Taxation Reform

Key Principles

Considerations for taxation flow from a variety of places. Some historical content still has pertinent relevance even when considering things from a new framework of approach.

The Ralph Review - An Australian effort from 1998 (link), it concluded that in tax reform there are broadly three aims: (1) certainty/simplicity, (2) equity, and (3) efficiency.
With the general idea being that while all three are rarely achievable in one policy, if you are compromising on one, it should be only to make gains on another.

These aims are generally in alignment with the precepts of inclusive institutions and are incorporated below:

Applied Principles

With the goal of achieving as many of these principles as possible, a new tax should:

  1. Create a tool to incentivise a desired behaviour where previously there was none.*

  2. Replace one or more other taxes without removing an existing tool for incentivisation.

  3. Be Equitable (Refrain from placing a higher burden on those with fewer resources to manage it.)

  4. Derive from transparently known information** to facilitate forecasting and preparation.

  5. Be generally efficient with regards to:

    • Minimizing Distortions - does not significantly alter people's choices regarding work, savings, investment, and consumption. (Notably: avoids taxing any incomes twice.)

    • Administrative Simplicity - taxes are simple to administer and easy for taxpayers to comply with, reducing the resources needed for both tax authorities and taxpayers.

    • Revenue Adequacy - generates sufficient revenue to negate its administration costs and meet government needs without creating undesirable economic distortions.

    • Stability and Predictability - naturally rise and fall during the intended conditions they are designed for, providing a predictable stabilising effect on the economy.

*Incentivisation explicitly does not include any form of regulation or punishment designed to discourage undesirable behaviour.
**Either the tax should derive entirely from values the business or inidvidual is the owner of, or from values provided publicly on a rolling basis. (i.e. business revenue is knowledge owned by the business, and retail market share is publicly calculated)

Standalone Reforms

Market Stabilisation Levers

These are taxation mechanisms designed to passively incentivise responsible corporate practices with respect to market dominance and inflationary periods.

While it is a common refrain to demand that corporations must arbitrarily prioritise ethical and sustainable business practices. The reality is that they are intrinsically incentivised to pursue whichever practices will generate profit. Therefore, any solution designed to encourage appropriate behaviour will be more effective if it dynamically alters the profit incentive rather than spending the taxpayer dollar on regulation. Regulation is most effective when it is well-funded; the less of it you have to fund, the more effectively that it’s likely to be enforced. This is a reason for pursuing such dynamic solutions, where they can be identified, to reduce the expense burden of government regulation. This approach also places the onus of economic adaptation on the market.

Decentralised forces for economic adaptation are key to the process of creative destruction and the health of inclusive economic institutions generally.

Market Dominance Tax

To address the natural consumer impact of reduced competition affecting pricing practices; a “market dominance tax” would exist for all consumer-facing business sectors. This would be a scaling tax which applies an increase to the corporate tax obligation of companies that is equal in magnitude to the extent to which they exceed a competitive market share in Australia. The ACCC would be responsible for determining what constitutes a competitive market share for each business sector independently, whether that’s 10%, 15%, 18%, or any other number as appropriately determined.

This tax is progressive, in that it causes no additional burden on corporations playing fair in the marketplace of ideas, but progressively penalises market players for anti-competitive behaviour.

As an added benefit, this will reduce the frequency with which the ACCC will have to make the case to prevent mergers that substantially lessen competition, as companies will be incentivised to shed underperforming assets (creating space for others) and innovate with their business practices to improve their profit margins without necessarily expanding their market share.

Market Inflation Tax

An “inflation tax” would be applied on all consumer-facing businesses that are considered “large” for tax purposes. This would be a scaling tax which applies an increase to the corporate tax obligation of companies such as the supermarket giants, equal in magnitude to how much the inflation rate exceeds the RBA Inflation Target.

This tax is progressive, in that it causes no additional burden when economic conditions are good, and acts as a lever to incentivise consumer-friendly pricing that will encourage market correction during periods of high inflation.

Specifically, this acts as a natural disincentive for Price Gouging, Sticky Pricing, and Greedflation.

Overlapping Reforms

These reforms can stand alone, but are also included (or intended to be included) with other policy elsewhere.

Land Tax Package

Incentivised Land Tax

Proposal: Conventionally, land tax in Australia is something which is considered most appropriately managed by the states. This paradigm is still held to be correct, but a federal legislation is required here to ensure a degree of standardisation and equitability, and to accommodate for certain constitutional requirements around taxation regarding the states.

To faciliate this, the federal government implements legislation to adopt a constant land valuation system (to be administered by the states) for all properties and move to charging a yearly land tax to all property owners equivalent to 3% (suggested) of the value of the property, with the following discounts:

  1. A 90% discount on that rate (to be 0.3%) for either; the principal place of residence, or the first property owned so long as both a) the owner lives in a property they do not own, and b) the property is occupied. 

