The levy dividing the nation
|
From levee banks to levy banks, recovery from the recent Queensland — and NSW and Victorian — floods will cost the Australian economy billions. “…The best preliminary estimate of the direct cost to the Federal Budget of this summer’s flood disaster is just over $5.6 billion,” declared PM Julia Gillard yesterday, as she proposed a flood levy to help raise around one third of those costs. The facts of the levy — essentially a once-off tax — are this:
It’s important that Gillard gain popular support on this in order to get the levy passed in a tight parliament. So far, things are looking worrying for her. The majority of talkback callers yesterday afternoon and this morning questioned why they were being hit by the flood levy tax, particularly after they’d already donated. One caller, whose family earned a combined $200,000+, objected to the levy on ABC 774 Victoria, noting that he had already donated over $1000 to the appeal. Caller Phil to Triple M Melbourne said Australians have become whingers who are happy to take money from the Federal Government, but do not want to give anything back. Many callers mentioned the high cost of the National Broadband Network, with several callers happy to pay a flood levy provided the NBN is scrapped. Caller Bill, a final-year economics student, spoke to ABC 612 in Brisbane — he said the levy is well and good from an egalitarian standpoint, but it’s indicative of a bigger problem that’s creeping into Australia. He says if the Government is constantly bailing people out and introducing levies, it doesn’t encourage people to take responsibility for their own circumstances. Other callers were quick to question why a similar levy wasn’t introduced after the Black Saturday bushfires in Victoria and the Canberra bushfires, or noted how they had lived through natural disasters and had received no such treatment from the government. Others noted how much the Liberal government under John Howard loved levies, with an Ansett levy — that went on for longer than promised — and a gun buyback levy introduced under his government. ABC News Breakfast journalist Michael Rowland noted a similar phenomena: “A torrent of viewer comment on News Breakfast on the flood levy. Overwhelmingly negative.” A glance at the newspaper front pages also show a variety of attitudes across the nations from “Gillard’s levy hits rough water” in Melbourne’s The Age to “Hands up to help your mates”:
It’s interesting to note that the girl on the front cover of The Australian complaining about the levy won’t actually be paying the levy,”Ms Gregg believes her pay as an administration worker will be under the threshold of the levy,” although her partner is expected to pay it. Here’s a look at what the pundits are saying: Don’t say the ‘T-word’ warns Tony Wright at The Age:
Compared to other government programs and initiatives — like Rudd’s stimulus — the $5.9 billion number is positively trivial, argues Peter Hartcher in the Sydney Morning Herald.
The Gillard government is suffering a “crisis of confidence”, declares Jessica Irvine in The SMH:
This is typical of a government still attempting to establish authority, says Tom Dusevic in The Australian:
No one cares about the policies being cut to pay for the floods apart from the greens, writes Ben Packham in The Oz:
It wasn’t an accident that Gillard used the word ‘I’ 50 times in her National Press Club speech yesterday, notes Michelle Grattan in The Age:
|
|
|
|
32 Comments
It would be interesting to see if the caller earning $200k who donated $1000 will knock back his $485 tax refund by not claiming the deduction. If he did claim the deduction and paid the levy he would be out of pocket in total $1765 or $34 per week or 0.88%.
I also find it interesting that Hockey and Abbott sit back and say they would cut the budget but I haven’t heard any specifics.
As someone who got 600mm of water into the house but managed to get everything up high so did not stick my hand out for money I’m slightly annoyed that I’m not considered to be “affected by floods”.
That annoyance will pass and I’ll just have to think of it as a donation to people that were not so lucky. It’s hard to think of another way to work out who is exempt anyway.
I don’t mind paying the levy. At least now I know what it will cost me, so I can reduce my total donations by that amount, which is exactly what I’ll do. But it’s annoying that so much money is still being wasted in leftover stimulus programs that should have ended a year ago, at the same time that the federal budget should have gone back into surplus. If they had done that, I wouldn’t mind if they went into slight deficit now for repairs after the floods.
The irony here is that the same wise men who created and promoted the financial equivalent of global warming are the ones leading the bitching about the levy. Unbelievable gall from discredited usurers and urgers.
This immediately tells me the levy is the right thing to do.
As for the people who did not hand back their $980.00, suck it up; you will get it back in the black economy, cash only deals, you will pull in the infrastructure rebuild. More irony.
lighten up freecountry; You can ease your guilt and still look generous by handing back your stimulus via the levy and donate the balance.
Free Country - Once again I will ask what the GDP growth figures would be if you removed the stimulus impact, especially if you go back a year.
