The supply of land is not fixed

Adam Creighton has managed to combine several of my pet hates into one article.

Productivity growth has stagnated and a better tax system is among the obvious levers governments can pull to revive it.

With bold reform on hold federally, it’s incumbent on the big states — which rely on the most damaging tax of all, stamp duty — to take the lead.

The old chestnut – substitute a land tax for stamp duty.  Because “productivity”, “efficiency”, insert buzz-word here.

S0 – first thing: A better tax system is a lower tax system, a non-arbitrary tax system.

Then: Stamp duty is not a tax. It is a fee for service. What service you ask? The service of recording and enforcing your property rights. Many of the functions government undertakes is that of acting as a trusted third party (don’t laugh).  Now it is true that government overcharges stamp duty and uses it as a revenue raiser, but that is a monopoly problem. Luckily we now have a technology that industrialises trust and government’s role as a trusted third party will come to be disrupted.

The idea of land tax causes a lot of confusion – this is because many smart people think that the supply curve of land is perfectly inelastic. If this were true, then a land tax would have no dead weight loss associated with it. There would be an income effect from the tax, but not substitution effect. In public finance finding such taxes is the equivalent of the holy grail.  The former Rudd government thought is had found such a thing with the ill-fated mining tax in 2010. To be fair, they were relying on the Henry Review who recommended the tax (but had failed to understand its own diagrammatic explanation of how the tax would work and didn’t realise that the  proposal violated the Modigliani and Miller cost of capital theorems). But I digress.

It s here that we need to differentiate between  economics and geography. It is true in a geographic sense that land is limited. More or less “they’re not any more land” as Lex Luthor explained in the Superman movies. Economically, however, land can be brought in and out of use like any other economic asset. It can be used more intensively, etc. There is no reason to believe that the supply of land as an economic asset is perfectly inelastic. As such the economic benefits of a land tax quickly evaporate.

Policy elites in Australia fantasise about taxing the family home.  The number of arguments deployed to arrive at that unhappy situation is astonishing.  The thing to remember is that the tax burden in Australia is high. The key to improved productivity is lower taxes and cutting red tape.

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36 Responses to The supply of land is not fixed

  1. stackja

    So many people want government to do things. So taxes increase.
    Land title needs registration.
    Government was the only way in the past.

  2. Entropy

    It is quite naive to think you could introduce a new tax like that and not expect it to ratchet up forever. Then it will be applied progressively so you pay more above a certain value, but that value will never change, so it captures more and more over time.

    But it will fund more assistance to the poor, I tells ya!

  3. stackja

    Land could be used better probably by replacing house blocks with HK towers.

  4. Deplorable

    The family home is already taxed, rates are used to provide social programs,subsidies to businesses, fire services levy and other non core activities. Even our country water board is stacked with city “elites” who use the rates to support the socialists fantasy’s.
    If any one believes we have property rights just try ignoring rates demands for a few years.

  5. Tim Neilson

    Deplorable
    #3184947, posted on October 15, 2019 at 3:01 pm

    Rates have been going up by more than inflation every year for decades. It’s certainly the case in inner Yarragrad, and everyone I’ve talked to about the issue says it’s the same in the suburbs, the regional towns and the rural areas.

    It’s no doubt fuelled by the “why doesn’t the government do something?” mentality, where even ratepayers seem to disregard costs and just vote for the candidates who promise the most.

    But it’s also fuelled by the “representation without taxation” system by which people who’ll never see a rates notice in their lives can Vote 1 Free Stuff.

