If you’ve been paying attention to what passes as ‘the tax debate’ in Australia you’ll notice a couple of threads running through it. Firstly, nearly all commentary is done by people who assume that our economic system is relatively fair and reasonable, sustainable and sensible, not the litany of disaster and inequity that it actually wreaks upon the world. But setting that aside, they also generally say that we have a number of problems:
- many of our state taxes are truly, atrociously bad, but stamp duty is the absolute worst;
- we don’t have enough revenue going to the states to cover their expected expenditures;
- we also probably don’t have enough coming in to cover our Federal Budget either (and that’s bad, which is arguable, but let’s let that one slide for a bit);
- income and company tax receipts are down (relatively) and that they’re prone to minimisation and avoidance.
Some have also pointed out the tax expenditures (ie. tax breaks) on housing investment (“negative gearing”), and superannuation are pretty outrageous and have iniquitous effects. (Saul Eslake’s submission to the Senate inquiry on housing policy and negative gearing is one for the ages. John Howard gets a rather enjoyable lashing.)
The answer for most of these commentators then, is to increase consumption taxes, the GST specifically. Even Jay Weatherill, SA Labor Premier has proposed expanding the GST and giving the states a slice so they can better fund their liabilities.
But you really have to be paying attention to notice the occasional advocate for taxes on property, rather than consumption.
Yet they are there. The Grattan Institute published a proposal for a broad based land tax in 2015. The Henry Tax Review (Recommendations 51 to 54, reproduced at the bottom of this post) said “Ideally, there would be no role for any stamp duties, including conveyancing stamp duties, in a modern Australian tax system.” The 2012 Lambert Review of NSW Finances initiated by Barry O’Farrell, (see particularly Table 13.1.1 where the ‘excess burden of land tax is compared to stamp duty. Stamp duty is 62c per dollar of revenue. Land tax is 6c) said land tax should be expanded. Fairfax’s Michael Pascoe and Jessica Irvine and other journalists have advocated a broad based land tax, specifically to replace stamp duty.
Labor should take this up and run with it before a) the Liberals bring in higher consumption taxes or b) bring in higher consumption taxes AND replace stamp duty with a broad based progressive land tax.
If you’re reading this blog, you already know that consumption taxes are terrible. They hit poor people hardest. If you don’t know that here’s Malcolm Turnbull malsplaining it in Parliament.
Well, here’s some news. Transaction taxes, like stamp duty on property, a tax on the family home, are even worse.
They are a massive drag on the economy (as noted in the Lambert review at page 13-2, table 13.1.1.) They distort markets, make it hard for people to move where they need or want to, and are a barrier to entry for the 30% or more people that don’t own a home. It is a pro-cyclical tax, making recessions worse and overheated markets more overheated.
Lets make this crystal clear: Stamp duty on property is the worst tax in NSW. A dog of a tax. You can’t get a worse tax.
It should be the #1 priority for replacement as a tax by any Labor Government.
So I will be proposing amendments to the NSW Labor Platform that will allow us to replace stamp duty as quickly as possible, after a public consultation process and proper input from Treasury and the public service.
At the moment, NSW Labor’s Platform bars an incoming Labor Government from considering a stamp duty replacement that includes a better way of taxing the principle place of residence. Remember of course that stamp duty is a massive tax on the principle place of residence right now. So the platform bars a land tax on owning the sacrosanct’family home’, but not a (iniquitous, distorting, inefficient, procyclical) transaction tax when buying the ‘family home’. This is patently absurd, so we need to change it so that an incoming Labor Government can at least consider a broad based progressive land tax to replace stamp duty.
So what follows is an open letter/briefing to all Party units, Branches, SECs, affiliated unions etc on this issue. I would be grateful if you would take it to your branch and have it moved and debated. I would be happy to come out and speak at any Branch or Party unit about what it means.
Platform Amendment to allow NSW Labor to consider a broad based land tax to replace Stamp Duty
In Chapter 3, ‘Our Economic Future’, part 3.19, dot point 2.
Delete the word ‘extensive’ after ‘on’.
Remove all words after ‘holdings’.
(Page 20 in 2014 Policy Book)”
For your reference, this is the section in the Platform:
3.19 NSW Labor will:
-Legislate to close any loopholes that allow the use of artificial tax avoidance schemes.
-Maintain a progressive system of taxation on extensive land holdings with exemptions for land used for primary production, or as the owner’s principal place of residence.
So the new clause would read:
3.19 NSW Labor will:
-Legislate to close any loopholes that allow the use of artificial tax avoidance schemes.
-Maintain a progressive system of taxation on land holdings.
Stamp Duty is a terrible tax.
NSW already taxes the family home, the principle place of residence with stamp duty.
Stamp duty is one of the most inefficient and despised taxes in our entire system.
