Stamp duty rated as the most inefficient tax in Australia

Chief economist compares the current regime with the annual tax proposed by the NSW treasury

Stamp duty rated as the most inefficient tax in Australia

Across all levels of government, whether federal, state or local, the current stamp duty regime is the most inefficient and should be abolished, according to Housing Industry Association chief economist Tim Reardon.

HIA recently joined a chorus of industry groups calling for the abolition of stamp duty after the NSW treasury proposed replacing the longstanding regime with an annual property tax.

MPA contacted Reardon for a discussion on how the new proposed levy would compare.

He pointed to the Henry tax review published in 2010 which found that the cost of stamp duty equated to 70 cents out of every dollar raised, making it, not only inequitable, but, the most inefficient tax in Australia.

“Almost any other form of tax will achieve a more efficient outcome,” he told MPA. While he wouldn’t comment on whether the annual property tax proposed by the NSW government would be the best solution, he said the abolition of stamp duty in the state was a good thing.

“The objective is to abolish stamp duty and this certainly moves towards that outcome,” he said.

Read more: HIA joins growing call to abolish stamp duty

Stamp duty as it currently stands is both inequitable and unreliable, he explained. Those who were required to move last year to seek new education or employment opportunities because of the pandemic incurred a punitive rate of tax if they purchased a new home.

“With retirees or elderly Australians that might like to move to be closer to family or to be closer to medical services, they likewise would be penalised if they were to buy a home to locate to,” he said. “It’s unreliable - as we saw both in 2018 and again last year, at a time when the government needed a reliable source of revenue, stamp duty revenue fell away very quickly. It particularly happened in NSW in 2018 where a small slowdown in house prices led to around a $500 million reduction in stamp duty revenues.”

While not reviewed by the Henry tax review, an annual property tax could potentially reduce the efficiency costs that are currently involved through a number of factors, he said.

“Because it doesn’t distort household behaviour, such as influencing your propensity to move, the efficiency costs are significantly lower,” said Reardon. “Because it encourages efficient use of land, its efficiency costs are much lower. Because it then means for other factors, such as allocation of public health resources and the allocation of expenditure on infrastructure, because those two also become more efficient, you get a significant efficiency improvement over and above the stamp duty regime that currently exists.”

REINSW CEO Tim McKibbin recently told MPA that an annual property tax wouldn’t benefit all segments of the market, especially cash-poor retirees who may not be able to afford the extra yearly cost.

Read more: Stamp duty change could mean a 50% surge in property sales

“We have people in properties that don’t respond to their current needs, but they are going to stay there,” he said. “Stamp duty or property tax is not providing any incentive to move.”

Reardon said the transition from stamp duty to any other form of tax would be difficult, but that the benefits of abolishing the current regime were clear.

“I think all political parties, governments and economists certainly agree that abolishing stamp duty is a good outcome but it is that transition that is the difficult part,” he said. “The community benefit, the economy-wide benefit, from abolishing stamp duty is sufficient that any individual households that are worse off can be appropriately compensated.

“The ACT have provided the slow transition model and they are doing it over a course of 20 years. NSW are looking at an opt-in model, which would mean that only those households that elected to defer that payment would incur that ongoing annual cost - which would mean that the impact on retirees that are asset rich and cash poor would be minimised.”

RELATED ARTICLES