  6. stevem

    Whilst Stamp Duty may technically be a fee for service, the states certainly treat it as a tax. Were it purely a fee for service it would be a fixed amount – perhaps $2000 to record the transaction, exorbitant but a fee nonetheless. As it is, it is charges on a sliding scale, just like personal income tax rising from a marginal rate of 1.25% for the cheapest (possible non-existent) properties up to a marginal rate of 7% on properties of >$3m (in NSW).
    The biggest problem with Stamp Duty is the disincentive it provides to move house. If a property owner gets a new job, it’s vastly preferable to commute rather than move closer to the new job. This exacerbates peak hour congestion on roads and public transport.
    That is, to me, the greatest reason to transition away from Stamp duty to a property tax.
    Of course the introduction needs to grandfather properties whose owners have paid Stamp Duty until such time as the property changes hands. The problem, of course, is the slump in revenue during the transition that would mean that the states would ignore the injustice and charge property owners from the date of the change.

  7. I_am_not_a_robot

    … substitute a land tax for stamp duty …

    The link is behind a paywall so I’m not sure what Adam Creighton is proposing but the last time I looked land tax is already levied in every state (except NT), I know for sure it is in Victoria, excepting the main residence.

    … The key to improved productivity is lower taxes and cutting red tape …

    I’d suggest first and foremost getting rid of all the ‘Paris Agreement’ economic burdens.

  8. The only reason that these people want a land tax is because it’s an endless flow of money that only increases over time. A stamp duty is ostensibly a one-off cost to a home buyer and if they live in their home 10, 20, 30 years they pay no more to government.

    Given that rates are already a form of tax for services that we often don’t want or need, instead of services that we do want and need, a land tax will only make things worse. And those that have already paid stamp duty will be hit twice.

  9. Pyrmonter

    Stamp duty is not a tax. It is a fee for service.

    No. Stamp is a tax on documents that evidence transactions. It has in the past been levied on contracts as diverse as trust deeds and insurance policies. Its chief incidence is now on property transactions, but the cost of their registration is born (a) by the party that subdivides (survey costs etc) and (b) the payment of lodgement fees (themselves inflated, historically to feed the public service clerical workforce; now to feed the private operators who’ve paid for what amount to tax farming arrangements) entirely independent and additional to stamp duty. Owners pay no periodic fee for continuing registration: once registered, ownership can remain recorded indefinitely (as is shown by continuous corporate ownership for over 150 years in some cases)

    Stamp Duty is a tax. One that reduces the liquidity and efficiency of every market afflicted by it. Given the exemptions applied to inheritances, it is one borne by those with a need to deal in their assets: immigrants; new households; those without existing ownership; as well as those required to sell. The Doomlord has a better grasp of Public Choice than your humble commenter, but it smacks of a classical instance of the majority (for any given period) expropriating a minority (those forced to buy or sell). The reduction in transaction flow and financial penalties distort markets already disturbed by the irrationality of land zoning.

    It has to go.

  10. Pyrmonter

    @ bemused

    In some states, one rationale for reducing state government funding for local government (as pernicious a form of vertical fiscal imbalance as the federal -> state dependency) has been the existence of rating, which is less unpopular than state taxation. It reaches a limit though when the lowest income councils reach their ‘pain threshold’.

  11. Sinclair Davidson

    Stamp is a tax on documents that evidence transactions.

    You’re not often wrong. 🙂

  12. Ben

    Some places in the US, the family home is a tax deduction.

  13. Pyrmonter

    @ Doomlord

    The liability for a ‘transactional tax’ is quite independent of registration:

    https://www.revenue.nsw.gov.au/taxes-duties-levies-royalties/transfer-duty

    and

    https://www.revenuesa.sa.gov.au/taxes-and-duties/stamp-duties

    Registration charges are separate. Not least, many of them are collected by the federal government in respect of the registration of interests in personalty, and are usually independent of the value of the asset dealt with:

    https://www.ppsr.gov.au/fees

    and

    https://nswlrs.com.au/Fees

  14. Rococo Liberal

    In South Australia there is stamp duty in the old fashioned sense. In all other States stamp duty is no more. It has been replaced by transfer duty. The latter is a tax on the transfer or the agreement to transfer dutiable property, which in all jurisdictions includes land.

  15. FelixKruell

    Then: Stamp duty is not a tax. It is a fee for service. What service you ask? The service of recording and enforcing your property rights.

