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Posted on 24 Oct 2017 by Gareth Brown

Stamp Duty is Stupid

Stamp Duty is Stupid

 

For much of the past decade I lived in Vienna, Austria. If you own a television, a radio or even just an internet connection you pay the state about €25 a month for the privilege, to fund various national broadcasters. Think of it as Netflix, only compulsory…more expensive…not on demand…with ads…and shittier.

Of course, in Australia we also fund the national broadcasters. The particularly asinine thing about Austrian television tax is that it isn’t levied through the normal tax system. When a new household is formed, they are supposed to register with the TV tax regulator. But everyone ‘forgets’. One day years later, a representative comes knocking and signs you up – with no fine for prior non-payment.

I know people who got signed up for TV tax 6 months after moving in, and others who’ve been watching free TV for more than a decade and are still at large. They pinged us after about three years when my wife was at home on maternity leave. A large proportion of the tax raised must leak in the form of wages for enforcement employees.

This has almost nothing to do with the topic at hand. I mention TV tax only because it’s a silly tax. But not the silliest I can think of. That award quite likely belongs to stamp duty.

Stamp duty is the name for the one-off tax payable by the buyer whenever a property changes ownership. It’s the way we’ve levied property tax in Australia for decades. And it’s beyond silly.

It’s a terrible tax for at least a few reasons:

1. It’s lumpy

The below graphs shows the NSW government’s takings from transfers and stamp duties paid, republished with the permission of Pete Wargent. The bulk of this tax relates to property stamp duty, although Pete warns me that the spike in November 2016 relates chiefly to the Ausgrid sale. In the 2009 financial year, transfers and stamp duty raised less than $3bn for the state. In the 2017 year it was more than $10bn. This is a significant percent of the state’s overall tax receipts today, and it’s a very cyclical (and currently frothy) source.

Not to criticise the state’s recent handling of the largesse. A long overdue burst of infrastructure spending is an appropriate use of a tax source that might one day shrink. Running a budget surplus and paying off debt also makes sense. But a less cyclical tax source would be superior.

Stamp Duty is Stupid

2. It’s applied unevenly

Australian states are fairly hamstrung in the ways they can generate tax. Property taxes are one of the few ways. But stamp duty is an acutely uneven way to apply it. If you don’t move house this year, your contribution to this part of the budget is zero. Oh, you want to move house? Send the state government half a year’s wage (or thereabouts). This leads directly to reason 3.

3. It’s a significant friction on the free movement of people

It imposes significant but often hidden costs on economic activity and well-being. Moving across town for a better job paying $5,000 more makes little financial sense if you incur a $40,000 one-off tax for doing so. Looking to move your business to another part of the state and actually hoping your staff move with you? Good luck. Considering downsizing? Why bother? I’d punt it even has a small dampening impact on birth rates.

The Economist suggests that stamp duty increases are a big part of why Britons move less than half as frequently as they did in the 1980s, and half as frequently as Americans do today. Mobility stagnation and economic dynamism do not go hand in hand.

The remedy

Property taxes are one of the few ways states can generate income. I don’t think property-related taxes can or will go away anytime soon. But I think a broader land or land & property tax has the potential to solve all three drawbacks listed above.

What I mean here is a tax paid annually by all property owners, not just those who are moving house this year. More like how council rates are usually levied. It should be based on the market value of the property – Malcolm Turnbull and James Packer should pay more than most of us. And it should be set initially to raise an overall annual amount less than current receipt of stamp duty, let’s say $6-7bn annually in NSW’s case, recognising the frothy nature of today’s stamp duty inflows. It should work out to maybe $2,500 annually per NSW residential property, on average. It would be less at the median and lower again if commercial properties are incorporated.

An obvious question here is what about the poor bugger that bought a house last week? The easy solution is to pick a term, I’ll use 8 years here but it could just as easily be 5 or 10. If stamp duty has been paid on a property in the past 8 years it excuses an owner from the new broad-based tax until the 8th anniversary of their purchase. Then they pay, like everyone else. There might be other tweaks necessary, particularly around pensioners.

Short-tenured British Prime Minister Anthony Eden once quipped:

Everyone is in favour of general economy and particular expenditure.

I don’t like taxes, and would generally rather they be lower than higher. But if we expect the state to provide schools, hospitals and a properly secured cell for Eddie Obeid, we’re going to pay some. And surely a broader property tax makes a lot more sense than lumping it exclusively on those property owners buying this year.

 

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Stamp Duty is Stupid
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12 thoughts on “Stamp Duty is Stupid

  1. Change from stamp duty on purchase of property to yearly land and property tax would also free up a lot of underused property and thus increase property availability and affordability.

    All of the empty nesters would have an incentive to downsize.

  2. My wife and I moved for what we hope will be the final time 5 years ago. We’re both 55 and although we both work, its not much. We decided on this house looking at our needs 10 to 15 years down the track so it has minimal maintenance and gardens. We didnt want to keep incurring in/out costs on property purchases. We’d be forced to sell if a new tax came in to move to a cheaper area (to reduce debt and loan repayments) as we just dont have the income we used to.