As for reducing your doantions, if you don’t think you need to support the individuals who have been effected and help rebuild infrastrucutre like roads, railways, bridges etc that’s up to you but don’t forget to factor in the reduction in tax casued by your donations. For example if your earned $60k and donated $100 you will have to pay a $50 levey but get back $35.50 (including low income offset but not any family tax benefits you may be entitled to) so the net extra cost to you would be $14.50 or $0.27 per week. I hope you put it to good use.
The RBA’s latest official review of the economy supports the government’s claims with a note: “The period when stimulus spending was contributing to GDP growth looks to have ended and the winding down of stimulus programs is expected to subtract from GDP”.
This is from the Busines Journal earlier this month. To me the fact that the winding down of stimulus spending will subtract from GDP shows that the privte sector still hasn’t fully recovered and if they had of stopped stimulus spending a year ago growth could of flatlined or even gone backwards.
The amount of the levy is trivial. The cost of rebuilding the infrastructure is enormous.. But it is the the trivial that catches everyone’s ear. The author of Parkinson’s Laws understood this syndrome.
“The time spent in a meeting on an item is inversely propotional to its value (up to a limit). “
Tamo - I have been in that meeting an hour for the board to discuss mobile phones, 5 minutes to approve a million dollar investment.
Jimmy: “if you don’t think you need to support the individuals who have been affected”
How did you get that from what I said? You’ve put words in my mouth that directly contradict my own. Why do you want to do a thing like that? Fitting me up with the Labor message of the day that non-Labor people don’t want to contribute?
It is a pity that such poor advice is being offered by the technocrats to JG and WS
This proposal has brought partisanship to a previously united national community.
If they would have capitalised on the flow of giving that is going on they could have united the nation to deal with flood damage that now affects WA NSW Vic and QLD.
Why not something innovative like better tax deductibility for eligible charities or a special bond issue for targetted infrastucture - ie roads, rail, telcoms councils and river facilities, all with a view to raise a targetted amount of funds.
By the way the theme for the Australia Day message by JG was pretty insenstive wasn’t it ? Just hold on? a mixed message given the horrendous experiences of those swept away.
Free Country - I thought the act of reducing your donations (which go to help the individuals) by the amount of the levy (which pays for state owned infrastructure) demonstrates my point. It would be like me reducing my Good Friday appeal donation by the amount of my tax that has gone into the new Royal Childrens Hospital.
If this levy comes in the vast majority of people (I would expect even yourself) will not even notice that their weekly pay packet has dropped by $1 and yet people are requesting there $20 donation back, isn’t this just a little tight fisted?
I also find it a concern the sheer number of “non Labor” people on News Ltd sites stating that they donated and complaining that if people aren’t smart enough to insure why should the govt bail them out showing they have absolutely no concept of what’s going on.
If I offended I am sorry but do you have any comment on my other points regarding the GDP?
Jimmy, war can also raise GDP in the short term, as a system trades in past and future wealth to make bombs, drop them, treat or bury victims, and rebuild the damage. Do you think everything that raises GDP is automatically good?
Well the good news is Queensland may get some sort of an infrastructure upgrade out of all this. Will the effected areas be rebuilt and designed to accommodate anther flood with bridges and levies etc? The sad bit is it takes a disaster for the value of vital infrastructure to be realized. If we had the extra dams to catch water we may still have had the flooding but now we would have extra water to help us through the times of drought.
If we get long term investment into water management, rail, roads and bridges I say bring on the deficit! Or maybe each state should get a levy every year specifically for national infrastructure building.
In the case of a levy for these floods I say dig deep and bring it on. The first priority is to get people back on their feet and back to some sort of normality. If the levy gets the money to them and the job done quicker its a good thing.
Here’s another idea. The land approval processes in Queensland have been shown to be defective, and there is talk of permanently abandoning residential zones in flood-prone areas. Land assessment and development will now have to be done on a heroic scale, or else Queensland will haemorrhage population and wealth to the other states. Last October it was reported that housing was oversupplied in Queensland partly due to people leaving the state because of home affordability issues.
Queensland could now act as a laboratory case for a whole new land regime. This is one of the great (and in recent years, underutilized) advantages of federalism. Major changes to taxation cause major disruption, but the Queensland property market is already disrupted, making now a great opportunity for reform.
Land is taxed mainly in transfer taxes — stamp duty and capital gains tax — which can be avoided by leveraging capital gains instead of selling. This inhibits the land market and puts high deadweight costs on society as people live far away from work and rent when they would rather buy.