    Nonsense. My property rights are recorded and enforced, whether I pay stamp duty or not.

    There is no reason to believe that the supply of land as an economic asset is perfectly inelastic. As such the economic benefits of a land tax quickly evaporate.

    This seems a stretch. Even if not perfectly inelastic, it’s highly inelastic. So you’d expect the dead weight loss to be lower for a land tax than for stamp duties.

  16. Gavin R Putland

    From the article: “[L]and tax would be paid out of disposable income (unless deferred). It’s therefore more difficult to lift its rate — a useful constraint on the growth of government.”

  17. Herodotus

    “they’re not any more land”
    Making? Apart from reclamation and islands growing. Oh, wait.
    Plenty of land out there. A lot is tied up in “national parks” or can’t be cleared for some loony activist reason, or for a more sensible water catchment reason.
    But there is plenty of land.

  18. Gavin R Putland

    “Those modes of taxation, by stamp-duties and by duties upon registration, are of very modern invention. In the course of little more than a century, however, stamp-duties have, in Europe, become almost universal, and duties upon registration extremely common. There is no art which one government sooner learns of another than that of draining money from the pockets of the people.”

    — Adam Smith, The Wealth of Nations, Book V, Chapter 2.

  19. Rococo Liberal

    My property rights are recorded and enforced, whether I pay stamp duty or not.

    Not wholly true. Section 304 of the Duties Act 1997 (NSW)makes it clear that if you have not paid duty on a transaction, then any document relating to that transaction will not be admissible in court as evidence. This means that if you want to sue the vendor over the contract and haven’t paid the duty, your rights will be severely limited.

  20. Pyrmonter

    @ Felix

    Sinc is right the supply of land is elastic: supply involves searching and negotiation as to use, both as between the current owner and potential users; and, perhaps more importantly, between the owner and the zoning authorities. There is no need for that activity to be undertaken, and land taxes levied on site value tend to impede it. But … and at the risk of being condemned as a socialist … surely ‘we’ want taxes to be levied in ways that are (relatively) less costly, on the assumption that at least some of the things governments do need to be done. We can argue about the overall inefficency of taxatoin (it’s too high), but once there is to be a government, it needs to be funded: and taxes on land value look attractive when compared to, for example, the level of taxation on personal exertion income; or (implicitly) in making markets in assets.

    @ Roccoco – understood. I had tried to illustrate that point with a comment that has disappeared into moderation. But the transfer taxes overcome the avoidance tactics (letters of offer rather than facility agreements; options to purchase rather than sales) that used to be common. Transfer duty is levied on transactions that _used_ to be (overwhelmingly) evidenced in writing, writings that the Statute of Frauds and its replacements required, and which had to be stamped.

  21. Rococo Liberal

    Land may be finite, but the value of land is not. Nor are the transactions involving land.

  22. Rococo Liberal
    #3185138, posted on October 15, 2019 at 6:04 pm

    My property rights are recorded and enforced, whether I pay stamp duty or not.

    Not wholly true. Section 304 of the Duties Act 1997 (NSW)makes it clear that if you have not paid duty on a transaction, then any document relating to that transaction will not be admissible in court as evidence. This means that if you want to sue the vendor over the contract and haven’t paid the duty, your rights will be severely limited.

    How does this affect the rights of a suitor in equity?

  23. Pyrmonter

    @ Frank

    I think Rococco is at the bar, so will correct someone from a mere office, but … there are common rules of evidence in both equity and at law, and the prohibition applies in both – it’s a statutory rule.

    You may be able to plead part performance or establish an estoppel (those used to be relied on to seek to bypass stamp, though not since the late 1990s) but the purpose of provisions such as that in the Duties Act is to encourage all parties to make sure the duty is paid. In my experience, they work.

