Land ownership tax can lift burden on working poor (2006 Young Writers Competition winner)

There is widespread community outrage directed at those who receive welfare as their primary source of income. In 2006-07, the federal Government plans to spend approximately $92 billion on social security. But what if there was a group that had skimmed more than $300 billion from the Australian community in 2003-04 alone, and continues to profit at the expense of the taxpayer and young families?

There is such a group - land owners. Chances are, the majority of you reading this article fall within this group of so-called social bludgers. People no longer think of land ownership as social extortion by a ruling class, as they might have in Dickensian England, because of the breakdown of the landed aristocracy over the 19th and 20th centuries.

But this trend is turning full circle. Land in desirable locations is becoming monopolised by a shrinking number of property investors, while working families are pushed to the outer suburbs, building on what were, until recently, paddocks. Not only pushed to the fringes of the city, these families are forced into record amounts of debt to finance the privilege of living in the sticks.

The costs of this trend are not only personal, but social, economic and environmental. Rising inner-city land prices create a widening socio-geographic gap between those with easy access to key educational, employment, entertainment and cultural facilities located near city centres, and those excluded. The costs to narrow this gap through high-speed transport or resource duplication are massive, and met by the taxpayer. Furthermore, increasing use of transport, even public transport, increases environmental destruction and greenhouse gas emissions. This is not to mention the time deficit faced by those who spend two or three hours a day simply commuting to work or school.

Finally, there is the economic opportunity cost of all the investment going into property. Unlike investment in shares or loans to business, investments in land ownership generate no increase in productivity or output. They simply rely on population increase and general increases in societal wealth to increase demand for, and thus the price of, land. In this respect, untaxed land ownership steals income from those involved in production - in 1911 land owners received only 8 per cent of national income with workers and entrepreneurs getting 85 per cent. Today it is 27 per cent and 41 per cent respectively. Ultimately, land monopolies act as a constraint on continued economic growth as more income passes from businesses and their employees to landlords. At the same time, Sydney Harbour's deep-water foreshore is taken up for residential rather than industrial developments and small shops in Surry Hills go out of business because they can no longer afford the rents.

This is the problem of the new landed aristocracy, but what is the solution? Obviously, there is no quick fix to Australian's love of land ownership. However, tax reforms could help erode rather than fuel it, as John Howard's new home buyer's grant has done in recent years.

More than 100 years ago, American political economist Henry George proposed replacing all other taxes with land tax. Given the restricted ownership of land at the time, this was a very popular idea. Today, this extreme solution is neither politically nor economically acceptable. However, leaving such a large source of unearned wealth untaxed is equally repugnant. Thus, replacing a host of taxes that inhibit productive activity with a land tax that targets wealth and encourages economic efficiency seems not only desirable but imperative.

With Australia's land valued at $1753 billion in 2004, a land tax of just over 2 per cent could replace the $39billion raised annually by the GST - a tax that not only targets the poor and reduces consumption of goods and services, but also adds considerably to the administrative costs of Australian business. A 5 per cent land tax could not only eliminate the GST, but also take almost $49 billion off working Australians' PAYE income tax bills. This would be a 42 per cent reduction in income tax which could be targeted to reduce the tax burden on the working poor and minimise tax traps that act as disincentives for people to move from welfare to work or seek promotion.

An obvious problem is the tax bill of $26,000 per annum on an average Sydney block of land worth $520,000. But if a 5 per cent land tax were to be phased in by 0.5 per cent a year over 10 years this would give the market a chance to adjust, and land values would fall or stabilise, reducing the tax burden. Phasing in would avoid a catastrophic crash that may leave many people in a situation where they owe more than their house and land is worth (a situation already confronting families in many areas of western Sydney as the housing market softens there). Furthermore, outside of Sydney and the more expensive areas of Melbourne, most home owners would find they saved more in income tax and GST than they expended in land tax.

This would be particularly true for rural and regional areas, as well as the smaller capital cities, making these places more attractive for business and as places to live. This might assist in reversing the trend towards over-crowding in Sydney, Melbourne and Brisbane. The amount of land tax paid on an apartment would also be massively smaller than that paid on a house because the tax on the land would be spread among many residents, thereby encouraging more intensive use of expensive inner-city land, and discouraging the tendency to urban sprawl.

Land tax is not an instant panacea to Australia's land distribution and economic problems. Still, it is an essential component to any successful policy program. The type and rate of land taxation may vary from that suggested above, but a nationally levied land tax should be introduced and used to lift the burden of taxes that discourage efficient economic activity, such as the GST, income tax or company tax. The longer Australia's governments ignore the problem of land monopolisation and housing cost, the more painful both the problem and eventual solution will become.

Michael Janda was the inaugural winner of the Australian Fabians Young Writers Competition in 2006. He is currently an online business report for the ABC and tweets at @mikejanda

For more information & to enter the 2012 Young Writers Competition, visit: http://www.fabian.org.au/youngwriters

Posted in: affordable housing,economics,land tax,public policy,taxation,young writers competition