc were very thin on the ground and even now if I raise the topic I tend to get blank looks.

        In any event, I don’t quibble about your point regarding the general populations suspicions re Canberra and welcome your confidence as that suggests I may have more cause for genuine optimism that some politician will seek to harvest that suspicion of the centre and launch direct policy proposals for devolving more power and responsibility away from Canberra.

        It may be that the anti-Canberra sympathisers don’t really know what an alternative might look like after decades of centralisation.

        In Queensland suspicion of Canberra remains an article of faith and the same probably goes for WA.

        With the woeful performance on the main stream parties and the growing acceptance by the community of independent politicians it may be just a matter of time.

        Of course the main parties are rushing to snuff out even the whiff of competition in the senate.

  9. “The game plan is to force the states to beg for a tax on food.”

    It gets worse: the next move is apparently to tell them to hike payroll tax instead. Yesterday, Treasury boss Martin Parkinson was quoted by AAP as saying that a comprehensive payroll tax is “effectively the same as a GST” and “no more a tax on labour than the GST.” Today, David Uren in the Australian has paraphrased him as follows:

    “Dr Parkinson said while payroll tax was often derided as a tax on labour, this was disproved by tax economists in the 1950s, who showed that companies passed it on in prices. It was effectively a tax on consumption and just as efficient as the GST, he said.”

    Meanwhile Peter Martin in the Age adds: “Because the GST taxes the value added at each state of production, and because labour is the means by which value is added, in theory the two taxes should have similar impacts.”

    It is not clear to what extent the last statement can be attributed to Parkinson. In any case, it’s bunk because it neglects three points. First, the GST, unlike payroll tax, is border-adjusted so as to exempt value added in Australia to exported products (and capture value added overseas to imported products). Second, the GST, unlike payroll tax, exempts value added in capital formation (but captures value added by capital to products consumed within the country). Third, the GST, unlike payroll tax, captures some instances of economic rent, i.e. value that is not added by labour or capital, but added by scarcity (which may be natural or artificial) and extracted by middlemen.

    Concerning the alleged equivalence between a payroll tax and a consumption tax, I’ve written an article for Leith’s consideration.

    • Stephen Morris

      Those defects would be remedied by making payroll tax a GST credit.

      I suspect that Parkinson is seeking to have payroll tax transferred to the Commonwealth. (See the comment on centralisation of taxation powers earlier.)

    • ““Dr Parkinson said while payroll tax was often derided as a tax on labour, this was disproved by tax economists in the 1950s, who showed that companies passed it on in prices. It was effectively a tax on consumption and just as efficient as the GST, he said.”

      Jesus H Christ…

      This is utter bilge and they know, they’ve known it since the work of Atkinson, Stiglitz, Pechman, Okner et al

      The incidence of payroll taxes in an open economy fall mostly upon the employee through lower wages.

  10. The availability of reverse mortgages also makes it more feasible for governments to rely more on the taxation of residential land.

    Might work in big cities. Good luck with that in the country.

    Seriously, instead of privatizing the land tax debt, why not just record it with the record-keeper of the land that the mortgage is on – the land registry. Why can people only think of the privatized way of doing this?