Land Tax is having its annual meek and ineffectual resurgence. Can we give it some oomph?

Land tax is a great tax.

Just today, Treasury released a report that shows how much more efficient Land Tax is than all the alternatives.

land tax

I’ve previously argued that to promote land tax, we should emphasise that it is unavoidable. But I’ve gone cold on that idea.

It is true, but not a great argument when the government is going soft on tax dodgers. It simply encourages people to say we should enforce our existing taxes. [They’re right, we should. But we should have land tax too.]

Today the SMH economics guru Jess Irvine wrote a long and very welcome piece about land tax. But it conflated the hard-to-grasp concept of a low distortion tax with the easier-to-grasp concept of a tax that’s hard to “dodge.”

“Land tax is one of the most efficient taxes for precisely the reason it is unpopular: it is hard to dodge. They know where you live. You can hire as many accountants as you want, but it is difficult  to hide that mansion in Point Piper.”

I found myself wondering why land tax is not on the agenda. And I think I’ve figured out why. The conceptual framework you need to grasp its benefits is not commonly shared. And you can see that by flicking to the hundreds of comments that followed the article.

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The comments on the article were almost exclusively focused on fairness. Fairness is just one of the keys to good tax policy. Efficiency is the other. And there is a gulf of understanding between economists and the general public on tax efficiency, with economists to blame.

To get land tax out there you need to teach people why distortion is bad.

Economics students learn about a model of the economy like this: Trade is mutually beneficial. Taxes prevent trade. Therefore taxes prevent that mutual benefit. The amount of prevention (aka the distortion) is called deadweight loss.

deadweight loss
Deadweight loss from a price ceiling works much the same as a tax. From Wikipedia

The distorting effect of taxes is one of the great insights of microeconomics. It is counter-intuitive and hard to see, because deadweight loss is always a counter-factual. But can we transmit this flash of inspiration and insight from economics to the general public without messing around drawing supply and demand curves, or measuring utility?

A stumbling block is that the purpose of current taxation is so muddled.

We use taxes on “good things” to raise revenue. And we use taxes on “bad things” to change behaviour.

From observing the tax system, it may be unclear why smoking and working are both taxed. Does the government hate work?

The progressivity of the tax system – which I emphasise I support – doubtless contributes to this confusion. Being a low-wage worker, buying healthy fresh food and education attracts lower rates of tax. Being rich, buying luxury cars, eating at restaurants and making capital gains in shares attracts higher rates of tax.

It would be easy for some to see the tax system as a kind of moral agent, punishing bad behaviour and rewarding good. In this scenario, land tax makes no sense.

Explaining that taxes distort behaviour – but we want to minimise that! – is going to be a hard sell when the public sees we use taxes to distort behaviour all the time.

We tax all these things, and you want me to believe that’s because you want to stop some of these things, but you don’t want to stop others? 

Fixing this will be hard. The terminology is a good place to start.

It cannot be helpful to use one word – “tax” –  for both imposts on activities we actually want to encourage, like work, buying goods and services, making profits and owning land; and for things we actually want  to discourage.

I’ll accept suggestions for how we could rename these taxes – Maybe they could be divided into Detrimental but Oh Well, it’s Necessary Taxes and Useful Pricing Taxes (DOWN and UP)?

This distinction would help plant the seed that some – but not all – taxes should be designed in a way that minimises distortion.

The journey to give land tax a fighting chance will be a very long one. The first steps in that journey will be to help give people the capacity to grasp why land tax might be desirable.

Can we make Australians WANT a land tax?

If tax reform is boring, that’s because it’s run by boring people. Economists can spend hours sitting round teasing out the intricacies of an allocative efficiency improvement.

But when it comes to convincing others, economists tend to stroke their moustaches, repeat the word “productivity” and wave their laser pointers at a dense thicket of lines on a graph.

We need some marketing type thinking to help us economists. There is no other way the Australian public can be swiftly convinced of the merits of new taxes. And convinced they must be, because the economy needs all the productivity gains it can get to lift incomes.

Land tax is the best tax. Everyone who understands economics knows it. It’s minimally distortionary.

“Well-structured taxes on land … are a highly efficient means of raising revenue.” [Henry Tax Review]

 

“… raising the percentage of tax that falls on the unimproved value of land has few distortionary or adverse affects…” [Macrobusiness]

 

“We argue that there is a compelling case for the abolition of stamp duties and their replacement by a broad-based land tax” [Australian Housing and Urban Research Institute]

But people really hate the idea of taxing land, and whipping up a scare campaign could scarcely be easier.

“Call For Tax on Family Home.” [Headline in the West Australian]

 

“People will be paying between 20 to 40 per cent more in land tax. The bill will also diminish Queensland’s ability to attract interstate and overseas investment which will ultimately flow through to impact employment” [Property Council of Australia, cited in the Australian]

We need to change people’s beliefs about taxes. But more than that: we need to change people’s feelings about taxes.

At the moment, land tax is wildly unpopular, while the luxury car tax is wildly popular. I theorise that people like the idea of a tax they can avoid, hate the idea of a tax they can’t avoid.

So how do we change people’s feelings about unavoidable taxes? Do we lecture them about deadweight loss and distortion?

deadweight loss

I can feel the eyes glazing over already.

We need something far punchier, something that fires the emotions. Something a little bit like this…

The ad starts with the bespectacled taxman knocking on the door of a large mansion. “Tax time!” he cheerfully announces.

The door is answered by a butler, before a rotund, pinstriped individual arrives and pulls his pockets inside out. His face affects an attempt at sorrow that barely conceals a smirk.

The taxman’s brow furrows in disgust and we zoom out to see him walking back down the long gravel driveway, past an array of parked supercars.

Cut to an exterior shot of a big city accounting company. The voiceover intones: “They can hide income. They can hide capital gains. They can even hide the companies they own. But they can’t hide land. Land tax now for a fairer Australia.”

I’ve discussed this kind of idea before, with a “Trevors in Traffic” campaign to promote congestion charging. The point is that you can’t start arguing for a solution when people don’t even understand there is a problem.

“I remember reading about a behaviour change campaign to get kids to wash their hands. Rather than starting with facts about soap, they started with an ad that dramatised germ transfer. Everything the main character touched after leaving the bathroom turned green. Understanding the problem (even in a stylised way) came first.”

Teaching people about the allocative efficiency of various taxes is going to be expensive. You’d need TV ads, newspaper ads, a PR blitz. But if it greases the wheels of tax reform, it could be the best money ever spent in the Australian economy.