As calls to abolish stamp duty grow stronger in the industry, economists are pushing for a shift to land taxes to cover the shortfall.
Australian Broker recently reported sentiments from a number of brokers calling on state governments to abolish “nefarious” stamp duties
Economist Leith van Onselen suggests a shift to land taxes would be the most effective way for the government to collect revenue while stabilising housing markets.
“Stamp duty is an inherently volatile source of taxation revenue for state governments, since it is critically dependent on both the volume of housing transfers as well as the price at which those homes transact,” says van Onselen.
With the RBA
’s latest decision to keep the cash rate at a record low of 2.5%, while simultaneously highlighting its unease at the ‘uncomfortably high’ Australian dollar, the pressure has been on to find new ways of taking the heat out of the housing market.
The recently released research paper Can non-interest rate policies stabilise housing markets?
looked at policies in 57 markets around the world in order to determine which were most effective at stabilising house prices and credit.
Following the housing boom and bust of the mid-2000s, the drawbacks of relying on interest rates alone to ensure financial stability have become increasingly clear,” reads the report. “
As Federal Reserve Chairman Ben Bernanke (2010) put it, monetary policy is a ‘blunt tool’ for stabilising housing markets.
Williams College professor of economics Kenneth Kuttner, who wrote the paper with Hong Kong based economist Ilhyock Shyim, says the results were particularly interesting with regard to tax-related policies.
“On the price side we found, taking the global results in totality, that taxes that directly affect the cost of how ownership would be most effective.”
Stamp duties could potentially be one of the tools that could take heat out of the market. According to a further paper by Andrew Leigh of the Australian National University and Ian Davidoff of the IMF, a 10% increase in stamp duty equates to an approximate 3% drop in house prices.
Leigh, however, stresses that the effect on houses is not the most significant effect of a stamp duty increase.
“Our research suggests there are house sales that aren’t taking place because there’s stamp duty in place and that’s leading to a bit of what economists would call a ‘mismatch’ in the housing market - retirees rattling round in houses that are too big or young families squeezed into apartments that are too small.”
According to the research paper, the 37% increase in stamp duty that occurred between 1993 and 2005 – mostly due to ‘bracket creep’ – resulted in close to 40,000 forgone sales.
“I think it’s certainly driving a wedge into the market and having an impact in that first home sales aren’t taking place as a result of stamp duty being in play.”
The ACT government’s move to gradually phase out stamp duty, replacing the revenue via land tax, is the most viable option at this stage, says Leigh.
“Governments have to raise money somehow and you’ve got to recognise that all taxes carry some distortion and government needs to be raising revenue in the least distortionary way.”
A recent report to the treasury detailed the efficiency benefits of a land tax over stamp duties “because it is levied on an immobile base and is difficult to avoid. Stamp duties do not have these properties”.
Van Onselen, however, emphasises that implementing the shift is likely to meet with strong opposition from influential parties.
“ I think it has to do with the difficulty around making all home owners pay taxes on a regular basis, and the fact that those that will be taxed the highest are the wealthy land owners, who tend to be vocal and well-connected politically,” he says.
“The options are there, and with stamp duty revenues remaining volatile and having shrunk in recent years, it is in the state and territory governments’ financial interest to pursue reform and change the tax mix.”