Strategic Tax Reform: Evaluating Living Standards in Australia

This report, authored by John Freebairn, examines strategic tax reform as a means to enhance living standards in Australia. It argues that taxation is more than just revenue collection, influencing economic choices and productivity. The report highlights the detrimental effects of tax-distorted incentives, such as conveyance duty, and proposes reforms like replacing conveyance duty with land or property tax to boost productivity. It addresses concerns about equity, transition issues, and cooperation between government levels. The author references the Henry review and other tax reform packages, advocating for comprehensive tax bases and lower rates to internalize external costs and improve overall tax burden distribution.

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SE Commentary
HD STRATEGIC TAX REFORM WILL HELP IMPROVE LIVING STANDARDS
BY JOHN FREEBAIRN
WC 825 words
PD 15 August 2018
SN The Australian
SC AUSTLN
ED Australian
PG 14
LA English
CY © 2018 News Limited. All rights reserved.
LP
Taxation is far from just a tool to collect revenue — it can help balance the economy
Australians are concerned about the lack of growth in real wages and their standard of living during the
past decade. Ultimately, higher productivity is the key driver of higher wages. Fortunately, there are
many taxation reform options that would generate gains in living standards, including changes
evaluated in the Henry review of 2010 and the government’s Re: Think document of 2015.
TD
Taxation involves more than a dollar-for-dollar transfer from the taxpayer to government. Tax-distorted
incentives can induce individuals and businesses to make choices less productive from a national
perspective, ultimately at the cost of lower living standards.
As an illustration, let’s look at the possible choice around income tax: it deters some people from
working at all and others from accepting longer hours — they prefer the tax-exempt options of additional
leisure and doing more work at home, perhaps looking after children rather than have them minded. To
avoid conveyance duty on a property, some people stay with the same residence and decline a better
job in another location. Or they take the job and commute, adding to traffic congestion. Or they avoid
the tax by staying in the same house even though the family at home has become smaller.
Many people choose to place their savings in a larger and more expensive home because the imputed
rent and capital gains income is not taxed, rather than place their savings in bank deposits and shares
that are taxed.
Tax-induced changes of decisions to less-preferred options result in a misallocation of resources and
incomes so that the cost of a dollar of tax is much greater than a dollar. Available estimates of the cost
to society, and loss of living standards, range from as high as 80c per dollar of conveyance duty and
30c for taxation of labour income, to nearly zero for local property rates.
Well researched and widely known taxation reforms can generate large gains in living standards by
reducing the magnitudes of distorting decisions. For example, replacing the conveyance duty on the
sale of properties with a land or property tax would generate a productivity gain of at least 50c per dollar
of tax-mix change.
It is hard to envisage industry hiding on the shelves productivity changes of such a magnitude. So why
the reluctance of governments to implement a land tax reform that replaces conveyance duty, other
than in the ACT?
First, there are unwarranted concerns for equity and redistribution. Since in aggregate the land tax
revenue increase is offset by the conveyance duty reduction, the reform package will have a minimal
effect on house prices.

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The reform package means those who buy and sell houses more often than the average would pay less
tax over their lifetime, while those who stay in the same property longer would pay more. Arguably, the
reform package with a similar level of land tax paid over a lifetime for people with similar incomes and
wealth, regardless of how often they change property, better meets the aim of an economically fairer
society.
Second, the swap of land tax for conveyance duty involves important transition issues. A recent buyer
who paid conveyance duty and then paid the replacement land tax could consider this a form of double
taxation. It should be noted that while the buyer writes the conveyance duty cheque, the market price for
houses adjusts so that about half of the tax is passed back to the seller as a lower price. The ACT
approached the “double tax” issue with a 20-year phase-in of a steady reduction of the conveyance duty
rate matched by a steady rise in land tax. Recent buyers and payers of conveyance duty might be given
a graduated discount rate for the new land tax.
Third, an important consideration in the land tax for conveyance duty reform package, and many other
taxation reforms, concerns commonwealth and state financial arrangements. As noted by the
Productivity Commission in its Moving the Dial report last year, co-operation across the levels of
government would facilitate the advancement of productivity enhancing tax reforms.
Many other tax reforms are explored and explained in the Henry review. At a general level, the review
proposed reform packages for each of the income, consumption and asset taxes to remove special
exemptions and deductions to achieve comprehensive tax bases together with lower tax rates on the
larger tax bases. Reform of special taxes on alcohol, petroleum products, gambling and motor vehicles
would explicitly internalise external costs.
As well as improving living standards, tax reform can be justified to change the aggregate revenue
collected and to change the overall tax burden distribution.John Freebairn is the Ritchie chair of
economics at the University of Melbourne. Conference details at
melbourneinstitute.unimelb.edu.au/outlook.
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AN Document AUSTLN0020180814ee8f00021