Tuesday, 12 March 2013

A nice little story about Stamp Duty... if there is such a thing

Hi Graeme,

Look I don't mind paying tax... Really.

Yes seriously! I figured out many years ago that the more tax I paid, the more wealthy I am from an asset and wealth perspective.

So in effect I love paying tax... and looking to pay a lot more in the future.

But, there is one tax that is absolutely crazy and it is quit frankly holding the economy, first home buyers and property investors to ransom.

It's the stupid tax called, stamp duty.

But there is light at the end of the tunnel and its from a very unusual source.

 The ACT government, that hot-bed or radicals, has announced that it's going to phase out stamp duty on property transactions over the next 20 years.

Good on 'em. This will be good news for the property market, but the stamp duty on property itself is a stupid tax, and it's about time the States broke their addiction with it.

If you ask me, Stamp Duty on property is the Cane Toad of Australian taxation.

Cane Toads were brought over from South America to eat the Cane Beetles in Queensland. As it turns out, the beetles in Queensland lived up in the cane, rather than on the ground like they did in South America. So it's questionable as to whether the Cane Toad ever actually ate a single Cane Beetle.

But once cane toads were introduced, they quickly slipped the leash of their handlers. Now they've become a monster completely beyond anyone's control.

In a compelling parallel, Stamp Duties as a concept were first introduced in the Netherlands all the way back in 1624. It soon spread in popularity among the European aristocracy, always fond of finding new and creative ways to crush and punish the peasants. William and Mary started levying stamp duties in the England in 1694 as a way of funding the war with France.

In time, stamp duties were passed down through our legal DNA until 1886, when NSW introduced a stamp duty on property as way of funding a war with Victoria over the right to play rugby...seriously, google it.

But likewise stamp duties have long since slipped the leash of their handlers, and they have become a monster completely beyond anyone's control.

Now this isn't a rant against taxes in general. I can see that in the modern world, taxation and the public provision of some services is a good thing.

...and I said it earlier, I love paying it!

But some taxes are better (less bad?) than others, and the stamp duty on property is about as bad as it gets. It is a stupid and inefficient tax that is holding the property market back from its full potential.

I say it's time to crush this cane toad once and for all.

My biggest gripe with the stamp duty on property is that it becomes an incredibly prohibitive upfront cost. If you're looking at a bill of $20-30,000, particularly on your first home, this can really take the wind from your sails.

And for what? The Cane Toad started out as a simple filing fee - a small cost to have your documents branded with the governments stamp and become legally recognised.

Now I know the public service is inefficient, but you can't tell me that $20,000 is a reasonable fee to pay for processing - particularly since they phased out actual stamps!

I mean, one study found that the stamp duty in NSW accounted for about a quarter of upfront costs, including deposit, moving costs, and legal work.

The property market relies on a constant supply of new entrants in the housing market, beginning their journey from entry-level homes into the palaces of their dreams, to keep things kicking along.

We should be doing everything we can to encourage them. Slugging them with a massive fee, just to get started, is an incredibly stupid idea. If it wasn't part of our legal and cultural heritage, there's no way you could get anyone to buy into such a blunt and damaging tax today.

The crazy thing is that it's not that great for the government either. Since it is a marginal tax, the fee is determined on the value of the property. However, the amount of revenue the government actually receives is a function of property values and the volume of property transactions in a given year.

Trouble is, the volume of transactions can swing wildly. I remember back in 2007 and 2008. The number of properties sold in Sydney fell a massive 19 percent. As a result, the amount of stamp duty raised in NSW fell 30 percent, smashing a whopping $1.2 billion hole into the budget.

So what this means is that in the presences of cycles (which are an constant feature of the housing market), the stamp duty needs to be higher than it otherwise would be, to compensate for the years when volumes, and revenue, fall.

It's just adding worse to bad...

The other trouble with stamp duty is that it is a transactional tax. In the principles of efficient tax design, you always try to minimise the impact on the number of transactions taking place.

(The obvious exception is the case where you're targeting a particular 'bad', such as smoking for example, where the point is to actually reduce use.)

But otherwise, economic transactions are the very life-force of the economy. In general, you want to keep the engine as lubricated as possible.

A big fat ugly stamp duty on selling your home, creates a massive obstacle for efficient market functioning. And the downsides of these market inefficiencies can play out in all sorts of way.

Not only does it deter new entrants to the market, as I said before, but it also stops the market adjusting to changes in conditions. Say for example the kids move out and your thinking of moving into something a bit smaller, closer to the beach. Or you get a new job on the other side of town.

Or maybe you feel a bit overstretched on your current mortgage and want to wind it back a bit.

A transactional tax like a stamp duty will mean that people hold off on making these decision for longer than they otherwise would have. The market is slow to react.

And when a market is slow to react, boom and bust cycles become exaggerated, which, as I said, exaggerates swings in government revenue.

So the case against is pretty compelling. The real trouble though is that the States are completely hooked on licking the cane toad. Stamp duty now accounts for about a full third of State taxation revenue every year.

That's why the ACT is giving itself a good twenty years to slowly wean itself off the habit.

Thankfully, there are other options. The 2010 Henry tax review suggested shifting more weight to existing land tax regimes, and scrapping stamp duty altogether.

Land tax avoids a lot of the traps stamp duty falls into. In particular, the same amount of revenue could be spread over the life of property ownership, rather than being front-loaded into the purchase price. This would therefore improve affordability and take some of the burden off first home buyers.

But whatever the case, the other states need to follow ACT's lead and break their addiction to property stamp duty.

And then perhaps we can be rid of this ugly cane toad once and for all.

Signed with Success,

Jon Giaan
Knowledge Source

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