Labor Signals Return to a Forgotten Left-wing Principle: Land Tax

Labor Returning to its Economic Justice Roots?

I’ve been struggling to find a news item about this – apart from one pay-walled article in the Australian Financial Review and a Hallelujah from Prosper Australia – but Chris Bowen has just announced that federal Labor is developing a tax reform agenda to address housing affordability, chief of which will be the replacement of stamp duty with a property tax. This is really significant and encouraging news for the future of crucial tax reform in this country, given that the failure to adequately tax land, and Australia’s world-beating tax lurks for housing are two of the main causes of our dangerous land bubble, which itself is at the epicentre of our massively imbalanced and inequitable economic model.

Additionally, the term “tax reform agenda” seems to signal a recognition that the preferential tax treatment of housing has adversely effected affordability, and that there may be a growing willingness to finally wind back egregious wealthy/middle class welfare such as negative gearing of investment properties and capital gains tax concessions. It also adds more evidence to the pile that there is gradually rising pressure to genuinely address housing affordability and our mega land bubble, including an emerging awareness of the raw deal that non-owners and younger Australians have been receiving for decades.

Less talked about, but nonetheless supported by such reforms, is the need to begin the long overdue restructure of our economy and political sponsorship to something other than just ‘houses and holes’. It’s most likely a bit late this time around to save us from the worst of our housing excesses, but these are necessary reforms for mitigating future speculative land cycles. Australia has a long and proud (though oft forgotten) history of boom and bust land cycles periodically crashing our economy and collapsing our financial system. Tax reform is a critical step to breaking this long-term cycle.

So congratulations to the ALP for actually seeing sense and advocating for a land tax to replace stamp duty. Land tax was an official Labor party policy from its inception right through to the 1960s, years after the Menzies Liberal government abolished them in favour of higher taxes on labour and business – a successful cornerstone of the neoliberal reform agenda that was designed to further concentrate wealth away from workers. A land tax has also been a top recommendation of nearly every tax review in living memory, including the Henry tax review, where the top recommendations were implementation of a land tax and a resource rent tax to replace more than a hundred inefficient taxes and duties and reduce the tax burden on labour and business.

It seems that federal Labor might finally be returning to a traditional and worthy (though little understood) left-wing principle of economic policy. Lets hope that the other parties and independents get on board and don’t use this as a political football, as has historically been the case. The ACT is already replacing stamp duty with a land tax, and they will begin to enjoy the many benefits before the rest of us, hopefully in time to help inform the case for federal reform.

Property Tax vs Land Tax

It’s less encouraging however that the ALP’s idea is a “property tax” on the improved value of land, rather than a more progressive “land value tax” on the unimproved value. To tax the improved value of land (that is, including the value of any built premises) is to penalise efficient and maximal use of available land, and to tax a depreciating asset (physical buildings) that in the case of a residential property, should therefore be considered a consumable good, not a taxable item. On the other hand, taxing the unimproved value of land encourages optimal use of a limited resource, because it reflects the holding cost of the land, not the cost to use it. In other words – use it or lose it.

By way of further background, land taxes have sometimes earned an undeserved reputation as a “poll tax” or a “tax on living”, but these characterisations have historically originated from landed interests and are most definitely false. Taxation of the raw value of land is the most equitable and efficient tax base that society can fund government activities with. Classic economic theory regarded land as the third factor of production (next to capital and labour), and for hundreds if not thousands of years land was correctly identified as the primary but finite source of wealth. Fair access to land (for shelter, farming, production, government etc.) was seen as a key to economic justice, and a crucial difference to the wonderful world of feudalism. The value of land was once inseparable from most economic models, but has since been written out of economics in order to monopolise natural wealth.

Land is the essential source of all wealth and productive activity, proof of which is the fact that fundamental land prices reflect a combination of the productive capacity of the land, the value of non-renewable resources present, proximity to tax-payer funded infrastructure and the amenity created by community efforts and resources. These are the original sources of value in an economy, often referred to as “the commons”, and because they are not the product of individual labour and capital, by rights they belong to everyone. A failure to tax land is to allow these commons to be captured as economic rent – the earning of windfall wealth separate to the investment of labour and capital.

If implemented progressively with correct exemptions, and used to replace inefficient and punitive taxes like stamp duties and to reduce the tax burden on “movable” productive capital – ie. labour, it is the best path to economic (and indeed environmental) justice with respect to structuring our taxes and our treatment of land. It provides an immovable and unavoidable tax base that recognises the root source of all wealth: land. Land taxes have historically been advocated by some very important economists, leaders and philosophers including notably Henry George, Abraham Lincoln, Benjamin Franklin, Voltaire, George Orwell, Thomas Jefferson and the “father of capitalism” Adam Smith, who had these sage words:

“Ground rents are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. Ground rents are, therefore, perhaps a species of revenue which best bear to have a particular tax imposed upon them.”

