Yves here. While some of the concerns in this post are specific to Australia, they can be readily translated to other property regimes. The part that is missing, however, is that the US relies on “real estate taxes” which includes the value of the buildings on the land. Michael Hudson has advocated taxing land much more heavily, since unlike taxing capital or labor, it does not burden the economy with higher costs . As he explains in a 2009 interview:
Our tax system favors debt rather than equity financing. By encouraging debt it has prompted a tax shift onto the “real” economy’s labor and capital. The resulting interest charge and tax shift mean that we’re not as efficient and low-cost producers as we used to be. This makes it hard to work out way out of our foreign debt.
You want to phase out the “tollbooth” economy that adds unnecessary charges to the cost of living and doing business – charges that have no counterpart in actual necessary cost of production. You want to avoid monopoly rent of the sort that Mexicans have to pay Telmex. And you want to avoid having the tax collector lower property taxes, leaving more revenue available to be pledged to banks as interest on higher mortgage loans. To get a lower-cost world, you have to counter political pressure from real estate owners and their bankers to shift taxes off rent-yielding properties onto labor and capital. Income and sales taxes add to the price of doing business, and hence reduce their supply and competitiveness. Most economists – even Milton Friedman – recommend that the more efficient tax burden is one that collects economic rent – property rent, fees charged for using the airwaves, monopoly rent, and other income that is basically an access charge. If you tax land rent, for instance, this doesn’t raise the price of housing or office space. The rent-of-location is set by the market place. Taxes – or interest charges to buy such property – are paid out of the market price for using this space or natural resource.
“Rent-seeking” charges are paid out of prices. So taxing economic rent doesn’t add to prices. It simply collects what nature or public infrastructure spending have provided freely – site value, the broadcasting spectrum, the rights to access the internet or other technology in cases where prices exceed the reasonable cost of production. Unfortunately, despite what Milton Friedman said, the economy today is increasingly about how to get a free lunch of this sort – and how to get the government to avoid taxing it, and shift the tax onto labor and industry instead. This loads down the economy with unnecessary costs and higher prices, especially when rent-yielding assets are bid up on credit. That’s the essence of this decade’s real estate boom….
What has really been fueling the rise in property prices in this country has been the fact that real estate has been untaxed. What the tax collector relinquishes is now free to be capitalized into debt service on higher loans to bid up real estate prices. In 1930 about 75% of state and local finances came from the property tax. Last year it was down to 16%, so that’s from 3/4ths down to 1/6. Cities have shifted the property tax onto wages and salaries – income and sales taxes that increase the price of business. Taxes used to fall on property and hence were progressive, but now have turned regressive. The result is that “tax deflation” now reinforces debt deflation. This threatens to aggravate the depression we’re entering.
By Leith van Onselen, Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. You can follow him on Twitter at @leithvo. Cross posted from MacroBusiness
The Economist over the weekend published a great primer on the benefits of broad-based land taxes:
Taxing land and property is one of the most efficient and least distorting ways for governments to raise money. A pure land tax, one without regard to how land is used or what is built on it, is the best sort. Since the amount of land is fixed, taxing it cannot distort supply in the way that taxing work or saving might discourage effort or thrift. Instead a land tax encourages efficient land use. Property developers, for instance, would be less inclined to hoard undeveloped land if they had to pay an annual levy on it. Property taxes that include the value of buildings on land are less efficient, since they are, in effect, a tax on the investment in that property. Even so, they are less likely to affect people’s behaviour than income or employment taxes. A study by the OECD suggests that taxes on immovable property are the most growth-friendly of all major taxes. That is even truer of urbanising emerging economies with large informal sectors.
Property taxes are a stable source of revenue in a globalised world where firms and skilled people can easily move. They are also less prone to cyclical swings. In the financial bust America’s state and local governments saw smaller declines in property taxes than other forms of revenue, largely because the valuations on which tax assessments are based were adjusted more slowly and less dramatically than actual prices. Property taxes may even restrain housing booms by making it more expensive to buy homes for purely speculative purposes.
Yet, despite these benefits, the average high income country, including all levels of government, raises under 5% of total tax revenue from annual levies on land or the buildings on it (including council rates):
Times are slowly changing, however, with The Economist reporting that some 20 countries that have recently introduced new property taxes, or are considering doing so. Ireland is a case in point. Following recent reforms, capital gains from rezoned land is now classified as windfall gain, attracting 80% tax.
While I would not like to see a broad-based land values tax (LVT) implemented on top of Australia’s other taxes, there are strong arguments for improving the efficiency and equity of the tax system by replacing highly distorting taxes, like stamp duties, with an LVT in a revenue neutral manner.
As argued previously, stamp duties are an inherently volatile source of taxation revenue in Australia, since they are critically dependent on both the volume of housing transfers as well as the price at which those homes transact. Stamp duties also unfairly penalise people that move to homes that better suit their needs, as well as hinder labour mobility since they discourage workers from relocating closer to employment.
In addition to the efficiency benefits purported above by The Economist, a broad-based land LVT would also assist in the provision of new housing via two main channels. First, an LVT would help make infrastructure investments self-funding for governments, since any land value uplift brought about through increased infrastructure investment (e.g. new roads, trains, etc) would be partly captured by the government via increased LVT receipts. Accordingly, governments would be more likely to facilitate development, rather than act to restrict it in a bid to save on infrastructure costs. Second, an LVT would penalise land banking and vagrancy, effectively increasing the supply of land in the process and bringing new homes to market more quickly.
Transitional issues in moving from stamp duties to an LVT, and concerns about double taxation, could be overcome by crediting all landowners with the amount of stamp duty paid and then deducting the hypothetical land tax they would have paid since the date of purchase. Asset rich, cash poor, retirees could also be permitted to accumulate their LVT liability, with the bill payable upon death (via the estate) or once the house is eventually sold (whichever comes first), with interest charged on any outstandings.
Requiring any LVT liability to be paid in smaller regular installments (e.g. once a month), rather than in a large annual or biannual lump-sum, could also assist in gaining community acceptance, since it seem like less of a burden.
The arguments for LVTs are well known. It’s just a shame that Australian policy makers will not even consider reform.