NSW Federal Financial Relations submission

Read my full submission here.

The NSW government has been conducting a review of taxes and federal financial relations. One of the main proposals to come out of the review has been to replace stamp duty on property transactions with a broad-based land value tax, or what I have called SD4LVT. 

There are many reasons to be sceptical of the political motivations of these types of reviews. Typically, you only undertake this type of drawn-out review process if you a) already know what you plan to do, or b) plan to do nothing but use the process to keep all the interested parties busy talking about something that will never happen while appearing to do something. 

I think this is a case of a). I say this because although the review proposes SD4LVT, the NSW government recently announced that it will be reducing land taxes by 50% for 20 years for corporate landlords. The reason given is to promote a corporate build-to-rent housing sector [1] which is currently disadvantaged because there are threshold values above which land taxes apply, giving a tax advantage to landlords that own few properties. 

But if the NSW government wants to expand land value taxes, why offer additional exemptions and reductions to fix the imbalance rather than remove the current exemptions to level the playing field?  

So I'm a sceptic. 

Regardless, the SD4LVT proposal has been justified with a lot of dodgy economics. I outline in my submission four main areas where the economic reasoning is flawed. 

1. The economic efficiency costs of stamp duty are low, not high.
2. Removing stamp duties may increase the price of housing.
3. Lower churn of housing assets is an economic benefit of stamp duty. 
4. Stamp duty revenue volatility helps stabilise the macroeconomy.

Please read the whole submission. Here's an excerpt about the nonsense economics that is behind the conventional wisdom about the high efficiency costs of stamp duty. 

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The metrics of economic disaster caused by stamp duties are derived from economic analysis using computational general equilibrium (CGE) models of the macroeconomy. The below table from the Draft Report shows that multiple assessments conclude that there are high economic costs to raising revenue from stamp duty.

However, these studies all use CGE models that assess the effect of transaction taxes because there are no transactions in the models. Instead of using a better tool for the job, or admitting the limits to knowledge, modellers have simply pretended that stamp duties are a different tax that applies to a tax-base that is in their model.

There are two main approaches to this. First, in the KPMG models, rather than stamp duty being a transaction tax that is incident on the seller (and therefore incident on land values), as it is in reality, they assume this instead.

...conveyancing stamp duties are modelled as a tax on investment in residential and commercial structures (p.125)

They assume that stamp duty is not a tax on transaction where the economic incidence is on land. Instead, they assume that stamp duties raise the cost of housing to all buyers and renters because it is a modelled as a tax on construction. The model assumption requires that stamp duties raise the cost of building new houses without affecting land prices, leading to reduced new housing construction in general. This is a classic example of garbage in, garbage out.

A second approach is in the COPS model is to pretend that stamp duty is a tax real estate agent fees and legal services used in housing transactions.

Stamp duty on conveyancing or property transfers in Australia are taxes that apply to the transfer of ownership of most properties. While the duty base is the sale value of the property purchased, the resources used in transferring property ownership is usually only a fraction of the value of the property transferred. To model transfer duties on residential property ownership in this way, we introduce a new bundle of goods into the household decision problem in VURMTAX, called Moving Services. This bundle consists of goods produced by the Real Estate Services, Other Business Services and Public Administration industries, and represent the real estate agent, legal and public administration goods demanded by households when transferring property. (p17)

...we have $8,367 million of stamp duty being levied on an activity with a resource cost of only $1,881 million. This implies a tax rate on the activity of transferring property of 445 per cent (=8367/1881). (p.804)

This means that instead of the tax being a small percentage of a large base (property turnover value) they are instead suggested that the tax is a 445% tax on real estate agents and conveyancing.

If that sounds crazy, that’s because it is. Any tax at this rate is going to look costly and inefficient in a CGE model. The more bizarre part of it is that if you believe this modelling approach is an accurate representation of stamp duties, then the cheaper real estate agents and lawyers become, the more economically inefficient stamp duties are.

The claims about the economic inefficiency of stamp duty that are relied upon to justify its removal have no plausible economic basis.

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[1] I've never understood what is supposed to be achieved by this. We currently have a rental market ownership structure of "investor owns dwelling." What is achieved with a structure of "investor owns shares of a company that owns dwellings?" On net its the same. I could be convinced that landlord professionalism could be improved. But again, most landlords employ profession property management services anyway.