Can you fix it?: Land tax is the key

Last updated 14:15 08/10/2012

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The Tax Working Group advised the government to introduce a 0.5 per cent of land value tax. Arthur Grimes gave a paper showing how a land tax was much superior to a capital gains tax as a way of curbing land price inflation.

A one per cent tax on value would lower land values by 18 per cent and help to curb property speculation. At the same time it would make property affordable for first home buyers.

The advice for 0.5 per cent was probably because of the realisation that the Government would have difficulty in introducing it due to opposition by the 'FIRE' sector, that is finance, insurance and real estate.

In the event the Government did not even run with 0.5 per cent but increased the GST by 2.5 percentage points - which is a regressive tax and also inflationary.

The reason the Government needed the extra revenue was to balance the budget and compensate for the tax cuts to the rich when it came into office.

Hypothetically a land tax can be increased to five per cent of value after which the land would be expected to have no value, however government expenditure on infrastructure and population changes would increase land values, and so valuations would still be able to be made.

Supposing that land taxes were increased by 0.5 per cent of land value each year up to the five per cent threshold and income and company taxes reduced accordingly, the net effect would be to lower taxes on production while raising a tax on land which has no cost of production.

Eighty per cent of bank lending is for mortgages. Imagine if the land component of the property was taken as a tax, then if you went for a mortgage the only loan you would need would be one on the deteriorating improvements.

This would mean that more lending could be given to business and to entrepreneurs.

Countries that have done well out of land taxes are Hong Kong, which had a 3.5 per cent land tax during the British administration, Singapore, where 66 per cent of the land is publicly owned and leased by the government, along with capital value property taxes up to 10 per cent on the 33 per cent in private title, and Taiwan where landowners can do their own valuations.

If the Taiwanese set their valuations too low to avoid some tax, they are then faced with the prospect of not getting the full value on the land when they need to sell.

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