The HIA has last week released through the Centre for International Economics a report that attempts to gloss over economic theory and establish a dangerous meme. The CIE's Taxation of the Housing Sector report was quoted prominently in the AFR.
Despite the GFC being caused by a global property (read land) bubble, the proposed solution will encourage more not less speculative behaviour.
The report concludes that all taxes on housing should be replaced with a new and broader GST. This is part of a global trend to switch taxes off wealth and place them on the under-educated poor with the regressive GST. A 10% tax on a $2 icy pole hits the disposable income of someone on $20,000 harder than a millionaire. It appears that such effects were not included in the modeling.
But we are told the modelling will prove beneficial to GDP. We ask – which sector of the economy will benefit most?
There are a number of aspects to the report that are agreeable. Stamp Duty is the most inefficient of taxes. Replacing this income stream is where we differ. We believe this should be replaced with a Land Tax rather than a broader GST (on basic food).
In the report we see statements such as 'raw land priced without distortion'. But yet the tables listed show how much have been hacked away from the effectiveness of Land Taxes. The raising of Land Tax thresholds in Victoria from $85,000 to $250,000 over the last decade sees the median block of land paying only $462. In Queensland, Land Tax has been virtually written off for affordable housing, where the threshold starts at $600,000.
Land prices have followed the rising Land Tax threshold increases, just as economic law dictates.
Many are so used to being brow beaten over Land Taxes and municipal rates that they no longer understand how they work.
Land Tax is quite simply a counterweight to mortgage debt.
If two parcels of land are offered for sale and one has a Land Tax liability attached to it, the rational buyer will pay less for that location. This infers less mortgage debt for the consumer and less profit for the developer and the banks. Such a tax replaces a lifetime of bank interest payments with a lower Land Tax paid to government.
The logical answer to 'raw land priced without distortion' is to increase Land Taxes to penalise speculation and inefficient land use.
However, such taxes are seen as a threat to profits and thus think tanks like the CIE are generously funded to deflect attention from this progressive tax.
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