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On the Issue of Land Tax and the Victorian Labor Party

Introduction

Recent articles, particularly from The Age newspaper [1], would suggest that land tax is causing a loss of investment and jobs in Victoria. Dramatic increases, due to the sharply progressive nature of the tax, has caused great concern among sections of the community. The Liberal opposition has responded with promises of land tax relief to small businesses.

It is of grave concern that, if on the basis of irresponsible reporting and the temptation of short-term political expediency, that the Victorian Labor Parliamentary caucus were to make a decision to substantially reduce or even abolish land tax.

Undoubtedly many members of the caucus are sufficiently knowledgeable in economic matters and the history of the Australian Labor Party not to approve of such a suggestion. However, for those who are unfamiliar with the issue the following will provide a brief summary of the key issues in land tax and what reforms are necessary.

Definition of Land Tax, Or Resource Rents

The idea of land tax is one that belongs to classical liberalism (e.g., Adam Smith, John Locke) and democratic radicals (e.g., Thomas Jefferson, Thomas Paine), adopted by many early socialists, and most notably Henry George, and is currently strongly supported by almost all major economists [2]. The basic proposition is that public revenues are raised through the collection of the rent from the site-only value of
unimproved land.

The terms "site-only value" and "unimproved" are extremely important. Land tax is derived from the value of land according to market rates. Where there is good infrastructure or the land is naturally more productive, land is more valuable. "Unimproved" means just that. The tax does not apply to any other value placed on the land, be it irrigation, plantations, or buildings. It is the rental value of a unimproved vacant block alone.

Such a rent collection is justified so that, when implemented properly, it does not act as any disincentive to productivity. This is unlike _all_ other taxes (e.g., taxes on profits, income, consumption and levies) in existence. It is also administratively efficient with extremely low compliance costs and is quite impossible to avoid. It provides a very stable source of public revenue. Finally, it is very important to note that any land taxes or increases to land taxes cannot be shifted to renters due to competitive market relations. It is a cost that can only borne by the landowner alone.

On a philosophical basis resource rents are justified on the grounds that the natural world is something which all have an equal and common right to access, whereas other taxes represent an involuntary fee paid by individuals or businesses to a government. Resource rents thus represent a system whereby the user pays, in proportion of their use, a rent to the community.

Where a land tax or resource rent does not exist an incentive is created for land or resource speculation. As an inelastic factor of production, requisite for life itself, and in fixed supply, private ownership and the private appropriation of usage rents is the easiest manner for an individual to become very rich without contributing to the production whatsoever. It is little wonder that economists refer to such behaviour as "rent-seeking".

Where resource rents do exist, an incentive is created by landowners is disinvest themselves of unused property and invest in production e.g., buildings, business, employment. There is an extremely high correlation between increases in productivity and increases to land tax, and likewise, decreases to productivity and decreases in land tax.

The Australian Labor Party and Land Tax

In 1891 the founders of the Australian Labor Party made land tax a major part their Platform. Up to 1905, the ALP supported a flat rate of taxation on the unimproved value of all land. After that, the Federal
party changed the platform to a graduated rental on unimproved land values, with zero value on estates worth less than five thousand pounds. Andrew Fisher won the 1910 election on the pledge to introduce land tax as a means of collecting public revenue. Unfortunately, there were significant "Protectionist" elements in the Labor Party at the time. As Coghlan illustrates;


"The idea that the Single Tax offered the only solution of financial and economic difficulties of the country had taken firm hold on the minds of a numerous and intelligent section of the community, yet, whilst land taxation became a leading principle with all classes supporting the Labour movement, the doctrine of the Single Tax was never officially adopted in any colony. For this there is an obvious explanation. The majority of the Labour Party being protectionist demanded high custom duties no matter what other taxation was imposed, while the minority were not so strongly free trade as to favour obtaining the whole Government revenue from land." [3]

In 1953, the Menzies government abolished the hitherto successful Federal land tax making it entirely a responsibility of the States. In response, in 1958 the Commonwealth Conference of the Labor Party removed the "rent-free threshold" as part of its policy. According to Clyde Cameron however, this commitment removed from Federal Labor policy without ever being taken to Conference. In June 1974, Cameron wrote to Labor's Treasurer, Frank Crean, reminding him of the Labor Party's promise to introduce a Federal resource rent. Treasury indicated that they "needed time" to review the proposal and following the actions of John Kerr, the proposal lapsed.

