Broad-based taxes drive economic inequality

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The yellow vest protests against broad-based taxes in France (image by Obier via Wikimedia).

Broad-based taxes are often designed to guarantee wealth concentration, not to mitigate inequality.

FOR CENTURIES, broad-based taxes have been the persistent aim of the "influensia" — that cohort that quietly sees society develops in the "proper" way. In the past, the "influensia" were mostly big landowners. Now, however, although they do own a lot of land – country estates, farms or vineyards – the common features are lots of solid assets and very good connections of influence.

There was a time was when the big landowners had to bear the costs of defending their territory — supply the arms, the vitals, the men and the front-line leadership. But the idea gradually developed that the plebs shouldn't only do the marching, fighting, dying and suffering deprivation, but could help with the costs of defending the threats to "their" country.

A spate of taxes was thus introduced: poll or head taxes, customs dues, stamp duties, liquor and tobacco taxes, income tax, sales taxes. Almost everything that could raise a little from a lot of people is taxed. But taxes on land and resources – which might raise a lot from a few – have been disparaged, even staunchly opposed.

It makes political sense; hurt a lot of people a bit — and you get a disorganised murmur. But hurt a few a lot, especially members of the "influensia" and you get an orchestrated, deafening roar.

Think of the GST and the minerals resource rent tax in recent years.

But now, as property ownership has become much more widespread – with suburban sprawl, "mum and dad" investors, subsidised first-home buyers and 5-acre lifestyle blocks – taxes on property are no longer as unthinkable as they used to be. They can now be broad-based.

So, interestingly:

  • The progressive think-tank, Per Capita, in the questionnaire of their 2018 'Tax Review' sought views on a broad-based land tax. Though, Per Capita have been unable to give any details of what they had in mind when framing the question;
  • The ABC radio program, Big Ideas, featured Peter Mares on October 22, recommending a tax on all homes to fund social housing;
  • The Grattan Institute published a paper, ‘State property tax reform: balancing economic principle and political realism’;
  • The Henry Tax Review also carried proposals for taxing land with 'differentiated' rates to 'eventually include all land’.

The consensus view seems to be that taxing property – which may be just land or land and improvements (and some are not sure which is what) – should be broad-based and is a complicated matter. The design and implementation need very careful consideration.

This attitude is held with total sincerity but it really is code from the "unwritten 'influensia' manual" for "let our advisers help draw up the details and regulations so that ‘tax experts’ are needed to work it all out". And, of course, that there are sufficient hidden loopholes, exemptions and caps so their legal obligations are minimised.

Too cynical? Just look at our income tax laws and see how difficult it is for the average person to opt out. But how many of the "influensia" use tax havens, family trusts, superannuation concessions and charity/consultancy/company set-ups to handle their millions legally with minimum pain to their pockets – though with highly paid tax experts as a deductible tax expense – regardless of their moral obligations.

Moral obligations? How do they feature in any tax? Very unusually but land value taxation is exceptional.

If you wish to have a piece of Australia for your exclusive use and benefit – as and when you determine – then you compensate the rest of us for our loss of amenity, for it is "our" land.

Further, the compensation must be proportional to the value of that land because it is what we – as a society – provide to that parcel of land and that gives and maintains its value; services that provide defence and security, policing, transport facilities, educated people power, health, education and recreational institutions and so on.

Thus a flat rate, which is nationally uniform and uncapped, land value tax regime would be broad-based, fair and morally justified. But this cannot be said of all broad-based land taxes.

Here are three examples of broad-based land tax regimes:

  • In the 1980s, Tasmania had a land value tax which applied to all landholders. Hence, it was truly broad-based. The smallest amount was $20 because this is what it cost to collect the tax per landholder (note: it produced no revenue benefit). And the maximum amount payable – regardless of the size or number of your holdings – was $150. Doubtless, this was to ensure that the Tasmanian Legislative Council, which was set up in 1830 to protect the interests of the new big-landholding free settlers – would not block this tax on land.
  • A uniform, flat rate land value tax could be applied to all properties at, say, 5% of current valuation — to be collected and used by the States and Territories starting at the beginning of the next financial year.
  • A flat rate federally mandated, nationally uniform state tax with very few exceptions could be introduced at a minuscule rate but with a planned and published program of regular yearly or half-yearly increments.

These different regimes, though all "broadly-based", would have vastly different social and economic outcomes:

  • The first is grossly unfair; maybe an example of balancing ‘economic principle and political realism’ as per Grattan Institute?
  • The second would create economic, social and political chaos;
  • The third would put us on the road to a vibrant, fair and equitable society. All who wanted access to land for productive and useful purposes would be able to get it because land would become much less costly to access.

In short, broad-based taxes are not in themselves benign and fair. They can be and have been designed with features that make them fundamentally unfair, with assessments that are subject to "interpretation" and that enshrine the persistence of inequality in our society.

Broad-based property taxes should have no place in any serious discussion about tax reform without recognition of the historical trajectory of such taxes unless there are caveats to ensure fairness and to obviate any caps and loopholes that would contribute to systemic inequalities.

You can follow Colin Cook on his blog Sour Dough

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