Stamp duty is regressive, as it hits low and high income people at the same rate, simply as a proportion of the cost of the house (sure, higher income people may buy more expensive houses, but moderate income people with lots of kids also buy expensive houses – stamp duty takes no account of income, only the property’s value).
It is socially regressive in that it discourages the transfer of houses to people that need them the most. We have 5 bedroom houses with one person in them and 2 bedroom apartments housing five people.
It is distorting- by making people pay stamp duty every time they want to move house, it discourages people from moving to where jobs, or family or other opportunities are.
It is inefficient, as it can be avoided by not selling one’s property.
It is pro-cyclical because receipts go up when the economy runs hot, encouraging Government spending, and receipts collapse when the economy tanks, encouraging Government spending cuts, worsening cyclical downturns. (See the 2008 post GFC mini-budget).
Stamp duty has increased disproportionately in the past 40 years as the cost of housing has increased.
Stamp duty has no friends in politics, academia or economics. It is a terrible tax. Everyone agrees it must be replaced.
With what do we replace stamp duty then?
Some conservatives want to replace it with a higher GST. But consumption taxes, as everyone in the ALP knows, are also regressive, lead to ‘compensation churn’ and can be avoided by overseas and ‘cash’ purchases.
Some progressives want to increase company and income taxes. While this isn’t the worst idea, both of these are Federally controlled taxes and NSW cannot replace stamp duty itself with increased company and income taxes. Furthermore, there has been a long term trend of declining receipts from these taxes, partly because they are more easily avoidable – companies and individuals can hide their income through various means. Crackdowns and closing loopholes only gets you so far- like drugs in sport, the regulators are always behind the innovators in tax minimisation. Land, on the other hand, cannot be moved offshore or hidden.
A broad based land tax is a progressive tax.
Broad based land taxes also have a very rare economic quality. They have a ‘negative dead weight’, that is, instead of dragging down growth and production, like most other taxes, they actually increase productive use of resources, by encouraging efficient and timely use of land.
Land taxes also capture the value of increased infrastructure allocations by Government. If the Government puts in a new railway and the value of land goes up, then land taxes will capture that value increase. This encourages investment in schools and transport.
The ACT Labor Government has introduced a broad based land tax phased in to replace stamp duty over a generation of property and home buying.
Land taxes also cannot be avoided by crooks and shonks, or overseas-based tax avoiders. If you run a cash-in-hand or criminal enterprise, you still have to pay land tax if you want to own property.
Objections to land tax
‘I paid stamp duty, why should I have to pay twice.’
This is a question of design rather than principle. You won’t have to pay twice if it is phased in slowly. If you have to start paying after 20 years, then it is probably fair enough that you pay some taxes for the upkeep of the State after that long a break.
‘I’m a pensioner sitting on a $1m property, I won’t be able to pay an annual land tax’
Again, a design issue. Pensioners would likely have their tax deferred until the sale or transfer of the property, similar to the way many of them pay their Council rates.
However, in the end, if someone is sitting on a $1m property, they are a lot wealthier than the vast majority of Australians, 30% of whom don’t own anything. Asking them to pay a fair share of the taxes to keep hospitals and schools going is only reasonable. Asking the purchaser of their house to pay for State services via stamp duty is deferring the cost of services from those who own to those who want to own property. Taxes shouldn’t just be levied on those buying, but on those that own things.
‘We’ll never win an election if we propose to tax people’s homes’.
The ALP has lost the past two elections with a primary vote of 25% and 30%. There is not much worse we can do. But even if we are concerned that people think we’re too economically innovative (rather that they thought us economically bold than corrupt and incompetent, but maybe that’s just me!), we can still go to the electorate with a promise to repeal stamp duty and replace it with something better, rather than a promise to simply implement a land tax. Labor could promise a tax summit, and a green paper-white paper process. It is absolutely guaranteed that Treasury, economists and academics of all ideologies will recommend replacing stamp duty, and most will suggest replacing it with a broad based land tax, as has been done in ACT. The only real impediment is our own Platform.
‘We should wait for the Feds to do this, rather than just doing it ourselves in NSW’
Waiting for the Feds may take a long time. Firstly, the Feds have different revenue problems, solving the States’ problems is not their highest priority. Secondly, NSW is in a special situation with massive housing affordability and congestion problems. Stamp duty is bad everywhere, but Hobart and Adelaide aren’t feeling the squeeze on housing as much as Sydney. NSW needs to solve this problem sooner than other States. Leaving it up to the Feds is also irresponsible because the Liberals version of tax reform is always the same- tax consumption via a GST. Labor’s response has to be more progressive.
‘What about a GST increase instead?’
Firstly, go join the Liberal Party if you think the GST is the answer to our tax woes.
Secondly, thank you for raising this- the big debate over tax in the future is simple- with income and company taxes declining, how do we keep paying for services?
