Just after Zimbabwe became independent in 1980, the Zimbabwean Government had an ingenious method of assessing land tax on the then fairly wealthy white farmers.
Farmers could value their land however the liked. The lower the value, the less land tax. But the catch was that the self-assessed value became the value for compulsory acquisition, according to a Canberra Times journalist who travelled there and reported on it at the time. The system was a surefire way to prevent low tax assessment.
That was in the days before Mugabe became a tyrant and just stole the land, destroying the economy in doing so.
I was reminded of this earlier in the week when the NSW Ombudsman, Bruce Barbour, brought down his report into land tax in NSW. As land tax systems go, the Zimbabwean one was effective and efficient.
The NSW system, on the other hand, is – pardon the epithet used for African hellholes – a basket case.
Barbour concluded that the system used by the NSW Valuer-General resulted in “an unacceptable risk of error in a considerable number of valuations”.
More than a third of valuations were outside the acceptable margin of error of 15 per cent.
Valuations are contracted out. A lot are done on a mass scale. It means individual sites are not examined. Valuers look at recent sales in the area and apply it across the board making allowances for the size of the block.
Too bad if you are paying land tax or rates based upon it. Who knows what might be happening in the ACT, where land tax is higher?
The NSW Ombudsman recommended that the Valuer-General “start a program to check the value of each property in NSW to ensure the land values used in the system are as accurate as possible.
“International best practice recommends this is done every six years. We have now gone 16 years without any systematic review and correction of base line valuation data. It’s way overdue and a major cause of some of the problems”.
“Hear, hear. Very sensible,” I hear you say.
Well just hang on a moment.
It might sound good to assess the value of each property to determine rates and land tax, so the wealthy pay more, but it is not efficient, or even very fair. With rates, people get the same service but pay different amounts according to the unimproved value of the land. And wealthy people with a big, new house might be paying the same as a pauper in a dump next door.
With land tax, someone pulling in big bucks in rent pays might pay less than someone getting low rent from a dump.
Even in the compact ACT where valuations must be easier to gather, land tax and rates are inefficient and unfair. I must declare that I am a payer of both land tax and rates. But I have an even greater interest in efficient taxation – then we all pay less.
Checking the value of each property every six years, as suggested by the NSW Ombudsman, is wasteful and costly compared to, say, the federal income tax system of self-assessment backed by the Damocles sword of audit, or even the Zimbabwe system of self-assessment backed by the Damocles sword of acquisition. And there are even more effective and efficient systems than these.
One of the most has been the GST. For all the boos and hisses at the time, the Australian GST has been remarkably effective and efficient, and has required very little overhaul.
So, it might be better if land tax was abolished and in its place the GST should apply to rent. The GST would be remitted to the states.
“No,” I hear every landlord and real-estate agent say.
“Impossible,” I hear the state and territory Governments say.
But back-of-the envelope figures suggest the GST on rent would raise about the same as land tax, if not more — even in the ACT which has the lowest percentage of private rentals in its housing mix and the highest land tax in Australia. Average rent, multiplied by the number of privately rented dwellings comes to between $35 million to $40 million – more than land tax. (The ACT raises $58 million in land tax, but a big chunk of that is on commercial premises.)
And no, this would not be a shift of the tax burden from landlords to struggling tenants. Rents are affected by costs, including land tax, and capacity for tenants to pay, so rents would quite quickly adjust.
And it would be fairer. The more rent collected, the more GST paid. At present, the sliding land-tax scale means slum landlords with a lot of lower-end units pay less land tax than someone – say, on a posting — who leases one smart house.
Last financial year, the GST pulled in $37.3 billion. The states and territories have never had it so good. Its success has been based upon getting rid of state taxes that cost a lot to collect.
Land tax should be among them.
One of the beauties of the GST is that most of the collection work is done by the taxpayer. And they are getting pretty good at it – well beyond the projections before it was introduced.
It is also fairer than the pro-progressive-tax economics text books of the 1960s suggested. It is hard to evade and the more you earn the more GST you collect (or in effect pay).
But politics, I suppose, will forever require exemptions (like rent) from the GST and valuers will continue to wastefully asses land block by block in the name of fairness.