Great big new tax — it’s a phrase that strikes fear into the heart of almost any politician after the very successful campaign against the Gillard government’s carbon price.
So what are the odds of state and territory politicians agreeing to a plan that would, on average, effectively treble the amount of council rates paid by property owners? Probably pretty low.
But what if you used the extra money to replace other hated taxes, such as stamp duty on property purchases and insurance premiums?
That’s what eminent economist Professor John Freebairn from the University of Melbourne is suggesting.
Like almost all economists, Professor Freebairn says stamp duty is one of the most inefficient taxes there is. Here’s why.
“If you don’t change your residence, you don’t pay stamp duty. If you change residence, you pay stamp duty,” he told RN Breakfast.
“As we go through our lives — with jobs in different locations, our family expands, it contracts, our income changes and so on — it would really be sensible for us to change the location of our property, maybe buy a bigger or a smaller one.
“But what conveyance duty does is say, ‘hey that’s very expensive if you do that’.
A common example would be older Australians who would like to trade down from a big family home to a smaller, lower maintenance apartment, but are deterred by the stamp duty bill and the prospect of losing part of their pension if they cash out some of their housing wealth.
In the last federal budget, the Commonwealth took a baby step towards addressing the second part of that equation, but it is up to the states and territories to get rid of stamp duties, and so far only the ACT is on its way to doing so.
The barrier that stands in the way is the more than $20 billion that state and territory governments rake in every year from property transfer duties.
That’s where Professor Freebairn’s property tax proposal comes in.
He is suggesting that stamp duty on property transfers, property insurance premiums and current land taxes (mostly on commercial and investment properties) should all be abolished and replaced with a single property tax on all land and buildings, with a rate that rises based on the value of the property to ensure that people who own the most expensive homes have the largest tax bills.
“So instead of paying, for example the $50,000 [in stamp duty] when you sell your house every 20 years [and buy another], you would be paying $2,500 every year,” he explained.
Abolishing stamp duty would cut mortgage interest bill
Aside from removing the disincentive to move to a more suitable house, such a move would also mean lower up-front costs for home buyers meaning they will likely have a lower mortgage.
In 2015, the Property Council of Australia estimated that the buyer of a typical Sydney house would pay an extra $26,452 in interest payments on the up-front stamp duty — money they would save under Professor Freebairn’s plan.
There would be little impact on average property prices, because the new tax would simply be replacing existing ones dollar-for-dollar.
Big economic benefits from moving towards land taxes
There are also economic benefits beyond the housing market from a broad-based property tax, which make land taxes the holy grail for many experts, including former treasury secretary Ken Henry who recommended greater reliance on them in his tax review.
“Basically, land can’t move and so if you put a tax on land it really doesn’t change the way we use the land,” Professor Freebairn explained.
“What it does is just pinch a few dollars off the land owner and give them to the government.”
Stamp duties present such a cost to economic efficiency, while land taxes are one of the few revenue raising measures that economists estimate actually provide a net economic boost, that Professor Freebairn puts the economic benefits from his plan at upwards of 50 cents per dollar of tax raised.
Given that conveyancing stamp duty alone raises more than $20 billion per annum, that’s a potential $10 billion per year benefit to the Australian economy.
In that respect, there is an argument for even higher land taxes than Professor Freebairn’s proposal, using the extra money to reduce charges like income tax.
If we put a tax on labour, our employment, that reduces the value of that employment so the tax induces us to work less,” he explained.
So it involves a transfer of dollars from the taxpayer to the government just like land tax does, but it also induces us to put less effort into that particular activity.”
There are two common criticisms about a shift from stamp duties to land tax.
One is the potential double taxation of people who have recently purchased and just paid stamp duty.
But Professor Freebairn says there are many ways to avoid this, such as in the ACT where stamp duty is being gradually reduced over the next 20 years at the same pace as land tax is being gradually increased.
The other common argument against ongoing property taxes is that people on low incomes who own valuable properties, such as pensioners, may be forced from their homes.
But the ACT again offers an example of a relatively easy solution.
“They [low income home owners] don’t actually pay in cash, that is held over and indexed by, say, the consumer price index, to a point in time when the house is sold, either at their death or when they just sell the house,” Professor Freebairn responded.
Only at that point, when the property is sold and the cash is available, will the property tax bill be paid.