Photo by Steve Doig on Unsplash

While economists are renown for never agreeing, almost all do agree that stamp duty on property transfers is bad tax. Similarly, it is widely accepted that replacing it with a land tax would substantially enhance both efficiency and equity.

Stamp duty, functioning as a transaction tax, discourages individuals from resizing their homes, curtails geographic mobility, and suffers from poor targeting – failing to be paid by the wealthy who opt not to move. Additionally, due to its imposition on the total property value, it also discourages property improvements. Conversely, a land tax does not distort behaviour and is borne by those holding the greatest property wealth.

Despite the widespread acknowledgement of these arguments, there has been little enthusiasm among politicians to replace stamp duty with a land tax. Breaking this impasse requires a recognition of the non-economic constraints on tax policy. Ever since French policymakers recognised the need to ‘pluck the goose with the least squawking’, political and psychological considerations have loomed large in practical tax policy. These become especially important when dealing with the transition from one tax structure to another.

A response to Bob Breunig’s proposal

Earlier this year, Bob Breunig presented a proposal on this blog that would “turn stamp duty into a land tax overnight”. In his proposal, the immediate elimination of stamp duty would be coupled with the introduction of a retrospective land tax from the date of last sale. However, the previously paid stamp duty would be credited against this new tax debt. Owners would have the option to postpone payment of the land tax until they sold the property, with interest applying.

While the credit for previously paid tax might alleviate one potential hurdle – people having already paid taxes for their homes – it could still result in long-term property owners facing a new tax (potentially deferred until they sold their homes). This presents a significant political obstacle, as those adversely affected by tax changes tend to be very vocal and organised. Although the tax they pay upon selling their house would be offset by the elimination of tax on their next purchase, this connection is indirect and contingent on the relative property values. This linkage is unlikely to sufficiently reassure those seen as potential losers.

Indeed, it is hard to see how this problem could be avoided in any transition from stamp duty to land tax. People who believe they have fulfilled their tax obligations for a specific transaction or property will strongly object if asked to pay another tax – even if, on average, most groups in society remain unaffected or better off.

Moreover, land taxes confront a broader psychological challenge. Economists view such taxes as efficient because they don’t change behaviour – land, being a fixed asset, exists and can be taxed irrespective of landowners’ actions. However, this very attribute might render land taxes politically unpalatable. Humans have a natural bias towards optimism, and if there is an opportunity to avoid a tax (for example, by not moving house) they are likely to think that they will have a strong chance of being able to take advantage of this – more so than the actual probability. Consequently, they might favour inefficient taxes over efficient ones.

A new stamp duty that mirrors a land tax

But there is one solution that could address both these psychological and political challenges: Maintain stamp duty on property transactions, yet structure the tax rules to emulate the economic effects of a land tax.

The key principle underlying this proposal is that while individuals are concerned about who pays, and when they pay, the tax burden, the economic impacts of taxes are determined solely by the balance between supply and demand responses. This presents an opportunity to design a tax that is both politically acceptable and economically optimal.

The proposed reform model has the following features:

  • New Stamp Duty continues to be paid by property purchasers.
  • The calculation of the New Stamp Duty involves a base amount multiplied by the number of years since the last stamp duty payment for the property. This calculation is capped at the duration since the introduction of the New Stamp Duty.
  • Two alternative options are proposed for the valuation base of the New Stamp Duty: continuing to use the property’s sale price (Option 1) or using the unimproved capital value of the land at the time of sale (Option 2).
  • The parameters of the New Stamp Duty will be adjusted to ensure that the total revenue is approximately equal to the same fraction of the gross state product as the existing stamp duty.
  • The initial ten years will serve as a phase-in period, during which the duty paid will be a weighted average of the old and new stamp duties, with the New Stamp Duty weight gradually increasing over time.
  • Stamp duty concessions will solely consider the characteristics of the purchasers. For example, certain property inheritors may be exempt from paying stamp duty, yet the counter for the number of years since the last payment would not reset upon inheritance.
  • Other property-related taxes, such as land taxes for non-owner-occupied dwellings, may remain unchanged.
  • Any property listed for sale must include the stamp duty identification number, facilitating access to a public database for purchasers to view the applicable stamp duty for the property. Under Option 1, this amount will vary depending on the sale price.

Advantages of my proposal

By retaining purchasers as the payers of the New Stamp Duty, the reform aims to avoid complaints about existing owners paying taxes twice for their property. Nevertheless, this approach may lead purchasers to devalue properties with higher stamp duty liabilities. Consequently, while the payment burden remains with purchasers, the economic burden of the tax will fall on long-term property owners (once fully introduced).

Given that properties held for shorter durations bear less economic burden, this system diminishes the disincentive for property sales, encouraging more turnover, appropriate property sizing, and geographic mobility.

Implementation of Option 2 in the New Stamp Duty would further remove disincentives for capital improvements on properties. However, the choice between these options hinges on the administrative feasibility of putting more weight on the property valuation process.

While this proposal assumes that the economic burden of the New Stamp Duty will mirror that of a land tax, these changes are deemed more politically feasible than a direct shift to a land value tax. Two factors contribute to this: first, the tax payment process remains unchanged (paid by the purchaser), removing objections of dual taxation. Second, while the New Stamp Duty will affect the future sale price, this it is a burden which is in principle avoidable (by minimising the property holding duration), likely appealing to taxpayers’ natural optimism.

Would the reform affect property prices? Since the overall tax amount mirrors the existing tax, the impact on the overall price level is expected to be minimal. However, property types that are infrequently traded and thus have greater New Stamp Duty burdens may witness price reductions, while those with low burdens – properties experiencing frequent turnover – will face decreased stamp duty and hence command higher sales prices.

This article has 3 comments

  1. Much simpler just to abolish stamp duty and replace it with Federal and State rates on land values and give PAYG credits against income tax for homeowners plus abolish payroll tax.

    By the way, it always amuses me to see some economists who rightly denounce stamp duty as a transfer tax not realise that CGT is also effectively just another transfer tax like a variable stamp duty. Get rid of CGT as well and replace it with a land value rate.

    A land holding charge is always more efficient than a transfer tax.

  2. Hi Terry
    Thanks for the comment.

    While attractive for its simplicity, going straight to a land tax has some problems. Most importantly, the political one of people complaining that they will be paying tax twice on their property. (Or, if you give existing owners an exemption then you have the problem of State govts complaining about the loss of revenue).

    CGT has similarities to a variable stamp duty. But the ‘variable’ part is important. The efficiency problem with stamp duty is that it increases as the property is more frequently traded. CGT or the variable stamp duty that I propose doesn’t have this problem.

  3. Start making Gas, oil and resources sectors pay thier fair of tax and reduce personal income taxes, as well as scrap stamp duty and you would still be well in front.

    Look at QATAR Gas tax and its tax system….

    Australia loves putting the burden on the workers and poor giving billionaires and corporations a free ride with legal tax evasion.

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