The Queensland government can’t do anything about capital gains tax (and a lot of property owners will now be depending on the small mercy of a capital loss offset) but replacing stamp duties and infrastructure levies with a continuous holding tax on the uplift of land value would solve not only this problem, but many others. If the cost of land is shifted from purchase cost to holding cost, then –
(1) Localized public works will become more evenly matched to residents’ needs rather than political bribes to marginal electorates, by internalizing the cost of making a given area more desirable, a cost that is currently externalized throughout Australia.
(2) Repurchase of land for rail corridors, park lands, or other public purposes, would also become cheaper. (Green spaces are unusually rare in Brisbane.)
(3) Wage money currently flowing through banks to their overseas lenders — dead money — would instead flow into government revenue where it can benefit those who pay it.
Anna Bligh tried to introduce a similar reform early last year, taxing the land-value uplift in commercial and investment properties. Her mistake was to back-date it, but the media misinformation focussed on the land-uplift aspect. In this, Bligh was right and her critics were wrong. Now is a chance to revisit this important reform, minus the back-dating, showcasing to the rest of the country how a broken land market can be fixed, and greatly assisting the recovery.
Free Country - Obviously not everything that raises GDP is automatically good but something that is designed to raise GDP and does is clearly doing the job it was designed for and more to my point if removing it prematurely decreases GDP, resulting in increased unemployment, lower consumer and business confidence, lower tax revenues and higher welfare payments why would you do it? Your assertion that the stimulus spending should of been withdrawn a year ago is questionable to say the least.
Free Country - “If the cost of land is shifted from purchase cost to holding cost, then –
(1) Localized public works will become more evenly matched to residents’ needs”
Aren’t you talking about rates?
Or maybe you are taling about Land Tax?
Free Country - Sorry but I need a little help with the land holding tax. Can you explain this a bit more for me as I am completely in the dark on this one. Is it more or less rates paid to the state in the form of a tax?
No, council rates follow the good model. Throughout Australia they are based on a mixture of unimproved and improved land values, and other adjustments. Here is a summary.
To oversimplify a bit, the unimproved-value formula is based on the principle of land, unlike capital, being immobile; while the improved-value formula aims to internalize the cost of having a property close to a CBD, a train station, a nice park, and so on. I believe the improved-value model is more useful for urban areas.
Another advantage I omitted is that it inhibits slum building. How often do you see butt-ugly apartment blocks cashing in on the nice houses around them while simultaneously diminishing the values of those nice houses? This is a localized externality, an example of market failure. A land-uplift base for state revenue would correct this and result in buildings that better match their surroundings.
Sorry, for “no” read “yes” to the last two questions from Jimmy and Observation. For a full explanation of why Anna Bligh was mostly right in the first place, please see Gavin Putland’s Land Values Research Group. Or I’m happy to explain further as it’s a pet topic of mine in case you didn’t notice.
A correction, I should have said “the improved-value formula aims to internalize the cost of having a property gaining better access to a CBD, a new train station, a nice park, improvements in the local schools, and so on.”
Free Country - Regardless of it’s calculation method council rates are in effect a holding tax that are used at least in part for localised public works. Land Tax is another holding tax (albeit only paid on residential buidlings when multiple house are held). As stamp duty is paid by the purchaser you would effectively be delaying income to the state meaning the holding cost would have to be increased to cover the time value of money.
This third holding cost would make it slightly cheaper to buy a house but more expensive to hold it meaning those who want to live in their house will have higher costs where those who buy investment properties will either charge higher rents to cover the cost or get a bigger gain from negative gearing.
Below is an extract from an article on the drum website, I will post the link but it will probably be stuck inmoderation for a while;
“Instead of allowing the deficit to blow-out, which was what most economists expected, she surprised by funding two-thirds of the Commonwealth’s $5.6 billion tab via spending cuts or deferrals, and the remainder through a tiny, once-off levy on higher-income earners unaffected by the floods. She also liberated stretched labour supply by expediting the processing of 457 visas and doubling the number of places in the job seeker relocation program. This all sounds like sensible stuff.
