It was good to see Media Watch back for 2007 on the ABC last night. And they were in good form, with a very interesting story on the “rental crisis”, particularly in Sydney.

Their investigation found that the media have greatly exaggerated current and prospective rent increases, and that part of the impetus for this has come from the state opposition’s campaign against land tax (backed by the real estate institute). One tenant featured on a Channel Nine news story was shown to have been put up to it by Peter Debnam’s office.

But while Media Watch knows a lot about the media, it may be short on economic expertise. No-one seems to have asked the obvious question: Why would anyone think that cutting land tax would help renters?

Some taxes, obviously, might restrict the supply of rental accommodation. Stamp duty, for example, is a disincentive to buying and selling property, and therefore can prevent it being used in the most economically efficient manner. Ditto for GST on building costs.

But land tax doesn’t tax buildings, just land value. And the supply of land itself is fixed. Land tax, provided it applies across the board, is an incentive for owners to make the most productive use of their land: it’s a stimulus to supply of housing, not a drag on it.

Of course, if you’re a political party that represents property owners, cutting land tax has its own rationale. If you can spin that as a benefit for renters — who aren’t likely to vote for you anyway — then that will just help everyone feel good about it. But since it doesn’t affect supply or demand, there’s no reason why renters would see any of the savings.

The best thing a state government could do for renters is abolish the cloud of exemptions and differential rates that presently complicate the land tax regime, and let it operate as a simple penalty on keeping land idle. But don’t hold your breath.

Peter Fray

Save 50% on a year of Crikey and The Atlantic.

The US election is in a little over a month. It seems that there’s a ridiculous twist in the story, almost every day.

Luckily for new Crikey subscribers, we’ve teamed up with one of America’s best publications, The Atlantic for the election race. Subscribe now to make sense of it all, and you’ll get a year of Crikey (usually $199) and a year’s digital subscription to The Atlantic (usually $70AUD), BOTH for just $129.

Peter Fray
Editor-in-chief of Crikey