  2. A 0% discount on that rate for the second property owned, so long as the owner lives in one of their owned properties.

Now this might seem odd but it has a purpose (and note 2. also accommodates for the Negative Gearing Reform.) Conventionally legislation put in place at the federal level automatically supersedes state legislation. However this is not actually a requirement of federal legislation. In contravention of the federal over state convention, federal legislation can be subordinate to state legislation if it specifies itself to be as such.

Therefore, to both ensure the consistency of method required to address the housing issue and also preserve the suitable management of the land tax by the states, the legislation shall specify that it would be superseded by state legislation that differed only by the applied numbers not by the structure or conditions of the federal legislation. Additionally, it would include provision that it is superseded only with the condition that the market for residential property had no other transaction costs applied to it at the state level. (i.e. stamp duty)

(Note: The above means that an empty property will incur the full land tax, or incur it pro-rata if unoccupied for part of a financial year, with an allowance of 1 month for facilitating a change in tenants. The above also means that a $1million dollar house would incur $3k land tax per year, or $30k if undiscounted.)

Justification: A market exists for the exchange of goods. Stamp duties are a barrier to that exchange, and contribute to the problem of housing affordability by making it more difficult for people in borderline or negative equity situations (where they cannot afford to sell their property) to transition to a residence that is more sustainable for them. It’s not a very good market if it is actively restricting exchange. (This also ties into CGT Reform.)

Stamp duties range from around 1-3%, commonly averaging around 1.5%. Average holding time for a property is around 10 years nationally(link), so double the stamp-duty value, averaged over 10 years is a suggested starting point. (Remembering the discount on principal place of residence). However, these numbers should be reviewed by applicable experts and are ultimately up to the states. The requirement is that the states must adopt this structure to have some control over it’s application, the numbers they use within it are up to them.

CGT Reform

Proposal: Get rid of all capital gains tax on residential properties for properties in states that have adopted a land tax compliant with the model proposed. No exceptions. (Accrued land tax may need paying pro-rata on sale.)

(Note: In the event that there is difficulty getting the land tax step adopted effectively, a potentially better solution would be to remove the CGT discount on houses, and tie CGT rate per state to be inversely proportional to the effectiveness of the state land tax. This is expected to be a considerable incentive, and an effective alternative that would push states towards adopting a land tax sufficient to make CGT trend to 0. — While more administratively complicated, this does have the advantage of adding a robust and stable mechanism to maintain that incentive into the future.)

Justification: As before: a market exists for the exchange of goods. CGT is a barrier to that exchange, and contributes to the problem of housing affordability by making it undesirable for many to sell their investment properties. This is a feature which actively restricts exchange.

Additionally, with an ongoing land tax that is variable with the value of the property, the capital gain on a property is already being paid by the owner in an incremental fashion. As in the rest of our system, and according to standard taxation doctrine, income should not be taxed twice. Therefore charging CGT on a property subject to a land tax would be inappropriate.

In conjunction with the Land Tax. Investors will find that if their property is not being lived in, it will absolutely be in their interest to sell it. Increasing housing availability, without penalising people currently in the situation of holding various properties only because the CGT loss would have negated the relative value of the sale. This also leads onto Negative Gearing Reform.

Negative Gearing Reform

Proposal: Change negative gearing so that only one residential property per investor unit comprising natural people (i.e. sole owner, married couple, co-ownership agreement) may be negatively geared. This includes houses, units and apartments in the definition of ‘property’.

Justification: Many advocate for complete annihilation of negative gearing; however, a complete and sudden removal of it would be intensely disruptive. Furthermore, those benefiting the least from it, would likely be the hardest hit - the “mom and pop” investors with only a single investment property.

Additionally, a moderate proportion of people may always be seeking to rent as a minimally complicated housing solution for various stages in life. Despite claims made by the Real Estate industry when it was abolished 1985-1987, rents did not rise precipitously and they are unlikely to now. However, rental availability would likely decline significantly with complete removal of negative gearing and it is impossible to tell exactly what the steady state point will be at this stage. As such there is some benefit to retaining it, at least in part, to cushion the change. 

Combined with the above proposals, the relative point-in-time impact to the majority of existing property owners should be small, but the overall effect should be deflationary to the market, in addition to promoting long-term stability to both prices and availability.

Notes:

In combination this transition plan has the effect of taxing properties that are left deliberately untenanted. Owners are consequently encouraged to rent them out or sell them.

Additionally, it may be reasonable for the land tax applied to the sole property that an investor unit may negatively gear to be discounted somewhat. This is accommodated for in the structure of the tax and would be a matter to be determined by the states through suitable inquiries into the material effects on the rental market after initial shocks have been seen and assessed for long-term impact.