The response of financial markets was emphatic: the probability of future interest rate hikes was instantly cut. Investors with real cash in the money markets decided that the government’s package was anti-inflationary, and would relieve some of the monetary policy burden on the Reserve Bank.”
http://www.abc.net.au/unleashed/43308.html
Jimmy:
That’s just a transitional problem. It can either be phased in over time, or the state can borrow against a future income which is much more predictable than stamp duties and infrastructure levies. Stamp duties go up and down with stock turnover rates, and are vulnerable to what’s called a “lock-in effect” (especially in the credit-boom era when reborrowing against a property can be more cost effective than selling it). The buyer pays it but it comes out of their purchasing power so it makes no difference whether it’s charged to the buyer or the seller. Infrastructure levies are vulnerable to the ups and downs of the building industry. Land taxes go up and down only slightly with fluctuations in property prices, but in any case the more efficient land market would be less susceptible to severe fluctuations, bubbles and crashes.
Buyers can either borrow the capital cost of the duties and levies, paying back much of the interest to overseas lenders while being terrified of rate rises, or they can pay the money to government and receive public goods in return, which are proportional to the taxes.
It also reduces the risk to an owner of going into negative equity. If land values go into a slump, then the tax charges would slump with them. Conversely, a slump in land value makes no difference to a borrower’s interest payments, and in some cases may even make it worse as lenders squeeze rates to cover their increased risk. We saw many of the non-bank lenders doing this in 2008.
Jimmy, re Gillard’s spending cuts, yes those are a step in the right direction. Cash for Clunkers, Green Car Innovation, Carbon Capture and Storage, Green Start … these were crappy programs to begin with. Cutting them may be too little too late, but at least it’s a step in the right direction.
On the theory of the land tax, please do see the link I mentioned, as it explains the theory more thoroughly but is written for a general audience.
Free Country - My issue with the deferral of the income for the state is that effectively they become the the holder of the debt (ie they purchaser borrows less from the bank but “owes” that money to the govt) and as the govt would want a shorter repayment period and probably higher interest the purchaser ends up paying more.
Seemingly the point of adding yet another holding cost to property is to either speed up turnover rates or charge more “stamp duty” over the holding period of the property. If we took the example of a $300k house the stamp duty is around $13k, if we used an interest rate of just 5%, paying almost $1700 a year in tax it will be 10 years before the state breaks even. Given the house price and interest rate are on the low side while the $1700 is roughly the same as rates in my municpality 10 years is probably on the low side meaning house turnover rates would nee to be considerably longer than 10 years now or the tax rate would have to considerably higher to net extra income.
Also as current home owners have already paid stamp duty and therefore I assume exempt from the new tax there would be a disincentive for them to sell.
As I said, all changes to taxation carry a disruption cost and require transition arrangements, so repeatedly pointing this out is equivalent to arguing “never change taxation”. I’m not going to draft the entire legislation right here in a blog. The Queensland property markets are already disrupted by the financial crisis and the floods, which is why those disruption costs would be much lower now than at other times.
The suggestion is to replace one-off, uncertain, market-inhibiting, high deadweight-loss taxation, which purchasers have to borrow and pay interest to overseas lenders, with a much more predictable payment stream which stays within the state and is proportional to the benefit that land owners get from it. A more predictable revenue stream means government can bridge the transition with borrowing at a lower cost.
I’m happy to answer questions, but not to go round and round in an argument for argument’s sake, which bores and distracts everyone from even noticing what we’re arguing about.
My suggestion was to use the flood repairs and restructuring as a good opportunity for moving Queensland to a land tax regime. Anna Bligh has already shown she understands the superiority of such a reform, but she was forced to water it down. The model she proposed could be further improved. People are now taking a second look at Bligh’s political qualities after her stellar handling of the flood crisis, so maybe it’s time to take a more honest look at her earlier efforts.
The result though is an extra cost to the home owner - they already pay “holding tax” in the form of council rates and possibly land tax, they pay for water infrastructure through water rates and they pay insurance (which has stamp duty and possibly fire service levys etc). The total of all this can easily more than $5k. Add interest payments and the extra cost a new holding tax and suddenly renting becomes the attractive option. Making the home owner pay more over a period of time rather than a one off does not encourage investment.
The capital value of land would go down, in proportion to the increase in discounted future holding costs. If calibrated properly, owners who buy in the new system would pay lower prices and pay higher taxes to government in proportion to the interest they no longer have to pay to the bank. So they would not be out of pocket.
It gets more complex for people who have already paid high prices under the old regime, including stamp duty and, if it’s a new home, infrastructure levies through the developer. A sliding scale would have to be worked out, calibrated to a historic index (eg RP Data-Rismark’s Hedonic Index) of prices in the area you live in, and it would go something like this: If you purchased in the last 12 months, there’s no change for now, you just keep paying the old land tax. If you purchased between five years ago you pay 25% of the new land tax; if you purchased ten years ago, 50%; if you purchased 20 years ago, you pay 100% the new tax.