  24. Davo

    But if we cut taxes, how would we buy votes from non-thinking idiots who think the government can just keep handing out ‘government money’ to them? …its free you know. Don’t know anyone who pays for its..take what you can get

  25. I had a rather disturbing thought the other day.

    Inflation is a poll tax.

    So why don’t people hate it?

    Now, poll taxes are in theory highly efficient as a tax. Minimal deadweight loss. Baring the business cycle effects, this then implies equity is a consideration.

    So is not destroying the tax base.

    For a long time, I have advocated three simple taxes, which are noted for their efficiency and simplicity, as well as broad base enabling a low rate to raise significant revenues:

    1. A VAT with minimal exceptions and simple reporting & thresholds.

    2. A land tax, but not rated so high as to be the entire tax base.

    3. A royalty on exhaustible resources and profit a pendres on crown lands.

    Privatisation would then be the default policy to expand the tax base.

    These taxes more or less are the best considering that public finance & Smith etc opined about taxation.

    I would suggest, rates of 2%, 10% and 5%. Ideally moving with a TABOR (through economic growth) down to 1%, 5% and 2.5%.

  26. Pyrmonter

    @ Frank

    Inflation is a tax on holding money and money’s worth: its incidence is quite different to a poll tax.

  27. I’m thinking in terms of direct resource costs. Everyone’s purchasing power is diminished basically in perpetuity.

    I’m not sure that a creditor benefiting from inflation is truly their incidence, perhaps it is merely their burden.

    The thing is of course, you can’t square this with the damaging effects on the business cycle and the total inequity of it all.

  28. Pyrmonter

    Getting off topic, but Frank, you might like this, a survey that touches on topics that the CW suggests were only dealt with a decade or two later:

    https://mises-media.s3.amazonaws.com/Inflation%20Its%20Cause%20and%20Cure_3.pdf

  29. Sinclair Davidson

    Pyrmonter – don’t know why your comment got eaten.

  30. Squirrel

    So far as I am aware, the only part of Straya that has started on the path to economic nirvana through the shift from stamp duty to land tax on the family home is the ACT – not sure if the paywalled part of Adam’s article examined the success, or otherwise, of that experiment but if it did, the analysis would be interesting.

    “Policy elites in Australia fantasise about taxing the family home.”

    I think that’s what this is really all about – get rid of stamp duty, wait for a bit, and then start the propaganda campaign, with lots of talk about rich Boomers (because no one else has any windfall home equity to speak of…..) for levying CGT on the family home.

    The silence on other costs of moving, not least real estate agents’ fees, is a reminder that this idea is being pushed by vested interests, not just policy dilettantes.

  31. Tel

    Luckily we now have a technology that industrialises trust and government’s role as a trusted third party will come to be disrupted.

    And then we will come to understand that it really is a tax when government steps in and says, “Nice idea, but you weren’t seriously expecting to get out of paying, were you?”

  32. GoTiges

    And the property taxes don’t end with stamp duty either. On the happy day you go down to the bank with your last mortgage payment and ask for the title deed, you’ll be required to pay (in our case) $80 for a bank fee and $120 (from memory) for the Queensland state government to give you an A4 piece of paper to show that you actually own the joint. And that takes about 8 weeks.

  33. RobK

    Luckily we now have a technology that industrialises trust and government’s role as a trusted third party will come to be disrupted.
    Hmmm. Disrupted? The “service “ maybe outsourced but the fee, will that be disrupted?

  34. Infidel Tiger

    Regardless of whether you agree with him on the taxation partor not, Creighton’s point about stamp duty being a barrier to mobility is well made.

    Particularly in places like WA that have had negative house price growth.

  35. Pyrmonter

    @ Doomlord

    Is a dynamic where suburban land owners vote to restrict further development (Australia; but also the west coast of the US) representative of good policy? Is universal home ownership (concentrating much household wealth in a single, in diversified asset, a good savings policy?

    @GT – you’re unlikely to get a certificate of title for much longer, even if you can now: all the states are living to electronic conveyancing, meaning no paper.

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