The Current Situation and Potential Reform

In Victoria, land taxes are paid on a sharply progressive scale which exempts the first $149,999 of value, starts at 0.1 cents per dollar at $150,000, 0.2 at $200,000, 0.5 at $540,000, 1.0 at $675,000, 1.75 at $810,000, 2.75 at $1,080,000, 3.0 at $1,620,000, 5.0 at $2,700,00. [4]

This sharply progressive scale, as has already been noted, causes severe problems when there are temporary increases in land values. Also, it acts as a significant barrier to economies of scale. Finally, it also adds to compliance costs and disputes.

It is strongly recommended, for the purpose of efficient use of public money and to promote productivity in Victoria that two actions are undertaken.

Firstly, that the progressive rate of land tax and its exemptions be abolished and replaced by a flat rate.

Secondly, that the overall government income derived from land tax be increased, with proportional reductions in other taxes which are in comparison (a) inefficient to collect, (b) reduce productivity and (c)
politically unpopular.

It is important, for the sake of political popularity, that the decision is seen as being "financially neutral" in terms of income derived by the government. Under no circumstances can any tax changes be seen as a "cash grab". However, it is also the government's responsibility, and hopefully its desire, to arrange taxation in a manner that provides the greatest public welfare and economic productivity.

For example, by increasing the general level of land tax (whilst removing exemptions and the progressive scale) whilst abolishing payroll tax (which has high compliance costs), stamp duties and the debits tax, the government would be engaging in act which would both significantly increase productivity and relieve the state taxation burden on those who own little or no landed property [5]

Likewise, the Labor Party should also encourage local councils not to rely on rates on capital property values, but rather on land values.

Ceteris paribus, every place in the world that has high land taxes has high productivity and low unemployment. This must be kept in mind at all times. Land taxes shift resources to productive economic activity.

I sincerely hope the Labor Party considers these proposals carefully and seeks as much advice as possible from respected and qualified economists. I am certain that they provide you with the same substantive information and conclusions as I have.

Please feel free to contact me on this matter if you require further information or have any questions.

Yours, and in solidarity,

Lev Lafayette

References

1] Soaring land tax costs jobs, investment (Russell Skelton, November 21, 2004)
http://www.theage.com.au/articles/2004/11/20/1100838277853.html?from=top5

and

Backdown on caravan park land tax (Russell Skelton, November 28, 2004) http://www.theage.com.au/news/National/Backdown-on-caravan-park-land-tax...

and

Doyle pledges land tax relief (Darren Gray, State Editor, April 5, 2004)
http://www.theage.com.au/articles/2004/04/04/1081017035247.html?from=sto...

2] This claim is not made lightly. In 1990/91, over twenty five professors of economics and some other senior economists wrote to Michael Gorbachev urging him to adopt land-site rentals as the basis of
the Russian public revenue system in the transition to a market economy. This letter included senior conservative, liberal and radical economists, including four holders of the Noble Laureate in Economics..
See Letter to Gorbachev, 1990/1991 http://www.taxreform.com.au/essays/russian.htm

See also;

"Pure ground rent is in the nature of a 'surplus,' which can be taxed heavily without distorting production incentives or reducing efficiency." (Paul Samuelson, Nobel laureate in Economics)

"In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago." (Milton Friedman, Nobel laureate in Economics)

"For efficiency, for adequate revenue, and for justice, every user of land should be required to make an annual payment to the local government equal to the current rental value of the land he or she prevents others from using." (Robert Solow, Nobel laureate in Economics)

"While the governments of developed nations with market economies collect some of the rent of land, they do not collect nearly as much as they could, and they therefore make unnecessarily great use of taxes that impede their economies -- taxes on such things as incomes, sales, and the value of capital goods." (William Vickrey, Nobel laureate in Economics)

3] T.A. Coghlan, Labour and Industry in Australia, Vol 4, p1836, 1918

4] Victorian State Revenue Office Land Tax Website
http://www.sro.vic.gov.au/sro/srowebsite.nsf/taxes_landtax.htm?OpenPage&...

5] The top 1% of the population own 12 percent of household assets. The top ten percent of the population hold 45%. The top twenty percent hold 65%. The bottom fifty percent holds 5%, which in most cases is held in superannuation (see in particular p17 of the document which includes distribution of wealth by type, and shows the percentile distribution).

see: Trends in Australian Wealth - New Estimates for the 1990s' (Simon Kelly). Paper Presented to the 30th Annual Conference of Economists University of Western Australia. 26 September 2001
http://www.natsem.canberra.edu.au/pubs/dps/dp34/dp34.html

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