IF CANBERRA had a cohort of filthy rich, Treasurer Andrew Barr’s tax “reform” might make some sense. But it does not. Canberra’s top end in the income and wealth scale is nothing like that in other Australian cities – business people with serious wealth.
Rather Canberra’s top end consists mainly of top public servants, academics, professionals, consultants and some small business people, mostly in retail. They have mostly made their money from salaries and fees and modest investments, not inheritance or business fortunes. The number of extremely wealthy miners, manufacturers, hedge fund owners and the like is wafer thin.
So the people Barr has hit, and hit heavily, in his Budget will not be able to ignore the new imposts with a flick of the hand — particularly those who have retired.
The stated aim of his reform is great: abolish inefficient taxes (especially stamp duty) and replace them with more efficient broad-based taxes.
But he should have done that in a neutral way. Instead, he has ramped up rates and land taxes, both commercial and residential, in a double whammy against those who aspire to live in higher end property.
Yes the rich should pay more, but not a double whammy. Under the existing rates system, everyone paid the same rate in the dollar of land value, so the more valuable the property, the more you paid. It was a bit like the GST. Rich people pay more GST because they spend more.
But under Barr’s new system you will pay a higher rate in the dollar the more your property is worth – for both rates and land tax.
Furthermore, Labor’s stated aim of abolishing stamp duty is too slow and too uneven to be called efficient or effective.
Stamp duty is inefficient because it dissuades people from making the best use of resources. Empty nesters or widows might want to move from a large house with big garden to a smaller house or unit. Often they will want something new and in the same area, so they will not be getting much change out of the swap. If they are hit with $60,000 or $70,000 in stamp duty, they might think twice.
Also, young families might want to move to a bigger house. Again, if they are going to be hit with a large stamp duty bill, they will think twice.
So you have some half-empty houses with widows in them and small houses bulging at the seams. Stamp duty discourages movement and we have some resource-wasteful extensions instead.
This will remain the case for perhaps more than a decade under the Barr plan – which incidentally was derived from the report by former Treasurer Ted Quinlan. Quinlan as Treasurer put stamp duty up on houses priced over the then average of $350,000 and said at a post-Budget breakfast he would tax the rich until their pips squeak.
Until this Budget, the duty rate on a $350,000 house (now barely a hut) had not changed.
Under the Barr plan, the duty payable at the top end will not move much for a long time. And more houses will move into that bracket as prices inevitably rise (admittedly after an expected lull).
If the barnacle of an inefficient tax remains at the top, the whole market is ultimately affected and the inefficiency continues. Moreover, as the barnacle is proportionately higher at the top, the brake on efficient movement in the housing market is more pronounced.
In short, this plan fails in its stated aim. Rather than the long-term visionary reform it has been painted as, it should be seen for what it is: a short-term handout to humour the bottom end of the market where Labor gets most of its votes. Well, I suppose the Government had to do something for all those people it encouraged to come to Canberra through in its glossy advertising campaigns in the bigger cities a while back.
But the handout is paid for by the high end of the market whose stamp duty hardly moves and who get hit with the rates double whammy.
Doing it this way is also bad economics. People naturally try to avoid highly taxed transactions. Tax spirits too high and they will turn to wine or brew their own beer. Governments can kill the goose that lays the tax egg. The incentive not to aspire to the top end is now even greater.
The new scheme suffers from a further wrong assumption: that people with a high priced property can afford to pay more than people with smaller dwellings. People with a large property portfolio of modestly priced dwellings will have greater wealth than someone with one expensive dwelling that they live in.
This is why progressive taxation should be left to the income-tax system where it is more equitable and not imposed in the property market where it does not belong.
Moreover, the new scheme will drive investors to the lower end of the market and encourage construction of down-market units. But maybe that is the aim of the policy – rows of Eastern European-style apartment blocks
Further, having high rates and high stamp duty might discourage people from moving to or retiring to Canberra.
The only efficiency gained is that some people at the lower end might be able to move closer to work and get the benefit of less stamp duty – but heaven forbid if they aspire to a bigger property.
It seems like the old story: governments introduce new taxes, but do not commensurately reduce existing taxes.
Bizarrely, the Government seems to have got away with its spin that it has not introduced new taxes and not put taxes up.
Well it has introduced a new rapaciously progressively rates system; it has increased it has increased taxes on commercial properties (in other words, on small business) by cunningly abolishing commercial land tax and replacing it with a rates system that will grab more than it gives; and it has increased stamp duty on houses over $1.3 million.
Yes, $1.3 million sounds a lot, but it will not be in 10 years, let alone the 20 years of this scheme.
Barr should have indexed stamp duty and laid out the detail of the whole 20 years with a promise of no stamp duty by 2032. Even then the new rates system would more than make up the gap.
That said, it is perhaps understandable that the Government has got away with selling the message that it is an economically rational and reformist government on tax. If you lock the town’s media into a room on Budget day as a captive audience and then hammer away at your message the result will be inevitable.
Footnote: I must declare that I am a residential and commercial rates and land-tax payer. (But that’s how you get to know about these things.)
CRISPIN HULL
This article first appeared in the Canberra Times on 9 June 2012.