Forget the Bahamas or Cayman Islands. Australians have created the best tax shelter on earth: Australian property.
Ahead of next week’s tax forum in Canberra, we can expect to hear a lot about the need to increase the goods and services tax and cut the company tax rate. But the most messed up part of our tax system is the way we tax housing.
Australia is home to some of the most expensive property in the world. There are many reasons for this: the halving in interest rates since the 1990s, freer availability of credit, housing supply shortages, a preference for bigger homes and the concentration of our population in coastal cities poorly serviced by public transport.
But one of the more fundamental reasons for Australia’s home affordability crisis is a tax system that preferences property investment over almost any other way of generating income, be it through wages, owning shares or simply putting your money in a bank.
The tax system is stacked in favour of property speculation which makes some people very rich, while leaving others, particularly young people, out in the cold. Notwithstanding the current cooling in the property market, affordability remains stretched for many would-be buyers. It’s fair to say that if you wanted to design an efficient way to tax housing – without distorting activity or encouraging price speculation – you’d probably do the opposite to now.
You wouldn’t give big tax breaks to speculators and investors, including negative gearing and capital gains tax discounts. You wouldn’t let home owners pocket every dollar gained through rising property prices, while taxing their labours at 30-ish per cent. You wouldn’t tax new housing through developer charges and infrastructure charges more heavily than established housing. You wouldn’t tax people through stamp duty simply for moving to accommodation more suitable to them, or closer to where the jobs are. In Australia, we do all of these things.
In its report finalised last year, the tax review panel chaired by Ken Henry suggested several ways to start tackling our housing tax mess. These included a standard savings income discount of 40 per cent to apply to all forms of saving, be it in housing, shares or bank deposits. At present, housing and shares get a 50 per cent discount and bank deposits nothing.
But Henry’s most profound recommendation was for the abolition of stamp duty, to be replaced by a broad based land tax. Currently, land tax applies only on investment housing. Henry would have it applied to all housing, including owner-occupied housing.
The golden rule of taxation is to try to distort as little as possible the course of economic activity. If you tax wages, people work less. So we should try to tax immoveable objects, like land and mineral resources, as much as possible. Taxing land satisfies the goal of efficiency in this way, but also equity, because rich people tend to own more land.
So what impact would a Henry-style stamp duty and land tax switch have on land values and government revenues? New modelling undertaken by a team led by Professor Gavin Wood for the Australian Housing and Urban Research Institute, using property valuation records for over a million land plots and 68,000 stamp-duty transactions in metropolitan Melbourne, sought to find out.
The researchers found that to offset the $1.3 billion a year in revenue lost from abolishing stamp duties would mean state governments having to impose an annual land tax of about $1100 on the average city dwelling. Of course, more expensive land in inner city areas would attract a higher tax bill.
So sure, under a revenue-neutral Ken Henry style swap, the average city household would be up for a new $1100 a year land tax bill, but wouldn’t have to pay $20,000 or so in stamp duty when they moved.
Given Australians move house on average every seven years, that’s a pretty good deal. And the new land tax would have several other advantages. First, it would stop discouraging people from moving to properties more suitable for them, such as smaller houses for older people which free up homes for younger families. In general, it would increase the mobility of the workforce – an important thing for a changing economy.
Second, it would be a more progressive tax system. Land tax bills would fall most heavily on inner city properties, where, you guessed it, richer people live.
Third, because future land tax liabilities would be factored into a property’s initial purchase price, it would lower house prices. The researchers estimate it would improve home affordability by about 6 per cent as soon as you announced the tax, and up to 10 per cent in areas within 10 kilometres of the CBD where affordability is most squeezed.
Fourth, the system would stop land banking – where developers and investors sit on empty lots – because it would impose a new cost on land use. This would bring more supply onto the housing market, easing affordability.
Fifth, a land tax system would lead to higher density development in inner city areas – to minimise the land tax footprint – while encouraging other people to relocate to the cheaper fringe.
Sixth, if land tax were applied on a per house basis, not per development basis as is currently the case, it would encourage larger investors into the rental housing market. This could open the way for longer leases and more professional property management than the existing cottage industry of mum and dad landlords.
I’m losing count now, but abolishing stamp duty and extending land tax would also reduce the number of taxes. It could be revenue neutral – a key criteria in these straitened times.
It would give state government a more stable source of revenue than stamp duty receipts which rise and fall with property cycles.
Transition arrangements would need to be worked out, possibly by only applying the land tax on properties bought after the abolition of stamp duty. A means test or deferred payment scheme should be considered for asset rich, income poor households.
It won’t solve Australia’s housing affordability crisis. But it’s a start.