REVENUE MEASURE 1: Introduce comprehensive land tax. Value: $12 billion
What if there were a way to raise taxes without hurting the economy!
Sigh. If only, right?
Actually, it’s more like, “if only we had the courage”.
Taxing land is how it’s done. The Henry white paper suggested it, and Treasury has recently shown it to be the least distorting tax that exists. (“Distortion” is essentially deterring economic activity, which all taxes do to varying extents.)
Taxing land is effective because unlike taxing consumption or work, taxing land can’t change the amount of it. Land tax is generally progressive because land ownership is correlated with wealth and income. It can be made more progressive by levying higher rates on more expensive property.
So a progressive but comprehensive land tax is the building block for any fantasy budget. A 2006 analysis of a (modest) hypothetical land tax in Melbourne suggested a tax with a maximum rate under 1.4% could raise $1.5 billion. Australia’s house prices have risen by around 60% since. A national tax at a similar rate could therefore raise $12 billion in 2015-16 if levied on residential and commercial land alike.
Land tax encourages the use of property in the most productive way. It would discourage outer-suburban land-banking by property developers, and the phenomenon of investors leaving houses empty. It would also encourage optimal use of inner-city blocks that might be lying idle.
The challenge in designing a land tax is in finding a way to treat fairly the asset rich but cash poor, such as pensioners. The perception of unfairness may be especially pronounced where property prices rise “around” those who bought into an area long before.
Options include exemptions, capping obligations based on age and earnings, or a financial instrument that allows debts to be deferred until the house is sold.
REVENUE MEASURE 2: Extend GST to education. Value: $1 billion
The next thing we’re going to do is make the GST fairer so it hits the well-off more than the poor. This will also reduce the number of exemptions to the GST, making it more effective.
It sounds a lot more controversial than it is. We’re going to tax education.
Taxing education turns out to be one of the most progressive GST changes available. Spending on education is concentrated among the well-off. The top quintile of households by income spends as much on education as the bottom four quintiles combined.
If you extend the GST to education you make the GST overall a less regressive, fairer tax. Much public discussion focuses on extending the GST to fresh food. The objection is always that such move is regressive. The same complaint could not be made in this case.
Free universal school education will of course continue to be available.
REVENUE MEASURE 3: Eradicate stamp duty. Cost: $13 billion
Stamp duty, like land tax, hits people who own property. But it is far worse for the economy, because it inhibits trade in land that could move land to more productive purposes.
Stamp duties are especially bad for private owners. They can take as much as 7% of a property transaction, so people move home as little as possible. Taxes on moving home are bad for cities. It means people tend to live in one place even if moving would bring them closer to their work, so they do more travel.
Stamp duties trap people in homes that are the wrong size for their needs, and are the hidden reason for our national obsession with renovating rather than moving. This contributes to the great spare bedroom glut, as more single people live in four-bedroom homes than one-bedroom homes.
Removing stamp duty should provide a long-term boost to economic growth. It ought also help make Australia’s housing stock more diverse, reduce traffic, and help people pocket the value of their homes when they are sold.