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.