“As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed and demand a rent even for its natural produce.”

“A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground.”

The Compelling Case for Restoring a Land Tax

A correctly implemented land tax on the unimproved value of land would have the following benefits:

•  Reduced incentives to speculate on rising land prices and participate in “land banking”, lowering the real cost of land, a key source of social/economic equality, (or inequality as it currently stands in Australia). Land is also a key cost of production, with Australia’s high land prices being a primary reason for our high cost economy.
• If used to replace stamp duty, a land tax would facilitate more efficient use of housing stock, whereby people are not penalised for moving to dwellings that suit changing circumstances – i.e. downsizing, up-sizing, relocating for employment. A more mobile workforce would aid economic productivity and further act to reduce prices.
• A land tax naturally favours productive investment and innovation over speculation (“investment”) on unproductive fixed assets; i.e. housing, and would therefore help generate and support productive enterprise. Mortgage lending for land speculation has cannibalised lending for business and productive enterprise in recent years/decades, helping to lower the diversity and productivity of our economy.
• Similarly, if used to reduce the tax burden on incomes (as it historically was), it removes a key disincentive to work for wages or invest in value-adding business, because wages and genuine profits are taxed less and speculative investment becomes less appealing.
• Encourage more efficient use of land for development purposes, particularly brownfield urban sites, and is therefore an excellent indirect way to mitigate urban sprawl and incentivise efficient infill development, thereby improving the environmental outcomes related to land use and urban planning. Large undeveloped land holdings in the inner city close to key amenities would pay for the privilege, while those desiring large blocks will be more likely to seek them in regional and rural areas, increasing the efficiency and utilisation of existing infrastructure.
• A land tax is a crucial step towards true-cost economics, and a strengthening of the idea of the commons. If we formally recognise the value of land and resources by taxing their use, we are closer to recognising the true economic value of clean air and water, a stable climate, and finite resources. The value captured from use of these resources can be used to directly offset some of the negative effects of environmental degradation and resource depletion. A land tax is therefore a key aspect of environmental justice.
• Perhaps most importantly, land taxes partly capture the uplift in real value created by government (tax payer) provision of infrastructure and community generated value and amenity (otherwise know as economic-rent or unearned income), and help prevent private interests from capturing this value as uplift in land prices. As an example, think of the Wild West pioneers lobbying the railway companies to direct lines through their land holdings. It was all about windfall gains in land value.
• Taxing these windfall gains would remove a key plank from the corrupt political structures that enable land owners and developers to lobby governments for rezoning and development rights, a practice that the NSW ICAC proceedings have proven to be widespread and a dominating force in long-term urban planning and particularly state government decision-making.
• Further, this “value capture” provides an excellent basis for funding local infrastructure, and provides an incentive for local and state governments to invest in new and improved infrastructure – whereas currently there are essentially disincentives for most local governments to provide costly infrastructure.
• A land tax can’t be passed on to renters, because it is a tax on the holding of the land, not a cost of letting the land. Consequently, real rents would likely be lower, as speculative land holders were encouraged to let their land if not otherwise using it productively.
• Land taxes are extremely difficult to avoid, because they cannot be shifted offshore or fudged with clever accounting. At a basic level, all that is needed is for current rate valuations to incorporate the unimproved value of land.

In summary, land taxes (coupled with taxes on all fixed sources of wealth such as resource rent taxes and fixed licences – taxis, broadcast frequencies etc.), have long been recognised by classical economists and certain political circles as the most progressive and equitable form of taxation. This is because these taxes address the concept of the Commons, the immutable sources of real value that individuals, big business and enterprise benefit from, (and increasingly monopolise in our current economic system), often at the expense of the community that creates the value in the first place, and who should therefore get something in return for profits which literally “cost us the earth”.

For (even) more information, check out Prosper Australia and their sister organisation Earthsharing Australia, who’s crucial research and advocacy on the subject have informed my understanding, and may well have contributed to the cause for Labor’s courageous proposal. Also, for an excellent detailed summary of the topic, I highly recommend the video “Real Estate 4 Ransom”. It’s worth every minute, and might change the way you think about land, economics, taxation and indeed the global financial system:

Real Estate 4 Ransom from Real Estate 4 Ransom on Vimeo.