## Wednesday, January 13, 2010

### The land tax remedy

I have made  my point about the social benefits of land taxes clearly in the past.  I want to now direct the interested reader elsewhere for some informative discussion.

Here is an excellent article discussing land taxes and land price bubbles in an Australian context.  More from the same author here, and a plug for his personal blog here (take note of the CPI discussion - I want to discuss that in more detail in the future).

For those who want to digest some of the classic writings on the issue, see Progress and Poverty by Henry George (written in 1879).

Unfortunately there is a powerful political lobby working against such beneficial tax reform.  The Property Council of Australia has been pushing for reductions in land taxes, citing any increase in tax revenue from this source as a national embarrassment.  Of course, the large increase observed in Queensland (below) is partly due to the extremely low land tax base in 2007/08.  Not mention of the scale of the tax, just the increase.  Queensland's land tax revenue was just a third of the land tax revenue of NSW in 2007/08.

A little off topic now, but over drinks on the weekend I was talking to a Dutch friend of mine who also happens to be an economist.  He is thinking of moving to Australia but is very hesitant due to the exorbitant cost of living here compared to incomes.  He recently bought a new apartment in a the 'happening' part of town, and his total costs per month (including loan repayments, body corporate, rates, and his insurance for the home, car and motorbike which are a package) are 800Euro ($1300AUD). That's only$300AUD per week for all those expenses combined! That is below the median rental rate for a 2 bedroom apartment in Brisbane (including new and old stock).

There are a number of reasons for this.  In Holland, interest on loans for owner occupied dwellings is tax deductible.  The interest rate itself is just 4%.

So if the Dutch average household income is slightly higher than Australia's, and the Dutch have generally less land available, why is owning a home so affordable there?  And why is the rate of Dutch home ownership (54%) much lower than Australia's (70%)?

1. What is the Dutch population growth like?

2. Dutch growth here

Australian growth here

But, is there really a causal link between population growth and dwelling prices? And once the rate of growth returns to near zero, does that mean prices fall?

I'll discuss in much more detail in a future post.

3. Dear Cameron,

There must be a causal link between population growth and land prices, for land is a fixed resource. In the near term, dwelling prices must also rise as a consequence of population growth. In the longer term, however, higher land values will drive supply of lower priced dwellings on smaller areas, like apartments. So perhaps population growth will not lead to higher dwelling prices? One thing, it won't do much for quality of life.

Your articles about land tax are most interesting, and I understand some of the advantages. One objection is that one is forced to pursue a productive enterprise in relation to the land. But supposing someone wanted land for a non-prodcutive purpose, like subsistence or recreation? Would not land taxes cause the loss of say private golf courses and tennis courts in cities and towns? I would not want to see the extent of over development in our cities as seen in Hong Kong, where the air pollution is so bad that it is a health hazard.

Robert

4. I'm a proponent of land tax, but the main argument against it is that you remove (or reduce) income tax, which is supposed to be paid mainly by the rich, and spread the tax burden over the population. I've always thought this argument to be incorrect, because the rich in fact own more land, and the land they do own is more valuable. Furthermore, those who fall into the tax-free threshold will hold no land, and their rent will not increase if a tax is placed on their rental, because their purchasing power has not increased.

Cameron, do you have any data about the value of land held by citizens relative to their income? Some hard data that showed the tax burden would not be placed on those who can least afford it would go some way to helping your argument. Apologies if you've posted such data before... I could not find any on your blog.

Cheers,
Tim

5. Tim,

Thanks for the comment.

I'm not sure we really need much data to support the fact that a land tax is progressive (the rich are taxed more). The simple fact is that a land tax is a wealth tax - the wealthier you are, the more you are taxed.

There is plenty of evidence for the relationship between household income and home ownership. For example this result: "THE RELATIONSHIP BETWEEN INCOME (CURRENT & PERMANENT) & THE PROBABILITY OF HOME OWNERSHIP ARE FOUND TO BE DEFINITELY NON-LINEAR, WITH THE EFFECT OF INCREMENTS OF INCOME GENERALLY BEING POSITIVE BUT AT A DECREASING RATE AT THE UPPER END OF THE RANGE OF OBSERVED INCOME." is found here

The question is whether it is more or less progressive than the current tax system.

But a land tax improves other things. For example, inherited land with a high tax burden may be sold off by beneficiaries because of the tax burden, rather than contribute to the accumulation of the family estate.