  3. Great blog Gareth,
    Good to have you back. Good time to plan your tilt at a State or Federal Senate seat.
    It makes sense and levels out income for government who can then better plan expenditures, ergo, it’s unlikely!
    The ACT did something similar for car and insurance sales, did they do it for houses?
    Flesh it out a bit; based on unimproved land value, like land tax for commercial and investment residential? what %? would it replace stamp duty on an 10year average/median basis?
    OR should taxation be turned upside down -States collect it all and remit proportion for Federal Services like defence, high court? More fiscal constraint along Swiss / Swedish lines.
    Need a fuller package to get you into the Senate.
    Finally, really unhappy to be paying for Eddy to be on a prison farm getting fit and gardening – surely restoration justice would having him cleaning public toilets 8 hours a day.

  4. Hi there,
    do not agree with the new buyer and giving them 8 years of relief – this is just re-creating the lumpiness that exists now. Secondly, there would be many pensioners on the edge, and the $2500 would be unaffordable for many, hence, the cry would be to increase the aged pension, such that the $2500 collected may become only, say, $1500, or possibly even less. We can’t have our oldies eating dog tin food can we ?
    Cheers.

  5. Agree completely, the problem is that’s there’s a huge voting bloc of homeowners out there who would be outraged at the prospect that they have to start paying a tax on the land that they’ve owned for years and for which they already paid stamp duty years ago. There aren’t many courageous politicians these days willing to take on vested interests, so I don’t expect much to be done here.

  6. With all due respect, you’re missing the point Gaz. You’re focusing on inefficiencies in the tax system when the focus should be on the inefficiency of government. More efficient govt = lower taxes (e.g. Singapore, Hong Kong).

    We already have a broad-based land tax – it’s called council rates. You are proposing to duplicate the payment of land tax for each individual household. One cheque to the council, another to the state. The real question is why do we have three levels of “gumint”?

    There’s no reference to local govt in the Constitution, so why not abolish it altogether. They don’t do anything well that the states couldn’t do badly. Why saddle households with ruinous costs just to benefit two groups of public servants?

    I know that class warfare is very fashionable these days (‘the rich don’t pay their fair share etc’); the reality is that if the rich weren’t paying tax then there’d be no tax raised! I’m not rich by the way, but you only have to look at the ATO’s own figures to know that the rich comfortably shoulder the lion’s share of the tax burden. Council rates? You betcha. Land tax on beach houses and investment properties? Absolutely. The more valuable the property, the more you pay.

    Two land taxes on beleaguered and highly indebted households just won’t fly – and nor should it. A politician (who shall remain nameless) said that you can’t tax your way to prosperity – and he was right.

    • How we ended up with 3 levels of government for 25 million people is a question I’ve often pondered.

      Anyhow, my point here is that the tax burden is being applied anyway, like it or not. If you want to rise up against that, be my guest. I might well join you. But if the burden is to continue, I think there are better and fairer ways to do it than stamp duty. The rest is beyond my pay grade for today.

  7. Fair call Gareth, thank you for taking the time to reply.

    One point that I should have included in my original post is that with a council and state land tax linked to a person’s primary residence, they really could be held hostage by rising property prices (indexed every year or two years) when their income growth is marginal or non-existent. This could limit their ability to service mortgages, manage everyday household expenses and conceivably force people to sell if the burden became too onerous (as it has for some holiday house owners).

    Greater mobility, yes, but perhaps not the sort of mobility that the average family would want.

  8. Australia once had a TV licence fee (tax) until about 1973. It was collected along the UK lines to pay for the cost of the ABC. (SBS did not exist then).

    The Whitlam Government abolished it because so many people avoided it that the cost of enforcement was greater than the amount collected.

    Although my parents paid the tax, many didn’t , doing things such as putting their TV behind a locked wall unit with doors opened when you wanted to watch TV, and hiding the TV antenna inside the roof rather than outside.

    Although I appreciate stamp duty is inefficient compared to land tax, coincidentally I have benefited greatly from it, because I still live in my first home which I purchased cheaply 27 years ago.

    Like many I have chosen to renovate and extend and not to change homes, thus not incurring stamp duty on purchase on a new home nor real estate agent fees on the sale of my old home.

    By the way until 2000 Australia used to have stamp duty on share purchases as well.

    • Thanks Peter, I wasn’t aware Australia used to have a TV tax – fascinating. I do remember paying some duties on share purchases in the 1990s, I don’t remember it being a large impost like property stamp duties are. A few bucks on top of the order from memory, although I wasn’t dealing in large amounts. I’ll have to pull out some old contract notes.
      Talking about inefficient taxes, does anyone remember FID? It was a tax on bank deposits. Internally, CBA management used to complain that it cost them more to calculate and collect than it raised for the government.

      • Yes, FID and bank account debits tax (or BAD tax for short). Both of these were also eliminated with the introduction of the GST. Surely the most stupid tax of all has to be payroll tax, a tax based on the amount you pay employees. I know there is a threshold, but once you reach it you pay extra tax for employing people.

        One tax I would like to see re-introduced is death duties (but at a federal level not state). That was a genuinely progressive tax, as the more wealth you had the more you paid, and you only paid it after death, so in a way it did not affect you personally. Yes your dependents might complain, but really any inheritance you may receive should really be treated as a windfall gain, and not something you should rely on.

        P.S I double checked and the TV licence fee was abolished in 1974 not 1973 as I previously suggested.

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