Double council rates – abolish payroll tax

Over at Catallaxy there has been a bit of a raging debate about land value taxes. I find it all quite intriguing.

The argument for land value taxes is that they essentially entail no dead weight costs. Whether this is true or not is open to some debate however I think it seems reasonable to claim that they entail a lot less in the way of dead weight costs than most other taxes. So on that basis it would seem reasonable to suggest that as a starting point we abolish payroll taxes and make up the revenue via a doubling of council rates (assuming we have to be revenue neutral about such things). Both taxes currently amount to about 4.5% of total government revenue.

The following article argues that ironically a revenue neutral shift toward more land value taxation would in fact be good for current land owners. That whilst the land tax would pull down property values, the upward push on land values from the subsequent stimulus to economic production would more than compensate.

http://www.lvrg.org.au/


 

In any tax jurisdiction, the supply of land is fixed. From the viewpoint of the taxpayer, the supply of land zoned for any particular purpose is also fixed, as is the supply of land within acceptable distance of any particular services, infrastructure, or markets. Yet access to suitably located land is essential to economic participation. Therefore land values, expressed as rent or as interest on purchase prices, are competed upward until they absorb the economy’s capacity to pay. As that capacity increases — as it usually does — so do land values [1]. That’s why economic growth doesn’t make housing more affordable. That’s why we load ourselves with debt in order to “own” our homes as soon as possible. This much is obvious even to the unschooled; they may not know anything about economics, but they know where their money goes.

Most taxes target transactions (or the results thereof), causing otherwise viable transactions, hence otherwise viable enterprises and industries, to become unviable. In this way, most taxes take far more money out of the private sector than they deliver to the Treasury (and thence back to the private sector through public spending). The margin by which the cost to the private sector exceeds the benefit to the Treasury is what economists call the excess burden or deadweight cost of taxation. In simple terms, most taxes take more than they give. This too is obvious even to the unschooled, who typically resent taxation more than they appreciate whatever the revenue is spent on; they may not know anything about economics, but they know they’re being overcharged.

These obvious premises have two obvious implications which somehow escape the notice not only of the unschooled, but also of most of the schooled:

* All taxes fall on land values. If land values absorb the economy’s capacity to pay, then all taxes, in so far as they reduce that capacity, reduce land values. A tax on the owner of the land is a deduction from the imputed rental value of the land for the owner and is discounted in the price that any alternative owner will pay for the land. A tax on any other entity is a deduction from that entity’s capacity to pay for land. Either way, the ultimate burden falls on land owners. Therefore, if the owners were informed and rational, their aversion to taxes would extend to all taxes and would not be concentrated exclusively, or even mainly, on taxes payable by land owners.

* All deadweight falls on land values. The margin by which taxes reduce the economy’s capacity to pay, hence land values, includes not only the actual tax paid, but also the deadweight cost. Indeed, the final reduction in capacity to pay, hence in land values, may not include all of the tax paid, because governments not only collect revenue but also spend it; but it does include the entire deadweight cost of taxation, because governments don’t get to spend the deadweight. Therefore, given that a certain amount of revenue must be collected, an informed and rational land owner will prefer that the revenue be raised with the least possible deadweight.

 

 

 

8 thoughts on “Double council rates – abolish payroll tax

  1. The above scheme sounds reasonable. But we really ought to get out of the habit of this revenue neutrality. In this particular case you want to raise the tax free threshold for retirees to balance the damage to many of them. So that would meet the requirements of revenue-negativity that are needed to fulfill ethical considerations.

    People are too absolutist with land tax. They either are full blown about it, wanting to bring up-front land values down to zero. Or down to agricultural level…. Or they go the Sinclair way and deny any scintilla of truth to the other guys argument.

    I asked one of these old blokes why a town called Kaitaia had taken off in growth and Awanui hadn’t. And this is despite the fact that Awanui was nearer the fisheries and the forestry which were big industries up North in NewZealand. Old guys said that the “Dallies” (Dalmations/Croations) well when they got hold of land they would never sell it. And this tendency to hoard land tends to inhibit economic development. The land tax, if that is the way one is getting around certain economic problems, just needs to be enough to stop this tendency and to get people to treat low-rise houses as a consumer-durable and not an investment good. We want to tip the balance in favour of vertical development a little bit. But no need to go overboard. As well there are other ways of solving these problems.

  2. As a general argument, it seems debatable.
    BUT I will still opt for zero tax rates, all round!

  3. One serious flaw in this scheme. How would broad-acre farm land be treated? Given that many farms are nominally worth several million dollars and may return no more than cost recovery in a majority of years, how would these be treated differently to a $2 mil mansion in Toorak?

  4. “…ironically a revenue neutral shift toward more land value taxation would in fact be good for current land owners. That whilst the land tax would pull down property values, the upward push on land values from the subsequent stimulus to economic production would more than compensate.”

    That’s not allowing for the effect of lags. During any transition it would be lose-lose for some.

  5. One can avoid transitional losers (whether on broad-acre farms or elsewhere) by taxing only future increases in the land value; see e.g. the footnotes on Mill and Churchill at http://lvrg.org.au/blog/2009/03/pure-poison-on-land-tax.html .

    The fact that some landholders who “suffer” increases in their land values are income-poor does not seem to stop them from borrowing against their windfalls in order to pay for consumption. But, as they are apparently unwilling to do the same in order to pay tax, their bills can be partly or fully deferred until their land is next sold or bequeathed.

  6. “The fact that some landholders… are income-poor does not seem to stop them from borrowing… to pay for consumption. But, as they are apparently unwilling to do the same in order to pay tax…”.

    It’s not necessarily the same someones, and some of the latter are unable and/or further disadvantaged if they try (e.g. by facing distress deals), rather than simply unwilling.

    From the point of view of all players, even this scheme does create a loser: the government itself (which has to be counted, as it makes the rules), because the change would not be revenue neutral but would require borrowings against that deferred revenue to meet its desired budget.

  7. One way to deal with the transitional issue (there are probably many) would be to exempt for a number of years land bought before the tax was brought in (heck they paid stamp duty). This would give the old folk time to die. Although personally I think those retiring in the next few years have had a pretty good run in terms of intergenerational fairness.

    Graeme – in terms of neutrality if you’re suggesting we just abolish payroll tax and replace it with nothing then no argument from me.

Comments are closed.