The Liberals say we should tax consumption, hitting the poorest hardest.
Labor should say that we should tax property, which makes the wealthiest pay their fair share.
With a broad based land tax, the 30% of the population that owns no property pays nothing at all.
Land taxes are also a disincentive to investing in property for speculative purposes, so investors (like our super funds) will be more likely to put money into productive asset classes like manufacturing capital, agricultural capital and other productive assets, rather than simply putting it into property and hoping for rent and capital growth.
Housing supply is also encouraged as land that is unused attracts the same tax as land that houses people or produces goods (if the tax is levied on the unimproved value of the land- more on that below).
Do you tax the whole house or just the unimproved land value?
The ‘economically correct’ method is to tax the unimproved value of the land, because taxing the house or other property built on it is taxing a ‘good’ thing, it’s a tax on the building work done, and the productive use of the land. Land taxes traditionally are designed to avoid this, so that building work and productive use of land is encouraged.
Some people have complaints that this is unfair and that the value of the entire property should be taxed, including any buildings that sit on the land.
People say that it is unfair that if they have lived in an area for a long time but haven’t improved their house, but due to circumstances beyond their control their land is worth far more, they shouldn’t have to pay for that.
But people in this circumstance are, no matter how it came about, sitting on an asset that has increased in value. If the tax is designed so that pensioners and others on low incomes don’t have to pay until the property is transferred or sold, then they shouldn’t have any problems. The tax they pay will always be lower than the profit they’ve made on the increased value of the property.
If they don’t want to pay any tax because they bought when the property was cheap and now the property is expensive, well that position is untenable and illogical. They can’t complain about having a windfall increase in the value of their assets and that this therefore means they have to pay more tax. The tax will never amount to more than the profit they made.
‘Won’t this encourage gentrification? Haven’t you seen the Blues Brothers? They wanted to kick out the nuns for not paying land tax!’
Gentrification is a complex and sometimes inevitable by-product of population growth and capitalist expansion, as anyone from the eastern suburbs of Sydney knows. Land tax evens out the unfair nature of gentrification by providing funds for social services, and by encouraging the transfer of land from those who don’t need it to those who do, from those who are hoarding it for rent, to those who will use it to produce things, whether that is a family or a manufactured good or art.
By keeping the tax on the unimproved value of the land, those who don’t have a fancy house will pay a similar rate to the person next door who has built a mansion. This can appear unfair. But the person who has a mansion has to pay GST on the products that build their house and tax on the income earned to pay for it. Taxing them at the property level for their wealth may or may not be a good idea, but it is extraneous to land tax. Many people are in favour of wealth taxes, and with the introduction of a land tax that may be a way in which we can start to set up the machinery of government necessary to tax wealth.
Australia is an unequal society becoming more unequal. NSW is even more unequal than most of Australia, and Sydney is at the cutting edge of one of our most insidious social and economic problems- housing inequality.
Stamp duty on principle places of residence is exacerbating those problems of inequality. A broad based land tax will not fix all of them, but it will make things better than they are now.
The experience in the ACT is that land tax, properly explained and implemented gradually and fairly, so that pensioners and low income people are protected, is popular and relatively easy to implement.
It is very likely that the Liberals will look at it as a policy option in the medium term, although their preference is for a higher, broader GST, as that protects their mates and hurts Labor’s constituents.
It is incumbent on Labor to come up with a progressive economic plan for NSW. It is impossible to do that without addressing State revenues and our broken tax system. Labor needs to have the debate about our tax system free from the ban on proposing a broad-based land tax.
Recommendations 51 to 54 from Henry Tax Review:
“C2 — Land tax and conveyance stamp duty
Recommendation 51: Ideally, there would be no role for any stamp duties, including conveyancing stamp duties, in a modern Australian tax system. Recognising the revenue needs of the States, the removal of stamp duty should be achieved through a switch to more efficient taxes, such as those levied on broad consumption or land bases. Increasing land tax at the same time as reducing stamp duty has the additional benefit of some offsetting impacts on asset prices.
Recommendation 52: Given the efficiency benefits of a broad land tax, it should be levied on as broad a base as possible. In order to tax more valuable land at higher rates, consideration should be given to levying land tax using an increasing marginal rate schedule, with the lowest rate being zero, with thresholds determined by the per-square-metre value.
Recommendation 53: In the long run, the land tax base should be broadened to eventually include all land. If this occurs, low-value land, such as most agricultural land, would not face a land tax liability where its value per square metre is below the lowest rate threshold.
Recommendation 54: There are a number of incremental reforms that could potentially improve the operation of land tax, including:
- ensuring that land tax applies per land holding, not on an entity’s total holding, in order to promote investment in land development;
- eliminating stamp duties on commercial and industrial properties in return for a broad land tax on those properties; and
- investigating various transitional arrangements necessary to achieve a broader land tax.”