The Centre of Policy Studies at Victoria University has published new modelling showing that switching from property stamp duties to broad-based land taxes would deliver big productivity benefits to the nation.
According to the modelling, after 20 years replacing stamp duty with land tax would boost national income by $0.30 for each dollar of revenue swapped, or up to $720 per household if implemented Australia-wide, equating to about 0.34% of annual gross domestic product (GDP):
The results in column [3] of Table E1 allow us to rank the taxes studied according to the welfare benefits that arise from small tax rate reductions. In Table E1, we rank our taxes from the most distortionary tax, which generates the largest benefit when its rate is reduced (shaded red), through to the least distortionary tax (shaded green). From Table E1, we see that a permanent reduction, implemented today, in the rate of TD [transfer duty] on transfers of existing houses would improve welfare by 132 cents per dollar of revenue foregone by 2040. This is the largest benefit generated of all the taxes we study…
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The federal government collects around 80% of the nation’s tax revenues, with the states and local government’s collecting the remainder via a narrow base of taxes like stamp duties.
Given that the abolition of inefficient stamp duties in favour of land taxes would generate significant productivity benefits to the national economy, and the federal government would monetise these benefit via an uplift in personal income and corporate tax receipts, the federal government should encourage the reform process via incentive payments to the states. Doing so would enable the states to share in the revenue uplift that would arise from the resulting economy-wide productivity growth.
This is how ‘cooperative federalism’ should work – the federal and state governments sharing in the fruits of reform.
Sadly, Treasurer Jim Chalmers last week suggested that he is not prepared to compensate states for switching from stamp duty to land taxes:
Dr Chalmers raised the hopes of states in March by saying he was “prepared to lead a conversation” on swapping stamp duties for land taxes if Labor won the May election…
But on Monday, he almost ruled out compensating the states for property tax reform…
“These are ultimately matters for the states,” Dr Chalmers said. “We want to work with them to address the substantial challenges we all confront in the economy, and in our budgets.”
Without the federal government’s active participation in the tax reform process, important productivity-lifting reforms like shifting from stamp duties to land taxes will remain in the ‘too hard’ basket.
Treasurer Jim Chalmers spent a lot of time talking up productivity reform leading up to the election. It’s time to put up or shut up..
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also Chief Economist and co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
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