The Australian’s Adam Creighton has written a ripper post explaining why, in the wake of tax avoidance scandals (e.g. multinational and the Panama Papers), a broad-based land tax is needed more than ever, but will never see the light of day due to vested interests and weak politicians:
Windfall gains to private land owners stemming from developments outside their control are a far better object for taxation than income and consumption, which prop up vast avoidance industries…
Taxes on land are unique economically because they can’t be avoided and they don’t distort supply…
In fact, over time land tax (which should apply only to the unimproved part) could even reduce rents by encouraging development, including more apartments, on undeveloped land…
Land taxes may well be fairer, too. Just as the owners of land adjacent to new railway stations have done nothing to generate their windfall, land owners don’t lift a finger to generate increases in unimproved land values…
A comprehensive national, flat rate tax on unimproved land taxes was part of Labor’s platform from 1891 to 1905. The party should consider resurrecting this policy and using the proceeds entirely to slash personal income and/or company tax to unleash a productivity, investment and spending boom. This would help affordability; property prices would automatically fall…
A 1 per cent annual land tax without any exemptions could raise around $44bn based on the ABS’s estimates…
The economic ignorance and self-interest of land owners will, however, prevent any shift towards land tax, however beneficial it might be in the long run for almost everyone.
Vested interests would launch a hysterical defence of existing arrangements, wrongly claiming poor renters would be harmed.
Others would argue even stupid policies can’t be changed because some people have arranged their affairs around them.
Creighton has nailed it.
Land taxes are one of the most efficient sources of tax available, actually creating positive welfare gains to the domestic population of $0.10 for each dollar raised, since non-resident home owners are also taxed (see below Treasury chart).
Even just switching inefficient stamp duties (which cost the economy $0.70 per dollar raised) to a broad-based land tax would produce an estimated 1.5% increase in GDP, or $24 billion, without changing the amount of tax raised.
Unfortunately, while the arguments for shifting the tax base towards land taxes are impeccable, there are several key factors holding politicians back.
Consider the proposal to merely junk stamp duties in favour of a broad-based land tax levied on all land holders.
As shown by the RBA, only around 6% of the housing stock is transacted on average in a given year:
This means that in a given year, only a small minority of households pay stamp duty (albeit tens-of-thousands of dollars of dollars). And once they pay it, they automatically become a roadblock to reform (“why should I pay tax twice”, is the common retort).
While having such a small group of taxpayers supporting services for the whole community is ridiculous, rather than governments sharing the tax burden by levying each household a much smaller amount on a regular basis, it is far easier politically to tax a small group than everyone.
The other major roadblock with land taxes is that they would be levied on retirees that are asset (house) rich but cash poor. They would, therefore, squeal like stuffed pigs if they were required to pay tax.
The obvious solutions to these roadblocks are:
- To overcome concerns around “double taxation”, provide a credit to anyone that has purchased a home in the past 10 years, equal to the amount of stamp duty paid, and then subtract the hypothetical land tax that would have been paid since the home was purchased.
- Allow retirees to accumulate their land tax 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.
However, even with such arrangements in place, politicians would still face the option of maintaining the status quo and taxing only a small number of people each year (easy) versus reforming and taxing almost everyone (hard).
Add in a fierce scare campaign from the property lobby – especially if land taxes were extended beyond just stamp duties to replace income taxes – and the likelihood of achieving meaningful reform is slim, especially with the current useless crop of politicians.