Tax is common property

At some point societies must pay for what they want, go without or go broke. This reality can prove painful as the debacle in Greece shows.

There’s no free lunch when it comes to enjoying the best living standards in history. However, civilisation’s prosperity bonus comes at a price – we need to fund our extra years of quality living and social infrastructure.

In Australia, the cost of community services (mainly driven by healthcare and education overheads) are rising twice as fast as current economic growth rates and three times faster than the basic cost of living.

Meanwhile, the number of taxpayers propping up the system (as a percentage of all Australians) is due to fall by 40 percent in three and a bit decades.

To pay its way, a society must constantly recharge productivity, boost workforce participation and the number of taxpayers sharing its mutual financing burdens. A growing population that can efficiently deploy the (public and private) capital required to invest in growth is critical.

The design and operation of the nation’s tax system is vital to a successful prosperity formula.

Australia’s present system is doomed to collapse under the weight of an ageing society. As the dust-collecting Henry Tax Review revealed, taxes per capita will probably double in real terms by 2050.

Henry showed it’s loopy to levy 125 different taxes when a handful do the heavy lifting. We should redesign the system to focus on efficient, broad-base, low-rate taxes that are equitable, fair and simple. Scrap the rest.

Property tax reform only works as part of a root and branch modernisation of the entire system. It will be hugely tempting for politicians to do nothing but hike property taxes as the ratio of taxpayers to retirees plummets over the next three decades. Check out Bernard Salt on page 40 of this edition for more on the subject.

Here are some reform scenarios to debate.

Fix the GST – broaden the GST base to cover all consumption (including financial services, food, education and health) at a 12.5 percent or 15 percent rate.

Groups as diverse as the Australian Council of Social Services, business advocates and think tanks, such as the Grattan Institute, see GST reform as a game changer.

Income tax surcharge – encourage the states and territories to add an increment to the headline personal income tax rate.

The surcharge could be standardised (like the Medicare Levy) for, say, five to 10 years, after which jurisdictions could set their own (competitive) rates.

The Federal Government would operate the piggy back income tax; however, jurisdictions would keep what they catch, thereby avoiding GST carve-up shenanigans.

Under this proposal, the additional revenue (with increased GST dollars) would be used to scrap payroll taxes and stamp duties, along with dozens of inefficient nuisance imposts (including fire services levies, car parking levies and developer charges).

A common tax on real estate – replace the multiplicity of narrowly-based, archaic land taxes and inefficient conveyance duties with a common tax on real estate that has these features:

  • Scope – covers all land users, including tenants
  • Rate – low rate (preferably flat), no threshold
  • Single tax – integrates with municipal government rates, centrally assessed and collected by the states/territories
  • Valuation method – site value
  • Deductible – for federal tax calculations, plus scrap all state legislation that outlaws lessor recovery under leases
  • Based on growth – each jurisdiction (and municipality) to set annual real estate tax budgets. The total pool of tax to be collected should be pegged to the forecast economic growth rate. In short, the quid quo pro for a non-volatile, growing tax base will be certainty for taxpayers.

The concept of a common real estate tax will require a frank debate with voters. The solution is to promise not to trigger the new system until a taxpayer purchases a property. Then offer them this choice: “Do you want to fork out a huge stamp duty bill up front, or pay more in rates each year?”

“How much more?” they ask. The answer is about double if everyone shares the burden.

Clearly, it will take at least a decade for everyone to transition to a new framework. Nevertheless, the community dividends are huge – a society that doesn’t penalise people for moving, greater tax efficiency that encourages economic growth, plus a fairer tax where all those who benefit from real estate chip in. In return, governments receive a stable, growing revenue base.

There are variations to the real estate tax model proposed above – all of which are worth exploring.

Property Australia is dead, long live Property Australia

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