Joe Hockey is beginning to understand not all taxes are created equal – The Guardian

Originally published at The Guardian.

The treasurer’s endorsement of land tax in South Australia is an encouraging move away from his general opposition to taxation

‘The best taxes don’t take other people’s money but instead recoup public money that’s appropriated by rentseekers.’ Photograph: Joel Carrett/AAP

Joe Hockey recently said “I don’t like higher taxes; I am philosophically opposed to higher taxes … because if you increase taxes you’re just collecting someone else’s money.”

As usual, the reality is not as simple as Hockey makes out. Not all taxes are made equal. The best taxes don’t take other people’s money but instead recoup public money that’s appropriated by rentseekers.

His own department’s recently released tax working paper makes this abundantly clear by calculating the economic cost of different kinds of taxation. The imposition of taxes that target unearned income (economic rent) can actually improve the economy instead of imposing an “excess burden” on the economy as income based taxes, stamp duties and insurance taxes do.

“Tax bads, not goods” is a great first principle in taxation policy. Tax the activities that create public expenses, like pollution, gambling, tobacco, alcohol and asset price speculation; and reduce taxes on things you want to encourage, such as work and sustainable business activity.

Housing is a good example of the application of this principle. If we want affordable housing then we should tax speculation on land prices; first by removing tax breaks like negative gearing and the concessional treatment of capital gains, and then by increasing the use of land taxes.

This is not “collecting someone else’s money” because increases in land values and the use-value of land are not generated by the land-owner. They are the result of community activity, including public spending on infrastructure and services. Thus, taxing land value is actually just recouping public and community expenditure and effort.

Every single taxation review conducted by treasury under either side of politics has recommended greater use of land taxes in the tax mix. There would be many beneficial effects of these changes beyond increasing tax revenue, including:

  • Discouraging speculators from the housing market which would reduce price rises and make housing more affordable;
  • Causing some real estate investors to shift investments to productive economic activity, improving the economy and creating jobs;
  • Giving households more disposable income because they will be spending less on housing, thus stimulating other parts of the economy.

Joe Hockey has recently endorsed the South Australian Labor government’s proposal to replace stamp duties on real estate with an annual land tax. This is an encouraging development and demonstrates that Hockey appreciates the economic advantages of land taxes.

However, while Hockey is happy for South Australia to take action, he’s ruled out the abolition of negative gearing, a federal government subsidy for housing investment that substantially impacts housing affordability and is effectively the opposite of a land tax.

Instead of encouraging the states to increase the use of land taxes, the federal government could implement a nationwide broad-based land tax that would increase revenue and improve the economy.

In addition to land taxes, there are other taxes that are economically benevolent including resource rent taxes (along the lines of that proposed by the Henry tax review), carbon tax and dividend, the auctioning of electromagnetic spectrum and rent-based gambling taxes.

There is an apparent disconnect in Australia between our expectations and ambitions for our country and our willingness to pay the taxes necessary to achieve them. It seems to me that there are a few baseline standards that we would expect from a country in Australia’s enviable economic position as one of the richest countries in the world at the richest time in human history.

We should have world class health and education systems, virtually no poverty, a welfare system focussed on creating equality of opportunity for all citizens and an economy that’s based around environmental sustainability (ie we try not to leave the planet in worse condition than we inherit it).

If we want these things then we probably need to increase taxes to create the space for sufficient government expenditure. If we were to implement a broad-based land tax, a carbon tax, rent-based gambling taxes and an effective resource rent tax we could substantially cut company and personal tax, get rid of negative gearing and the concessional treatment of capital gains, get rid of insurance taxes and stamp duties and still have all the government services in the above wish list.

Our economy would also operate more efficiently, grow faster and government revenue would be more stable. I think you’d have to try pretty hard to find an economist who would disagree.

Economically, none of this is difficult. The real challenges are political. Tax reform is notoriously challenging because there are always losers and losers shout the loudest. Serious tax reform requires either the buffer of a popularity surplus or very strong political leadership with clear public communication. Hockey’s endorsement of the South Australian land tax proposal is an encouraging sign. Hopefully he will walk the walk when it comes to his own government’s tax reform program.

  • Public comments on the federal government’s tax discussion paper Re:think are due by 1 June 2015.
This entry was posted in Australian politics, housing affordability, Land tax, tax economics and tagged , , , . Bookmark the permalink.

1 Response to Joe Hockey is beginning to understand not all taxes are created equal – The Guardian

  1. Even Milton Friedman agreed that taxes on land were the “least bad tax” (at about the 1 minute mark) but is so unpopular (at about the 2 minute mark):

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